THIRD DIVISION
(Branch 220), which was reversed by the CA, reads as
[G.R. No. 143994. July 11, 2002]
LOS BAOS RURAL BANK, INC., petitioner, vs. PACITA O.
AFRICA, GLORIA AFRICA, ANTONIO AFRICA, ARISTEO
AFRICA, SOCORRO AFRICA, CONSUELO AFRICA, AND
LOURDES AFRICA, respondents.
DECISION
PANGANIBAN, J.:
A writ of preliminary injunction is issued to preserve the
status quo ante, upon an applicants showing of two
important requisite conditions; namely, (1) the right to be
protected exists prima facie, and (2) the acts sought to be
enjoined are violative of that right. It must be proven that
the violation sought to be prevented would cause an
irreparable injustice.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules
of Court, assailing the June 30, 2000 Decision[1] of the
Court of Appeals[2] (CA) in CA-GR SP No. 53355. The
decretal portion of the Decision reads as follows:
WHEREFORE, the petition is GRANTED. The Order dated
April 19, 1999 insofar as it denied the petitioners
application for the issuance of a writ of preliminary
injunction, is hereby RECALLED and SET ASIDE.
Let a writ of preliminary injunction issue in this case to
restrain the respondent bank from proceeding with the
foreclosure and consolidation of the title over the subject
property upon posting by petitioners of a bond in the
amount of Php20,000.00.[3]
The Order of the Regional Trial Court (RTC) of Quezon City
follows:
WHEREFORE, premises considered, the Order of the Court
dated July 22, 1997 is hereby recalled and set aside. The
application for issuance of writ of preliminary injunction is
hereby DENIED.
Issues in this case having been joined, let this case be set
for pre-trial on May 28, 1999 at 8:30 o clock in the morning.
Send notice of pre-trial to the parties and counsels.[4]
The Facts
The factual antecedents of the case are summarized by the
Court of Appeals in this wise:
Petitioner Pacita Africa (Pacita for brevity) is the widow of
Alberto Africa and the rest of her co-petitioners are their
children.
Records disclose that sometime in June 1989, the Quezon
City Hall building where the Register of Deeds was then
holding office was razed by fire, destroying some of its
records/documents among which was the original Transfer
Certificate of Title (TCT) No. 203492 covering a parcel of
land situated in Diliman, Quezon City, and registered in the
name of petitioner Pacita. The aforesaid property was part
of the conjugal property of petitioner Pacita and her late
husband Alberto Africa.
On request of Pacita, private respondent Macy Africa, the
common-law wife of petitioner Antonio Africa, worked for
the reconstitution of the aforesaid TCT No. 203492. The
same was done and a new Transfer Certificate of Title (TCT)
No. RT-76140 (203492) PR-36463 was issued in the name
of Pacita Africa. While the reconstituted title was in her
possession, Macy allegedly forged, or caused the forgery
of, Pacitas signature on a Deed of Absolute Sale dated
December 29, 1992, purporting to transfer ownership of
the subject property to Macy. On the strength of the forged
Deed of Absolute Sale, Macy was able to cause the issuance
of TCT No. 81519 in her name, without the knowledge of
any of herein petitioners.
Still as part of the scheme to defraud petitioners, Macy
caused the preparation of a fake TCT No. 81519 in the
name of Pacita, which the former showed to the latter to
make Pacita believe that the said title was issued in her
(Pacitas) name.
Sometime in March 1994, petitioners discovered private
respondents fraudulent act. They (petitioners) likewise
came to know that the subject property was mortgaged by
Macy to the respondent bank. To protect their interests
over the subject property, petitioners lodged an action in
court against Macy and the respondent bank for
Annulment of Title, Deed of Absolute Sale and Deed of
Mortgage. The case was originally assigned to Branch 99 of
the RTC of Quezon City and docketed as Civil Case No. Q-
94-20898.
After the filing of the aforesaid case, the respondent bank
in utter bad faith, foreclosed the subject property on June
11, 1996 without due notice to the petitioners, prompting
the petitioners to amend [their] complaint, this time
incorporating therein a prayer for the issuance of a
temporary restraining order and/or writ of preliminary
injunction, to stop the respondent bank from, among
others, consolidating title to the subject property.
On July 2, 1997, RTC Branch 99 issued an Order granting
petitioners application for a temporary restraining order.
Meanwhile, the respondent bank filed its Manifestation,
Opposition and Motion to Postpone dated July 11, 1997,
praying, inter alia, for the denial of petitioners application
for a writ of preliminary injunction, or in the alternative, for
the cancellation of the hearing thereon. On July 18, 1997,
the aforesaid court denied the respondent banks motion
to postpone and proceeded with the hearing of petitioners
application. Thereafter, petitioners application was
considered submitted for resolution.
On July 22, 1997, the Court issued an Order granting
petitioners application for a writ of preliminary injunction
to which respondent bank filed a Motion for
Reconsideration dated July 11, 1997 followed by a Motion
for Inhibition on January 1, 1998 praying that Hon. Felix M.
de Guzman, presiding judge of RTC, Branch 99, inhibit
himself from further trying the case. This latter motion was
granted, and the case was re-raffled and assigned to
Branch 220.
On April 19, 1999, RTC Branch 220, public respondent
herein, issued the questioned Order. [5]
Ruling of the Court of Appeals
The CA overturned the RTC Order dated April 19, 1999, and
granted the issuance of a preliminary injunction to restrain
petitioner from proceeding with the foreclosure and the
consolidation of title over the subject property. The CA
ruled that respondents had title to and possession of the
property and were deprived thereof by petitioner. Thus,
respondents had a clear and unmistakable right to protect
their title and possession.[6]
Hence, this Petition.[7]
Issues
In its Memorandum, petitioner raises the following issues
for the Courts consideration:
I
Whether the Court of Appeals acted with patent grave
abuse of discretion in applying the ruling in Verzosa vs.
Court of Appeals, (299 SCRA 100), to the instant case to
justify its reversal of the 19 April 1999 Order of Branch 220
of the Regional Trial Court of Quezon City in Civil Case No.
Q-94-20898[;]
II
Whether the Court of Appeals acted with patent grave
abuse of discretion when it rationalized its decision by
citing factual premises therein that are not borne out by
the records nor based on evidence and in fact contrary to
reality[;]
III
Whether the Court of Appeals acted with patent grave
abuse of discretion when it ignored, disregarded and/or
deviated from established jurisprudence governing the
issuance of preliminary injunction demanded by private
respondents against the petitioner bank[;]
IV
Whether the Court [of] Appeals acted with patent grave
abuse of discretion when it disregarded the pertinent
provisions of Section 3, Rule 58, of the Revised Rules of
Court providing for the grounds for issuance of preliminary
injunction.[8]
In sum, the issues boil down to whether the appellate court
erred in issuing a writ of preliminary injunction to stop
petitioners consolidation of its title to the subject property.
This Courts Ruling
The Petition is not meritorious; it has not shown any
reversible error in the CAs Decision.
Main Issue:
Propriety of Preliminary Injunction
Petitioner argues that respondents do not have a right to
the relief demanded, because they merely have possession
of the property, as the legal title is in the name of Macy
Africa.[9] Furthermore, it claims that the consolidation of
title in its name does not constitute an invasion of a right
that is material and substantial.[10]
On the other hand, respondents maintain that they would
suffer great irreparable damage if the writ of preliminary
injunction is not granted.[11] They likewise contend that if
petitioner is allowed to consolidate its title to the subject
property, they would lose their ancestral home, a loss that
would result in unnecessary and protracted proceedings
involving third parties.[12]
We agree with respondents.
The grounds for the issuance of a writ of preliminary
injunction are enumerated in Rule 58, Section 3 of the
Revised Rules of Court, which reads as follows:
Sec. 3. Grounds for issuance of preliminary injunction. A
preliminary injunction may be granted when it is
established;
(a)That the applicant is entitled to the relief demanded,
and the whole or part of such relief consists in restraining
the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;
(b)That the commission, continuance or non-performance
of the act or acts complained of during the litigation would
probably work injustice to the applicant; or
(c)That a party, court, agency or a person is doing,
threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation
of the rights of the applicant respecting the subject of the
action or proceeding, and tending to render the judgment
ineffectual.
Injunction is a preservative remedy aimed at no other
purpose than to protect the complainants substantive
rights and interests[13] during the pendency of the
principal action.[14] A preliminary injunction, as the term
itself suggests, is merely temporary.[15] It is to be resorted
to only when there is a pressing necessity to avoid injurious
consequences that cannot be remedied under any
standard of compensation.[16]
Moreover, injunction, like other equitable remedies,
should be issued only at the instance of a suitor who has
sufficient interest in or title to the right or the property
sought to be protected.[17] It is proper only when the
plaintiff appears to be entitled to the relief demanded in
the complaint.[18] In particular, the existence of the right
and the violation thereof must appear in the allegations of
the complaint[19] and must constitute at least a prima
facie showing of a right to the final relief.[20] Thus, there
are two requisite conditions for the issuance of a
preliminary injunction, namely, (1) the right to be
protected exists prima facie, and (2) the acts sought to be
enjoined are violative of that right.[21] It must be proven
that the violation sought to be prevented would cause an
irreparable injustice.
Further, while a clear showing of the right is necessary, its
existence need not be conclusively established.[22] In fact,
the evidence required to justify the issuance of a writ of
preliminary injunction in the hearing thereon need not be
conclusive or complete. The evidence need only be a
sampling intended merely to give the court an idea of the
justification for the preliminary injunction, pending the
decision of the case on the merits.[23] Thus, to be entitled
to the writ, respondents are only required to show that
they have the ostensible right to the final relief prayed for
in their Complaint.[24]
First Requisite:
Existence of the Right
In the case at bar, we find ample justification for the
issuance of a writ of preliminary injunction.[25] Evidently,
the question on whether or not respondents possess the
requisite right hinges on the prima facie existence of their
legal title to the subject property.[26] They have shown
that they have that right, and that it is directly threatened
by the act sought to be enjoined.[27]
First, as alleged in the Complaint,[28] Respondent Pacita
Africa is the registered owner of the subject property. Her
ownership is evidenced by the reconstituted Transfer
Certificate of Title (TCT) No. RT-76140 (203492) PR-
36463,[29] issued by the Registry of Deeds of Quezon City.
Second, the validity of the Deed of Sale[30] dated
December 29, 1992, is still in dispute because Respondent
Pacita Africa claims that her signature was forged by the
vendee, Macy Africa.[31] Third, there is doubt as to the
validity of the mortgage in favor of petitioner, because
there exists on record two TCTs covering the mortgaged
property: (1) TCT No. 81519[32] registered in the name of
Pacita Africa and (2) TCT No. 81519[33] registered in the
name of Macy Africa.
If indeed the Deed of Sale is a forgery, no parcel of land was
ever transferred to the purported buyer[34] who, not
being the owner, could not have validly mortgaged the
property.[35] Consequently, neither has petitioner -- the
buyer and mortgagee of the same lot -- ever acquired any
title thereto.[36] Significantly, no evidence was presented
by petitioner to controvert these allegations put forward
by respondents. Clearly then, on the basis of the evidence
presented, respondents possess the right to prevent
petitioner from consolidating the title in its name. The first
requisite -- the existence of a right to be protected -- is thus
present.[37]
Second Requisite:
Violation of Applicants Right
As to the second requisite, what is sought to be enjoined
by respondents is the consolidation of the title to the
subject property in petitioners name. After having
discovered that the property had been mortgaged to
petitioner, respondents filed on June 12, 1994 an action for
Annulment of Title, Deed of Sale, and Mortgage to protect
their rights over the property.[38] This notwithstanding,
petitioner foreclosed it on June 11, 1996.[39] To enjoin
petitioner from consolidating the title in its name,
respondents then filed an Amended Complaint,[40]
praying for a writ of preliminary injunction.
Unless legally stopped, petitioner may consolidate title to
the property in its name and enjoy the unbridled freedom
to dispose of it to third persons, to the damage and
prejudice of respondents.[41] What respondents stand to
lose is material and substantial.[42] They would lose their
ancestral home even without the benefit of a trial.[43]
Clearly, the act sought to be enjoined is violative of their
proprietary right over the property.[44]
A writ of preliminary injunction is issued precisely to
preserve threatened or continuous irremediable injury to
some of the parties before their claims can be thoroughly
studied and adjudicated.[45] Denial of the application for
the writ may make the Complaint of respondents moot and
academic. Furthermore, it would render ineffectual a final
judgment in their favor or, at the very least, compel them
to litigate needlessly with third persons who may have
acquired an interest in the property.[46] Such a situation
cannot be countenanced.[47]
Lis Pendens
Petitioner further contends that respondents are not
entitled to the relief prayed for, because they caused a
notice of lis pendens to be annotated at the back of TCT
No. 81519, registered in the name of Macy P. Africa; thus,
that notice provided ample protection of their rights and
interests.[48]
We are not persuaded. A notice of lis pendens serves as an
announcement to the whole world that a particular real
property is in litigation and as a warning that those who
acquire an interest in the property do so at their own risk -
- they gamble on the result of the litigation over it.[49]
However, the cancellation of such notice may be ordered
by the court that has jurisdiction over it at any given
time.[50] Its continuance or removal -- like the continuance
or the removal of a preliminary attachment or injunction -
- is not contingent on the existence of a final judgment on
the action and ordinarily has no effect on the merits
thereof.[51] Thus, the notice of lis pendens does not suffice
to protect herein respondents rights over the property.[52]
It does not provide complete and ample protection.
Status Quo Ante
Petitioner further claims that the RTC erred in enjoining the
foreclosure sale of the subject property.[53] It argues that
the foreclosure may no longer be enjoined, because it has
long been effected since 1996.[54] We agree with
petitioner.
It is a well-entrenched rule that consummated acts can no
longer be restrained by injunction[55] whose sole objective
is to preserve the status quo until the merits of the case are
fully heard.[56] Status quo is defined as the last actual
peaceful uncontested situation that precedes a
controversy, and its preservation is the office of an
injunctive writ.[57]
In the instant case, the status quo was the situation of the
parties at the time of the filing of the Amended
Complaint[58] with a prayer for a writ of preliminary
injunction. It was that point at which petitioner had already
foreclosed the subject property and, hence, could no
longer be enjoined from going on with the foreclosure.
However, the last actual uncontested status that preceded
the controversy was when the property in dispute was still
registered in the name of Macy Africa, petitioner not
having consolidated in its name the title thereto.[59] Thus,
the issuance of the writ would no doubt preserve the status
quo.[60]
We cannot rule on the allegation of petitioner that this
case is a scam perpetrated by private respondents to
defraud it.[61] The truth or the falsity of that assertion
cannot be ascertained by this Court at this time. Verily, we
refrain from expressing any opinion on the merits of the
case, pending a full consideration of the evidence that
would be presented by the parties.[62]
WHEREFORE, the Petition is DENIED and the assailed
Decision of the Court of Appeals AFFIRMED. Costs against
petitioner.
SO ORDERED.
SEBASTIAN SIGA-AN, G.R. No. 173227
Petitioner,
Present:
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE
CASTRO,* JJ.
Promulgated:
ALICIA VILLANUEVA,
 Respondent. January 20, 2009
x--------------------------------------------
- - - - - -x
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition[1] for Review on Certiorari under
Rule 45 of the Rules of Court seeking to set aside the
Decision,[2] dated 16 December 2005, and
Resolution,[3] dated 19 June 2006 of the Court of Appeals
in CA-G.R. CV No. 71814, which affirmed in toto the
Decision,[4] dated 26 January 2001, of the Las Pinas City
Regional Trial Court, Branch 255, in Civil Case No. LP-98-
0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a
complaint[5] for sum of money against petitioner Sebastian
Siga-an before the Las Pinas City Regional Trial Court (RTC),
Branch 255, docketed as Civil Case No. LP-98-
0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to
the Philippine Navy Office (PNO) located at Fort Bonifacio,
Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner
approached her inside the PNO and offered to loan her the
amount of P540,000.00. Since she needed capital for her
business transactions with the PNO, she accepted
petitioners proposal. The loan agreement was not reduced
in writing. Also, there was no stipulation as to the payment
of interest for the loan.[6]
On 31 August 1993, respondent issued a check
worth P500,000.00 to petitioner as partial payment of the
loan. On 31 October 1993, she issued another check in the
amount of P200,000.00 to petitioner as payment of the
remaining balance of the loan. Petitioner told her that
since she paid a total amount of P700,000.00 for
the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the
loan. Not satisfied with the amount applied as interest,
petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with his
demand. As all her transactions with the PNO were subject
to the approval of petitioner as comptroller of the PNO,
and fearing that petitioner might block or unduly influence
the payment of her vouchers in the PNO, she
conceded. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for
receipt for the payments but petitioner told her that it was
not necessary as there was mutual trust and confidence
between them. According to her computation, the total
amount she paid to petitioner for the loan and interest
accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the
propriety of paying interest on the loan despite absence of
agreement to that effect. Her lawyer told her that
petitioner could not validly collect interest on the loan
because there was no agreement between her and
petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for
the P540,000.00 worth of loan, and upon being advised by
her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of
the excess amount of P660,000.00. Petitioner, despite
receipt of the demand letter, ignored her claim for
reimbursement.[8]
Respondent prayed that the RTC render judgment ordering
petitioner to pay respondent (1) P660,000.00 plus legal
interest from the time of demand; (2) P300,000.00 as
moral damages; (3) P50,000.00 as exemplary damages;
and (4) an amount equivalent to 25% of P660,000.00 as
attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant
her a loan, as she needed money to finance her business
venture with the PNO. At first, he was reluctant to deal
with respondent, because the latter had a spotty record as
a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.[11]
Subsequently, respondent again asked him to give her a the amount of P660,000.00 through mistake, petitioner
loan. As respondent had been able to pay the previous loan should return the said amount to respondent pursuant to
in full, he agreed to grant her another loan. Later, the principle of solutio indebiti.[13]
respondent requested him to restructure the payment of
the loan because she could not give full payment on the
due date. He acceded to her request. Thereafter, The RTC also ruled that petitioner should pay moral
respondent pleaded for another restructuring of the damages for the sleepless nights and wounded feelings
payment of the loan. This time he rejected her plea. Thus, experienced by respondent. Further, petitioner should pay
respondent proposed to execute a promissory note exemplary damages by way of example or correction for
wherein she would acknowledge her obligation to him, the public good, plus attorneys fees and costs of suit.
inclusive of interest, and that she would issue several
postdated checks to guarantee the payment of her
obligation. Upon his approval of respondents request for The dispositive portion of the RTC Decision reads:
restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she
admitted having borrowed an amount of P1,240,000.00,
WHEREFORE, in view of the foregoing evidence and in the
inclusive of interest, from petitioner and that she would
light of the provisions of law and jurisprudence on the
pay said amount in March 1995. Respondent also issued to
matter, judgment is hereby rendered in favor of the
him six postdated checks amounting to P1,240,000.00 as
plaintiff and against the defendant as follows:
guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment
but only one check was honored. He demanded that
respondent settle her obligation, but the latter failed to do (1) Ordering defendant to pay plaintiff the amount
so. Hence, he filed criminal cases for Violation of the of P660,000.00 plus legal interest of 12% per annum
Bouncing Checks Law (Batas Pambansa Blg. 22) against computed from 3 March 1998 until the amount is paid in
respondent. The cases were assigned to the Metropolitan full;
Trial Court of Makati City, Branch 65 (MeTC).[12] (2) Ordering defendant to pay plaintiff the amount
of P300,000.00 as moral damages;

Petitioner insisted that there was no overpayment because

respondent admitted in the latters promissory note that (3) Ordering defendant to pay plaintiff the amount
her monetary obligation as of 12 September 1994 of P50,000.00 as exemplary damages;
amounted to P1,240,000.00 inclusive of interests. He
argued that respondent was already estopped from
complaining that she should not have paid any interest,
(4) Ordering defendant to pay plaintiff the amount
because she was given several times to settle her
equivalent to 25% of P660,000.00 as attorneys fees; and
obligation but failed to do so. He maintained that to rule in
favor of respondent is tantamount to concluding that the
loan was given interest-free. Based on the foregoing
averments, he asked the RTC to dismiss respondents (5) Ordering defendant to pay the costs of suit.[14]
complaint.

After trial, the RTC rendered a Decision on 26 January 2001 Petitioner appealed to the Court of Appeals. On 16
holding that respondent made an overpayment of her loan December 2005, the appellate court promulgated its
obligation to petitioner and that the latter should refund Decision affirming in toto the RTC Decision, thus:
the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount
of P540,000.00, and that the alleged interests due should
WHEREFORE, the foregoing considered, the instant appeal
not be included in the computation of respondents total
is hereby DENIED and the assailed decision [is]
monetary debt because there was no agreement between
AFFIRMED in toto.[15]
them regarding payment of interest. It concluded that
since respondent made an excess payment to petitioner in

Petitioner filed a motion for reconsideration of the
appellate courts decision but this was denied.[16] Hence,
petitioner lodged the instant petition before us assigning
the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING
THAT NO INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING
THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the use
or forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts
as penalty or indemnity for damages. This is called
compensatory interest.[18] The right to interest arises only
by virtue of a contract or by virtue of damages for delay or
failure to pay the principal loan on which interest is
demanded.[19]
Article 1956 of the Civil Code, which refers to monetary
interest,[20] specifically mandates that no interest shall be
due unless it has been expressly stipulated in writing. As
can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required
for the payment of monetary interest. Thus, we have held
that collection of interest without any stipulation therefor
in writing is prohibited by law.[21]
It appears that petitioner and respondent did not agree on
the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified
that although she accepted petitioners offer of loan
amounting to P540,000.00, there was, nonetheless, no
verbal or written agreement for her to pay interest on the
loan.[22]
Petitioner presented a handwritten promissory note dated
12 September 1994[23] wherein respondent purportedly
admitted owing petitioner capital and
interest. Respondent, however, explained that it was
petitioner who made a promissory note and she was told
to copy it in her own handwriting; that all her transactions
with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to
disapprove her transactions with the PNO if she would not
pay interest; that being unaware of the law on interest and
fearing that petitioner would make good of his threats if
she would not obey his instruction to copy the promissory
note, she copied the promissory note in her own
handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written
agreement on interest.[24] Petitioner did not rebut the
foregoing testimony. It is evident that respondent did not
really consent to the payment of interest for the loan and
that she was merely tricked and coerced by petitioner to
pay interest. Hence, it cannot be gainfully said that such
promissory note pertains to an express stipulation of
interest or written agreement of interest on the loan
between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the
Court of Appeals found that he and respondent agreed on
the payment of 7% rate of interest on the loan; that the
agreed 7% rate of interest was duly admitted by
respondent in her testimony in the Batas Pambansa Blg. 22
cases he filed against respondent; that despite such judicial
admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that
no interest was due him since the agreement on interest
was not reduced in writing; that the application of Article
1956 of the Civil Code should not be absolute, and an
exception to the application of such provision should be
made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that
it would be unfair to allow respondent to pay only the loan
when the latter very well knew and even admitted in the
Batas Pambansa Blg. 22 cases that there was an agreed 7%
rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found
that the RTC did not make a ruling therein that petitioner
and respondent agreed on the payment of interest at the
rate of 7% for the loan. The RTC clearly stated that
although petitioner and respondent entered into a valid
oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest
thereon.[26] While the Court of Appeals mentioned in its
Decision that it concurred in the RTCs ruling that petitioner
and respondent agreed on a certain rate of interest as
regards the loan, we consider this as merely an
inadvertence because, as earlier elucidated, both the RTC
and the Court of Appeals ruled that petitioner is not
entitled to the payment of interest on the loan. The rule is
that factual findings of the trial court deserve great weight
and respect especially when affirmed by the appellate
court.[27] We found no compelling reason to disturb the
ruling of both courts.
Petitioners reliance on respondents alleged admission in
the Batas Pambansa Blg. 22 cases that they had agreed on
the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely
testified that after paying the total amount of loan,
petitioner ordered her to pay interest.[28] Respondent did
not categorically declare in the same case that she and
respondent made an express stipulation in writing as
regards payment of interest at the rate of 7%. As earlier
discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of
interest.
There are instances in which an interest may be imposed
even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the
Civil Code states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay,
a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil
Code provides that interest due shall earn legal interest
from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may
be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In
other words, the two instances apply only to compensatory
interest and not to monetary interest.[29] The case at bar
involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in
the instant case because it was not duly proven that
respondent defaulted in paying the loan. Also, as earlier
found, no interest was due on the loan because there was
no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that
the principle of solutio indebiti does not apply to the
instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor,
the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of
the Civil Code explains the principle of solutio indebiti. Said
provision provides that if something is received when there
is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such
a case, a creditor-debtor relationship is created under a
quasi-contract whereby the payor becomes the creditor
who then has the right to demand the return of payment
made by mistake, and the person who has no right to
receive such payment becomes obligated to return the
same. The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself
unjustly at the expense of another.[31] The principle
of solutio indebiti applies where (1) a payment is made
when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake,
and not through liberality or some other cause.[32] We have
held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.[33]
It was duly established that respondent paid interest to
petitioner. Respondent was under no duty to make such
payment because there was no express stipulation in
writing to that effect. There was no binding relation
between petitioner and respondent as regards the
payment of interest. The payment was clearly a
mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary
award and damages imposed by the RTC and the Court of
Appeals.
Records show that respondent received a loan amounting
to P540,000.00 from petitioner.[34] Respondent issued two
checks with a total worth of P700,000.00 in favor of
petitioner as payment of the loan.[35] These checks were
subsequently encashed by petitioner.[36] Obviously, there
was an excess of P160,000.00 in the payment for the
loan. Petitioner claims that the excess of P160,000.00
serves as interest on the loan to which he was
entitled. Aside from issuing the said two checks,
respondent also paid cash in the total amount
of P175,000.00 to petitioner as interest.[37] Although no
receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner,
nonetheless, admitted in his Reply-Affidavit[38] in the Batas
Pambansa Blg. 22 cases that respondent paid him a total
amount of P175,000.00 cash in addition to the two checks.
Section 26 Rule 130 of the Rules of Evidence provides that
the declaration of a party as to a relevant fact may be given
in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other
proof of additional payment as interest was presented by
respondent. Since we have previously found that
petitioner is not entitled to payment of interest and that
the principle of solutio indebiti applies to the instant case,
petitioner should return to respondent the excess amount
of P160,000.00 and P175,000.00 or the total amount
of P335,000.00. Accordingly, the reimbursable amount to
respondent fixed by the RTC and the Court of Appeals
should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for
violation of Batas Pambansa Blg. 22 against respondent. In
the said cases, the MeTC found respondent guilty of
violating Batas Pambansa Blg. 22 for issuing five
dishonored checks to petitioner. Nonetheless,
respondents conviction therein does not affect our ruling
in the instant case. The two checks, subject matter of this
case, totaling P700,000.00 which respondent claimed as
payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced
in the five criminal cases. Further, the MeTC found that
respondent made an overpayment of the loan by reason of
the interest which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral damages
may be recovered if the party underwent physical
suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. Respondent testified
that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the
award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC
and the Court of Appeals, is exorbitant and should be
equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the
court according to the circumstances of each case. This
discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate
that it was the result of prejudice or corruption on the part
of the trial court.[40] To our mind, the amount
of P150,000.00 as moral damages is fair, reasonable, and
proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-
contract, such as solutio indebiti, exemplary damages may
be imposed if the defendant acted in an oppressive
manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her
transactions with the PNO if she would not pay
interest. This forced respondent to pay interest despite
lack of agreement thereto. Thus, the award of exemplary
damages is appropriate. The amount of P50,000.00
imposed as exemplary damages by the RTC and the Court
is fitting so as to deter petitioner and other lenders from
committing similar and other serious wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees,
the trial court must state the factual, legal or equitable
justification for awarding the same.[42] In the case under
consideration, the RTC stated in its Decision that the award
of attorneys fees equivalent to 25% of the amount paid as
interest by respondent to petitioner is reasonable and
moderate considering the extent of work rendered by
respondents lawyer in the instant case and the fact that it
dragged on for several years.[43] Further, respondent
testified that she agreed to compensate her lawyer
handling the instant case such amount.[44] The award,
therefore, of attorneys fees and its amount equivalent to
25% of the amount paid as interest by respondent to
petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12%
rate of legal interest on the amount refundable to
respondent computed from 3 March 1998 until its full
payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of
Appeals,[45] that when an obligation, not constituting a loan
or forbearance of money is breached, an interest on the
amount of damages awarded may be imposed at the rate
of 6% per annum. We further declared that when the
judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether it is
a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction,
this interim period being deemed equivalent to a
forbearance of credit.
In the present case, petitioners obligation arose from a
quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum
should be imposed on the amount to be refunded as well
as on the damages awarded and on the attorneys fees, to
be computed from the time of the extra-judicial demand
on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from
the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-
G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1)
the amount of P660,000.00 as refundable amount of
interest is reduced to THREE HUNDRED THIRTY FIVE
THOUSAND PESOS (P335,000.00); (2) the amount
of P300,000.00 imposed as moral damages is reduced to
ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3)
an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the
attorneys fees to be computed from the time of the extra-
judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also
imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.
SO ORDERED.
[G.R. No. 137232. June 29, 2005]
ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO
YUJUICO, petitioners, vs. HOME BANKERS SAVINGS AND
TRUST COMPANY, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the petition for review
on certiorari assailing the Decision[1] of the Court of
Appeals dated March 31, 1998 in CA-G.R. CV No. 48708 and
its Resolution dated January 12, 1999.
The facts of the case as found by the Court of Appeals are:
Sometime in 1989, Rosario Textile Mills Corporation
(RTMC) applied from Home Bankers Savings & Trust Co. for
an Omnibus Credit Line for P10 million. The bank approved
RTMCs credit line but for only P8 million. The bank notified
RTMC of the grant of the said loan thru a letter dated
March 2, 1989 which contains terms and conditions
conformed by RTMC thru Edilberto V. Yujuico. On March 3,
1989, Yujuico signed a Surety Agreement in favor of the
bank, in which he bound himself jointly and severally with
RTMC for the payment of all RTMCs indebtedness to the
bank from 1989 to 1990. RTMC availed of the credit line by
making numerous drawdowns, each drawdown being
covered by a separate promissory note and trust receipt.
RTMC, represented by Yujuico, executed in favor of the
bank a total of eleven (11) promissory notes.
Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the banks demand
letters, RTMC failed to pay its loans. Hence, on January 22,
1993, the bank filed a complaint for sum of money against
RTMC and Yujuico before the Regional Trial Court, Br. 16,
Manila.
In their answer (OR, pp. 44-47), RTMC and Yujuico contend
that they should be absolved from liability. They claimed
that although the grant of the credit line and the execution
of the suretyship agreement are admitted, the bank gave
assurance that the suretyship agreement was merely a
formality under which Yujuico will not be personally liable.
They argue that the importation of raw materials under the
credit line was with a grant of option to them to turn-over
to the bank the imported raw materials should these fail to
meet their manufacturing requirements. RTMC offered to
make such turn-over since the imported materials did not
conform to the required specifications. However, the bank
refused to accept the same, until the materials were
destroyed by a fire which gutted down RTMCs premises.
For failure of the parties to amicably settle the case, trial
on the merits proceeded. After the trial, the Court a
quo rendered a decision in favor of the bank, the decretal
part of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered in favor of plaintiff and against defendants who
are ordered to pay jointly and severally in favor of plaintiff,
inclusive of stipulated 30% per annum interest and penalty
of 3% per month until fully paid, under the following
promissory notes:
90-1116 6-20-90 P737,088.25 9-18-90
(maturity)
90-1320 7-13-90 P650,000.00 10-11-90
90-1334 7-17-90 P422,500.00 10-15-90
90-1335 7-17-90 P422,500.00 10-15-90
90-1347 7-18-90 P795,000.00 10-16-90
90-1373 7-20-90 P715,900.00 10-18-90
90-1397 7-27-90 P773,500.00 10-20-90
90-1429 7-26-90 P425,750.00 10-24-90
90-1540 8-7-90 P720,984.00 11-5-90
90-1569 8-9-90 P209,433.75 11-8-90
90-0922 5-28-90 P747,780.00 8-26-90
The counterclaims of defendants are hereby DISMISSED.
SO ORDERED. (OR, p. 323; Rollo, p. 73).[2]
Dissatisfied, RTMC and Yujuico, herein petitioners,
appealed to the Court of Appeals, contending that under
the trust receipt contracts between the parties, they
merely held the goods described therein in trust for
respondent Home Bankers Savings and Trust Company
(the bank) which owns the same. Since the ownership of
the goods remains with the bank, then it should bear the
loss. With the destruction of the goods by fire, petitioners
should have been relieved of any obligation to pay.
The Court of Appeals, however, affirmed the trial courts
judgment, holding that the bank is merely the holder of the
security for its advance payments to petitioners; and that
the goods they purchased, through the credit line
extended by the bank, belong to them and hold said goods
at their own risk.
Petitioners then filed a motion for reconsideration but this
was denied by the Appellate Court in its Resolution dated
January 12, 1999.
Hence, this petition for review on certiorari ascribing to the
Court of Appeals the following errors:
I RTMC imported the raw materials needed for its
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT THE ACTS OF THE PETITIONERS-
DEFENDANTS WERE TANTAMOUNT TO A VALID AND
EFFECTIVE TENDER OF THE GOODS TO THE RESPONDENT-
PLAINTIFF.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT
APPLYING THE DOCTRINE OF RES PERIT DOMINO IN THE
CASE AT BAR CONSIDERING THE VALID AND EFFECTIVE
TENDER OF THE DEFECTIVE RAW MATERIALS BY THE
PETITIONERS-DEFENDANTS TO THE RESPONDENT-
PLAINTIFF AND THE EXPRESS STIPULATION IN THEIR
CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS
WITH THE RESPONDENT-PLAINTIFF.
III
THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE
1370 OF THE CIVIL CODE AND THE LONG-STANDING
JURISPRUDENCE THAT INTENTION OF THE PARTIES IS
PRIMORDIAL IN ITS FAILURE TO UPHOLD THE INTENTION
OF THE PARTIES THAT THE SURETY AGREEMENT WAS A
MERE FORMALITY AND DID NOT INTEND TO HOLD
PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.
IV
ASSUMING ARGUENDO THAT THE SURETYSHIP
AGREEMENT WAS VALID AND EFFECTIVE, THE HONORABLE
COURT OF APPEALS VIOLATED THE BASIC LEGAL PRECEPT
THAT A SURETY IS NOT LIABLE UNLESS THE DEBTOR IS
HIMSELF LIABLE.
V
THE HONORABLE COURT OF APPEALS VIOLATED THE
PURPOSE OF TRUST RECEIPT LAW IN HOLDING THE
PETITIONERS LIABLE TO THE RESPONDENT.
The above assigned errors boil down to the following
issues: (1) whether the Court of Appeals erred in holding
that petitioners are not relieved of their obligation to pay
their loan after they tried to tender the goods to the bank
which refused to accept the same, and which goods were
subsequently lost in a fire; (2) whether the Court of Appeals
erred when it ruled that petitioners are solidarily liable for
the payment of their obligations to the bank; and (3)
whether the Court of Appeals violated the Trust Receipts
Law.
On the first issue, petitioners theorize that when petitioner
manufacture, using the credit line, it was merely acting on
behalf of the bank, the true owner of the goods by virtue
of the trust receipts. Hence, under the doctrine of res perit
domino, the bank took the risk of the loss of said raw
materials. RTMCs role in the transaction was that of end
user of the raw materials and when it did not accept those
materials as they did not meet the manufacturing
requirements, RTMC made a valid and effective tender of
the goods to the bank. Since the bank refused to accept the
raw materials, RTMC stored them in its warehouse. When
the warehouse and its contents were gutted by fire,
petitioners obligation to the bank was accordingly
extinguished.
Petitioners stance, however, conveniently ignores the true
nature of its transaction with the bank. We recall that
RTMC filed with the bank an application for a credit line in
the amount of P10 million, but only P8 million was
approved. RTMC then made withdrawals from this credit
line and issued several promissory notes in favor of the
bank. In banking and commerce, a credit line is that
amount of money or merchandise which a banker,
merchant, or supplier agrees to supply to a person on
credit and generally agreed to in advance.[3] It is the fixed
limit of credit granted by a bank, retailer, or credit card
issuer to a customer, to the full extent of which the latter
may avail himself of his dealings with the former but which
he must not exceed and is usually intended to cover a
series of transactions in which case, when the customers
line of credit is nearly exhausted, he is expected to reduce
his indebtedness by payments before making any further
drawings.[4]
It is thus clear that the principal transaction between
petitioner RTMC and the bank is a contract of loan. RTMC
used the proceeds of this loan to purchase raw materials
from a supplier abroad. In order to secure the payment of
the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to
evidence this security arrangement. Simply stated, the
trust receipts were mere securities.
In Samo vs. People,[5] we described a trust receipt as a
security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the
merchandise imported or purchased.[6]
[7]
In Vintola vs. Insular Bank of Asia and America, we
elucidated further that a trust receipt, therefore, is a
security agreement, pursuant to which a bank acquires a
security interest in the goods. It secures an indebtedness
and there can be no such thing as security interest that
secures no obligation.[8] Section 3 (h) of the Trust Receipts
Law (P.D. No. 115) defines a security interest as follows:
(h) Security Interest means a property interest in goods,
documents, or instruments to secure performance of some
obligation of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to
be absolute, whenever such title is in substance taken or
retained for security only.
Petitioners insistence that the ownership of the raw
materials remained with the bank is untenable. In Sia vs.
People,[9] Abad vs. Court of Appeals,[10] and PNB vs.
Pineda,[11] we held that:
If under the trust receipt, the bank is made to appear as
the owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of
the goods in any manner it wants, which it cannot do, just
to give consistency with purpose of the trust receipt of
giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the
inception of the transaction would be to disregard the
loan feature thereof...[12]
Thus, petitioners cannot be relieved of their obligation to
pay their loan in favor of the bank.
Anent the second issue, petitioner Yujuico contends that
the suretyship agreement he signed does not bind him, the
same being a mere formality.
We reject petitioner Yujuicos contentions for two reasons.
First, there is no record to support his allegation that the
surety agreement is a mere formality; and
Second, as correctly held by the Court of Appeals, the
Suretyship Agreement signed by petitioner Yujuico binds
him. The terms clearly show that he agreed to pay the bank
jointly and severally with RTMC. The parole evidence rule
under Section 9, Rule 130 of the Revised Rules of Court is
in point, thus:
SEC. 9. Evidence of written agreements. When the terms of
an agreement have been reduced in writing, it is
considered as containing all the terms agreed upon and
there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents
of the written agreement.
However, a party may present evidence to modify, explain,
or add to the terms of the written agreement if he puts in
issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the
written agreement;
(b) The failure of the written agreement to express the true
intent and agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or June 13
their successors in interest after the execution of the
written agreement.
x x x. x----------------------------------------------------------------------------
--------x
Under this Rule, the terms of a contract are rendered
conclusive upon the parties and evidence aliunde is not
admissible to vary or contradict a complete and
enforceable agreement embodied in a document.[13] We
have carefully examined the Suretyship Agreement signed DECISION
by Yujuico and found no ambiguity therein. Documents
must be taken as explaining all the terms of the agreement
between the parties when there appears to be no BRION, J.:
ambiguity in the language of said documents nor any
failure to express the true intent and agreement of the
parties.[14]
As to the third and final issue At the risk of being
repetitious, we stress that the contract between the
parties is a loan. What respondent bank sought to collect
as creditor was the loan it granted to petitioners. Before this Court is a petition for review
Petitioners recourse is to sue their supplier, if indeed the on certiorari,[1] under Rule 45 of the Rules of Court,
materials were defective. assailing the decision[2] dated January 20, 2005 of the Court
WHEREFORE, the petition is DENIED. The assailed Decision of Appeals in CA-G.R. SP No. 76588. In the assailed
and Resolution of the Court of Appeals in CA-G.R. CV No. decision, the Court of Appeals dismissed the criminal
48708 are AFFIRMED IN TOTO. Costs against petitioners. complaint for estafa against the respondents, Lamberto C.
Perez, Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and
SO ORDERED. Napoleon Garcia, who allegedly violated Article 315,
paragraph 1(b) of the Revised Penal Code, in relation with
Section 13 of Presidential Decree No. (P.D.) 115 the Trust
SECOND DIVISION Receipts Law.

LAND BANK OF THE PHILIPPINES, G.R.Petitioner

No. 166884Land Bank of the Philippines (LBP) is a
government financial institution and the official depository
Petitioner, of the Philippines.[3] Respondents are the officers and
representatives of Asian Construction and Development
Present:
Corporation (ACDC), a corporation incorporated under
Philippine law and engaged in the construction business.[4]
- versus - CARPIO, J., Chairperson,
BRION,
On June 7, 1999, LBP filed a complaint for estafa or
violation of Article 315, paragraph 1(b) of the Revised Penal
PEREZ,
Code, in relation to P.D. 115, against the respondents
SERENO,
beforeand
the City Prosecutors Office in Makati City. In the
affidavit-complaint[5] of June 7, 1999, the LBPs Account
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. ESTELITA P. REYES, JJ. for the Account Management Development, Edna
Officer
ANGELES-PANLILIO, and NAPOLEON O. GARCIA, L. Juan, stated that LBP extended a credit accommodation
Respondents. to ACDC through the execution of an Omnibus Credit Line
Promulgated:
Agreement (Agreement)[6] between LBP and ACDC on
October 29, 1996. In various instances, ACDC used the
Letters of Credit/Trust Receipts Facility of the Agreement
to buy construction materials. The respondents, as officers
and representatives of ACDC, executed trust receipts[7] in
connection with the construction materials, with a total
principal amount of P52,344,096.32. The trust receipts
matured, but ACDC failed to return to LBP the proceeds of
the construction projects or the construction materials
subject of the trust receipts.LBP sent ACDC a demand
letter,[8] dated May 4, 1999, for the payment of its debts,
including those under the Trust Receipts Facility in the
amount of P66,425,924.39. When ACDC failed to comply
with the demand letter, LBP filed the affidavit-complaint.
The respondents filed a joint affidavit[9] wherein they
stated that they signed the trust receipt documents on or
about the same time LBP and ACDC executed the loan
documents; their signatures were required by LBP for the
release of the loans. The trust receipts in this case do not
contain (1) a description of the goods placed in trust, (2)
their invoice values, and (3) their maturity dates, in
violation of Section 5(a) of P.D. 115. Moreover, they
alleged that ACDC acted as a subcontractor for government
projects such as the Metro Rail Transit, the Clark
Centennial Exposition and the Quezon Power Plant in
Mauban, Quezon. Its clients for the construction projects,
which were the general contractors of these projects, have
not yet paid them; thus, ACDC had yet to receive the
proceeds of the materials that were the subject of the trust
receipts and were allegedly used for these
constructions. As there were no proceeds received from
these clients, no misappropriation thereof could have
taken place.
On September 30, 1999, Makati Assistant City Prosecutor
Amador Y. Pineda issued a Resolution[10] dismissing the
complaint. He pointed out that the evidence presented by
LBP failed to state the date when the goods described in
the letters of credit were actually released to the
possession of the respondents. Section 4 of P.D. 115
requires that the goods covered by trust receipts be
released to the possession of the entrustee after the latters
execution and delivery to the entruster of a signed trust
receipt. He adds that LBPs evidence also fails to show the
date when the trust receipts were executed since all the
trust receipts are undated. Its dispositive portion reads:
WHEREFORE, premises considered, and for insufficiency of
evidence, it is respectfully recommended that the instant
complaints be dismissed, as upon approval, the same are
hereby dismissed.[11]
LBP filed a motion for reconsideration which the Makati
Assistant City Prosecutor denied in his order of January 7,
2000.[12]
On appeal, the Secretary of Justice reversed the Resolution
of the Assistant City Prosecutor. In his resolution of August
1, 2002,[13] the Secretary of Justice pointed out that there
was no question that the goods covered by the trust
receipts were received by ACDC. He likewise adopted LBPs
argument that while the subjects of the trust receipts were
not mentioned in the trust receipts, they were listed in the
letters of credit referred to in the trust receipts. He also
noted that the trust receipts contained maturity dates and
clearly set out their stipulations. He further rejected the
respondents defense that ACDC failed to remit the
payments to LBP due to the failure of the clients of ACDC
to pay them. The dispositive portion of the resolution
reads:
WHEREFORE, the assailed resolution is REVERSED and SET
ASIDE. The City Prosecutor of Makati City is hereby
directed to file an information for estafa under Art. 315 (1)
(b) of the Revised Penal Code in relation to Section 13,
Presidential Decree No. 115 against respondents Lamberto
C. Perez, Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio]
and Napoleon O. Garcia and to report the action taken
within ten (10) days from receipt hereof.[14]
The respondents filed a motion for reconsideration of the
resolution dated August 1, 2002, which the Secretary of
Justice denied.[15] He rejected the respondents submission
that Colinares v. Court of Appeals[16] does not apply to the
case. He explained that in Colinares, the building materials
were delivered to the accused before they applied to the
bank for a loan to pay for the merchandise; thus, the
ownership of the merchandise had already been
transferred to the entrustees before the trust receipts
agreements were entered into. In the present case, the
parties have already entered into the Agreement before
the construction materials were delivered to ACDC.
Subsequently, the respondents filed a petition for review
before the Court of Appeals.
After both parties submitted their respective Memoranda,
the Court of Appeals promulgated the assailed decision of
January 20, 2005.[17] Applying the doctrine in Colinares, it
ruled that this case did not involve a trust receipt
transaction, but a mere loan. It emphasized that
construction materials, the subject of the trust receipt
transaction, were delivered to ACDC even before the trust
receipts were executed. It noted that LBP did not offer
proof that the goods were received by ACDC, and that the
trust receipts did not contain a description of the goods,
their invoice value, the amount of the draft to be paid, and
their maturity dates. It also adopted ACDCs argument that
since no payment for the construction projects had been
received by ACDC, its officers could not have been guilty of
misappropriating any payment. The dispositive portion
reads:
WHEREFORE, in view of the foregoing, the Petition is GIVEN
DUE COURSE. The assailed Resolutions of the respondent
Secretary of Justice dated August 1, 2002 and February 17,
2003, respectively in I.S. No. 99-F-9218-28 are hereby
REVERSED and SET ASIDE.[18]
LBP now files this petition for review on certiorari, dated
March 15, 2005, raising the following error:
THE COURT OF APPEALS GRAVELY ERRED WHEN IT
REVERSED AND SET ASIDE THE RESOLUTIONS OF THE
HONORABLE SECRETARY OF JUSTICE BY APPLYING THE
RULING IN THE CASE OF COLINARES V. COURT OF APPEALS,
339 SCRA 609, WHICH IS NOT APPLICABLE IN THE CASE AT
BAR.[19]
On April 8, 2010, while the case was pending before this
Court, the respondents filed a motion to dismiss.[20] They
informed the Court that LBP had already assigned to
Philippine Opportunities for Growth and Income, Inc. all of
its rights, title and interests in the loans subject of this case
in a Deed of Absolute Sale dated June 23, 2005 (attached
as Annex C of the motion). The respondents also stated
that Avent Holdings Corporation, in behalf of ACDC, had
already settled ACDCs obligation to LBP on October 8,
2009. Included as Annex A in this motion was a
certification[21] issued by the Philippine Opportunities for
Growth and Income, Inc., stating that it was LBPs
successor-in-interest insofar as the trust receipts in this
case are concerned and that Avent Holdings Corporation
had already settled the claims of LBP or obligations of
ACDC arising from these trust receipts.
We deny this petition.
The disputed transactions are not trust receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in
this manner:
Section 4. What constitutes a trust receipt transaction. A
trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the
entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or
the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt,
or for other purposes substantially equivalent to any of the
following:
1. In the case of goods or documents, (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That, in
the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods
whether in its original or processed form until the
entrustee has complied fully with his obligation under the
trust receipt; or (c) to load, unload, ship or tranship or
otherwise deal with them in a manner preliminary or
necessary to their sale[.]

There are two obligations in a trust receipt transaction. The
first is covered by the provision that refers to money under
the obligation to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision
referring to merchandise received under the obligation to
return it (devolvera) to the owner.Thus, under the Trust
Receipts Law,[22] intent to defraud is presumed when (1)
the entrustee fails to turn over the proceeds of the sale of
goods covered by the trust receipt to the entruster; or (2)
when the entrustee fails to return the goods under trust, if
they are not disposed of in accordance with the terms of
the trust receipts.[23]
In all trust receipt transactions, both obligations on the
part of the trustee exist in the alternative the return of the
proceeds of the sale or the return or recovery of the goods,
whether raw or processed.[24] When both parties enter into
an agreement knowing that the return of the goods subject
of the trust receipt is not possible even without any fault
on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the
only obligation actually agreed upon by the parties would
be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan,[25] where the borrower
is obligated to pay the bank the amount spent for the
purchase of the goods.
Article 1371 of the Civil Code provides that [i]n order to
judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. Under this provision, we can examine the
contemporaneous actions of the parties rather than rely
purely on the trust receipts that they signed in order to
understand the transaction through their intent.
We note in this regard that at the onset of these
transactions, LBP knew that ACDC was in the construction
business and that the materials that it sought to buy under
the letters of credit were to be used for the following
projects: the Metro Rail Transit Project and the Clark
Centennial Exposition Project.[26] LBP had in fact authorized
the delivery of the materials on the construction sites for
these projects, as seen in the letters of credit it attached to
its complaint.[27] Clearly, they were aware of the fact that
there was no way they could recover the buildings or
constructions for which the materials subject of the alleged
trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought
the return of the construction materials,[28] its demand
letter dated May 4, 1999 sought the payment of the
balance but failed to ask, as an alternative, for the return
of the construction materials or the buildings where these
materials had been used.[29]
The fact that LBP had knowingly authorized the delivery of
construction materials to a construction site of two
government projects, as well as unspecified construction
sites, repudiates the idea that LBP intended to be the
owner of those construction materials. As a government
financial institution, LBP should have been aware that the
materials were to be used for the construction of an
immovable property, as well as a property of the public
domain. As an immovable property, the ownership of
whatever was constructed with those materials would
presumably belong to the owner of the land, under Article
445 of the Civil Code which provides:
Article 445. Whatever is built, planted or sown on the land
of another and the improvements or repairs made
thereon, belong to the owner of the land, subject to the
provisions of the following articles.
Even if we consider the vague possibility that the materials,
consisting of cement, bolts and reinforcing steel bars,
would be used for the construction of a movable property,
the ownership of these properties would still pertain to the
government and not remain with the bank as they would
be classified as property of the public domain, which is
defined by the Civil Code as:
Article 420. The following things are property of public
dominion:
(1) Those intended for public use, such as roads, canals,
rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for
public use, and are intended for some public service or for
the development of the national wealth.
In contrast with the present situation, it is fundamental in
a trust receipt transaction that the person who advanced
payment for the merchandise becomes the absolute owner
of said merchandise and continues as owner until he or she
is paid in full, or if the goods had already been sold, the
proceeds should be turned over to him or to her.[30]
Thus, in concluding that the transaction was a loan and not
a trust receipt, we noted in Colinares that the industry or
line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not
importers acquiring goods for resale.[31] Indeed, goods sold
in retail are often within the custody or control of the
trustee until they are purchased. In the case of materials
used in the manufacture of finished products, these
finished products if not the raw materials or their
components similarly remain in the possession of the
trustee until they are sold. But the goods and the materials
that are used for a construction project are often placed
under the control and custody of the clients employing the
contractor, who can only be compelled to return the
materials if they fail to pay the contractor and often only
after the requisite legal proceedings. The contractors
difficulty and uncertainty in claiming these materials (or
the buildings and structures which they become part of),
as soon as the bank demands them, disqualify them from
being covered by trust receipt agreements.
Based on these premises, we cannot consider the
agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties
were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which
they were used; and (2) from the moment the materials
were used for the government projects, they became
public, not LBPs, property.
Since these transactions are not trust receipts, an action
for estafa should not be brought against the respondents,
who are liable only for a loan. In passing, it is useful to note
that this is the threat held against borrowers that Retired
Justice Claudio Teehankee emphatically opposed in his
dissent in People v. Cuevo,[32] restated in Ong v. CA, et
al.:[33]
The very definition of trust receipt x x x sustains the lower
courts rationale in dismissing the information that the
contract covered by a trust receipt is merely a secured
loan. The goods imported by the small importer and retail
dealer through the banks financing remain of their own
property and risk and the old capitalist orientation of
putting them in jail for estafa for non-payment of the
secured loan (granted after they had been fully
investigated by the bank as good credit risks) through the
fiction of the trust receipt device should no longer be
permitted in this day and age.
As the law stands today, violations of Trust Receipts Law
are criminally punishable, but no criminal complaint for
violation of Article 315, paragraph 1(b) of the Revised Penal
Code, in relation with P.D. 115, should prosper against a
borrower who was not part of a genuine trust receipt
transaction.
Misappropriation or abuse of confidence is absent in this
case.
Even if we assume that the transactions were trust
receipts, the complaint against the respondents still should
have been dismissed. The Trust Receipts Law punishes the
dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another, regardless of
whether the latter is the owner or not. The law does not
singularly seek to enforce payment of the loan, as there can
be no violation of [the] right against imprisonment for non-
payment of a debt.[34]
In order that the respondents may be validly prosecuted
for estafa under Article 315, paragraph 1(b) of the Revised
Penal Code,[35] in relation with Section 13 of the Trust
Receipts Law, the following elements must be established:
(a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds
thereof to [the trustor], or to return the goods if not sold;
(b) they misappropriated or converted the goods and/or
the proceeds of the sale; (c) they performed such acts with
abuse of confidence to the damage and prejudice of
Metrobank; and (d) demand was made on them by [the
trustor] for the remittance of the proceeds or the return of
the unsold goods.[36]
In this case, no dishonesty or abuse of confidence existed
in the handling of the construction materials.
In this case, the misappropriation could be committed
should the entrustee fail to turn over the proceeds of the
sale of the goods covered by the trust receipt transaction
or fail to return the goods themselves. The respondents
could not have failed to return the proceeds since their
allegations that the clients of ACDC had not paid for the
projects it had undertaken with them at the time the case
was filed had never been questioned or denied by
LBP. What can only be attributed to the respondents would
be the failure to return the goods subject of the trust
receipts.
We do not likewise see any allegation in the complaint that
ACDC had used the construction materials in a manner that
LBP had not authorized. As earlier pointed out, LBP had
authorized the delivery of these materials to these project
sites for which they were used. When it had done so, LBP
should have been aware that it could not possibly recover
the processed materials as they would become part of
government projects, two of which (the Metro Rail Transit
Project and the Quezon Power Plant Project) had even
become part of the operations of public utilities vital to
public service. It clearly had no intention of getting these
materials back; if it had, as a primary government lending
institution, it would be guilty of extreme negligence and
incompetence in not foreseeing the legal complications
and public inconvenience that would arise should it decide
to claim the materials. ACDCs failure to return these
materials or their end product at the time these trust
receipts expired could not be attributed to its volition. No
bad faith, malice, negligence or breach of contract has
been attributed to ACDC, its officers or
representatives. Therefore, absent any abuse of
confidence or misappropriation on the part of the
respondents, the criminal proceedings against them for
estafa should not prosper.
In Metropolitan Bank,[37] we affirmed the city prosecutors
dismissal of a complaint for violation of the Trust Receipts
Law. In dismissing the complaint, we took note of the Court
of Appeals finding that the bank was interested only in
collecting its money and not in the return of the
goods. Apart from the bare allegation that demand was
made for the return of the goods (raw materials that were
manufactured into textiles), the bank had not
accompanied its complaint with a demand letter. In
addition, there was no evidence offered that the
respondents therein had misappropriated or misused the
goods in question.
The petition should be dismissed because the OSG did not
file it and the civil liabilities have already been settled.
The proceedings before us, regarding the criminal aspect
of this case, should be dismissed as it does not appear from
the records that the complaint was filed with the
participation or consent of the Office of the Solicitor
General (OSG). Section 35, Chapter 12, Title III, Book IV of
the Administrative Code of 1987 provides that:
Section 35. Powers and Functions. The Office of the
Solicitor General shall represent the Government of the
Philippines, its agencies and instrumentalities and its
officials and agents in any litigation, proceedings,
investigation or matter requiring the services of lawyers. x
x x It shall have the following specific powers and functions:
(1) Represent the Government in the Supreme Court and
the Court of Appeals in all criminal proceedings; represent
the Government and its officers in the Supreme Court, the
Court of Appeals and all other courts or tribunals in all civil
actions and special proceedings in which the Government
or any officer thereof in his official capacity is a party.
(Emphasis provided.)
In Heirs of Federico C. Delgado v. Gonzalez,[38] we ruled that
the preliminary investigation is part of a criminal
proceeding. As all criminal proceedings before the
Supreme Court and the Court of Appeals may be brought
and defended by only the Solicitor General in behalf of the
Republic of the Philippines, a criminal action brought to us
by a private party alone suffers from a fatal defect. The
present petition was brought in behalf of LBP by the
Government Corporate Counsel to protect its private
interests. Since the representative of the People of the
Philippines had not taken any part of the case, it should be
dismissed.
On the other hand, if we look at the mandate given to the
Office of the Government Corporate Counsel, we find that
it is limited to the civil liabilities arising from the crime, and
is subject to the control and supervision of the public
prosecutor. Section 2, Rule 8 of the Rules Governing the
Exercise by the Office of the Government Corporate
Counsel of its Authority, Duties and Powers as Principal
Law Office of All Government Owned or Controlled
Corporations, filed before the Office of the National
Administration Register on September 5, 2011, reads:
Section 2. Extent of legal assistance The OGCC shall
represent the complaining GOCC in all stages of the
criminal proceedings. The legal assistance extended is not
limited to the preparation of appropriate sworn
statements but shall include all aspects of an effective
private prosecution including recovery of civil liability
arising from the crime, subject to the control and
supervision of the public prosecutor.
Based on jurisprudence, there are two exceptions when a
private party complainant or offended party in a criminal
case may file a petition with this Court, without the
intervention of the OSG: (1) when there is denial of due
process of law to the prosecution, and the State or its
agents refuse to act on the case to the prejudice of the
State and the private offended party;[39] and (2) when the
private offended party questions the civil aspect of a
decision of the lower court.[40]
In this petition, LBP fails to allege any inaction or refusal to
act on the part of the OSG, tantamount to a denial of due
process. No explanation appears as to why the OSG was
not a party to the case. Neither can LBP now question the
civil aspect of this decision as it had already assigned ACDCs
debts to a third person, Philippine Opportunities for
Growth and Income, Inc., and the civil liabilities appear to
have already been settled by Avent Holdings Corporation,
in behalf of ACDC. These facts have not been disputed by
LBP. Therefore, we can reasonably conclude that LBP no
longer has any claims against ACDC, as regards the subject
matter of this case, that would entitle it to file a civil or
criminal action.
WHEREFORE, we DENY the petition and AFFIRM the
January 20, 2005 decision of the Court of Appeals in CA-
G.R. SP No. 76588. No costs.
SO ORDERED.
G.R. No. 195117 August 14, 2013
HUR TIN YANG, PETITIONER
vs.
PEOPLE OF THE PHILIPPINES, RESPONDENT.
RESOLUTION
VELASCO JR., J.:
This is a motion for reconsideration of our February 1, 2012
Minute Resolution1 sustaining the July 28, 2010
Decision2 and December 20, 2010 Resolution3 of the Court
of Appeals (CA) in CA-G.R. CR No. 30426, finding petitioner
Hur Tin Yang guilty beyond reasonable doubt of the crime
of Estafa under A11icle 315, paragraph 1 (b) of the Revised
Penal Code (RPC) in relation to Presidential Decree No. 115
(PD 115) or the Trust Receipts Law.
In twenty-four (24) consolidated Informations, all dated
March 15, 2002, petitioner Hur Tin Yang was charged at the
instance of the same complainant with the crime of Estafa
under Article 315, par. 1(b) of the RPC,4 in relation to PD
115,5 docketed as Criminal Case Nos. 04-223911 to 34 and
raffled to the Regional Trial Court of Manila, Branch 20. The
24 Informations––differing only as regards the alleged date
of commission of the crime, date of the trust receipts, the
number of the letter of credit, the subject goods and the
amount––uniformly recite:
That on or about May 28, 1998, in the City of Manila,
Philippines, the said accused being then the authorized
officer of SUPERMAX PHILIPPINES, INC., with office address
at No. 11/F, Global Tower, Gen Mascardo corner M. Reyes
St., Bangkal, Makati City, did then and there willfully,
unlawfully and feloniously defraud the METROPOLITAN
BANK AND TRUST COMPANY (METROBANK), a corporation
duly organized and existing under and by virtue of the laws
of the Republic of the Philippines, represented by its
Officer in Charge, WINNIE M. VILLANUEVA, in the following
manner, to wit: the said accused received in trust from the
said Metropolitan Bank and Trust Company reinforcing
bars valued at ₱1,062,918.84 specified in the undated
Trust Receipt Agreement covered by Letter of Credit No.
MG-LOC 216/98 for the purpose of holding said
merchandise/goods in trust, with obligation on the part of
the accused to turn over the proceeds of the sale thereof
or if unsold, to return the goods to the said bank within the
specified period agreed upon, but herein accused once in
possession of the said merchandise/goods, far from
complying with his aforesaid obligation, failed and refused
and still fails and refuses to do so despite repeated
demands made upon him to that effect and with intent to
defraud and with grave abuse of confidence and trust,
misappropriated, misapplied and converted the said
merchandise/goods or the value thereof to his own
personal use and benefit, to the damage and prejudice of
said METROPOLITAN BANK AND TRUST COMPANY in the
aforesaid amount of ₱1,062,918.84, Philippine Currency.
Contrary to law.6
Upon arraignment, petitioner pleaded "not guilty."
Thereafter, trial on the merits then ensued.
The facts of these consolidated cases are undisputed:
Supermax Philippines, Inc. (Supermax) is a domestic
corporation engaged in the construction business. On
various occasions in the month of April, May, July, August,
September, October and November 1998, Metropolitan
Bank and Trust Company (Metrobank), Magdalena Branch,
Manila, extended several commercial letters of credit (LCs)
to Supermax. These commercial LCs were used by
Supermax to pay for the delivery of several construction
materials which will be used in their construction business.
Thereafter, Metrobank required petitioner, as
representative and Vice-President for Internal Affairs of
Supermax, to sign twenty-four (24) trust receipts as
security for the construction materials and to hold those
materials or the proceeds of the sales in trust for
Metrobank to the extent of the amount stated in the trust
receipts.
When the 24 trust receipts fell due and despite the receipt
of a demand letter dated August 15, 2000, Supermax failed
to pay or deliver the goods or proceeds to Metrobank.
Instead, Supermax, through petitioner, requested the
restructuring of the loan. When the intended restructuring
of the loan did not materialize, Metrobank sent another
demand letter dated October 11, 2001. As the demands fell
on deaf ears, Metrobank, through its representative,
Winnie M. Villanueva, filed the instant criminal complaints
against petitioner.
For his defense, while admitting signing the trust receipts,
petitioner argued that said trust receipts were demanded
by Metrobank as additional security for the loans extended
to Supermax for the purchase of construction equipment
and materials. In support of this argument, petitioner
presented as witness, Priscila Alfonso, who testified that
the construction materials covered by the trust receipts
were delivered way before petitioner signed the
corresponding trust receipts.7 Further, petitioner argued
that Metrobank knew all along that the construction
materials subject of the trust receipts were not intended
for resale but for personal use of Supermax relating to its
construction business.8
The trial court a quo, by Judgment dated October 6, 2006,
found petitioner guilty as charged and sentenced him as
follows:
His guilt having been proven and established beyond
reasonable doubt, the Court hereby renders judgment
CONVICTING accused HUR TIN YANG of the crime of estafa
under Article 315 paragraph 1 (a) of the Revised Penal Code
and hereby imposes upon him the indeterminate penalty
of 4 years, 2 months and 1 day of prision correccional to 20
years of reclusion temporal and to pay Metropolitan Bank
and Trust Company, Inc. the amount of Php13,156,256.51
as civil liability and to pay cost.
SO ORDERED.9
Petitioner appealed to the CA. On July 28, 2010, the
appellate court rendered a Decision, upholding the findings
of the RTC that the prosecution has satisfactorily
established the guilt of petitioner beyond reasonable
doubt, including the following critical facts, to wit: (1)
petitioner signing the trust receipts agreement; (2)
Supermax failing to pay the loan; and (3) Supermax failing
to turn over the proceeds of the sale or the goods to
Metrobank upon demand. Curiously, but significantly, the
CA also found that even before the execution of the trust
receipts, Metrobank knew or should have known that the
subject construction materials were never intended for
resale or for the manufacture of items to be sold.10
The CA ruled that since the offense punished under PD 115
is in the nature of malum prohibitum, a mere failure to
deliver the proceeds of the sale or goods, if not sold, is
sufficient to justify a conviction under PD 115. The fallo of
the CA Decision reads:
WHEREFORE, in view of the foregoing premises, the appeal
filed in this case is hereby DENIED and, consequently,
DISMISSED. The assailed Decision dated October 6, 2006 of
the Rregional Trial Court, Branch 20, in the City of Manila
in Criminal Cases Nos. 04223911 to 223934 is hereby
AFFIRMED.
SO ORDERED.
Petitioner filed a Motion for Reconsideration, but it was
denied in a Resolution dated December 20, 2010. Not
satisfied, petitioner filed a petition for review under Rule
45 of the Rules of Court. The Office of the Solicitor General
(OSG) filed its Comment dated November 28, 2011,
stressing that the pieces of evidence adduced from the
testimony and documents submitted before the trial court
are sufficient to establish the guilt of petitioner.11
On February 1, 2012, this Court dismissed the Petition via
a Minute Resolution on the ground that the CA committed
no reversible error in the assailed July 28, 2010 Decision.
Hence, petitioner filed the present Motion for
Reconsideration contending that the transactions between
the parties do not constitute trust receipt agreements but
rather of simple loans.
On October 3, 2012, the OSG filed its Comment on the
Motion for Reconsideration, praying for the denial of said
motion and arguing that petitioner merely reiterated his
arguments in the petition and his Motion for
Reconsideration is nothing more than a mere rehash of the
matters already thoroughly passed upon by the RTC, the
CA and this Court.12
The sole issue for the consideration of the Court is whether
or not petitioner is liable for Estafa under Art. 315, par. 1(b)
of the RPC in relation to PD 115, even if it was sufficiently
proved that the entruster (Metrobank) knew beforehand
that the goods (construction materials) subject of the trust
receipts were never intended to be sold but only for use in
the entrustee’s construction business.
The motion for reconsideration has merit.
In determining the nature of a contract, courts are not
bound by the title or name given by the parties. The
decisive factor in evaluating such agreement is the
intention of the parties, as shown not necessarily by the
terminology used in the contract but by their conduct,
words, actions and deeds prior to, during and immediately
after executing the agreement. As such, therefore,
documentary and parol evidence may be submitted and
admitted to prove such intention.13
In the instant case, the factual findings of the trial and
appellate courts reveal that the dealing between petitioner
and Metrobank was not a trust receipt transaction but one
of simple loan. Petitioner’s admission––that he signed the
trust receipts on behalf of Supermax, which failed to pay
the loan or turn over the proceeds of the sale or the goods
to Metrobank upon demand––does not conclusively prove
that the transaction was, indeed, a trust receipts
transaction. In contrast to the nomenclature of the
transaction, the parties really intended a contract of loan.
This Court––in Ng v. People14 and Land Bank of the
Philippines v. Perez,15 cases which are in all four corners
the same as the instant case––ruled that the fact that the
entruster bank knew even before the execution of the trust
receipt agreements that the construction materials
covered were never intended by the entrustee for resale
or for the manufacture of items to be sold is sufficient to
prove that the transaction was a simple loan and not a trust
receipts transaction.
The petitioner was charged with Estafa committed in what
is called, under PD 115, a "trust receipt transaction," which
is defined as:
Section 4. What constitutes a trust receipts transaction.—
A trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latter’s execution and delivery to the
entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or
the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt,
or for other purposes substantially equivalent to any of the
following:
1. In the case of goods or documents: (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That, in
the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods
whether in its original or processed form until the
entrustee has complied full with his obligation under the
trust receipt; or (c) to load, unload, ship or transship or
otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments: (a) to sell or procure their sale
or exchange; or (b) to deliver them to a principal; or (c) to
effect the consummation of some transactions involving
delivery to a depository or register; or (d) to effect their
presentation, collection or renewal.
Simply stated, a trust receipt transaction is one where the
entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return
the merchandise to the entruster. There are, therefore,
two obligations in a trust receipt transaction: the first
refers to money received under the obligation involving
the duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the
merchandise received under the obligation to "return" it
(devolvera) to the owner.16 A violation of any of these
undertakings constitutes Estafa defined under Art. 315,
par. 1(b) of the RPC, as provided in Sec. 13 of PD 115, viz:
Section 13. Penalty Clause.—The failure of an entrustee to
turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the
trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the
provisions of Article Three hundred fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal
Code. x x x (Emphasis supplied.)
Nonetheless, when both parties enter into an agreement
knowing fully well that the return of the goods subject of
the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction
penalized under Sec. 13 of PD 115 in relation to Art. 315,
par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds of
the sale transaction. This transaction becomes a mere loan,
where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.17
In Ng v. People, Anthony Ng, then engaged in the business
of building and fabricating telecommunication towers,
applied for a credit line of PhP 3,000,000 with Asiatrust
Development Bank, Inc. Prior to the approval of the loan,
Anthony Ng informed Asiatrust that the proceeds would be
used for purchasing construction materials necessary for
the completion of several steel towers he was
commissioned to build by several telecommunication
companies. Asiatrust approved the loan but required
Anthony Ng to sign a trust receipt agreement. When
Anthony Ng failed to pay the loan, Asiatrust filed a criminal
case for Estafa in relation to PD 115 or the Trust Receipts
Law. This Court acquitted Anthony Ng and ruled that the
Trust Receipts Law was created to "to aid in financing
importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the
merchandise imported or purchased." Since Asiatrust
knew that Anthony Ng was neither an importer nor retail
dealer, it should have known that the said agreement could
not possibly apply to petitioner, viz:
The true nature of a trust receipt transaction can be found
in the "whereas" clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient business device to
assist importers and merchants solve their financing
problems." Obviously, the State, in enacting the law,
sought to find a way to assist importers and merchants in
their financing in order to encourage commerce in the
Philippines.
[A] trust receipt is considered a security transaction
intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance
the importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased.
Similarly, American Jurisprudence demonstrates that trust
receipt transactions always refer to a method of "financing
importations or financing sales." The principle is of course
not limited in its application to financing importations,
since the principle is equally applicable to domestic
transactions. Regardless of whether the transaction is
foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts mainly
involved sales.
Following the precept of the law, such transactions affect
situations wherein the entruster, who owns or holds
absolute title or security interests over specified goods,
documents or instruments, releases the subject goods to
the possession of the entrustee. The release of such goods
to the entrustee is conditioned upon his execution and
delivery to the entruster of a trust receipt wherein the
former binds himself to hold the specific goods, documents
or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the
proceeds to the extent of the amount owing to the
entruster or the goods, documents or instruments
themselves if they are unsold. x x x [T]he entruster is
entitled "only to the proceeds derived from the sale of
goods released under a trust receipt to the entrustee."
Considering that the goods in this case were never
intended for sale but for use in the fabrication of steel
communication towers, the trial court erred in ruling that
the agreement is a trust receipt transaction.
xxxx
To emphasize, the Trust Receipts Law was created to "to
aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not
be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased."
Since Asiatrust knew that petitioner was neither an
importer nor retail dealer, it should have known that the
said agreement could not possibly apply to petitioner.18
Further, in Land Bank of the Philippines v. Perez, the
respondents were officers of Asian Construction and
Development Corporation (ACDC), a corporation engaged
in the construction business. On several occasions,
respondents executed in favor of Land Bank of the
Philippines (LBP) trust receipts to secure the purchase of
construction materials that they will need in their
construction projects. When the trust receipts matured,
ACDC failed to return to LBP the proceeds of the
construction projects or the construction materials subject
of the trust receipts. After several demands went
unheeded, LBP filed a complaint for Estafa or violation of
Art. 315, par. 1(b) of the RPC, in relation to PD 115, against
the respondent officers of ACDC. This Court, like in Ng,
acquitted all the respondents on the postulate that the
parties really intended a simple contract of loan and not a
trust receipts transaction, viz:
When both parties enter into an agreement knowing that
the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Section
13 of P.D. 115; the only obligation actually agreed upon by
the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan, where
the borrower is obligated to pay the bank the amount
spent for the purchase of the goods.
xxxx
Thus, in concluding that the transaction was a loan and not
a trust receipt, we noted in Colinares that the industry or
line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not
importers acquiring goods for resale. Indeed, goods sold in
retail are often within the custody or control of the trustee
until they are purchased. In the case of materials used in
the manufacture of finished products, these finished
products – if not the raw materials or their components –
similarly remain in the possession of the trustee until they
are sold. But the goods and the materials that are used for
a construction project are often placed under the control
and custody of the clients employing the contractor, who
can only be compelled to return the materials if they fail to
pay the contractor and often only after the requisite legal
proceedings. The contractor’s difficulty and uncertainty in
claiming these materials (or the buildings and structures
which they become part of), as soon as the bank demands
them, disqualify them from being covered by trust receipt
agreements.19
Since the factual milieu of Ng and Land Bank of the
Philippines are in all four corners similar to the instant case,
it behooves this Court, following the principle of stare
decisis,20 to rule that the transactions in the instant case
are not trust receipts transactions but contracts of simple
loan. The fact that the entruster bank, Metrobank in this
case, knew even before the execution of the alleged trust
receipt agreements that the covered construction
materials were never intended by the entrustee
(petitioner) for resale or for the manufacture of items to be
sold would take the transaction between petitioner and
Metrobank outside the ambit of the Trust Receipts Law.
For reasons discussed above, the subject transactions in
the instant case are not trust receipts
transactions.1âwphi1 Thus, the consolidated complaints
for Estafa in relation to PD 115 have really no leg to stand
on.
The Court’s ruling in Colinares v. Court of Appeals21 is very
apt, thus:
The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them
under the threats of criminal prosecution should they be
unable to pay it may be unjust and inequitable. if not
reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan
be disapproved. The resort to this scheme leaves poor and
hapless borrowers at the mercy of banks and is prone to
misinterpretation x x x.
Unfortunately, what happened in Colinares is exactly the
situation in the instant case. This reprehensible bank
practice described in Colinares should be stopped and
discouraged. For this Court to give life to the constitutional
provision of non-imprisonment for nonpayment of
debts,22 it is imperative that petitioner be acquitted of the
crime of Estafa under Art. 315, par. 1 (b) ofthe RPC, in
relation to PD 115.
WHEREFORE, the Resolution dated February 1, 2012,
upholding theCA's Decision dated July 28, 2010 and
Resolution dated December 20, 2010 in CA-G.R. CR No.
30426, is hereby RECONSIDERED. Petitioner Hur Tin Yang is
ACQUITTED of the charge of violating Art. 315, par. 1 (b) of
the RPC, in relation to the pertinent provision of PD 115 in
Criminal Case Nos. 04-223911 to 34.
SO ORDERED.
PART VI LETTERS OF CREDIT
G.R. No. 74886 December 8, 1992
1 BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
MILLS, INC. and ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of
public respondent; Intermediate Appellate Court (now
Court of Appeals), dated 10 March 1986, in AC-G.R. No.
66733 which affirmed in toto the 15 June 1978 decision of
Branch 9 (Quezon City) of the then Court of First Instance
(now Regional Trial Court) of Rizal in Civil Case No. Q-
19312. The latter involved an action instituted by the
petitioner for the recovery of a sum of money representing
the amount paid by it to the Nissho Company Ltd. of Japan
for textile machinery imported by the defendant, now
private respondent, Philippine Rayon Mills, Inc.
(hereinafter Philippine Rayon), represented by co-
defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are
summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon
Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a
five-year deferred payment plan (Exhibit B, Plaintiff's
Folder of Exhibits, p 2). To effect payment for said
machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and
Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit
No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts were drawn and issued
by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As
indicated on their faces, two of these drafts (Exhibit X and
X-1, Ibid., pp. 65-66) were accepted by the defendant-
appellant through its president, Anacleto R. Chi, while the
others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the defendant-
appellant which accepted delivery of the same. To enable
the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the
Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of
defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant
fail to pay the total amount or any portion of the drafts
issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased
business operation (sic). On December 29, 1969,
defendant-appellant's factory was leased by Yupangco
Cotton Mills for an annual rental of P200,000.00 (Exhibit
I, Ibid., p. 22). The lease was renewed on January 3, 1973
(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile
machineries in the defendant-appellant's factory were sold
to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from
the letter of credit and the trust receipt remained unpaid
and unliquidated. Repeated formal demands (Exhibits U,
V, and W, Ibid., pp. 62, 63, 64) for the payment of the said
trust receipt yielded no result Hence, the present action for
the collection of the principal amount of P956,384.95 was
filed on October 3, 1974 against the defendant-appellant
and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the
complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the
sum of P153,645.22, the amounts due under Exhibits "X"
& "X-1", with interest at 6% per annum beginning
September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to
"X-11", inclusive, the same not having been accepted by
defendant Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the instant case is
premature.
Insofar as defendant Anacleto R. Chi is concerned, the case
is dismissed. Plaintiff is ordered to pay defendant Anacleto
R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate
Appellate Court. In urging the said court to reverse or
modify the decision, petitioner alleged in its Brief that the
trial court erred in (a) disregarding its right to
reimbursement from the private respondents for the
entire unpaid balance of the imported machines, the total
amount of which was paid to the Nissho Company Ltd.,
thereby violating the principle of the third party payor's
right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the
rule against unjust enrichment; (b) refusing to hold
Anacleto R. Chi, as the responsible officer of defendant
corporation, liable under Section 13 of P.D No 115 for the
entire unpaid balance of the imported machines covered
by the bank's trust receipt (Exhibit "C"); (c) finding that the
solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of
Anacleto R. Chi that he is at least a simple guarantor of the
said trust receipt obligation; (e) contravening, based on the
assumption that Chi is a simple guarantor, Articles 2059,
2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had
already attached; (f) contravening the judicial admissions
of Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the drafts (Exhibits "X",
"X-l" to "X-11''); and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon before the latter
could be held liable thereon. 4
In its decision, public respondent sustained the trial court
in all respects. As to the first and last assigned errors, it
ruled that the provision on unjust enrichment, Article 2142
of the Civil Code, applies only if there is no express contract
between the parties and there is a clear showing that the
payment is justified. In the instant case, the relationship
existing between the petitioner and Philippine Rayon is
governed by specific contracts, namely the application for
letters of credit, the promissory note, the drafts and the
trust receipt. With respect to the last ten (10) drafts
(Exhibits "X-2" to "X-11") which had not been presented to
and were not accepted by Philippine Rayon, petitioner was
not justified in unilaterally paying the amounts stated
therein. The public respondent did not agree with the
petitioner's claim that the drafts were sight drafts which
did not require presentment for acceptance to Philippine
Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten
(10) drafts were not presented and accepted, no valid
demand for payment can be made.
Public respondent also disagreed with the petitioner's
contention that private respondent Chi is solidarily liable
with Philippine Rayon pursuant to Section 13 of P.D. No.
115 and based on his signature on the solidary guaranty
clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil
liability provided for in said Section 13 attaches only after
conviction. As to the second, it expressed misgivings as to
whether Chi's signature on the trust receipt made the
latter automatically liable thereon because the so-called
solidary guaranty clause at the dorsal portion of the trust
receipt is to be signed not by one (1) person alone, but by
two (2) persons; the last sentence of the same is
incomplete and unsigned by witnesses; and it is not
acknowledged before a notary public. Besides, even
granting that it was executed and acknowledged before a
notary public, Chi cannot be held liable therefor because
the records fail to show that petitioner had either
exhausted the properties of Philippine Rayon or had
resorted to all legal remedies as required in Article 2058 of
the Civil Code. As provided for under Articles 2052 and
2054 of the Civil Code, the obligation of a guarantor is
merely accessory and subsidiary, respectively. Chi's liability
would therefore arise only when the principal debtor fails
to comply with his obligation. 5
Its motion to reconsider the decision having been denied
by the public respondent in its Resolution of 11 June
1986, 6 petitioner filed the instant petition on 31 July 1986
submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR
FULL REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO
NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE
RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE
OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON
AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A
SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS
SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND
RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON
RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO
THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE
TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11)
AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE
THE LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due
course to the petition after the filing of the Comment
thereto by private respondent Anacleto Chi and of the
Reply to the latter by the petitioner; both parties were also
required to submit their respective memoranda which they
subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the
trust receipt;
3. Whether private respondent Chi is jointly and severally
liable with Philippine Rayon for the obligation sought to be
enforced and if not, whether he may be considered a
guarantor; in the latter situation, whether the case should
have been dismissed on the ground of lack of cause of
action as there was no prior exhaustion of Philippine
Rayon's properties.
Both the trial court and the public respondent ruled that
Philippine Rayon could be held liable for the two (2)
drafts, Exhibits "X" and "X-1", because only these appear
to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts
(Exhibits "X-2" to "X-11" inclusive) did not arise because
the same were not presented for acceptance. In short,
both courts concluded that acceptance of the drafts by
Philippine Rayon was indispensable to make the latter
liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed
from Philippine Rayon's application for a commercial letter
of credit with the petitioner in the amount of $128,548.78
to cover the former's contract to purchase and import
loom and textile machinery from Nissho Company, Ltd. of
Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial
court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for
Commercial Letter of Credit, plaintiff bank 10 was under
obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically drew
against said letter of credit from 1963 to 1968, pursuant to
plaintiff's contract with the defendant Philippine Rayon
Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc.,
was obligated to pay plaintiff bank the amounts of the
drafts drawn by Nisso (sic) Company, Ltd. against said
plaintiff bank together with any accruing commercial
charges, interest, etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank
or other person made at the request of a customer that
the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the
credit. 11Through a letter of credit, the bank merely
substitutes its own promise to pay for one of its customers
who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. 12 In the instant
case then, the drawee was necessarily the herein
petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made.
— Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other
case, where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary
in order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment
for acceptance.
The acceptance of a bill is the signification by the drawee
of his assent to the order of the drawer; 14 this may be done
in writing by the drawee in the bill itself, or in a separate
instrument. 15
The parties herein agree, and the trial court explicitly ruled,
that the subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are
supposed to be payable upon acceptance unless plaintiff
bank has given the Philippine Rayon Mills Inc. time within
which to pay the same. The first two drafts (Annexes C &
D, Exh. X & X-1) were duly accepted as indicated on their
face (sic), and upon such acceptance should have been
paid forthwith. These two drafts were not paid and
although Philippine Rayon Mills
ought to have paid the same, the fact remains that until
now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL,
payable on demand. Section 7 provides:
Sec. 7. When payable on demand. — An instrument is
payable on demand —
(a) When so it is expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting,
or indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our
liability for payment at maturity of any accepted draft, bill
of exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the
public respondent, contemplate prior acceptance by
Philippine Rayon, but by the petitioner. Acceptance,
however, was not even necessary in the first place because
the drafts which were eventually issued were sight drafts
And even if these were not sight drafts, thereby
necessitating acceptance, it would be the petitioner — and
not Philippine Rayon — which had to accept the same for
the latter was not the drawee. Presentment for acceptance
is defined an the production of a bill of exchange to a
drawee for acceptance. 18The trial court and the public
respondent, therefore, erred in ruling that presentment for
acceptance was an indispensable requisite for Philippine
Rayon's liability on the drafts to attach. Contrary to both
courts' pronouncements, Philippine Rayon immediately
became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the
petitioner. A different conclusion would violate the
principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and
the issuer, Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine
Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. The
typical setting and purpose of a letter of credit are
described in Hibernia Bank and Trust Co.vs. J. Aron & Co.,
Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time
necessarily elapses between the sale and the receipt by a
purchaser of the merchandise, during which interval great
price changes may occur. Buyers and sellers struggle for
the advantage of position. The seller is desirous of being
paid as surely and as soon as possible, realizing that the
vendee at a distant point has it in his power to reject on
trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit
meet this condition by affording celerity and certainty of
payment. Their purpose is to insure to a seller payment of
a definite amount upon presentation of documents. The
bank deals only with documents. It has nothing to do with
the quality of the merchandise. Disputes as to the
merchandise shipped may arise and be litigated later
between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank
when the proper documents are presented.
The trial court and the public respondent likewise erred
in disregarding the trust receipt and in not holding that
Philippine Rayon was liable thereon. In People vs. Yu Chai
Ho, 20 this Court explains the nature of a trust receipt by
quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of capital,
of credit, or of business facilities and agencies abroad, to
the enterprise of foreign commerce. Much of this trade
could hardly be carried on by any other means, and
therefore it is of the first importance that the
fundamental factor in the transaction, the banker's
advance of money and credit, should receive the amplest
protection. Accordingly, in order to secure that the
banker shall be repaid at the critical point — that is, when
the imported goods finally reach the hands of the
intended vendee — the banker takes the full title to the
goods at the very beginning; he takes it as soon as the
goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to
hold that title as his indispensable security until the goods
are sold in the United States and the vendee is called upon
to pay for them. This security is not an ordinary pledge by
the importer to the banker, for the importer has never
owned the goods, and moreover he is not able to deliver
the possession; but the security is the complete title vested
originally in the bankers, and this characteristic of the
transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the
banker is always under the obligation to reconvey; but only
after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de
Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a
conditional sale as provided by the Chattel Mortgage Law,
that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The
ownership of the merchandise continues to be vested in
the owner thereof or in the person who has advanced
payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his
representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts
Law, which took effect on 29 January 1973, a trust receipt
transaction is defined as "any transaction by and between
a person referred to in this Decree as the entruster, and
another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or
security interests' over certain specified goods, documents
or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the
entruster of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or
the goods, instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms
and conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the
following: . . ."
It is alleged in the complaint that private respondents
"not only have presumably put said machinery to good
use and have profited by its operation and/or disposition
but very recent information that (sic) reached plaintiff
bank that defendants already sold the machinery covered
by the trust receipt to Yupangco Cotton Mills," and that
"as trustees of the property covered by the trust receipt,
. . . and therefore acting in fiduciary (sic) capacity,
defendants have willfully violated their duty to account
for the whereabouts of the machinery covered by the
trust receipt or for the proceeds of any lease, sale or other
disposition of the same that they may have made,
notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use
any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no
specific prayer for the delivery to the petitioner by
Philippine Rayon of the proceeds of the sale of the
machinery covered by the trust receipt, such relief is
covered by the general prayer for "such further and other
relief as may be just and equitable on the
premises." 24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust
Receipts Law, no legal obstacle prevented it from
enforcing the civil liability arising out of the trust, receipt
in a separate civil action. Under Section 13 of the Trust
Receipts Law, the failure of an entrustee to turn over the
proceeds of the sale of goods, documents or instruments
covered by a trust receipt to the extent of the amount
owing to the entruster or as appear in the trust receipt or
to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article 315, paragraph
1(b) of the Revised Penal Code. 25 Under Article 33 of the
Civil Code, a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the
injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed,
and not for that adduced by the public respondent, that
private respondent Chi's signature in the dorsal portion of
the trust receipt did not bind him solidarily with Philippine
Rayon. The statement at the dorsal portion of the said trust
receipt, which petitioner describes as a "solidary guaranty
clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly and
severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of
money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or
pertaining to, and/or in any event connected with the
default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps or exhaust its
remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the
statement, specifically the clause ". . . we jointly and
severally agree and undertake . . .," and the concluding
sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as
follows:
With respect to the second argument, we have our
misgivings as to whether the mere signature of defendant-
appellee Chi of (sic) the guaranty agreement, Exhibit "C-1",
will make it an actionable document. It should be noted
that Exhibit "C-1" was prepared and printed by the
plaintiff-appellant. A perusal of Exhibit "C-1" shows that it
was to be signed and executed by two persons. It was
signed only by defendant-appellee Chi. Exhibit "C-1" was to
be witnessed by two persons, but no one signed in that
capacity. The last sentence of the guaranty clause is
incomplete. Furthermore, the plaintiff-appellant also failed
to have the purported guarantee clause acknowledged
before a notary public. All these show that the alleged
guaranty provision was disregarded and, therefore, not
consummated.
But granting arguendo that the guaranty provision in
Exhibit "C-1" was fully executed and acknowledged still
defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had
neither exhausted the property of the defendant-appellant
nor had it resorted to all legal remedies against the said
defendant-appellant as provided in Article 2058 of the Civil
Code. The obligation of a guarantor is merely accessory
under Article 2052 of the Civil Code and subsidiary under
Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor
fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty
clause yields no other conclusion than that the obligation
of Chi is only that of a guarantor. This is further bolstered
by the last sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be
exhausted was not filled up. Under Article 2058 of the Civil
Code, the defense of exhaustion (excussion) may be raised
by a guarantor before he may be held liable for the
obligation. Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however,
described the guaranty as solidary between the
guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking
of the two (2) parties who are to sign it or to the liability
existing between themselves. It does not refer to the
undertaking between either one or both of them on the
one hand and the petitioner on the other with respect to
the liability described under the trust receipt. Elsewise
stated, their liability is not divisible as between them, i.e.,
it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of
the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is
limited to the affixing of his signature thereon. It is,
therefore, a contract of adhesion; 28 as such, it must be
strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public
respondent that this solidary guaranty clause was
effectively disregarded simply because it was not signed
and witnessed by two (2) persons and acknowledged
before a notary public. While indeed, the clause ought to
have been signed by two (2) guarantors, the fact that it was
only Chi who signed the same did not make his act an idle
ceremony or render the clause totally meaningless. By his
signing, Chi became the sole guarantor. The attestation by
witnesses and the acknowledgement before a notary
public are not required by law to make a party liable on the
instrument. The rule is that contracts shall be obligatory in
whatever form they may have been entered into, provided
all the essential requisites for their validity are present;
however, when the law requires that a contract be in some
form in order that it may be valid or enforceable, or that it
be proved in a certain way, that requirement is absolute
and indispensable. 30 With respect to a guaranty, 31 which
is a promise to answer for the debt or default of another,
the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would
be unenforceable unless ratified. 32 While the
acknowledgement of a surety before a notary public is
required to make the same a public document, under
Article 1358 of the Civil Code, a contract of guaranty does
not have to appear in a public document.
And now to the other ground relied upon by the petitioner
as basis for the solidary liability of Chi, namely the criminal
proceedings against the latter for the violation of P.D. No.
115. Petitioner claims that because of the said criminal
proceedings, Chi would be answerable for the civil liability
arising therefrom pursuant to Section 13 of P.D. No. 115.
Public respondent rejected this claim because such civil
liability presupposes prior conviction as can be gleaned
from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The
said section reads:
Sec. 13. Penalty Clause. — The failure of an entrustee to
turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the
trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph
one (b) of Act Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the
criminal offense.
A close examination of the quoted provision reveals that it
is the last sentence which provides for the correct solution.
It is clear that if the violation or offense is committed by a
corporation, partnership, association or other juridical
entities, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is
imprisonment, the duration of which would depend on the
amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious:
corporations, partnerships, associations and other juridical
entities cannot be put in jail. However, it is these entities
which are made liable for the civil liability arising from the
criminal offense. This is the import of the clause "without
prejudice to the civil liabilities arising from the criminal
offense." And, as We stated earlier, since that violation of
a trust receipt constitutes fraud under Article 33 of the Civil
Code, petitioner was acting well within its rights in filing an
independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety
of the dismissal of the case against private respondent Chi.
The trial court based the dismissal, and the respondent
Court its affirmance thereof, on the theory that Chi is not
liable on the trust receipt in any capacity — either as surety
or as guarantor — because his signature at the dorsal
portion thereof was useless; and even if he could be bound
by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to
pay until
after petitioner has exhausted and resorted to all legal
remedies against the principal debtor, Philippine Rayon.
The records fail to show that petitioner had done
so 33 Reliance is thus placed on Article 2058 of the Civil
Code which provides:
Art. 2056. 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.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine
qua non for the institution of an action against a guarantor.
In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
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.
There was then nothing procedurally objectionable in
impleading private respondent Chi as a co-defendant in
Civil Case No. Q-19312 before the trial court. As a matter
of fact, Section 6, Rule 3 of the Rules of Court on permissive
joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom
or against whom any right to relief in respect to or arising
out of the same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these
rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to
all such plaintiffs or to all such defendants may arise in the
action; but the court may make such orders as may be just
to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any
proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is
based on trial convenience and is designed to permit the
joinder of plaintiffs or defendants whenever there is a
common question of law or fact. It will save the parties
unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation
in the trust receipt plus all the accessories thereof including
judicial costs; with respect to the latter, he shall only be
liable for those costs incurred after being judicially
required to pay. 36 Interest and damages, being accessories
of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the
complaint. Attorney's fees may even be allowed in
appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi
cannot be the same as that to be paid by Philippine Rayon
since it is only the trust receipt that is covered by the
guaranty and not the full extent of the latter's liability. All
things considered, he can be held liable for the sum of
P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion
in dismissing the complaint as against private respondent
Chi and condemning petitioner to pay him P20,000.00 as
attorney's fees.
In the light of the foregoing, it would no longer necessary
to discuss the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public
respondent in AC-G.R. CV No. 66733 and, necessarily, that
of Branch 9 (Quezon City) of the then Court of First Instance
of Rizal in Civil Case No. Q-19312 are hereby REVERSED and
SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc.
liable on the twelve drafts in question (Exhibits "X", "X-1"
to "X-11", inclusive) and on the trust receipt (Exhibit "C"),
and ordering it to pay petitioner: (a) the amounts due
thereon in the total sum of P956,384.95 as of 15
September 1974, with interest thereon at six percent (6%)
per annum from 16 September 1974 until it is fully paid,
less whatever may have been applied thereto by virtue of
foreclosure of mortgages, if any; (b) a sum equal to ten
percent (10%) of the aforesaid amount as attorney's fees;
and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily
liable on the trust receipt and ordering him to pay the face
value thereof, with interest at the legal rate, commencing
from the date of the filing of the complaint in Civil Case No.
Q-19312 until the same is fully paid as well as the costs and
attorney's fees in the sum of P10,000.00 if the writ of
execution for the enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon
Guevarra for private respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has
found the distressed parties coming to court as adversaries
in seeking a definition of their respective rights or liabilities
thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA,
Manila, received by registered mail an Irrevocable Letter
of Credit No. 20272/81 purportedly issued by Bank of
Ayudhya, Samyaek Branch, for the account of General
Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank
and private respondent Inter-Resin Industrial Corporation
as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin
informing the latter of the foregoing and transmitting,
along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with
the letter of credit, Inter-Resin sent Atty. Emiliano Tanay
to Bank of America to have the letter of credit confirmed.
The bank did not. Reynaldo Dueñas, bank employee in
charge of letters of credit, however, explained to Atty.
Tanay that there was no need for confirmation because
the letter of credit would not have been transmitted if it
were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to
make a partial availment under the letter of credit by
submitting to Bank of America invoices, covering the
shipment of 24,000 bales of polyethylene rope to General
Chemicals valued at US$1,320,600.00, the corresponding
packing list, export declaration and bill of lading. Finally,
after being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter of
credit, Bank of America issued in favor of Inter-Resin a
Cashier's Check for P10,219,093.20, "the Peso equivalent
of the draft (for) US$1,320,600.00 drawn by Inter-Resin,
after deducting the costs for documentary stamps, postage
and mail issuance." 1 The check was picked up by Inter-
Resin's Executive Vice-President Barcelina Tio. On 10 April
1981, Ban k of America wrote Bank of Ayudhya advising the
latter of the availment under the letter of credit and sought
the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to
Bank of America the documents for the second availment
under the same letter of credit consisting of a packing list,
bill of lading, invoices, export declaration and bills in set,
evidencing the second shipment of goods. Immediately
upon receipt of a telex from the Bank of Ayudhya
declaring the letter of credit fraudulent, 2 Bank of
America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining
the authenticity of the letter of credit. 3 Bank of America
kept Inter-Resin informed of the developments. Sensing a
fraud, Bank of America sought the assistance of the
National Bureau of Investigation (NBI). With the help of
the staff of the Philippine Embassy at Bangkok, as well as
the police and customs personnel of Thailand, the NBI
agents, who were sent to Thailand, discovered that the
vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Here at
home, the NBI also investigated Inter-Resin's President
Francisco Trajano and Executive Vice President Barcelina
Tio, who, thereafter, were criminally charged for estafa
through falsification of commercial documents. The case,
however, was eventually dismissed by the Rizal Provincial
Fiscal who found no prima facieevidence to warrant
prosecution.
Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-Resin
claimed that not only was it entitled to retain
P10,219,093.20 on its first shipment but also to the balance
US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-
Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-
Resin to send the merchandise to Thailand; (b) the telex
declaring the letter of credit fraudulent was unverified and
self-serving, hence, hearsay, but even assuming that the
letter of credit was fake, "the fault should be borne by the
BA which was careless and negligent" 5 for failing to utilize
its modern means of communication to verify with Bank of
Ayudhya in Thailand the authenticity of the letter of credit
before sending the same to Inter-Resin; (c) the loading of
plastic products into the vans were under strict
supervision, inspection and verification of government
officers who have in their favor the presumption of
regularity in the performance of official functions; and (d)
Bank of America failed to prove the participation of Inter-
Resin or its employees in the alleged fraud as, in fact, the
complaint for estafa through falsification of documents
was dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court;
hence, this present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a)
whether it has warranted the genuineness and authenticity
of the letter of credit and, corollarily, whether it has acted
merely as an advising bank or as a confirming bank; (b)
whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the
dishonor of the letter of credit by Bank of Ayudhya,
whether Bank of America may recover against Inter-Resin
under the draft executed in its partial availment of the
letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America
cannot, on appeal, belatedly raise the issue of being only
an advising bank; (b) the findings of the trial court that the
ropes have actually been shipped is binding on the Court;
and, (c) Bank of America cannot recover from Inter-Resin
because the drawer of the letter of credit is the Bank of
Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got
themselves into the mess, it may be well to start by
recalling how, in its modern use, a letter of credit is
employed in trade transactions.
A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse,
the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the
latter of credit, the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents
required by the letter of credit. 10 The buyer and the seller
agree on what documents are to be presented for
payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the
buyer.
Once the credit is established, the seller ships the goods to
the buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required
documents to the issuing bank. The issuing bank redeems
the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the
letter of credit requires. The bank then obtains possession
of the documents upon paying the seller. The transaction
is completed when the buyer reimburses the issuing bank
and acquires the documents entitling him to the goods.
Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the
buyer acquires said documents and control over the goods
only after reimbursing the bank.
What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the issuing
bank to pay the seller of the draft and the required shipping
documents are presented to it. In turn, this arrangement
assures the seller of prompt payment, independent of any
breach of the main sales contract. By this so-called
"independence principle," the bank determines
compliance with the letter of credit only by examining the
shipping documents presented; it is precluded from
determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a)
the buyer, 12 who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of
credit, 13 which undertakes to pay the seller upon receipt
of the draft and proper document of titles and to surrender
the documents to the buyer upon reimbursement; and, (c)
the seller, 14 who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be
increased. Thus, the services of an advising (notifying)
bank 15 may be utilized to convey to the seller the existence
of the credit; or, of a confirming bank 16 which will lend
credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, 17 which undertakes to
encash the drafts drawn by the exporter. Further, instead
of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed
the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of
this commercial instrument transcends national
boundaries, and it is thus not uncommon to find a dearth
of national law that can adequately provide for its
governance. This country is no exception. Our own Code of
Commerce basically introduces only its concept under
Articles 567-572, inclusive, thereof. It is no wonder then
why great reliance has been placed on commercial usage
and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules.
The rules were later developed into what is now known as
the Uniform Customs and Practice for Documentary
Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for,
to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we
have accepted, to the extent of their pertinency, the
application in our jurisdiction of this international
commercial credit regulatory set of rules. 20 In Bank of
Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the
Code of Commerce which expresses that, in the absence of
any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and
customs generally observed. We have further observed
that there being no specific provisions which govern the
legal complexities arising from transactions involving
letters of credit not only between or among banks
themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the U.C.P. is
undeniable.
The first issue raised with the petitioner, i.e., that it has in
this instance merely been advising bank, is outrightly
rejected by Inter-Resin and is thus sought to be discarded
for having been raised only on appeal. We cannot agree.
The crucial point of dispute in this case is whether under
the "letter of credit," Bank of America has incurred any
liability to the "beneficiary" thereof, an issue that largely is
dependent on the bank's participation in that transaction;
as a mere advising or notifying bank, it would not be liable,
but as a confirming bank, had this been the case, it could
be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association —
Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said:
Where the issues already raised also rest on other issues
not specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as
they arise from the matters on record, the court has the
authority to include them in its discussion of the
controversy and to pass upon them just as well. In brief, in
those cases where questions not particularly raised by the
parties surface as necessary for the complete adjudication
of the rights and obligations of the parties, the interests of
justice dictate that the court should consider and resolve
them. The rule that only issues or theories raised in the
initial proceedings may be taken up by a party thereto on
appeal should only refer to independent, not concomitant
matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise
to the adverse party, is in reality not existent on matters
that are properly litigated in the lower court and appear on
record.
It cannot seriously be disputed, looking at this case, that
Bank of America has, in fact, only been an advising, not
confirming, bank, and this much is clearly evident, among
other things, by the provisions of the letter of credit itself,
the petitioner bank's letter of advice, its request for
payment of advising fee, and the admission of Inter-Resin
that it has paid the same. That Bank of America has asked
Inter-Resin to submit documents required by the letter of
credit and eventually has paid the proceeds thereof, did
not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to be drawn
under the account of General Chemicals (buyer) only
means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall
that the letter of credit is an engagement of the issuing
bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11
March 1981 has expressly stated that "[t]he enclosure
is solely an advise of credit opened by the abovementioned
correspondent and conveys no engagement by us." 24This
written reservation by Bank of America in limiting its
obligation only to being an advising bank is in consonance
with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not
incur any obligation more than just notifying Inter-Resin of
the letter of credit issued in its favor, let alone to confirm
the letter of credit. 25 The bare statement of the bank
employees, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's
letter of advise, 26 nor can it justify the conclusion that the
bank must now assume total liability on the letter of credit.
Indeed, Inter-Resin itself cannot claim to have been all that
free from fault. As the seller, the issuance of the letter of
credit should have obviously been a great concern to it. 27 It
would have, in fact, been strange if it did not, prior to the
letter of credit, enter into a contract, or negotiated at the
every least, with General Chemicals. 28 In the ordinary
course of business, the perfection of contract precedes the
issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is
the primordial obligation of an advising bank. The view that
Bank of America should have first checked the authenticity
of the letter of credit with bank of Ayudhya, by using
advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in
U.C.P. Article 18 of the U.C.P. states that: "Banks assume
no liability or responsibility for the consequences arising
out of the delay and/or loss in transit of any messages,
letters or documents, or for delay, mutilation or other
errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America
is bound only to check the "apparent authenticity" of the
letter of credit, which it did. 29 Clarifying its meaning,
Webster's Ninth New Collegiate Dictionary 30 explains that
the word "APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more
rigorous examination or greater knowledge."
May Bank of America then recover what it has paid under
the letter of credit when the corresponding draft for partial
availment thereunder and the required documents were
later negotiated with it by Inter-Resin? The answer is yes.
This kind of transaction is what is commonly referred to as
a discounting arrangement. This time, Bank of America has
acted independently as a negotiating bank, thus saving
Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment. (Inter-
Resin, of course, could have chosen other banks with which
to negotiate the draft and the documents.) As a negotiating
bank, Bank of America has a right to recourse against the
issuer bank and until reimbursement is obtained, Inter-
Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. 31
While bank of America has indeed failed to allege material
facts in its complaint that might have likewise warranted
the application of the Negotiable Instruments Law and
possible then allowed it to even go after the indorsers of
the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery
from Inter-Resin itself. Inter-Resin admits having received
P10,219,093.20 from bank of America on the letter of
credit and in having executed the corresponding draft. The
payment to Inter-Resin has given, as aforesaid, Bank of
America the right of reimbursement from the issuing bank,
Bank of Ayudhya which, in turn, would then seek
indemnification from the buyer (the General Chemicals of
Thailand). Since Bank of Ayudhya disowned the letter of
credit, however, Bank of America may now turn to Inter-
Resin for restitution.
Between the seller and the negotiating bank there is the
usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of
the credit are indicated to be without recourse therefore,
the negotiating bank has the ordinary right of recourse
against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the
negotiating bank may be one and the same does not affect
its rights and obligations in either capacity, although a
special agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that
Inter-Resin sent waste instead of its products, is really of
no consequence. In the operation of a letter of credit, the
involved banks deal only with documents and not on goods
described in those documents. 34
The other issues raised in then instant petition, for
instance, whether or not Bank of Ayudhya did issue the
letter of credit and whether or not the main contract of
sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are
matters, instead, that can only be of concern to the herein
parties in an appropriate recourse against those, who,
unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we
conclude that petitioner Bank of America has acted merely
as a notifying bank and did not assume the responsibility
of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled
to recover on Inter-Resin's partial availment as beneficiary
of the letter of credit which has been disowned by the
alleged issuer bank.
No judgment of civil liability against the other defendants,
Francisco Trajano and other unidentified parties, can be
made, in this instance, there being no sufficient evidence
to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and
respondent Inter-Resin Industrial Corporation is ordered to
refund to petitioner Bank of America NT & SA the amount
of P10,219,093.20 with legal interest from the filing of the
complaint until fully paid.
No costs.
SO ORDERED.
[G.R. No. 90828. September 5, 2000]
MELVIN COLINARES and LORDINO VELOSO, petitioners,
vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF
THE PHILIPPINES, respondents.
DECISION
DAVIDE, JR., C.J.:
In 1979 Melvin Colinares and Lordino Veloso (hereafter
Petitioners) were contracted for a consideration
of P40,000 by the Carmelite Sisters of Cagayan de Oro City
to renovate the latters convent at Camaman-an, Cagayan
de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF
Solatone acoustical board 2x4x, 300 SF tanguile wood tiles
12x12, 260 SF Marcelo economy tiles and 2 gallons UMYLIN
cement adhesive from CM Builders Centre for the
construction project.[1] The following day, 31 October
1979, Petitioners applied for a commercial letter of
credit[2] with the Philippine Banking Corporation, Cagayan
de Oro City branch (hereafter PBC) in favor of CM Builders
Centre. PBC approved the letter of credit[3] for P22,389.80
to cover the full invoice value of the goods. Petitioners
signed a pro-forma trust receipt[4] as security. The loan was
due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners
marginal deposit as partial payment of the loan.[5]
On 7 May 1980, PBC wrote[6] to Petitioners demanding that
the amount be paid within seven days from notice. Instead
of complying with PBCs demand, Veloso confessed that
they lost P19,195.83 in the Carmelite Monastery Project
and requested for a grace period of until 15 June 1980 to
settle the account.[7]
PBC sent a new demand letter[8]to Petitioners on 16
October 1980 and informed them that their outstanding
balance as of 17 November 1979 was P20,824.40 exclusive
of attorneys fees of 25%.[9]
On 2 December 1980, Petitioners proposed[10] that the
terms of payment of the loan be modified as
follows: P2,000 on or before 3 December 1980, and P1,000
per month starting 31 January 1980 until the account is
fully paid. Pending approval of the proposal, Petitioners
paid P1,000 to PBC on 4 December 1980,[11] and
thereafter P500 on 11 February 1981,[12] 16 March
1981,[13] and 20 April 1981.[14] Concurrently with the
separate demand for attorneys fees by PBCs legal counsel,
PBC continued to demand payment of the balance.[15]
On 14 January 1983, Petitioners were charged with the
violation of P.D. No. 115 (Trust Receipts Law) in relation to
Article 315 of the Revised Penal Code in an Information
which was filed with Branch 18, Regional Trial Court of
Cagayan de Oro City. The accusatory portion of the
Information reads:
That on or about October 31, 1979, in the City of Cagayan
de Oro, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused entered into a
trust receipt agreement with the Philippine Banking
Corporation at Cagayan de Oro City wherein the accused,
as entrustee, received from the entruster the following
goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the
part of the accused-entrustee to hold the aforesaid items
in trust for the entruster and/or to sell on cash basis or
otherwise dispose of the said items and to turn over to the
entruster the proceeds of the sale of said goods or if there
be no sale to return said items to the entruster on or before
January 29, 1980 but that the said accused after receipt of
the goods, with intent to defraud and cause damage to the
entruster, conspiring, confederating together and mutually
helping one another, did then and there wilfully, unlawfully
and feloniously fail and refuse to remit the proceeds of the
sale of the goods to the entruster despite repeated
demands but instead converted, misappropriated and
misapplied the proceeds to their own personal use, benefit
and gain, to the damage and prejudice of the Philippine
Banking Corporation, in the aforesaid sum of P22,389.80,
Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised
Penal Code.[16]
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction
was a clean loan as per verbal guarantee of Cayo Garcia
Tuiza, PBCs former manager. He and petitioner Colinares
signed the documents without reading the fine print, only
learning of the trust receipt implication much later. When
he brought this to the attention of PBC, Mr. Tuiza assured
him that the trust receipt was a mere formality.[17]
On 7 July 1986, the trial court promulgated its
decision[18] convicting Petitioners of estafa for violating
P.D. No. 115 in relation to Article 315 of the Revised Penal
Code and sentencing each of them to suffer imprisonment
of two years and one day of prision correccional as
minimum to six years and one day of prision mayor as
maximum, and to solidarily indemnify PBC the amount
of P20,824.44, with legal interest from 29 January 1980, 12
% penalty charge per annum, 25% of the sums due as
attorneys fees, and costs.
The trial court considered the transaction between PBC
and Petitioners as a trust receipt transaction under Section
4, P.D. No. 115. It considered Petitioners use of the goods
in their Carmelite monastery project an act of disposing as
contemplated under Section 13, P.D. No. 115, and treated
the charge invoice[19] for goods issued by CM Builders
Centre as a document within the meaning of Section 3
thereof. It concluded that the failure of Petitioners to turn
over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of
Appeals which was docketed as CA-G.R. CR No.
05408. Petitioners asserted therein that the trial court
erred in ruling that they violated the Trust Receipt Law, and
in holding them criminally liable therefor. In the
alternative, they contend that at most they can only be
made civilly liable for payment of the loan.
In its decision[20] 6 March 1989, the Court of Appeals
modified the judgment of the trial court by increasing the
penalty to six years and one day of prision mayor as
minimum to fourteen years eight months and one day
of reclusion temporal as maximum. It held that the
documentary evidence of the prosecution prevails over
Velosos testimony, discredited Petitioners claim that the
documents they signed were in blank, and disbelieved that
they were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New
Trial/Reconsideration[21] alleging that the Disclosure
Statement on Loan/Credit Transaction[22] (hereafter
Disclosure Statement) signed by them and Tuiza was
suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it
bears a 14% interest as opposed to the trust receipt which
does not at all bear any interest. Petitioners further
maintained that when PBC allowed them to pay in
installment, the agreement was novated and a creditor-
debtor relationship was created.
In its resolution[23]of 16 October 1989 the Court of Appeals
denied the Motion for New Trial/Reconsideration because
the alleged newly discovered evidence was actually
forgotten evidence already in existence during the trial,
and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on
16 November 1989. They raised the following issues:
I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR
NEW TRIAL ON THE GROUND OF NEWLY DISCOVERED
EVIDENCE, NAMELY, DISCLOSURE ON LOAN/CREDIT
TRANSACTION, WHICH IF INTRODUCED AND ADMITTED,
WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE
A DENIAL OF DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT,
WHETHER OR NOT THE ACCUSED WERE PROPERLY
CHARGED, TRIED AND CONVICTED FOR VIOLATION OF SEC.
13, PD NO. 115 IN RELATION TO ARTICLE 315 PARAGRAPH
(I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-
CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-
TRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR
SITUATION.
In its Comment of 22 January 1990, the Office of the
Solicitor General urged us to deny the petition for lack of
merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss
the case on the ground that they had already fully paid PBC
on 2 February 1990 the amount of P70,000 for the balance
of the loan, including interest and other charges, as
evidenced by the different receipts issued by PBC,[24] and
that the PBC executed an Affidavit of desistance.[25]
We required the Solicitor General to comment on the
Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General
opined that payment of the loan was akin to a voluntary
surrender or plea of guilty which merely serves to mitigate
Petitioners culpability, but does not in any way extinguish
their criminal liability.
In the Resolution of 13 August 1990, we gave due course
to the Petition and required the parties to file their
respective memoranda.
The parties subsequently filed their respective
memoranda.
It was only on 18 May 1999 when this case was assigned to
the ponente. Thereafter, we required the parties to move
in the premises and for Petitioners to manifest if they are
still interested in the further prosecution of this case and
inform us of their present whereabouts and whether their
bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the
Court of Appeals of Petitioners Motion for New Trial and
the true nature of the contract between Petitioners and
the PBC. As to the latter, Petitioners assert that it was an
ordinary loan, not a trust receipt agreement under the
Trust Receipts Law.
The grant or denial of a motion for new trial rests upon the
discretion of the judge. New trial may be granted if: (1)
errors of law or irregularities have been committed during
the trial prejudicial to the substantial rights of the accused;
or (2) new and material evidence has been discovered
which the accused could not with reasonable diligence
have discovered and produced at the trial, and which, if
introduced and admitted, would probably change the
judgment.[26]
For newly discovered evidence to be a ground for new trial,
such evidence must be (1) discovered after trial; (2) could
not have been discovered and produced at the trial even
with the exercise of reasonable diligence; and (3) material,
not merely cumulative, corroborative, or impeaching, and
of such weight that, if admitted, would probably change
the judgment.[27] It is essential that the offering party
exercised reasonable diligence in seeking to locate the
evidence before or during trial but nonetheless failed to
secure it.[28]
We find no indication in the pleadings that the Disclosure
Statement is a newly discovered evidence.
Petitioners could not have been unaware that the two-
page document exists. The Disclosure Statement itself
states, NOTICE TO BORROWER: YOU ARE ENTITLED TO A
COPY OF THIS PAPER WHICH YOU SHALL SIGN.[29] Assuming
Petitioners copy was then unavailable, they could have
compelled its production in court,[30] which they never
did. Petitioners have miserably failed to establish the
second requisite of the rule on newly discovered evidence.
Petitioners themselves admitted that they searched again
their voluminous records, meticulously and patiently, until
they discovered this new and material evidence only upon
learning of the Court of Appeals decision and after they
were shocked by the penalty imposed.[31] Clearly, the
alleged newly discovered evidence is mere forgotten
evidence that jurisprudence excludes as a ground for new
trial.[32]
However, the second issue should be resolved in favor of
Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a
trust receipt transaction as any transaction by and
between a person referred to as the entruster, and another
person referred to as the entrustee, whereby the entruster
who owns or holds absolute title or security interest over
certain specified goods, documents or instruments,
releases the same to the possession of the entrustee upon
the latters execution and delivery to the entruster of a
signed document called a trust receipt wherein the
entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in
the trust receipt.
There are two possible situations in a trust receipt
transaction. The first is covered by the provision which
refers to money received under the obligation involving
the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation
to return it (devolvera) to the owner.[33]
Failure of the entrustee to turn over the proceeds of the
sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed
of in accordance with the terms of the trust receipt shall be
punishable as estafa under Article 315 (1) of the Revised
Penal Code,[34] without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case
at bar reveals that the transaction intended by the parties
was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders
Centre on 30 October 1979. On that day, ownership over
the merchandise was already transferred to Petitioners
who were to use the materials for their construction
project. It was only a day later, 31 October 1979, that they
went to the bank to apply for a loan to pay for the
merchandise.
This situation belies what normally obtains in a pure trust
receipt transaction where goods are owned by the bank
and only released to the importer in trust subsequent to
the grant of the loan. The bank acquires a security interest
in the goods as holder of a security title for the advances it
had made to the entrustee.[35] The ownership of the
merchandise continues to be vested in the person who had
advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his
representative or successor in interest.[36] To secure that
the bank shall be paid, it takes full title to the goods at the
very beginning and continues to hold that title as his
indispensable security until the goods are sold and the
vendee is called upon to pay for them; hence, the importer
has never owned the goods and is not able to deliver
possession.[37] In a certain manner, trust receipts partake
of the nature of a conditional sale where the importer
becomes absolute owner of the imported merchandise as
soon as he has paid its price.[38]
Trust receipt transactions are intended to aid in financing
importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the
merchandise imported or purchased.[39]
The antecedent acts in a trust receipt transaction consist of
the application and approval of the letter of credit, the
making of the marginal deposit and the effective
importation of goods through the efforts of the
importer.[40]
PBC attempted to cover up the true delivery date of the
merchandise, yet the trial court took notice even though it
failed to attach any significance to such fact in the
judgment. Despite the Court of Appeals contrary view that
the goods were delivered to Petitioners previous to the
execution of the letter of credit and trust receipt, we find
that the records of the case speak volubly and this fact
remains uncontroverted. It is not uncommon for us to
peruse through the transcript of the stenographic notes of
the proceedings to be satisfied that the records of the case
do support the conclusions of the trial court.[41] After such
perusal Grego Mutia, PBCs credit investigator, admitted
thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of
credit and trust receipt agreement were received by the
accused?
A Yes, sir
Q Do you have evidence to show that these goods subject
matter of this letter of credit and trust receipt were
delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring
to this document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30
has been superimposed with numeral 1.[42]
During the cross and re-direct examinations he also
impliedly admitted that the transaction was indeed a
loan. Thus:
Q In short the amount stated in your Exhibit C, the trust
receipt was a loan to the accused you admit that?
A Because in the bank the loan is considered part of the
loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value
received. The borrower will pay the bank on a certain
specified date with interest[43]
Such statement is akin to an admission against interest
binding upon PBC.
Petitioner Velosos claim that they were made to believe
that the transaction was a loan was also not denied by
PBC. He declared:
Q Testimony was given here that that was covered by trust
receipt. In short it was a special kind of loan. What can you
say as to that?
A I dont think that would be a trust receipt because we
were made to understand by the manager who
encouraged us to avail of their facilities that they will be
granting us a loan[44]
PBC could have presented its former bank manager, Cayo
Garcia Tuiza, who contracted with Petitioners, to refute
Velosos testimony, yet it only presented credit investigator
Grego Mutia. Nowhere from Mutias testimony can it be
gleaned that PBC represented to Petitioners that the
transaction they were entering into was not a pure loan but
had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment
of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the
owner.[45] Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud
and misappropriating the money for their personal
use. The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved
to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they
evade payment of their obligation nor attempt to abscond.
Instead, Petitioners sought favorable terms precisely to
meet their obligation.
Also noteworthy is the fact that Petitioners are not
importers acquiring the goods for re-sale, contrary to the
express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their
construction project. At no time did title over the
construction materials pass to the bank, but directly to the
Petitioners from CM Builders Centre. This impresses upon
the trust receipt in question vagueness and ambiguity,
which should not be the basis for criminal prosecution in
the event of violation of its provisions.[46]
The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them
under the threats of criminal prosecution should they be
unable to pay it may be unjust and inequitable, if not
reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan
be disapproved.The resort to this scheme leaves poor and
hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and admitted
that it was only after collection of the money, as
manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and
the Resolution of 16 October 1989 of the Court of Appeals
in CA-GR. No. 05408 are REVERSED and
SET ASIDE. Petitioners are hereby ACQUITTED of the crime
charged, i.e., for violation of P.D. No. 115 in relation to
Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.
G.R. No. 183486
THE HONGKONG & SHANGHAI BANKING CORPORATION,
LIMITED, Petitioner,
vs.
NATIONAL STEEL CORPORATION and CITYTRUST
BANKING CORPORATION (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondents.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of
the Rules of Court. Petitioner The Hongkong & Shanghai
Banking Corporation, Limited (HSBC) filed this petition to
assail the Decision of the Court of Appeals (CA) dated
November 19, 2007 (Assailed Decision) which reversed the
ruling of the Regional Trial Court, Branch 62 of Makati City
(RTC Makati) and its Resolution denying HSBC's Motion for
Reconsideration dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into
an Export Sales Contract (the Contract) with Klockner East
Asia Limited (Klockner) on October 12, 1993. 1 NSC sold
1,200 metric tons of prime cold rolled coils to Klockner
under FOB ST Iligan terms. In accordance with the
requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as the
beneficiary in the amount of US$468,000. On October 22,
1993, HSBC issued an irrevocable and onsight letter of
credit no. HKH 239409 (the Letter of Credit) in favor of
NSC.2 The Letter of Credit stated that it is governed by the
International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits, Publication No. 400
(UCP 400). Under UCP 400, HSBC as the issuing bank, has
the obligation to immediately pay NSC upon presentment
of the documents listed in the Letter of Credit.3 These
documents are: (1) one original commercial invoice; (2)
one packing list; (3) one non-negotiable copy of clean on
board ocean bill of lading made out to order, blank
endorsed marked 'freight collect and notify applicant;' (4)
copy of Mill Test Certificate made out 'to whom it may
concern;' (5) copy of beneficiary's telex to applicant (Telex
No. 86660 Klock HX) advising shipment details
including DIC No., shipping marks, name of vessel, port of
shipment, port of destination, bill of lading date, sailing and
ETA dates, description of goods, size, weight, number of
packages and value of goods latest two days after shipment
date; and (6) beneficiary's certificate certifying that (a) one
set of non-negotiable copies of documents (being those
listed above) have been faxed to applicant (FAX No.
5294987) latest two days after shipment date; and (b) one
set of documents including one copy each of invoice and
packing list, 3/3 original bills of lading plus one non-
negotiable copy and three original Mill Test Certificates
have been sent to applicant by air courier service latest two
days after shipment date. 4
The Letter of Credit was amended twice to reflect changes
in the terms of delivery. On November 2, 1993, the Letter
of Credit was first amended to change the delivery terms
from FOB ST Iligan to FOB ST Manila and to increase the
amount to US$488,400.5 It was subsequently amended on
November 18, 1993 to extend the expiry and shipment
date to December 8, 1993.6 On November 21, 1993, NSC,
through Emerald Forwarding Corporation, loaded and
shipped the cargo of prime cold rolled coils on board MV
Sea Dragon under China Ocean Shipping Company Bill of
Lading No. HKG 266001. The cargo arrived in Hongkong on
November 25, 1993.7
NSC coursed the collection of its payment from Klockner
through CityTrust Banking Corporation (CityTrust). NSC had
earlier obtained a loan from CityTrust secured by the
proceeds of the Letter of Credit issued by HSBC.8
On November 29, 1993, CityTrust sent a collection order
(Collection Order) to HSBC respecting the collection of
payment from Klockner. The Collection Order instructed as
follows: (1) deliver documents against payment; (2) cable
advice of non-payment with reason; (3) cable advice
payment; and (4) remit proceeds via TELEX. 9 The
Collection Order also contained the following statement:
"Subject to Uniform Rules for the Collection of Commercial
Paper Publication No. 322." 10 Further, the Collection Order
stated that proceeds should be remitted to Standard
Chartered Bank of Australia, Ltd., Offshore Branch Manila
(SCB-M) which was, in turn, in charge of remitting the
amount to CityTrust. 11 On the same date, CityTrust also
presented to HSBC the following documents: (1) Letter of
Credit; (2) Bill of Lading; (3) Commercial Invoice; ( 4)
Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to
Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's
Certificate of air courier transmittal of documents; and (9)
DHL Receipt No. 669988911 and Certificate of Origin. 12
On December 2, 1993, HSBC sent a cablegram to CityTrust
acknowledging receipt of the Collection Order. It also
stated that the documents will be presented to "the
drawee against payment subject to UCP 322 [Uniform
Rules for Collection (URC) 322] as instructed ... " 13 SCB-M
then sent a cablegram to HSBC requesting the latter to
urgently remit the proceeds to its account. It further asked
that HSBC inform it "if unable to pay" 14 and of the "reasons
thereof." 15 Neither CityTrust nor SCB-M objected to
HSBC's statement that the collection will be handled under
the Uniform Rules for Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent
a cablegram where it repeated that "this bill is being
handled subject to [URC] 322 as instructed by [the]
collecting bank." 16 It also informed SCB-M that it has
referred the matter to Klockner for payment and that it will
revert upon the receipt of the amount. 17 On December 8,
1993, the Letter of Credit expired.18
On December 10, 1993, HSBC sent another cablegram to
SCB-M advising it that Klockner had refused payment. It
then informed SCB-M that it intends to return the
documents to NSC with all the banking charges for its
account. 19In a cablegram dated December 14, 1993,
CityTrust requested HSBC to inform it of Klockner's reason
for refusing payment so that it may refer the matter to
NSC.20 HSBC did not respond and CityTrust thus sent a
follow-up cablegram to HSBC on December 17, 1993. In
this cablegram, CityTrust insisted that a demand for
payment must be made from Klockner since the
documents "were found in compliance with LC terms and
conditions."21 HSBC replied on the same day stating that in
accordance with CityTrust's instruction in its Collection
Order, HSBC treated the transaction as a matter under URC
322. Thus, it demanded payment from Klockner which
unfortunately refused payment for unspecified reasons. It
then noted that under URC 322, Klockner has no duty to
provide a reason for the refusal. Hence, HSBC requested
for further instructions as to whether it should continue to
press for payment or return the documents.22 CityTrust
responded that as advised by its client, HSBC should
continue to press for payment.23
Klockner continued to refuse payment and HSBC notified
CityTrust in a cablegram dated January 7, 1994, that should
Klockner still refuse to accept the bill by January 12, 1994,
it will return the full set of documents to CityTrust with all
the charges for the account of the drawer. 24
Meanwhile, on January 12, 1994, CityTrust sent a letter to
NSC stating that it executed NSC's instructions "to send, ON
COLLECTION BASIS, the export documents ... "25 CityTrust
also explained that its act of sending the export documents
on collection basis has been its usual practice in response
to NSC's instructions in its transactions.26
NSC responded to this in a letter dated January 18,
1994.27 NSC expressed its disagreement with CityTrust's
contention that it sent the export documents to HSBC on
collection basis. It highlighted that it "negotiated with
CityTrust the export documents pertaining to LC No. HKH
239409 of HSBC and it was CityTrust, which wrongfully
treated the negotiation, as 'on collection basis."' 28 NSC
further claimed that CityTrust used its own mistake as an
excuse against payment under the Letter of Credit. Thus,
NSC argued that CityTrust remains liable under the Letter
of Credit. It also stated that it presumes that CityTrust has
preserved whatever right of reimbursement it may have
against HSBC. 29
On January 13, 1994, CityTrust notified HSBC that it should
continue to press for payment and to hold on to the
document until further notice. 30
However, Klockner persisted in its refusal to pay. Thus, on
February 17, 1994, HSBC returned the documents to
CityTrust. 31 In a letter accompanying the returned
documents, HSBC stated that it considered itself
discharged of its duty under the transaction. It also asked
for payment of handling charges.32 In response, CityTrust
sent a cablegram to HSBC dated February 21, 1994 stating
that it is "no longer possible for beneficiary to wait for you
to get paid by applicant."33 It explained that since the
documents required under the Letter of Credit have been
properly sent to HSBC, Citytrust demanded payment from
it. CityTrust also stated, for the first time in all of its
correspondence with HSBC, that "re your previous telexes,
ICC Publication No. 322 is not applicable."34 HSBC
responded in cablegram dated February 28, 1994.35 It
insisted that CityTrust sent documents which clearly stated
that the collection was being made under URC 322. Thus,
in accordance with its instructions, HSBC, in the next three
months, demanded payment from Klockner which the
latter eventually refused. Hence, HSBC stated that it opted
to return the documents. It then informed CityTrust that it
considered the transaction closed save for the latter's
obligation to pay the handling charges.36
Disagreeing with HSBC' s position, CityTrust sent a
cablegram dated March 9, 1994.37 It insisted that HSBC
should pay it in accordance with the terms of the Letter of
Credit which it issued on October 22, 1993. Under the
Letter of Credit, HSBC undertook to reimburse the
presenting bank under "ICC 400 upon the presentment of
all necessary documents."38 CityTrust also stated that the
reference to URC 322 in its Collection Order was merely in
fine print. The Collection Order itself was only pro-forma.
CityTrust emphasized that the reference to URC 322 has
been "obviously superseded by our specific instructions to
'deliver documents against payment/cable advice non-
payment with reason/cable advice payment/remit
proceeds via telex' which was typed in on said
form."39 CityTrust also claimed that the controlling
document is the Letter of Credit and not the mere fine print
on the Collection Order.40HSBC replied on March 10,
1994.41 It argued that CityTrust clearly instructed it to
collect payment under URC 322, thus, CityTrust can no
longer claim a contrary position three months after it made
its request. HSBC repeated that the transaction is closed
except for CityTrust's obligation to pay for the expenses
which HSBC incurred.42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC
where it, for the first time, demanded payment under the
Letter of Credit. 43 On March 11, 1994, the NSC sent
another letter to HSBC through the Office of the Corporate
Counsel which served as its final demand. These demands
were made after approximately four months from the
expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against
it for collection of sum of money (Complaint)44 docketed as
Civil Case No. 94-2122 (Collection Case) of the RTC Makati.
In its Complaint, NSC alleged that it coursed the collection
of the Letter of Credit through CityTrust. However,
notwithstanding CityTrust's complete presentation of the
documents in accordance with the requirements in the
Letter of Credit, HSBC unreasonably refused to pay its
obligation in the amount of US$485,767.93.45
HSBC filed its Answer46 on January 6, 1995. HSBC denied
any liability under the Letter of Credit. It argued in its
Answer that CityTrust modified the obligation when it
stated in its Collection Order that the transaction is subject
to URC 322 and not under UCP 400.47 It also filed a Motion
to Admit Attached Third-Party Complaint48 against
CityTrust on November 21, 1995.49 It claimed that CityTrust
instructed it to collect payment under URC 322 and never
raised that it intended to collect under the Letter of
Credit.50 HSBC prayed that in the event that the court finds
it liable to NSC, CityTrust should be subrogated in its place
and be made directly liable to NSC.51 The RTC Makati
granted the motion and admitted the third party
complaint. CityTrust filed its Answer52 on January 8, 1996.
CityTrust denied that it modified the obligation. It argued
that as a mere agent, it cannot modify the terms of the
Letter of Credit without the consent of all the
parties. 53 Further, it explained that the supposed
instruction that the transaction is subject to URC 322 was
merely in fine print in a pro forma document and was
superimposed and pasted over by a large pink sticker with
different remittance instructions.54
After a full-blown trial,55 the RTC Makati rendered a
decision (RTC Decision) dated February 23, 2000.56 It found
that HSBC is not liable to pay NSC the amount stated in the
Letter of Credit. It ruled that the applicable law is URC 322
as it was the law which CityTrust intended to apply to the
transaction. Under URC 322, HSBC has no liability to pay
when Klockner refused payment. The dispositive portion
states -
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Plaintiffs Complaint against HSBC is DISMISSED; and,
HSBC's Counterclaims against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay Third-
Party Plaintiff HSBC the following:
2.1 US$771.21 as actual and consequential damages; and
2.2 Pl00,000 as attorney's fees.
3. No pronouncement as to costs.
SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the
CA. In its Assailed Decision dated November 19, 2007,58the
CA reversed the RTC Makati. The CA found that it is UCP
400 and not URC 322 which governs the transaction.
According to the CA, the terms of the Letter of Credit
clearly stated that UCP 400 shall apply. Further, the CA
explained that even if the Letter of Credit did not state that
UCP 400 governs, it nevertheless finds application as this
Court has consistently recognized it under Philippine
jurisdiction. Thus, applying UCP 400 and principles
concerning letters of credit, the CA explained that the
obligation of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required
documents are properly presented. Under the
independence principle, the issuing bank's obligation to
pay under the letter of credit is separate from the
compliance of the parties in the main contract. The
dispositive portion held -
WHEREFORE, in view of the foregoing, the assailed
decision is hereby REVERSED and SET ASIDE. HSBC is
ordered to pay its obligation under the irrevocable letter of
credit in the amount of US$485,767.93 to NSC with legal
interest of six percent (6%) per annum from the filing of the
complaint until the amount is fully paid, plus attorney's
fees equivalent to 10% of the principal. Costs against
appellee HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed
Decision which the CA denied in its Assailed Resolution
dated June 23, 2008.60
Hence, HSBC filed this Petition for Review on
Certiorari61 before this Court, seeking a reversal of the CA'
s Assailed Decision and Resolution. In its petition, HSBC
contends that CityTrust's order to collect under URC 322
did not modify nor contradict the Letter of Credit. In fact,
it is customary practice in commercial transactions for
entities to collect under URC 322 even if there is an
underlying letter of credit. Further, CityTrust acted as an
agent of NSC in collecting payment and as such, it had the
authority to instruct HSBC to proceed under URC 322 and
not under UCP 400. Having clearly and expressly instructed
HSBC to collect under URC 322 and having fully intended
the transaction to proceed under such rule as shown by the
series of correspondence between CityTrust and HSBC,
CityTrust is estopped from now claiming that the collection
was made under UCP 400 in accordance with the Letter of
Credit.
NSC, on the other hand, claims that HSBC's obligation to
pay is clear from the terms of the Letter of Credit and under
UCP 400. It asserts that the applicable rule is UCP 400 and
HSBC has no basis to argue that CityTrust's presentment of
the documents allowed HSBC to vary the terms of their
agreement. 62
The Issues
The central question in this case is who among the parties
bears the liability to pay the amount stated in the Letter of
Credit. This requires a determination of which between
UCP 400 and URC 322 governs the transaction. The
obligations of the parties under the proper applicable rule
will, in turn, determine their liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to
address the unique needs of certain commercial
transactions. It is recognized in our jurisdiction and is
sanctioned under Article 56763 of the Code of Commerce
and in numerous jurisprudence defining a letter of credit,
the principles relating to it, and the obligations of parties
arising from it.
In Bank of America, NT & SA v. Court of Appeals,64 this
Court defined a letter of credit as " ... a financial device
developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses
to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before
paying."65 Through a letter of credit, a buyer obtains the
credit of a third party, usually a bank, to provide assurance
of payment.66
This, in turn, convinces a seller to part with his or her goods
even before he or she is paid, as he or she is insured by the
third party that he or she will be paid as soon as he or she
presents the documents agreed upon. 67
A letter of credit generally arises out of a separate contract
requiring the assurance of payment of a third party. In a
transaction involving a letter of credit, there are usually
three transactions and three parties. The first transaction,
which constitutes the underlying transaction in a letter of
credit, is a contract of sale between the buyer and the
seller. The contract may require that the buyer obtain a
letter of credit from a third party acceptable to the seller.
The obligations of the parties under this contract are
governed by our law on sales.
The second transaction is the issuance of a letter of credit
between the buyer and the issuing bank. The buyer
requests the issuing bank to issue a letter of credit naming
the seller as the beneficiary. In this transaction, the issuing
bank undertakes to pay the seller upon presentation of the
documents identified in the letter of credit. The buyer, on
the other hand, obliges himself or herself to reimburse the
issuing bank for the payment made. In addition, this
transaction may also include a fee for the issuing bank's
services. 68 This transaction constitutes an obligation on
the part of the issuing bank to perform a service in
consideration of the buyer's payment. The obligations of
the parties and their remedies in cases of breach are
governed by the letter of credit itself and by our general
law on obligations, as our civil law finds suppletory
application in commercial documents. 69
The third transaction takes place between the seller and
the issuing bank. The issuing bank issues the letter of credit
for the benefit of the seller. The seller may agree to ship
the goods to the buyer even before actual payment
provided that the issuing bank informs him or her that a
letter of credit has been issued for his or her benefit. This
means that the seller can draw drafts from the issuing bank
upon presentation of certain documents identified in the
letter of credit. The relationship between the issuing bank
and the seller is not strictly contractual since there is no
privity of contract nor meeting of the minds between
them. 70 It also does not constitute a stipulation pour
autrui in favor of the seller since the issuing bank must
honor the drafts drawn against the letter of credit
regardless of any defect in the underlying
contract.71 Neither can it be considered as an assignment
by the buyer to the seller-beneficiary as the buyer himself
cannot draw on the letter. 72 From its inception, only the
seller can demand payment under the letter of credit. It is
also not a contract of suretyship or guaranty since it
involves primary liability in the event of
default. 73 Nevertheless, while the relationship between
the seller-beneficiary and the issuing bank is not strictly
contractual, strict payment under the terms of a letter of
credit is an enforceable right. 74 This enforceable right finds
two legal underpinnings. First, letters of credit, as will be
further explained, are governed by recognized
international norms which dictate strict compliance with
its terms. Second, the issuing bank has an existing
agreement with the buyer to pay the seller upon proper
presentation of documents. Thus, as the law on obligations
applies even in commercial documents, 75 the issuing bank
has a duty to the buyer to honor in good faith its obligation
under their agreement. As will be seen in the succeeding
discussion, this transaction is also governed by
international customs which this Court has recognized in
this jurisdiction. 76
In simpler terms, the various transactions that give rise to
a letter of credit proceed as follows: Once the seller ships
the goods, he or she obtains the documents required
under the letter of credit. He or she shall then present
these documents to the issuing bank which must then pay
the amount identified under the letter of credit after it
ascertains that the documents are complete. The issuing
bank then holds on to these documents which the buyer
needs in order to claim the goods shipped. The buyer
reimburses the issuing bank for its payment at which point
the issuing bank releases the documents to the buyer. The
buyer is then able to present these documents in order to
claim the goods. At this point, all the transactions are
completed. The seller received payment for his or her
performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the
seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be
a correspondent bank which facilitates the ease of
completing the transactions. A correspondent bank may be
a notifying bank, a negotiating bank or a confirming bank
depending on the nature of the obligations assumed. 77 A
notifying bank undertakes to inform the seller-beneficiary
that a letter of credit exists. It may also have the duty of
transmitting the letter of credit. As its obligation is limited
to this duty, it assumes no liability to pay under the letter
of credit. 78 A negotiating bank, on the other hand,
purchases drafts at a discount from the seller-beneficiary
and presents them to the issuing bank for payment. 79 Prior
to negotiation, a negotiating bank has no obligation. A
contractual relationship between the negotiating bank and
the seller-beneficiary arises only after the negotiating bank
purchases or discounts the drafts. 80 Meanwhile, a
confirming bank may honor the letter of credit issued by
another bank or confirms that the letter of credit will be
honored by the issuing bank. 81 A confirming bank
essentially insures that the credit will be paid in accordance
with the terms of the letter of credit.82 It therefore
assumes a direct obligation to the seller-beneficiary. 83
Parenthetically, when banks are involved in letters of credit
transactions, the standard of care imposed on banks
engaged in business imbued with public interest applies to
them. Banks have the duty to act with the highest degree
of diligence in dealing with clients. 84 Thus, in dealing with
the parties in a letter of credit, banks must also observe
this degree of care.
The value of letters of credit in commerce hinges on an
important aspect of such a commercial transaction.
Through a letter of credit, a seller-beneficiary is assured of
payment regardless of the status of the underlying
transaction. International contracts of sales are perfected
and consummated because of the certainty that the seller
will be paid thus making him or her willing to part with the
goods even prior to actual receipt of the amount agreed
upon. The legally demandable obligation of an issuing bank
to pay under the letter of credit, and the enforceable right
of the seller-beneficiary to demand payment, are
indispensable essentials for the system of letters of credit,
if it is to serve its purpose of facilitating commerce. Thus, a
touchstone of any law or custom governing letters of credit
is an emphasis on the imperative that issuing banks respect
their obligation to pay, and that seller-beneficiaries may
reasonably expect payment, in accordance with the terms
of a letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences regulated
by Articles 567 to 57285 of the Code of Commerce. These
provisions must be read with Article 286 of the same code
which states that acts of commerce are governed by their
provisions, by the usages and customs generally observed
in the particular place and, in the absence of both rules, by
civil law. In addition, Article 5087 also states that
commercial contracts shall be governed by the Code of
Commerce and special laws and in their absence, by
general civil law.
The International Chamber of Commerce (ICC)88 drafted a
set of rules to govern transactions involving letters of
credit. This set of rules is known as the Uniform Customs
and Practice for Documentary Credits (UCP). Since its first
issuance in 1933, the UCP has seen several revisions, the
latest of which was in 2007, known as the UCP 600.
However, for the period relevant to this case, the prevailing
version is the 1993 revision called the UCP 400. Throughout
the years, the UCP has grown to become the worldwide
standard in transactions involving letters of credit.89 It has
enjoyed near universal application with an estimated 95%
of worldwide letters of credit issued subject to the UCP.90
In Bank of the Philippine Islands v. De Reny Fabric
Industries, Inc.,91 this Court applied a provision from the
UCP in resolving a case pertaining to a letter of credit
transaction. This Court explained that the use of
international custom in our jurisdiction is justified by
Article 2 of the Code of Commerce which provides that acts
of commerce are governed by, among others, usages and
customs generally observed. Further, in Feati Bank & Trust
Company v. Court of Appeals,92 this Court ruled that the
UCP should be applied in cases where the letter of credit
expressly states that it is the governing rule.93 This Court
also held in Feati that the UCP applies even if it is not
incorporated into the letter of the credit.94 The application
of the UCP in Bank of Philippine Islands and in Feati was
further affirmed in Metropolitan Waterworks and
Sewerage System v. Daway95 where this Court held that
"[l]etters of credit have long been and are still governed by
the provisions of the Uniform Customs and Practice for
Documentary Credit[s] of the International Chamber of
Commerce."96 These precedents highlight the binding
nature of the UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are
governed primarily by their own provisions, 97 by laws
specifically applicable to them, 98 and by usage and
custom. 99 Consistent with our rulings in several cases, 100
usage and custom refers to UCP 400. When the particular
issues are not covered by the provisions of the letter of
credit, by laws specifically applicable to them and by UCP
400, our general civil law finds suppletory app1ication.101
Applying this set of laws and rules, this Court rules that
HSBC is liable under the provisions of the Letter of Credit,
in accordance with usage and custom as embodied in UCP
400, and under the provisions of general civil law.
HSBC 's Liability
The Letter of Credit categorically stated that it is subject to
UCP 400, to wit:
Except so far as otherwise expressly stated, this
documentary credit is subject to uniform Customs and
Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No.
400.102
From the moment that HSBC agreed to the terms of the
Letter of Credit - which states that UCP 400 applies - its
actions in connection with the transaction automatically
became bound by the rules set in UCP 400. Even assuming
that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that
HSBC, as the issuing bank of a letter of credit, undertook
certain obligations dictated by the terms of the Letter of
Credit itself and by UCP 400. In Feati, this Court applied
UCP 400 even when there is no express stipulation in the
letter of credit that it governs the transaction. 103 On the
strength of our ruling in Feati, we have the legal duty to
apply UCP 400 in this case independent of the parties'
agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight,
such as the Letter of Credit in this case, constitutes a
definite undertaking of the issuing bank to pay, provided
that the stipulated documents are presented and that the
terms and conditions of the credit are complied
with. 104 Further, UCP 400 provides that an issuing bank has
the obligation to examine the documents with reasonable
care. 105 Thus, when CityTrust forwarded the Letter of
Credit with the attached documents to HSBC, it had the
duty to make a determination of whether its obligation to
pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC
322 that should govern the transaction. 106 URC 322 is a set
of norms compiled by the ICC. 107 It was drafted by
international experts and has been adopted by the ICC
members. Owing to the status of the ICC and the
international representation of its membership, these
rules have been widely observed by businesses throughout
the world. It prescribes the collection procedures,
technology, and standards for handling collection
transactions for banks. 108 Under the facts of this case, a
bank acting in accordance with the terms of URC 322
merely facilitates collection. Its duty is to forward the letter
of credit and the required documents from the entity
seeking payment to another entity which has the duty to
pay. The bank incurs no obligation other than as a
collecting agent. This is different in the case of an issuing
bank acting in accordance with UCP 400. In this case, the
issuing bank has the duty to pay the amount stated in the
letter of credit upon due presentment. HSBC claims that
while UCP 400 applies to letters of credit, it is also common
for beneficiaries of such letters to seek collection under
URC 322. HSBC further claims that URC 322 is an accepted
custom in commerce. 109 HSBC's argument is without
merit. We note that HSBC failed to present evidence to
prove that URC 322 constitutes custom and usage
recognized in commerce. Neither was there sufficient
evidence to prove that beneficiaries under a letter of credit
commonly resort to collection under URC 322 as a matter
of industry practice. HSBC claims that the testimony of its
witness Mr. Lincoln MacMahon (Mr. MacMahon) suffices
for this purpose. 110However, Mr. MacMahon was not
presented as an expert witness capable of establishing the
existing banking and commercial practice relating to URC
322 and letters of credit. Thus, this Court cannot hold that
URC 322 and resort to it by beneficiaries of letters of credit
are customs that
demand application in this case.111
HSBC's position that URC 322 applies, thus allowing it, the
issuing bank, to disregard the Letter of Credit, and merely
demand collection from Klockner cannot be countenanced.
Such an argument effectively asks this Court to give
imprimatur to a practice that undermines the value and
reliability of letters of credit in trade and commerce. The
entire system of letters of credit rely on the assurance that
upon presentment of the proper documents, the
beneficiary has an enforceable right and the issuing bank a
demandable obligation, to pay the amount agreed upon.
Were a party to the transaction allowed to simply set this
aside by the mere invocation of another set of norms
related to commerce - one that is not established as a
custom that is entitled to recognition by this Court - the
sanctity of letters of credit will be jeopardized. To repeat,
any law or custom governing letters of credit should have,
at its core, an emphasis on the imperative that issuing
banks respect their obligation to pay and that seller-
beneficiaries may reasonably expect payment in
accordance with the terms of a letter of credit. Thus, the
CA correctly ruled, to wit:
At this juncture, it is significant to stress that an irrevocable
letter of credit cannot, during its lifetime, be cancelled or
modified without the express permission of the
beneficiary. Not even partial payment of the obligation by
the applicant-buyer would amend or modify the obligation
of the issuing bank. The subsequent correspondences of
[CityTrust] to HSBC, thus, could not in any way affect or
amend the letter of credit, as it was not a party thereto. As
a notifying bank, it has nothing to do with the contract
between the issuing bank and the buyer regarding the
issuance of the letter of credit. 112 (Citations omitted)
The provisions in the Civil Code and our jurisprudence
apply suppletorily in this case. 113 When a party knowingly
and freely binds himself or herself to perform an act, a
juridical tie is created and he or she becomes bound to
fulfill his or her obligation. In this case, HSBC's obligation
arose from two sources. First, it has a contractual duty to
Klockner whereby it agreed to pay NSC upon due
presentment of the Letter of Credit and the attached
documents. Second, it has an obligation to NSC to honor
the Letter of Credit. In complying with its obligation, HSBC
had the duty to perform all acts necessary. This includes a
proper examination of the documents presented to it and
making a judicious inquiry of whether CityTrust, in behalf
of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the
highest degree of diligence. In all of its transactions, it must
exercise the highest standard of care and must fulfill its
obligations with utmost fidelity to its clients. Thus, upon
receipt of CityTrust's Collection Order with the Letter of
Credit, HSBC had the obligation to carefully examine the
documents it received. Had it observed the standard of
care expected of it, HSBC would have discovered that the
Letter of Credit is the very same document which it issued
upon the request of Klockner, its client. Had HSBC taken
the time to perform its duty with the highest degree of
diligence, it would have been alerted by the fact that the
documents presented to it corresponded with the
documents stated in the Letter of Credit, to which HSBC
freely and knowingly agreed. HSBC ought to have noticed
the discrepancy between CityTrust's request for collection
under URC 322 and the terms of the Letter of Credit.
Notwithstanding any statements by CityTrust in the
Collection Order as to the applicable rules, HSBC had the
independent duty of ascertaining whether the
presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to
Klockner (its client) and NSC (the beneficiary). Regardless
of any error that CityTrust may have committed, the
standard of care expected of HSBC dictates that it should
have made a separate detennination of the significance of
the presentment of the Letter of Credit and the attached
documents. A bank exercising the appropriate degree of
diligence would have, at the very least, inquired if NSC was
seeking payment under the Letter of Credit or merely
seeking collection under URC 322. In failing to do so, HSBC
fell below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of
the Letter of Credit with the attached documents in behalf
of NSC, constitutes due presentment.1avvphi1 Under the
terms of the Letter of Credit, HSBC undertook to pay the
amount of US$485,767.93 upon presentment of the Letter
of Credit and the required documents.114 In accordance
with this agreement, NSC, through CityTrust, presented the
Letter of Credit and the following documents: (1) Letter of
Credit; (2) Bill of Lading; (3) Commercial Invoice; (4) Packing
List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on
shipping details; (7) Beneficiary's Certificate of facsimile
transmittal of documents; (8) Beneficiary's Certificate of air
courier transmittal of documents; and (9) DHL Receipt No.
669988911 and Certificate of Origin.115
In transactions where the letter of credit is payable on
sight, as in this case, the issuer must pay upon due
presentment. This obligation is imbued with the character
of definiteness in that not even the defect or breach in the
underlying transaction will affect the issuing bank's
liability. 116 This is the Independence Principle in the law on
letters of credit. Article 17 of UCP 400 explains that under
this principle, an issuing bank assumes no liability or
responsibility "for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents,
or for the general and/or particular conditions stipulated in
the documents or superimposed thereon ... " Thus, as long
as the proper documents are presented, the issuing bank
has an obligation to pay even if the buyer should later on
refuse payment. Hence, Klockner's refusal to pay carries no
effect whatsoever on HSBC's obligation to pay under the
Letter of Credit. To allow HSBC to refuse to honor the
Letter of Credit simply because it could not collect first
from Klockner is to countenance a breach of the
Independence Principle.
HSBC's persistent refusal to comply with its obligation
notwithstanding due presentment constitutes delay
contemplated in Article 1169 of the Civil Code. 117 This
provision states that a party to an obligation incurs in delay
from the time the other party makes a judicial or
extrajudicial demand for the fulfillment of the obligation.
We rule that the due presentment of the Letter of Credit
and the attached documents is tantamount to a demand.
HSBC incurred in delay when it failed to fulfill its obligation
despite such a demand.
Under Article 1170 of the Civil Code, 118 a party in delay is
liable for damages. The extent of these damages pertains
to the pecuniary loss duly proven. 119 In this case, such
damage refers to the losses which NSC incurred in the
amount of US$485,767.93 as stated in the Letter of Credit.
We also award interest as indemnity for the damages
incurred in the amount of six percent (6%) from the date of
NSC's extrajudicial demand. 120 An interest in the amount
of six percent (6%) is also awarded from the time of the
finality of this decision until full payment. 121
Having been remiss in its obligations under the applicable
law, rules and jurisprudence, HSBC only has itself to blame
for its consequent liability to NSC.
However, this Court finds that there is no basis for the CA's
grant of attorney's fees in favor of NSC. Article 2208 of the
Civil Code122 enumerates the grounds for the award of
attorney's fees. This Court has explained that the award of
attorney's fees is an exception rather than the rule. 123 The
winning party is not automatically entitled to attorney's
fees as there should be no premium on the right to
litigate. 124 While courts may exercise discretion in granting
attorney's fees, this Court has stressed that the grounds
used as basis for its award must approximate as closely as
possible the enumeration in Article 2208. 125 Its award
must have sufficient factual and legal justifications. 126 This
Court rules that none of the grounds stated in Article 2208
are present in this case. NSC has not cited any specific
ground nor presented any particular fact to warrant the
award of attorney's fees.
CityTrust's Liability
When NSC obtained the services of CityTrust in collecting
under the Letter of Credit, it constituted CityTrust as its
agent. Article 1868 of the Civil Code states that a contract
of agency exists when a person binds himself or herself "to
render some service or to do something in representation
or on behalf of another, with the consent or authority of
the latter." In this case, CityTrust bound itself to collect
under the Letter of Credit in behalf of NSC.
One of the obligations of an agent is to carry out the agency
in accordance with the instructions of the principal. 127In
ascertaining NSC's instructions to CityTrust, its letter dated
January 18, 1994 is determinative. In this letter, NSC clearly
stated that it "negotiated with CityTrust the export
documents pertaining to LC No. HKH 239409 of HSBC and
it was CityTrust which wrongfully treated the negotiation
as 'on collection basis."' 128 HSBC persistently
communicated with CityTrust and consistently repeated
that it will proceed with collection under URC 322. At no
point did CityTrust correct HSBC or seek clarification from
NSC. In insisting upon its course of action, CityTrust failed
to act in accordance with the instructions given by NSC, its
principal. Nevertheless while this Court recognizes that
CityTrust committed a breach of its obligation to NSC, this
carries no implications on the clear liability of HSBC. As this
Court already mentioned, HSBC had a separate obligation
that it failed to perform by reason of acts independent of
CityTrust's breach of its obligation under its contract of
agency. If CityTrust has incurred any liability, it is to its
principal NSC. However, NSC has not raised any claim
against CityTrust at any point in these proceedings. Thus,
this Court cannot make any finding of liability against
CityTrust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed
Decision dated November 19, 2007 is AFFIRMED to the
extent that it orders HSBC to pay NSC the amount of
US$485,767.93. HSBC is also liable to pay legal interest of
six percent (6%) per annum from the time of extrajudicial
demand. An interest of six percent (6%) is also awarded
from the time of the finality of this decision until the
amount is fully paid. We delete the award of attorney's
fees. No pronouncement as to cost.
SO ORDERED.
PART VII GUARANTY AND SURETY (ARTICLES 2047-2084)
I. NATURE AND EXTENT
SALVADOR P. ESCAO G. R. No. 151953
and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
Promulgated:
June 29, 2007
x----------------------------------------------------------------------------
-----x
DECISION
TINGA, J.:
The main contention raised in this petition is that
petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more
perplexing question is whether this obligation to repay is
solidary, as contended by respondent and the lower courts,
or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the
Philippines (PDCP)[1] entered into a loan agreement with
Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to
make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to certain
terms and conditions.[2] On the same day, three
stockholders-officers of Falcon, namely: respondent Rafael
Ortigas, Jr. (Ortigas), George A. Scholey and George T.
Scholey executed an Assumption of Solidary Liability
whereby they agreed to assume in [their] individual
capacity, solidary liability with [Falcon] for the due and
punctual payment of the loan contracted by Falcon with
PDCP.[3] In the meantime, two separate guaranties were
executed to guarantee the payment of the same loan by
other stockholders and officers of Falcon, acting in their
personal and individual capacities. One Guaranty[4] was
executed by petitioner Salvador Escao (Escao), while the
other[5] by petitioner Mario M. Silos (Silos), Ricardo C.
Silverio (Silverio), Carlos L. Inductivo (Inductivo) and
Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control
of Falcon to Escao, Silos and Joseph M. Matti (Matti). Thus,
contracts were executed whereby Ortigas, George A.
Scholey, Inductivo and the heirs of then already deceased
George T. Scholey assigned their shares of stock in Falcon
to Escao, Silos and Matti.[6] Part of the consideration that
induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous
joint and several undertakings with Falcon, including those
related to the loan with PDCP. Thus, an Undertaking
dated 11 June 1982 was executed by the concerned
parties,[7] namely: with Escao, Silos and Matti identified in
the document as SURETIES, on one hand, and Ortigas,
Inductivo and the Scholeys as OBLIGORS, on the other. The
Undertaking reads in part:
3. That whether or not SURETIES are able to
immediately cause PDCP and PAIC to release OBLIGORS
from their said guarantees [sic], SURETIES hereby
irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP and PAIC under
the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand
from PDCP and/or PAIC for the payment of FALCONs
obligations with it, any of [the] OBLIGORS shall
immediately inform SURETIES thereof so that the latter can
timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against
any and/or all of OBLIGORS for collection of said loans
and/or credit facilities, SURETIES agree to defend
OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief in
respect to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any
reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees[sic].[8]
Falcon eventually availed of the sum of US$178,655.59
from the credit line extended by PDCP. It would also
execute a Deed of Chattel Mortgage over its personal
properties to further secure the loan. However, Falcon
subsequently defaulted in its payments. After PDCP
foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07, which Falcon did
not satisfy despite demand.[9]
On 28 April 1989, in order to recover the indebtedness,
PDCP filed a complaint for sum of money with the Regional
Trial Court of Makati (RTC) against Falcon, Ortigas, Escao,
Silos, Silverio and Inductivo. The case was docketed as Civil
Case No. 89-5128. For his part, Ortigas filed together with
his answer a cross-claim against his co-defendants Falcon,
Escao and Silos, and also manifested his intent to file a
third-party complaint against the Scholeys and
Matti.[10] The cross-claim lodged against Escao and Silos
was predicated on the 1982 Undertaking, wherein they
agreed to assume the liabilities of Ortigas with respect to
the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement
with PDCP. The first to come to terms with PDCP was Escao,
who in December of 1993, entered into a compromise
agreement whereby he agreed to pay the
bank P1,000,000.00. In exchange, PDCP waived or assigned
in favor of Escao one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the
case.[11] The compromise agreement was approved by the
RTC in a Judgment[12] dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement[13] with PDCP, allegedly without
the knowledge of Escao, Matti and Silos. Thereby, Ortigas
agreed to pay PDCP P1,300,000.00 as full satisfaction of
the PDCPs claim against Ortigas,[14] in exchange for PDCPs
release of Ortigas from any liability or claim arising from
the Falcon loan agreement, and a renunciation of its claims
against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00 in
exchange for PDCPs waiver of its claims against him.[15]

In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escao, Silos and Matti, on the
basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos,[16] while he maintained
his cross-claim against Escao. In 1995, Ortigas filed a
motion for Summary Judgment in his favor against Escao,
Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escao, Silos and Matti to pay
Ortigas, jointly and severally, the amount
of P1,300,000.00, as well as P20,000.00 in attorneys
fees.[17] The trial court ratiocinated that none of the third-
party defendants disputed the 1982 Undertaking, and that
the mere denials of defendants with respect to non-
compliance of Ortigas of the terms and conditions of the
Undertaking, unaccompanied by any substantial fact which
would be admissible in evidence at a hearing, are not
sufficient to raise genuine issues of fact necessary to defeat
a motion for summary judgment, even if such facts were
raised in the pleadings.[18] In an Order dated 7 March
1996, the trial court denied the motion for reconsideration
of the Summary Judgment and awarded Ortigas legal
interest of 12% per annum to be computed from 28
February 1994.[19]
From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escao and Silos appealed
jointly while Matti appealed by his lonesome. In a
Decision[20] dated 23 January 2002, the Court of Appeals
dismissed the appeals and affirmed the Summary
Judgment. The appellate court found that the RTC did not
err in rendering the summary judgment since the three
appellants did not effectively deny their execution of the
1982 Undertaking. The special defenses that were raised,
payment and excussion, were characterized by the Court
of Appeals as appear[ing] to be merely sham in the light of
the pleadings and supporting documents and
affidavits.[21] Thus, it was concluded that there was no
genuine issue that would still require the rigors of trial, and
that the appealed judgment was decided on the bases of
the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and
Silos.[22] Two main issues are raised. First, petitioners
dispute that they are liable to Ortigas on the basis of the
1982 Undertaking, a document which they do not disavow
and have in fact annexed to their petition. Second, on the
assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable
only, and not solidarily. Further assuming that they are
liable, petitioners also submit that they are not liable for
interest and if at all, the proper interest rate is 6% and not
12%.
Interestingly, petitioners do not challenge, whether in their
petition or their memorandum before the Court, the
appropriateness of the summary judgment as a relief
favorable to Ortigas. Under Section 3, Rule 35 of the 1997
Rules of Civil Procedure, summary judgment may avail if
the pleadings, supporting affidavits, depositions and
admissions on file show that, except as to the amount of
damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to
demonstrate before us that there existed a genuine issue
as to any material fact that would preclude summary
judgment. Thus, we affirm with ease the common rulings
of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether
petitioners were correctly held liable to Ortigas on the
basis of the 1982 Undertaking in this Summary Judgment.
An examination of the document reveals several clauses
that make it clear that the agreement was brought forth by
the desire of Ortigas, Inductivo and the Scholeys to be
released from their liability under the loan agreement
which release was, in turn, part of the consideration for the
assignment of their shares in Falcon to petitioners and
Matti. The whereas clauses manifest that Ortigas had
bound himself with Falcon for the payment of the loan with
PDCP, and that amongst the consideration for OBLIGORS
and/or their principals aforesaid selling is SURETIES
relieving OBLIGORS of any and all liability arising from their
said joint and several undertakings with FALCON.[23] Most
crucial is the clause in Paragraph 3 of the Undertaking
wherein petitioners irrevocably agree and undertake to
assume all of OBLIGORs said guarantees [sic] to PDCP x x x
under the following terms and conditions.[24]
At the same time, it is clear that the assumption by
petitioners of Ortigass guarantees [sic] to PDCP is governed
by stipulated terms and conditions as set forth in sub-
paragraphs (a) to (c) of Paragraph 3. First, upon receipt by
any of OBLIGORS of any demand from PDCP for the
payment of Falcons obligations with it, any of OBLIGORS
was to immediately inform SURETIES thereof so that the
latter can timely take appropriate measures. Second,
should any and/or all of OBLIGORS be impleaded by PDCP
in a suit for collection of its loan, SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice
to any and/or all of OBLIGORS impleading SURETIES therein
for contribution, indemnity, subrogation or other
relief[25] in respect to any of the claims of PDCP. Third, if any
of the OBLIGORS is for any reason made to pay any amount
to [PDCP], SURETIES [were to] reimburse OBLIGORS for
said amount/s within seven (7) calendar days from such
payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not made to pay PDCP the
amount now sought to be reimbursed, as Ortigas
voluntarily paid PDCP the amount of P1.3 Million as an
amicable settlement of the claims posed by the bank
against him. However, the subject clause in paragraph 3(c)
actually reads [i]n the event that any of OBLIGORS is for
any reason made to pay any amount to PDCP x x x[27] As
pointed out by Ortigas, the phrase for any reason
reasonably includes any extra-judicial settlement of
obligation such as what Ortigas had undertaken to pay to
PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment
adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held
water had the Undertaking made clear that the right of
Ortigas to seek reimbursement accrued only after he had
delivered payment to PDCP as a consequence of a final and
executory judgment. On the contrary, the clear intent of
the Undertaking was for petitioners and Matti to relieve
the burden on Ortigas and his fellow OBLIGORS as soon as
possible, and not only after Ortigas had been subjected to
a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to
exert all efforts to cause PDCP x x x to within a reasonable
time release all the OBLIGORS x x x from their guarantees
[sic] to PDCP x x x[28] In the event that Ortigas and his fellow
OBLIGORS could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the
Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions
and to pledge or assign such payments to Ortigas, et al., as
security for whatever amounts the latter may be held liable
under their guaranties. In addition, paragraph 1 also makes
clear that nothing in the Undertaking shall prevent
OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said
guarantees [sic].[29]
There is no argument to support petitioners position on the
import of the phrase made to pay in the Undertaking, other
than an unduly literalist reading that is clearly inconsistent
with the thrust of the document. Under the Civil Code, the
various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.[30] Likewise
applicable is the provision that if some stipulation of any
contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate
to render it effectual.[31] As a means to effect the general
intent of the document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of petitioners, that
holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of
any of the other conditions set in paragraph 3, as they
claim. Following the general assertion in the petition that
Ortigas violated the terms of the Undertaking, petitioners
add that Ortigas paid PDCP BANK the amount of P1.3
million without petitioners ESCANO and SILOSs knowledge
and consent.[32] Paragraph 3(a) of the Undertaking does
impose a requirement that any of the OBLIGORS shall
immediately inform SURETIES if they received any demand
for payment of FALCONs obligations to PDCP, but that
requirement is reasoned so that the [SURETIES] can timely
take appropriate measures[33] presumably to settle the
obligation without having to burden the OBLIGORS. This
notice requirement in paragraph 3(a) is markedly way off
from the suggestion of petitioners that Ortigas, after
already having been impleaded as a defendant in the
collection suit, was obliged under the 1982 Undertaking to
notify them before settling with PDCP.
The other arguments petitioners have offered to escape
liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in
the first place. They note that Ortigas had, in his answer,
denied any liability to PDCP and had alleged that he signed
the Assumption of Solidary Liability not in his personal
capacity, but as an officer of Falcon. However, such
position, according to petitioners, could not be justified
since Ortigas later voluntarily paid PDCP the amount
of P1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises
are still erroneous. The Partial Compromise Agreement
between PDCP and Ortigas expressly stipulated that
Ortigass offer to pay PDCP was conditioned without
[Ortigass] admitting liability to plaintiff PDCP Banks
complaint, and to terminate and dismiss the said case as
against Ortigas solely.[34] Petitioners profess it is
unthinkable for Ortigas to have voluntarily paid PDCP
without admitting his liability,[35] yet such contention
based on assumption cannot supersede the literal terms of
the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the
payment to PDCP after he had already assigned his
obligation to petitioners through the 1982 Undertaking.
Yet the fact is PDCP did pursue a judicial claim against
Ortigas notwithstanding the Undertaking he executed with
petitioners. Not being a party to such Undertaking, PDCP
was not precluded by a contract from pursuing its claim
against Ortigas based on the original Assumption of
Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas
from relieving his distress through a settlement with the
creditor bank. Indeed, paragraph 1 of the Undertaking
expressly states that nothing herein shall prevent
OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said
guarantees [sic].[36] Simply put, the Undertaking did not bar
Ortigas from pursuing his own settlement with PDCP.
Neither did the Undertaking bar Ortigas from recovering
from petitioners whatever amount he may have paid PDCP
through his own settlement. The stipulation that if Ortigas
was for any reason made to pay any amount to PDCP[,] x x
x SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such
payment[37] makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners,
in the alternative, that is, on the assumption that they are
indeed liable.
Petitioners submit that they could only be held jointly, not
solidarily, liable to Ortigas, claiming that the Undertaking
did not provide for express solidarity. They cite Article 1207
of the New Civil Code, which states in part that [t]here is a
solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation
requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are
jointly and severally liable for the Undertaking, as the
language used in the agreement clearly shows that it is a
surety agreement[38] between the obligors (Ortigas group)
and the sureties (Escao group). Ortigas points out that the
Undertaking uses the word SURETIES although the
document, in describing the parties. It is further contended
that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are
solidarily liable because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or
any of the SURETIES default from their obligation in the
Undertaking.[39]
In case, there is a concurrence of two or more creditors or
of two or more debtors in one and the same obligation,
Article 1207 of the Civil Code states that among them,
[t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
obligation requires solidarity. Article 1210 supplies further
caution against the broad interpretation of solidarity by
providing: The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of
itself imply indivisibility.
These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence
of express and indubitable terms characterizing the
obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary in
character to prove such fact with a preponderance of
evidence.
The Undertaking does not contain any express stipulation
that the petitioners agreed to bind themselves jointly and
severally in their obligations to the Ortigas group, or any
such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be
joint. Ortigas, as the party alleging that the obligation is in
fact solidary, bears the burden to overcome the
presumption of jointness of obligations. We rule and so
hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the
petitioners and Matti identified themselves in the
Undertaking as SURETIES, a term repeated no less than
thirteen (13) times in the document. Ortigas claims that
such manner of identification sufficiently establishes that
the obligation of petitioners to him was joint and solidary
in nature.
The term surety has a specific meaning under our Civil
Code. Article 2047 provides the statutory definition of a
surety agreement, thus:
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. [Emphasis supplied][40]
As provided in Article 2047 in a surety agreement the
surety undertakes to be bound solidarily with the principal
debtor. Thus, a surety agreement is an ancillary contract as
it presupposes the existence of a principal contract. It
appears that Ortigass argument rests solely on the solidary
nature of the obligation of the surety under Article 2047.
In tandem with the nomenclature SURETIES accorded to
petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established
in the
Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly is
not the case here, notwithstanding the use of the
nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a
principal debtor to whom the surety is solidarily bound by
way of an ancillary obligation of segregate identity from
the obligation between the principal debtor and the
creditor. The suretyship does bind the surety to the
creditor, inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu of
proceeding against the principal debtor for the same
obligation.[41] At the same time, there is also a legal tie
created between the surety and the principal debtor to
which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is
extinguished.[42] At the same time, the surety may seek
reimbursement from the principal debtor for the amount
paid, for the surety does in fact become subrogated to all
the rights and remedies of the creditor.[43]
Note that Article 2047 itself specifically calls for the
application of the provisions on joint and solidary
obligations to suretyship contracts.[44] Article 1217 of the
Civil Code thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal debtor, in
case of suretyship) in favor of the one who paid (i.e., the
surety).[45] However, a significant distinction still lies
between a joint and several debtor, on one hand, and a
surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or the
surety alone to answer for the entirety of the principal
debt. The difference lies in the respective faculties of the
joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary
co-debtor and a surety:
A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code.
The second paragraph of [Article 2047] is practically
equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship
existing between the co-debtors liable in solidum is similar
to the common law suretyship.[46]
In the case of joint and several debtors, Article 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 or debtors.
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.
What is the source of this right to full reimbursement by
the surety? We find the right under Article 2066 of the Civil
Code, which assures that [t]he guarantor who pays for a
debtor must be indemnified by the latter, such indemnity
comprising of, among others, the total amount of the
debt.[47] Further, Article 2067 of the Civil Code likewise
establishes that [t]he guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had
against the debtor.[48]
Articles 2066 and 2067 explicitly pertain to guarantors, and
one might argue that the provisions should not extend to
sureties, especially in light of the qualifier in Article 2047
that the provisions on joint and several obligations should
apply to sureties. We reject that argument, and instead
adopt Dr. Tolentinos observation that [t]he reference in
the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or several
obligations, however, does not mean that suretyship is
withdrawn from the applicable provisions governing
guaranty.[49] For if that were not the implication, there
would be no material difference between the surety as
defined under Article 2047 and the joint and several
debtors, for both classes of obligors would be governed by
exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation
as established and granted to the guarantor by Articles
2066 and 2067 extend as well to sureties as defined under
Article 2047. These rights granted to the surety who pays
materially differ from those granted under Article 1217 to
the solidary debtor who pays, since the indemnification
that pertains to the latter extends only [to] the share which
corresponds to each [co-debtor]. It is for this reason that
the Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as SURETIES,
they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in
light of the general presumption favoring joint liability, the
Court would have to be satisfied that among the
petitioners and Matti, there is one or some of them who
stand as the principal debtor to Ortigas and another as
surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the
parties that such is the case, and certainly the Undertaking
is not revelatory of such intention. If the Court were to give
full fruition to the use of the term SURETIES as conclusive
indication of the existence of a surety agreement that in
turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a
corresponding set of rights and obligations as between the
SURETIES which petitioners and Matti did not clearly
intend.
It is not impossible that as between Escao, Silos and Matti,
there was an agreement whereby in the event that Ortigas
were to seek reimbursement from them per the terms of
the Undertaking, one of them was to act as surety and to
pay Ortigas in full, subject to his right to full reimbursement
from the other two obligors. In such case, there would have
been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such
an agreement, it does not appear on the record. More
consequentially, no such intention is reflected in the
Undertaking itself, the very document that creates the
conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere
utilization of the term SURETIES could not work to such
effect, especially as it does not appear who exactly is the
principal debtor whose obligation is assured or guaranteed
by the surety.
Ortigas further argues that the nature of the Undertaking
requires solidary obligation of the Sureties, since the
Undertaking expressly seeks to reliev[e] obligors of any and
all liability arising from their said joint and several
undertaking with [F]alcon, and for the sureties to
irrevocably agree and undertake to assume all of obligors
said guarantees to PDCP.[50] We do not doubt that a finding
of solidary liability among the petitioners works to the
benefit of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as solidary.
Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation
requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to
PDCP would still be accomplished through the complete
execution of such a judgment.
Petitioners further claim that they are not liable for
attorneys fees since the Undertaking contained no such
stipulation for attorneys fees, and that the situation did not
fall under the instances under Article 2208 of the Civil Code
where attorneys fees are recoverable in the absence of
stipulation.
We disagree. As Ortigas points out, the acts or omissions
of the petitioners led to his being impleaded in the suit filed
by PDCP. The Undertaking was precisely executed as a
means to obtain the release of Ortigas and the Scholeys
from their previous obligations as sureties of Falcon,
especially considering that they were already divesting
their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of
Ortigas from his surety agreements with Falcon. Specific
provisions likewise mandate the immediate repayment of
Ortigas should he still be made to pay PDCP by reason of
the guaranty agreements from which he was ostensibly to
be released through the efforts of petitioners. None of
these provisions were complied with by petitioners, and
Article 2208(2) precisely allows for the recovery of
attorneys fees [w]hen the defendants act or omission has
compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.
Finally, petitioners claim that they should not be liable for
interest since the Undertaking does not contain any
stipulation for interest, and assuming that they are liable,
that the rate of interest should not be 12% per annum, as
adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court
of Appeals[51] set forth the rules with respect to the manner
of computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time quantification of damages
may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.[52]
Since what was the constituted in the Undertaking
consisted of a payment in a sum of money, the rate of
interest thereon shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand.
The interest rate imposed by the RTC is thus proper.
However, the computation should be reckoned from
judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to
petitioners and Matti after he paid PDCP, but on 14 March
1994, Ortigas made a judicial demand when he filed a
Third-Party Complaint praying that petitioners and Matti
be made to reimburse him for the payments made to
PDCP. It is the filing of this Third Party Complaint on 14
March 1994 that should be considered as the date of
judicial demand from which the computation of interest
should be reckoned.[53] Since the RTC held that interest
should be computed from 28 February 1994, the
appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order
of the Regional Trial Court dated 5 October
1995 is MODIFIED by declaring that petitioners and Joseph
M. Matti are only jointly liable, not jointly and severally, to
respondent Rafael Ortigas, Jr. in the amount
of P1,300,000.00. The Order of the Regional Trial Court
dated 7 March 1996 is MODIFIED in that the legal interest
of 12% per annum on the amount of P1,300,000.00 is to be
computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the
Order of the lower court. The assailed rulings are affirmed
in all other respects. Costs against petitioners.
SO ORDERED.
SECOND DIVISION

ASSET BUILDERS G.R. No. 187116 THE FACTS

CORPORATION,
Petitioner,
Present: On April 28, 2006, Asset Builders
Corporation (ABC) entered into an agreement with Lucky
Star Drilling & Construction Corporation (Lucky Star) as
CARPIO, J., Chairperson, part of the completion of its project to construct the ACG
Commercial Complex on NHA Avenue corner Olalia Street,
NACHURA, Barangay Dela Paz, Antipolo City.[2] As can be gleaned from
LEONARDO-DE the Purchase Order,[3] Lucky Star was to supply labor,
- versus - CASTRO,* materials, tools, and equipment including technical
supervision to drill one (1) exploratory production well on
PERALTA, and the project site. The total contract price for the said project
was P1,150,000.00. The salient terms and conditions of
MENDOZA, JJ.
said agreement are as follows:
i. Lump sum price--------PHP1,150,000.00;

STRONGHOLD
ii. 50% downpayment---upon submission of surety bond
INSURANCE COMPANY,
in an equivalent amount and performance bond equivalent
INCORPORATED,
to 30 % of contract amount;
Respondent.
Promulgated:
iii. Completion date-----60 calendar days;
October 18, 2010

iv. Penalty----2/10 of 1% of total contract amount for

every day of delay;
X ---------------------------------------------------------------------------
-----------X
v. Terms---50% down payment to be released after
submission of bonds;
DECISION

vi. RetentionSubject to 10% retention to be released

MENDOZA, J.: after the project is accepted by the owner;

This petition for review on certiorari under Rule 45 of the
1997 Rules of Civil Procedure assails the February 27, 2009
Decision[1] of the Regional Trial Court, Pasig City, Branch
71 (RTC), in Civil Case No. 71034, ordering defendant Lucky
Star to pay petitioner Asset Builders Corporation the sum
of P575,000.00 with damages, but absolving respondent
Stronghold Insurance Company, Incorporated
(Stronghold) of any liability on its Surety Bond and
Performance Bond.
To guarantee faithful compliance with their agreement,
Lucky Star engaged respondent Stronghold which issued
two (2) bonds in favor of petitioner. The first, SURETY
BOND G(16) No. 141558, dated May 9, 2006, covers the
sum of P575,000.00[4] or the required downpayment for
the drilling work. The full text of the surety bond is herein
quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION
CORP., 168 ACACIA St., Octagon Industrial Estate Subd.,
Pasig City as principal, and STRONGHOLD INSURANCE
COMPANY, INC., a corporation duly organized and existing
under and by virtue of laws of the Philippines, as surety,
are held and firmly bound unto ASSET BUILDERS
CORPORATION to the sum of Pesos FIVE HUNDRED
SEVENTY FIVE THOUSAND ONLY (P575,000.00) Philippine
Currency, for the payment of which, well and truly to be
made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and
severally, firmly by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done
through deductions from periodic billings of the advance
payment made or to be made by the Obligee to the
Principal in connection with the supply of labor, materials,
tools and equipment including technical supervision to drill
one (1) exploratory production well located at NIA Ave. cor.
Olalia St., Brgy. dela Paz, Antipolo City. This bond is callable
on demand.
The liability of the surety company upon determination
under this bond shall in no case exceed the penal sum of
PESOS: FIVE HUNDRED SEVENTY FIVE THOUSAND
(P575,000.00) only, Philippine Currency.
WHEREAS, the Obligee requires said principal to give a
good and sufficient bond in the above stated sum to secure
the full and faithful performance on his part of said
undertakings.
NOW, THEREFORE, if the above bounden principal shall in
all respects duly and fully observe and perform all and
singular the aforesaid [co]-venants, conditions and
agreements to the true intent and meaning thereof, then
this obligation shall be null and void, otherwise to remain
in full force and effect.
Liability of surety on this bond will expire on May 09,
2007 and said bond will be cancelled five DAYS after its
expiration, unless surety is notified of and existing
obligations hereunder.
x x x[5]
With respect to the second contract, PERFORMANCE BOND
G(13) No. 115388, dated May 09, 2006, it covers the sum
of P345,000.00.[6] Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168
Acacia St., Octagon Indl., contractor, of Estate, Sub., Pasig
City Philippines, as principal and the STRONGHOLD
INSURANCE COMPANY, INC. a corporation duly organized
and existing under and by virtue of the laws of the
Philippines, with head office at Makati, as Surety, are held
and firmly bound unto the ASSET BUILDERS CORPORATION
and to any individual, firm, partnership, corporation or
association supplying the principal with labor or materials
in the penal sum of THREE HUNDRED FORTY FIVE
THOUSAND ONLY (P345,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we
bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly by
these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the ASSET
BUILDERS CORPORATION represented by
_________________, to fully and faithfully.
Comply with the supply of labor, materials, tools and
equipment including technical supervision to drill one (1)
exploratory production well located at NIA Ave. cor. Olalia
St., Brgy. Dela Paz, Antipolo City. This bond is callable on
demand.
WHEREAS, the liability of the Surety Company under this
bond shall in no case exceed the sum of PESOS THREE
HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00)
Philippine Currency, inclusive of interest, attorneys fee,
and other damages, and shall not be liable for any and forfeit the bonds should it still fail to complete said
advances of the obligee to the principal. project within the agreed period.

WHEREAS, said contract requires the said principal to give On August 3, 2006, ABC sent a Notice of Rescission of
a good and sufficient bond in the above-stated sum to Contract with Demand for Damages to Lucky
secure the full and faithfull performance on its part of said Star.[9] Pertinent portions of said notice read:
contract, and the satisfaction of obligations for materials
used and labor employed upon the work;
Pursuant to paragraph 1 of the Terms and Conditions of the
service contract, notice is hereby made on you of the
NOW THEREFORE, if the principal shall perform well and rescission of the contract and accordingly demand is
truly and fulfill all the undertakings, covenants, terms, hereby made on you, within seven (7) days from receipt
conditions, and agreements of said contract during the hereof:
original term of said contract and any extension thereof
that may be granted by the obligee, with notice to the
surety and during the life of any guaranty required under (1) to refund the down payment of PHP563,500.00, plus
the contract, and shall also perform well and truly and legal interest thereon;
fulfill all the undertakings, covenants, terms, conditions,
and agreements of any and all duly authorized
modifications of said contract that may hereinafter be (2) to pay liquidated damages equivalent to 2/10 of 1% of
made, without notice to the surety except when such the contract price for every day of delay, or a total of
modifications increase the contract price; and such PHP138,000.00;
principal contractor or his or its sub-contractors shall
promptly make payment to any individual, firm,
partnership, corporation or association supplying the
(3) to pay the amount guaranteed by your performance
principal of its sub-contractors with labor and materials in
bond in the amount of PHP345,000.00;
the prosecution of the work provided for in the said
contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect.Any
extension of the period of time which may be granted by (4) to pay PHP150,000.00 in other consequential damages;
the obligee to the contractor shall be considered as given,
and any modifications of said contract shall be considered
as authorized, with the express consent of the Surety. (5) to pay exemplary damages in the amount
of PHP150,000.00;

The right of any individual, firm, partnership, corporation

or association supplying the contractor with labor or (6) to vacate the project site, together with all your men
materials for the prosecution of the work hereinbefore and equipment.
stated, to institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and
confirmed. x x x Should you refuse to comply with our demand within the
above period, we shall be constrained to sue you in court,
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with
in which event we shall demand payment of attorneys fees
2% withholding tax) as advance payment, representing
in the amount of at least PHP100,000.0.
50% of the contract price.[7] Lucky Star, thereafter,
commenced the drilling work. By July 18, 2006, just a few
days before the agreed completion date of 60 calendar
days, Lucky Star managed to accomplish only ten (10) % of
the drilling work. On the same date, petitioner sent a On August 16, 2006, ABC sent a Notice of Claim for
demand letter to Lucky Star for the immediate completion payment to Stronghold to make good its obligation under
of the drilling work[8] with a threat to cancel the agreement its bonds.[10]
Despite notice, ABC did not receive any reply either from 2. to pay plaintiff in the amount of PHP100,000.00 as
Lucky Star or Stronghold, prompting it to file its Complaint liquidated damages;
for Rescission with Damages against both before the
RTC[11] on November 21, 2006.
3. to pay plaintiff in the amount of PHP50,000.00 as
exemplary damages;
In its Answer (with Complusory Counterclaim and Cross-
Claim), dated January 24, 2007, Stronghold denied any
liability arguing that ABC had not shown any proof that it 4. to pay plaintiff in the amount of PHP 50,000.00 as
made an advance payment of 50% of the contract price of attorneys fees;
the project. It further averred that ABCs rescission of its
contract with Lucky Star virtually revoked the claims
against the two bonds and absolved them from further 5. to pay the costs of the suit.
liability.[12]

Defendant Stronghold Insurance Company, Inc.s

Lucky Star, on the other hand, failed to file a responsive compulsory counterclaim and cross-claim are dismissed.[15]
pleading within the prescribed period and, thus, was
declared in default by the RTC in its Order dated August 24,
2007.[13]
Hence, this petition.

On February 27, 2009, the RTC rendered the assailed

Petitioner ABC prays for the reversal of the challenged
decision ordering Lucky Star to pay ABC but absolving
decision based on the following
Stronghold from liability.[14] Relevant parts of the decision,
including the decretal portion, read:

GROUNDS

On the liability of defendant Stronghold Insurance, the
Court rules on the negative.
The surety bond and performance bond executed by
defendants Lucky Star and Stronghold Insurance are in the
nature of accessory contracts which depend for its
existence upon another contract. Thus, when the
agreement (Exhibit A) between the plaintiff and defendant
Asset Builders was rescinded, the surety and performance
bond were automatically cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of the plaintiff and against defendant
Lucky Star Drilling & Construction, ordering the latter as
follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual
damages plus legal interest from the filing of the
complaint;
A. The Lower Court seriously erred and unjustly ACTED
ARBITRARILY with manifest bias and grave abuse of
discretion, CONTRARY to applicable laws and established
jurisprudence in declaring
the automatic CANCELLATION of respondent Strongholds
Surety Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID
PRINCIPAL OBLIGATION guaranteed by Respondents
Bonds, arising out of the Contractors DEFAULT and Non-
performance.
(b) Upon breach by its Principal/contractor,
the LIABILITIES of Respondents bonds had
already ACCRUED, automatically attached, and had
become already DIRECT, PRIMARY and ABSOLUTE, even
before Petitioners legitimate exercise of its option under
Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the
Respondent Stronghold as its LIABILITIES on its subject
bonds have already
become INTERWOVEN and INSEPARABLE with the
liabilities of its Principal, the Contractor Lucky Star.
B. With the Lower Courts completely erroneous ruling on
the liabilities of Respondents bonds, the Lower
Court equally ERRED with manifest bias and grave abuse,
in its FAILURE to comply with the duty of court to make a
finding of unreasonable denial or withholding by
Respondent Stronghold or Petitioners claims and impose
upon the Respondent the penalties provided for under
Section 241 and 244 of the Insurance Code.[16]
Essentially, the primary issue is whether or not respondent
insurance company, as surety, can be held liable under its
bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound
itself to the petitioner when it executed in its favor surety
and performance bonds. The contents of the said contracts
clearly establish that the parties entered into a surety
agreement as defined under Article 2047 of the New Civil
Code. Thus:
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. [Emphasis supplied]
As provided in Article 2047, the surety undertakes to be
bound solidarily with the principal obligor. That
undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence
secondary only to a valid principal obligation, the 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 any benefit
therefrom.[17] Let it be stressed that notwithstanding the
fact that the surety contract is secondary to the principal
obligation, the surety assumes liability as a regular party to
the undertaking.[18]
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation,[19] reiterating the ruling in Garcia v. Court of
Appeals,[20] expounds on the nature of the suretys liability:
X x x. The suretys obligation is not an original and direct
one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety
is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the
principal.
Suretyship, in essence, contains two types of relationship
the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and the
accessory surety relationship between the principal (Lucky
Star) and the surety (respondent). In this arrangement, the
obligee accepts the suretys solidary undertaking to pay if
the obligor does not pay. Such acceptance, however, does
not change in any material way the obligees relationship
with the principal obligor. Neither does it make the surety
an active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the surety
the right to intervene in the principal contract. The suretys
role arises only upon the obligors default, at which time, it
can be directly held liable by the obligee for payment as a
solidary obligor.[21]
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite
petitioners demand for completion, it was already in
delay. Due to this default, Lucky Stars liability attached
and, as a necessary consequence, respondents liability
under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking
with the petitioner and further failed to return
the P575,000.00 downpayment that was already advanced
to it, respondent, as surety, became solidarily bound with
Lucky Star for the repayment of the said amount to
petitioner. The clause, this bond is callable on demand,
strongly speaks of respondents primary and direct
responsibility to the petitioner.
Accordingly, after liability has attached to the principal, the
obligee or, in this case, the petitioner, can exercise the
right to proceed against Lucky Star or respondent or
both. Article 1216 of the New Civil Code 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.
Contrary to the trial courts ruling, respondent insurance
company was not automatically released from any liability
when petitioner resorted to the rescission of the principal
contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising
from the surety contracts comes to life upon the solidary
obligors default. It should be emphasized that petitioner
had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the
project. Without a doubt, Lucky Stars unsatisfactory
progress in the drilling work and its failure to complete it in
due time amount to non-performance of its obligation.
In fine, respondent should be answerable to petitioner on
account of Lucky Stars non-performance of its obligation as
guaranteed by the performance bond.
Finally, Article 1217[22] of the New Civil Code acknowledges
the right of reimbursement from a co-debtor (the principal
co-debtor, in case of suretyship) in favor of the one who
paid (the surety). Thus, respondent is entitled to
reimbursement from Lucky Star for the amount it may be
required to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the
Regional Trial Court, Pasig City, Branch 71,
is AFFIRMED with MODIFICATION. Respondent
Stronghold Insurance is hereby declared jointly and
severally liable with Lucky Star for the payment
of P575,000.00 and the payment of P345,000.00 on the
basis of its performance bond.
SO ORDERED.
[G.R. No. 15825. November 5, 1920. ]
CARMEN CASTELLVI DE HIGGINS and HORACE L.
HIGGINS, Plaintiffs-Appellants, v. GEORGE C.
SELLNER, Defendant-Appellee.
Wolfson, Wolfson & Schwarzkopf for Appellants.
Williams & Ferrier for Appellee.
SYLLABUS
1. CONTRACTS; SURETY AND GUARANTY; COMPARATIVE
JURISPRUDENCE CIVIL CODE TRANSLATION IN ENGLISH;
FIANZA, TRANSLATION IN ENGLISH. — In the original
Spanish of the Civil Code now in force in the Philippine
Islands, Title XIV of Book IV is entitled "De la Fianza." The
Spanish word "ficrnza" is translated in the Washington and
Walton editions of the Civil Code "security." "Fianza"
appears in the Fisher translation as "suretyship."cralaw
virtua1aw library
2. ID.; ID.; ID.; ID.; "FIADOR," TRANSLATION IN ENGLISH. —
The Spanish word "fiador" is found in all of the English
translations of the Civil Code as "surety."cralaw virtua1aw
library
3. ID.; ID.; ID.; ID.; SURETYSHIP AND GUARANTY IN THE
CIVIL LAW. — The law of guaranty is not treated of by that
name in the Civil Code, although indirect reference to the
same is made in the Code of Commerce.
4. ID.; ID.; ID.; ID.; ID. — In terminology at least, no
distinction is made in the Civil Code between the obligation
of a surety and that of a guarantor.
5. ID.; ID.; ID.; ID.; ID. — The substantive law of the
Philippines although having a civil law origin, can be
supplemented by a reference to the precepts of the law
merchant.
6. ID.; ID.; ID.; DIFFERENCES UNDER AMERICAN LAW. — A
surety and a guarantor are alike in that each promises to
answer for the debt or default of another.
7. ID.; ID.; ID.; ID. — A surety and a guarantor are unlike in
that the surety assumes liability as a regular party to the
undertaking, while the liability of the guarantor depends
upon an independent agreement to pay the obligation if
the primary payor fails to do so. A surety is charged as an
original promissor; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is
primary; the obligation of the guarantor is secondary.
8 ID. ID.; ID.; ID.; CIVIL CODE PROVISIONS COMPARED WITH
AMERICAN DOCTRINE. — What the first portion of article
1822 of the Civil Code provides is somewhat akin to the
contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship.
9. ID.; ID.; ID.; ID.; ID. — When, in subsequent articles found
in section 1 of chapter II of the title concerning fianza of
the Civil Code, the Code speaks of the effects of suretyship
between surety and creditor, it has, in comparison with the
common law, the effect of guaranty between guarantor
and creditor.
10 ID.; ID.; ID.; ID.; ID. — The civil law suretyship is nearly
synonymous with the common law guaranty; and the civil
law relation existing between codebtors liable in solidum is
similar to the common law suretyship.
11. ID.; ID.; INSTANT CASE. — The defendant George C.
Sellner wrote to John T. Macleod, agent of the plaintiff,
Mrs. Horace L. Higgins, on May 31, 1915, a letter of the
following tenor: "Dear Sir: I hereby obligate and bind
myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by
the Reystone Mining Co., W. I. Clarke, and John Maye,
jointly and severally, in your favor and due six months after
date for P10,000 is not fully paid at maturity with interest,
I will, within fifteen days after notice of such default, pay
you in cash the sum of P10,000 and interest upon your
surrendering to me the three thousand shares of stock of
the Keystone Mining Co. held by you as security for the
payment of said note." Held: That defendant Sellner is a
guarantor within the meaning of the provisions of the Civil
Code.
DECISION
MALCOLM, J. :
This is an action brought by plaintiffs to recover from
defendant from of P10.000. The brief decision of the trial
court held that the suit was premature, and absolved the
defendant from the complaint, with the costs against the
plaintiffs.
The basis of plaintiffs’ action is a letter written by
defendant George C. Sellner to John T. Macleod, agent for
Mrs. Horace L. Higgins, on May 31, 1915, of the following
tenor:jgc:chanrobles.com.ph
"DEAR SIR: I hereby obligate and bind myself, my heirs
successors and assigns that if the promissory note
executed the 29th day of May 1915 by the Keystone Mining
Co W. H. Clarke, and John Maye, jointly and severally, in
your favor and due six months after date for P10,000 is not
fully paid at maturity with interest, I will, within fifteen
days after notice of such default, pay you in cash the sum
of P10,000 and interest upon your surrendering to me the
three thousand shares of stock of the Keystone Mining Co.
held by you as security for the payment of said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."cralaw virtua1aw library
Counsel for both parties agree that the only point at issue
is the determination of defendant’s status in the
transaction referred to. Plaintiffs contend that he is a
surety; defendant contends that he is a guarantor.
Plaintiffs also admit that if defendant is a guarantor,
articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the
Philippine Islands, Title XIV of Book IV is entitled "De la
Fuenza." The Spanish word "fianza" is translated in the
Washington and Walton editions of the Civil Code as
"security." "Fianza" appears in the Fisher translation as
"suretyship." The Spanish word "fador" is found in all of the
English translations of the Civil Code as "surety." The law of
guaranty is not treated of by that name in the Civil Code,
although indirect reference to the same is made in the
Code of Commerce. In terminology at least, no distinction
is made in the Civil Code between the obligation of a surety
and that of a guarantor.
As has been done in the State of Louisiana, where, like in
the Philippines, the substantive law has a civil law origin,
we feel free to supplement the statutory law by a reference
to the precepts of the law merchant.
The points-of difference between a surety and a guarantor
are familiar to American authorities. A surety and a
guarantor are alike in that each promises to answer for the
debt or default of another. A surety and a guarantor are
unlike in that the surety assumes liability as a regular party
to the undertaking, while the liability of the guarantor
depends upon an independent agreement to pay the
obligation if the primary payor fails to do so. A surety is
charged as an original promissor; the engagement of the
guarantor is a collateral undertaking. The obligation of the
surety is primary; the obligation of the guarantor is
secondary. (See U. S. v. Varadero de la Quinta [1919], 40
Phil., 48; Lachman v. Block [1894], 46 La. Ann., 649;
Bedford v. Kelley [1913], 173 Mich., 492; Brandt, on
Suretyship and Guaranty, sec. 1, cited approvingly by many
authorities.)
Turning back again to our Civil Code, we first note that
according to article 1822 "By fianza (security or suretyship)
one person binds himself to pay or perform for a third
person in case the latter should fail to do so." But "If the
surety binds himself in solidum with the principal debtor,
the provisions of Section fourth, Chapter third, Title first,
shall be applicable." What the first portion of the cited
article provides is, consequently, seen to be somewhat akin
to the contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship. When
in subsequent articles found in section 1 of Chapter II of the
title concerning fianza, the Code speaks of the effects of
Suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty
between guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common law
guaranty; and the civil law relationship existing between
codebtors le in solidum is similar to the common law
suretyship.
It is perfectly clear that the obligation assumed by
defendant was simply that of a guarantor, or, to be more
precise, of the fiador whose responsibility is fixed in the
Civil Code. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within fifteen
days after notice of such default and upon surrender to him
if the three thousand shares of Keystone Mining Company
stock, he will assume responsibility. Sellner is not bound
with the principals by the same instrument executed at the
same time and on the same consideration, but his
responsibility is a secondary one found in an independent
collateral agreement. Neither is Sellner jointly and
severally liable with the principal debtors.
With particular reference, therefore, to appellants’
assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil
Code.
There is also an equitable aspect to the case which
reenforces this conclusion. The note executed by the Key
stone Mining Company matured on November 29, 1916.
Interest on the note was not accepted by the makers until
September 30, 1916. When the note became due, it is
admitted that the shares of stock used as collateral security
were selling at par; that is, they were worth P30,000.
Notice that the note had not been paid was not given to
the defendant until just about three years, after it matured
and when the Keystone Mining Company stock was
worthless. Defendant, consequently, through the laches of
plaintiff, has lost possible chance to recoup, through the
sale of the stock, any amount which he might be compelled
to pay as a surety or guarantor. The "indulgence," as this
word is used in the law of guaranty, of the creditors of the
principal, as evidenced by the acceptance of interest, and
by failure promptly to notify the guarantor, may thus have
served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at
the same result, judgment is affirmed, with costs of this
instance against the appellants. So ordered.
Johnson, Araullo and Villamor, JJ., concur.
G.R. No. L-16666 April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE
ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for
appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one
Romulo Machetti, by a written agreement undertook to
construct a building on Calle Rosario in the city of Manila
for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that
the contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine Islands to the
amount of P128,800 and the following endorsement in the
English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with
the terms and conditions as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE
ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of
architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him from
time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the
sum of the P4,978.08, was paid. Subsequently it was found
that the work had not been carried out in accordance with
the specifications which formed part of the contract and
that the workmanship was not of the standard required,
and the Hospicio de San Jose therefore answered the
complaint and presented a counterclaim for damages for
the partial noncompliance with the terms of the
agreement abovementioned, in the total sum of P71,350.
After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27, 1918, declared insolvent
and on March 4, 1918, an order was entered suspending
the proceeding in the present case in accordance with
section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a
motion asking that the Fidelity and Surety Company be
made cross-defendant to the exclusion of Machetti and
that the proceedings be continued as to said company, but
still remain suspended as to Machetti. This motion was
granted and on February 7, 1920, the Hospicio filed a
complaint against the Fidelity and Surety Company asking
for a judgement for P12,800 against the company upon its
guaranty. After trial, the Court of First Instance rendered
judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now
before this court upon appeal by the Fidelity and Surety
Company form said judgment.
As will be seen, the original action which Machetti was the
plaintiff and the Hospicio de San Jose defendant, has been
converted into an action in which the Hospicio de San Jose
is plaintiff and the Fidelity and Surety Company, the
original plaintiff's guarantor, is the defendant, Machetti
having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger
than that of an ordinary surety. The contract of guaranty is
written in the English language and the terms employed
must of course be given the signification which ordinarily
attaches to them in that language. In English the term
"guarantor" implies an undertaking of guaranty, as
distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert the
contract into one of suretyship but such circumstances do
not exist in the present case; on the contrary it appear
affirmatively that the contract is the guarantor's separate
undertaking in which the principal does not join, that its
rests on a separate consideration moving from the
principal and that although it is written in continuation of
the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing
features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does
not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt, the
other an insurer of the solvency of the debtor.
(Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362;
Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins
and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de
la Quinta, 40 Phil., 48.) This latter liability is what the
Fidelity and Surety Company assumed in the present case.
The undertaking is perhaps not exactly that of
a fianza under the Civil Code, but is a perfectly valid
contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound
itself to pay only the event its principal, Machetti, cannot
pay it follows that it cannot be compelled to pay until it is
shown that Machetti is unable to pay. Such ability may be
proven by the return of a writ of execution unsatisfied or
by other means, but is not sufficiently established by the
mere fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final
liquidation of his estate.
The judgment appealed from is therefore reversed without
costs and without prejudice to such right of action as the
cross-complainant, the Hospicio de San Jose, may have
after exhausting its remedy against the plaintiff Machetti.
So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ.,
concur.
G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE
CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on
Certiorari1 filed 6 November 2009 assailing the
Decision2 and Resolution3 of the Court of Appeals (CA) in
CA-G.R. CV No. 89263, which reversed the Decision4 of the
Regional Trial Court (RTC), Branch 141, Makati City in Civil
Case No. 02-461, ordering respondent to pay petitioner a
sum of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a
purchase order for various telecommunications equipment
(sic), accessories, spares, services and software, at a total
purchase price of Two Million One Hundred Twenty Eight
Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of
the said purchase price for the goods delivered, One Virtual
promised to pay a portion thereof totalling US$1.2 Million
in accordance with the payment schedule dated 22
November 1999. To ensure the prompt payment of this
amount, it obtained defendant UCPB General Insurance
Co., Inc.’s surety bond dated 3 December 1999, in favor of
GILAT.
During the period between [sic] September 1999 and June
2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by
airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of
the equipment (including the software components for
which payment was secured by the surety bond, was
shipped by GILAT and duly received by One Virtual. Under
an endorsement dated December 23, 1999 (Exhibit "E"),
the surety issued, with One Virtual’s conformity, an
amendment to the surety bond, Annex "A" thereof,
correcting its expiry date from May 30, 2001 to July 30,
2001.
One Virtual failed to pay GILAT the amount of Four
Hundred Thousand Dollars (US$400,000.00) on the due
date of May 30, 2000 in accordance with the payment
schedule attached as Annex "A" to the surety bond,
prompting GILAT to write the surety defendant UCPB on
June 5, 2000, a demand letter (Exhibit "G") for payment of
the said amount of US$400,000.00. No part of the amount
set forth in this demand has been paid to date by either
One Virtual or defendant UCPB. One Virtual likewise failed
to pay on the succeeding payment instalment date of 30
November 2000 as set out in Annex "A" of the surety bond,
prompting GILAT to send a second demand letter dated
January 24, 2001, for the payment of the full amount of
US$1,200,000.00 guaranteed under the surety bond, plus
interests and expenses (Exhibits "H") and which letter was
received by the defendant surety on January 25, 2001.
However, defendant UCPB failed to settle the amount of
US$1,200,000.00 or a part thereof, hence, the instant
complaint."5(Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd.,
filed a Complaint6 against respondent UCPB General
Insurance Co., Inc., to recover the amounts supposedly
covered by the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its Decision,7 the
dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court hereby
renders judgment for the plaintiff, and against the
defendant, ordering, to wit:
1. The defendant surety to pay the plaintiff the amount of
One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt under
the Surety Bond, with legal interest thereon at the rate of
12% per annum computed from the time the judgment
becomes final and executory until the obligation is fully
settled; and
2. The defendant surety to pay the plaintiff the amount of
Forty Four Thousand Four Dollars and Four Cents
(US$44,004.04) representing attorney’s fees and litigation
expenses.
Accordingly, defendant’s counterclaim is hereby dismissed
for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that
plaintiff [petitioner] delivered all the subject equipments
[sic] and the same was installed. Even with the delivery and
installation made, One Virtual failed to pay any of the
payments agreed upon. Demand notwithstanding,
defendant failed and refused and continued to fail and
refused to settle the obligation."8
Considering that its liability was indeed that of a surety, as
"spelled out in the Surety Bond executed by and between
One Virtual as Principal, UCPB as Surety and GILAT as
Creditor/Bond Obligee,"9 respondent agreed and bound
itself to pay in accordance with the Payment Milestones.
This obligation was not made dependent on any condition
outside the terms and conditions of the Surety Bond and
Payment Milestones.10
Insofar as the interests were concerned, the RTC denied
petitioner’s claim on the premise that while a surety can be
held liable for interest even if it becomes more onerous
than the principal obligation, the surety shall only accrue
when the delay or refusal to pay the principal obligation is
without any justifiable cause.11 Here, respondent failed to
pay its surety obligation because of the advice of its
principal (One Virtual) not to pay.12 The RTC then obligated
respondent to pay petitioner the amount of
USD1,200,000.00 representing the principal debt under
the Surety Bond, with legal interest at the rate of 12% per
annum computed from the time the judgment becomes
final and executory, and USD44,004.04 representing
attorney’s fees and litigation expenses.
On 18 October 2007, respondent appealed to the CA.13 The
appellate court rendered a Decision14 in the following
manner:
WHEREFORE, this appealed case is DISMISSED for lack of
jurisdiction. The trial court’s Decision dated December 28,
2006 is VACATED. Plaintiff-appellant Gilat Satellite
Networks Ltd., and One Virtual are ordered to proceed to
arbitration, the outcome of which shall necessary bind the
parties, including the surety, defendant-appellant United
Coconut Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the
‘complementary-contracts-construed-together’ doctrine
finds application." According to this doctrine, the accessory
contract must be construed with the principal
agreement.15 In this case, the appellate court considered
the Purchase Agreement entered into between petitioner
and One Virtual as the principal contract,16 whose
stipulations are also binding on the parties to the
suretyship.17 Bearing in mind the arbitration clause
contained in the Purchase Agreement18 and pursuant to
the policy of the courts to encourage alternative dispute
resolution methods,19 the trial court’s Decision was
vacated; petitioner and One Virtual were ordered to
proceed to arbitration.
On 9 September 2008, petitioner filed a Motion for
Reconsideration with Motion for Oral Argument. The
motion was denied for lack of merit in a Resolution20 issued
by the CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 on the
Petition for Review. On 24 November 2010, petitioner filed
a Reply.22
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and
ordering petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to legal interest due
to the delay in the fulfilment by respondent of its
obligation under the Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does not give the
surety the right to intervene in the principal contract, nor
can an arbitration clause between the buyer and the seller
be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no
court can compel arbitration, unless a party entitled to it
applies for this relief.23 This referral, however, can only be
demanded by one who is a party to the arbitration
agreement.24 Considering that neither petitioner nor One
Virtual has asked for a referral, there is no basis for the CA’s
order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil
Code25 clearly provide that the creditor may proceed
against the surety without having first sued the principal
debtor.26 Even the Surety Agreement itself states that
respondent becomes liable upon "mere failure of the
Principal to make such prompt payment."27 Thus,
petitioner should not be ordered to make a separate claim
against One Virtual (via arbitration) before proceeding
against respondent.28
On the other hand, respondent maintains that a surety
contract is merely an accessory contract, which cannot
exist without a valid obligation.29 Thus, the surety may avail
itself of all the defenses available to the principal debtor
and inherent in the debt30 – that is, the right to invoke the
arbitration clause in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s
liability is joint and solidary with that of the principal
debtor. This undertaking makes a surety agreement an
ancillary contract, as it presupposes the existence of a
principal contract.31 Nevertheless, although the contract of
a surety is in essence secondary only to a valid principal
obligation, its liability to the creditor or "promise" of the
principal is said to be direct, primary and absolute; in other
words, a surety is directly and equally bound with the
principal.32 He becomes liable for the debt and duty of the
principal obligor, even without possessing a direct or
personal interest in the obligations constituted by the
latter.33Thus, a surety is not entitled to a separate notice of
default or to the benefit of excussion.34 It may in fact be
sued separately or together with the principal debtor.35
After a thorough examination of the pieces of evidence
presented by both parties,36 the RTC found that petitioner
had delivered all the goods to One Virtual and installed
them. Despite these compliances, One Virtual still failed to
pay its obligation,37 triggering respondent’s liability to
petitioner as the former’s surety.1âwphi1 In other words,
the failure of One Virtual, as the principal debtor, to fulfill
its monetary obligation to petitioner gave the latter an
immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that
the Purchase Agreement, being the principal contract to
which the Suretyship Agreement is accessory, must take
precedence over arbitration as the preferred mode of
settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v.
Tokyu Construction Co. Ltd.,38 that "[the] acceptance [of a
surety agreement], however, does not change in any
material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the
principal creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to intervene
in the principal contract. The surety’s role arises only upon
the debtor’s default, at which time, it can be directly held
liable by the creditor for payment as a solidary obligor."
Hence, the surety remains a stranger to the Purchase
Agreement. We agree with petitioner that respondent
cannot invoke in its favor the arbitration clause in the
Purchase Agreement, because it is not a party to that
contract.39 An arbitration agreement being contractual in
nature,40 it is binding only on the parties thereto, as well as
their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in
stating that a referral to arbitration may only take place "if
at least one party so requests not later than the pre-trial
conference, or upon the request of both parties
thereafter." Respondent has not presented even an iota of
evidence to show that either petitioner or One Virtual
submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but
rather the debt itself.43 They are contracted precisely to
mitigate risks of non-performance on the part of the
obligor. This responsibility necessarily places a surety on
the same level as that of the principal debtor.44 The effect
is that the creditor is given the right to directly proceed
against either principal debtor or surety. This is the reason
why excussion cannot be invoked.45 To require the creditor
to proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce. At
any rate, as we have held in Palmares v. Court of
Appeals,46 "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."
Interest, as a form of indemnity, may be awarded to a
creditor for the delay incurred by a debtor in the payment
of the latter’s obligation, provided that the delay is
inexcusable.
Anent the issue of interests, petitioner alleges that it
deserves to be paid legal interest of 12% per annum from
the time of its first demand on respondent on 5 June 2000
or at most, from the second demand on 24 January 2001
because of the latter’s delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code, petitioner
insists that the delay started to run from the time it
demanded the fulfilment of respondent’s obligation under
the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable
for legal interest of 6% per annum from the date of
petitioner’s last demand on 24 January 2001.
In rejecting petitioner’s position, the RTC stated that
interests may only accrue when the delay or the refusal of
a party to pay is without any justifiable cause.48 In this case,
respondent’s failure to heed the demand was due to the
advice of One Virtual that petitioner allegedly breached its
undertakings as stated in the Purchase Agreement.49 The
CA, however, made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation
consists in the payment of a sum of money, and the debtor
incurs a delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the
legal interest."
Delay arises from the time the obligee judicially or
extrajudicially demands from the obligor the performance
of the obligation, and the latter fails to comply.50 Delay, as
used in Article 1169, is synonymous with default or mora,
which means delay in the fulfilment of obligations.51 It is
the nonfulfillment of an obligation with respect to
time.52 In order for the debtor (in this case, the surety) to
be in default, it is necessary that the following requisites be
present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or
extrajudicially.53
Having held that a surety upon demand fails to pay, it can
be held liable for interest, even if in thus paying, its liability
becomes more than the principal obligation.54 The
increased liability is not because of the contract, but
because of the default and the necessity of judicial
collection.55
However, for delay to merit interest, it must be inexcusable
in nature. In Guanio v. Makati-Shangri-la Hotel,56 citing
RCPI v. Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence
of the contract and the failure of its compliance justify,
prima facie, a corresponding right of relief. The law,
recognizing the obligatory force of contracts, will not
permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the
contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The
remedy serves to preserve the interests of the promissee
that may include his "expectation interest," which is his
interest in having the benefit of his bargain by being put in
as good a position as he would have been in had the
contract been performed, or his "reliance interest," which
is his interest in being reimbursed for loss caused by
reliance on the contract by being put in as good a position
as he would have been in had the contract not been made;
or his "restitution interest," which is his interest in having
restored to him any benefit that he has conferred on the
other party. Indeed, agreements can accomplish little,
either for their makers or for society, unless they are made
the basis for action. The effect of every infraction is to
create a new duty, that is, to make RECOMPENSE to the
one who has been injured by the failure of another to
observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due
diligence x x x or of the attendance of fortuitous event, to
excuse him from his ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof
to show that respondent’s delay was indeed justified by
the circumstances – that is, One Virtual’s advice regarding
petitioner’s alleged breach of obligations. The lower
court’s Decision itself belied this contention when it said
that "plaintiff is not disputing that it did not complete
commissioning work on one of the two systems because
One Virtual at that time is already in default and has not
paid GILAT."58Assuming arguendo that the commissioning
work was not completed, respondent has no one to blame
but its principal, One Virtual; if only it had paid its
obligation on time, petitioner would not have been forced
to stop operations. Moreover, the deposition of Mr. Erez
Antebi, vice president of Gilat, repeatedly stated that
petitioner had delivered all equipment, including the
licensed software; and that the equipment had been
installed and in fact, gone into
operation.59 Notwithstanding these compliances,
respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code
is explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169 of the Civil
Code and of the settled rule that where there has been an
extra-judicial demand before an action for performance
was filed, interest on the amount due begins to run, not
from the date of the filing of the complaint, but from the
date of that extra-judicial demand.60 Considering that
respondent failed to pay its obligation on 30 May 2000 in
accordance with the Purchase Agreement, and that the
extrajudicial demand of petitioner was sent on 5 June
2000,61 we agree with the latter that interest must start to
run from the time petitioner sent its first demand letter (5
June 2000), because the obligation was already due and
demandable at that time.
With regard to the interest rate to be imposed, we take cue
from Nacar v. Gallery Frames,62 which modified the
guidelines established in Eastern Shipping Lines v. CA63 in
relation to Bangko Sentral-Monetary Board Circular No.
799 (Series of 2013), to wit:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded.1âwphi1 In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
xxxx
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
Applying the above-discussed concepts and in the absence
of an agreement as to interests, we are hereby compelled
to award petitioner legal interest at the rate of 6% per
annum from 5 June 2000, its first date of extra judicial
demand, until the satisfaction of the debt in accordance
with the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is
hereby GRANTED. The assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 89263 are
REVERSED. The Decision of the Regional Trial Court, Branch
141, Makati City is REINSTATED, with MODIFICATION
insofar as the award of legal interest is concerned.
Respondent is hereby ordered to pay legal interest at the
rate of 6% per annum from 5 June 2000 until the
satisfaction of its obligation under the Suretyship Contract
and Purchase Agreement.
SO ORDERED.
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and
binds herself to be jointly and severally liable with the
principal debtor in case the latter defaults in the payment
of the loan, is such undertaking of the former deemed to
be that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990,
private respondent M.B. Lending Corporation extended a
loan to the spouses Osmeña and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount
of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof.1 On four
occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability
under the promissory note, respondent corporation filed a
complaint3 against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors,
allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner
alleged that sometime in August 1990, immediately after
the loan matured, she offered to settle the obligation with
respondent corporation but the latter informed her that
they would try to collect from the spouses Azarraga and
that she need not worry about it; that there has already
been a partial payment in the amount of P17,010.00; that
the interest of 6% per month compounded at the same
rate per month, as well as the penalty charges of 3% per
month, are usurious and unconscionable; and that while
she agrees to be liable on the note but only upon default
of the principal debtor, respondent corporation acted in
bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the
proceeds of the loan.
During the pre-trial conference, the parties submitted the
following issues for the resolution of the trial court: (1)
what the rate of interest, penalty and damages should be;
(2) whether the liability of the defendant (herein
petitioner) is primary or subsidiary; and (3) whether the
defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary
liability.5
Thereafter, the parties agreed to submit the case for
decision based on the pleadings filed and the memoranda
to be submitted by them. On November 26, 1992, the
Regional Trial Court of Iloilo City, Branch 23, rendered
judgment dismissing the complaint without prejudice to
the filing of a separate action for a sum of money against
the spouses Osmeña and Merlyn Azarraga who are
primarily liable on the instrument.6 This was based on the
findings of the court a quo that the filing of the complaint
against herein petitioner Estrella Palmares, to the
exclusion of the Azarraga spouses, amounted to a
discharge of a prior party; that the offer made by petitioner
to pay the obligation is considered a valid tender of
payment sufficient to discharge a person's secondary
liability on the instrument; as co-maker, is only secondarily
liable on the instrument; and that the promissory note is a
contract of adhesion.
Respondent Court of Appeals, however, reversed the
decision of the trial court, and rendered judgment
declaring herein petitioner Palmares liable to pay
respondent corporation:
1. The sum of P13,700.00 representing the outstanding
balance still due and owing with interest at six percent (6%)
per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three
percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per
stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent
appellate court declared that petitioner Palmares is a
surety since she bound herself to be jointly and severally
or solidarily liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As such,
petitioner is primarily liable on the note and hence may be
sued by the creditor corporation for the entire obligation.
It also adverted to the fact that petitioner admitted her
liability in her Answer although she claims that the
Azarraga spouses should have been impleaded.
Respondent court ordered the imposition of the stipulated
6% interest and 3% penalty charges on the ground that the
Usury Law is no longer enforceable pursuant to Central
Bank Circular No. 905. Finally, it rationalized that even if
the promissory note were to be considered as a contract of
adhesion, the same is not entirely prohibited because the
one who adheres to the contract is free to reject it entirely;
if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is
asserted that:
A. The Court of Appeals erred in ruling that Palmares acted
as surety and is therefore solidarily liable to pay the
promissory note.
1. The terms of the promissory note are vague. Its
conflicting provisions do not establish Palmares' solidary
liability.
2. The promissory note contains provisions which establish
the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares'
liability is solidary.
4. The promissory note is a contract of adhesion and should
be construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this
point.
B. Assuming that Palmares' liability is solidary, the Court of
Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory
note.
The foregoing contentions of petitioner are denied and
contradicted in their material points by respondent
corporation. They are further refuted by accepted
doctrines in the American jurisdiction after which we
patterned our statutory law on surety and guaranty. This
case then affords us the opportunity to make an extended
exposition on the ramifications of these two specialized
contracts, for such guidance as may be taken therefrom in
similar local controversies in the future.
The basis of petitioner Palmares' liability under the
promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-
quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker
of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the
same conditions above-contained.8
Petitioner contends that the provisions of the second and
third paragraph are conflicting in that while the second
paragraph seems to define her liability as that of a surety
which is joint and solidary with the principal maker, on the
other hand, under the third paragraph her liability is
actually that of a mere guarantor because she bound
herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the
third paragraph defines the nature of her liability as that of
a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule
is that clauses in the contract should be interpreted in
relation to one another and not by parts. In other words,
the second paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between
the two provisions, petitioner avers that she could be held
liable only as a guarantor for several reasons. First, the
words "jointly and severally or solidarily liable" used in the
second paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter
into such transactions without fully realizing the nature
and extent of her liability. On the contrary, the wordings
used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of
suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication
beyond specified limits, taking into consideration the
peculiar nature of a surety agreement which holds the
surety liable despite the absence of any direct
consideration received from either the principal obligor or
the creditor. Third, the promissory note is a contract of
adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner
partially filled up, the contents thereof were never
explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity in the contract
should be strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be
deemed restricted by the clause in the third paragraph of
the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be
compelled to pay the loan because the principal debtors
cannot be considered in default in the absence of a judicial
or extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported demand
letters were never attached to the pleadings filed by
private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that
she received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or
the principal debtors in default for the simple reason that
the latter subsequently made a partial payment on the loan
in September, 1991, a fact which was never controverted
by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred
in awarding the amount of P2,745,483.39 in favor of
private respondent when, in truth and in fact, the
outstanding balance of the loan is only P13,700.00. Where
the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially
complied with, the court may equitably reduce the
penalty10 on grounds of substantial justice. More
importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan
matured, she informed said respondent of her desire to
settle the obligation. The court should, therefore, mitigate
the damages to be paid since petitioner has shown a
sincere desire for a compromise.11
After a judicious evaluation of the arguments of the
parties, we are constrained to dismiss the petition for lack
of merit, but to except therefrom the issue anent the
propriety of the monetary award adjudged to herein
respondent corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note executed
between the parties is a contract of adhesion, it has been
the consistent holding of the Court that contracts of
adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld.
The peculiar nature of such contracts necessitate a close
scrutiny of the factual milieu to which the provisions are
intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and
ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the
drafter thereof when justified in light of the operative facts
and surrounding circumstances.12 The factual scenario
obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
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.
It is a cardinal rule in the interpretation of contracts that if
the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning
of its stipulation shall control.13 In the case at bar,
petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or
solidarily liable" contained in the second paragraph of her
contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is
diametrically opposed to her manifestation in the contract
that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability
with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established
by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to
prove fraud must, therefore, fail as it was evidenced only
by her own uncorroborated and, expectedly, self-serving
allegations.14
Having entered into the contract with full knowledge of its
terms and conditions, petitioner is estopped to assert that
she did so under a misapprehension or in ignorance of their
legal effect, or as to the legal effect of the
undertaking.15 The rule that ignorance of the contents of
an instrument does not ordinarily affect the liability of one
who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of liability.16
Petitioner would like to make capital of the fact that
although she obligated herself to be jointly and severally
liable with the principal maker, her liability is deemed
restricted by the provisions of the third paragraph of her
contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note," which makes her
contract one of guaranty and not suretyship. The
purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is
an insurer of the solvency of the debtor.17 A suretyship is
an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay.18 Stated differently,
a surety promises to pay the principal's debt if the principal
will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed
against the guarantor if the principal is unable to pay.19 A
surety binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on the
other hand, does not contract that the principal will pay,
but simply that he is able to do so.20 In other words, a
surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the principal
debtor.21
Quintessentially, the undertaking to pay upon default of
the principal debtor does not automatically remove it from
the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory
note do not contain any other condition for the
enforcement of respondent corporation's right against
petitioner. It has not been shown, either in the contract or
the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the
defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit
by joining in the principal debtor's obligation, so as to
render himself directly and primarily responsible with him,
and without reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability,
petitioner erroneously invokes the rule on strictissimi juris,
which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined
under the rule of reasonable construction applicable to all
written contracts, then the liability of the surety, under his
contract, as thus interpreted and construed, is not to be
extended beyond its strict meaning.23 The rule, however,
will apply only after it has been definitely ascertained that
the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a
surety or a guarantor.
Prescinding from these jurisprudential authorities, there
can be no doubt that the stipulation contained in the third
paragraph of the controverted suretyship contract merely
elucidated on and made more specific the obligation of
petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner,
that she is merely a guarantor because her liability attaches
only upon default of the principal debtor, must necessarily
fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts shall also be
principally considered.24 Several attendant factors in that
genre lend support to our finding that petitioner is a surety.
For one, when petitioner was informed about the failure of
the principal debtor to pay the loan, she immediately
offered to settle the account with respondent corporation.
Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another,
and this is most revealing, petitioner presented the
receipts of the payments already made, from the time of
initial payment up to the last, which were all issued in her
name and of the Azarraga spouses.25 This can only be
construed to mean that the payments made by the
principal debtors were considered by respondent
corporation as creditable directly upon the account and
inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with
that of her principals only goes to show that, from the very
start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a
surety is bound equally and absolutely with the
principal,26 and as such is deemed an original promisor and
debtor from the beginning.27 This is because in suretyship
there is but one contract, and the surety is bound by the
same agreement which binds the principal.28 In essence,
the contract of a surety starts with the agreement,29 which
is precisely the situation obtaining in this case before the
Court.
It will further be observed that petitioner's undertaking as
co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor,
and the principal obligors. A surety is usually bound with
his principal by the same instrument, executed at the same
time and upon the same consideration; he is an original
debtor, and his liability is immediate and direct.30 Thus, it
has been held that where a written agreement on the same
sheet of paper with and immediately following the
principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract,
the signers were "sureties" jointly liable with the buyer.31 A
surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon
the same instrument, and the same consideration usually
supports the obligation for both the principal and the
surety.32
There is no merit in petitioner's contention that the
complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there
having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to
the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that "should
I fail to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in
order that delay may exist since the contract itself already
expressly so declares.33 As a surety, petitioner is equally
bound by such waiver.
Even if it were otherwise, demand on the sureties is not
necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand.34 On this
point, it may be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice of the
principal's default. Inasmuch as the creditor owes no duty
of active diligence to take care of the interest of the surety,
his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect
of discharging the surety. The surety is bound to take
notice of the principal's default and to perform the
obligation. He cannot complain that the creditor has not
notified
him in the absence of a special agreement to that effect in
the contract of suretyship.35
The alleged failure of respondent corporation to prove the
fact of demand on the principal debtors, by not attaching
copies thereof to its pleadings, is likewise immaterial. In
the absence of a statutory or contractual requirement, it is
not necessary that payment or performance of his
obligation be first demanded of the principal, especially
where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the
principal be called on to account.36 The underlying
principle therefor is that a suretyship is a direct contract to
pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is
made, without any demand upon the principal whatsoever
or any notice of default.37 As an original promisor and
debtor from the beginning, he is held ordinarily to know
every default of his principal.38
Petitioner questions the propriety of the filing of a
complaint solely against her to the exclusion of the
principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan. What petitioner
is trying to imply is that the creditor, herein respondent
corporation, should have proceeded first against the
principal before suing on her obligation as surety. We
disagree.
A creditor's right to proceed against the surety exists
independently of his right to proceed against the
principal.39 Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for the creditor
to proceed against a principal in order to hold the surety
liable, where, by the terms of the contract, the obligation
of the surety is the same that of the principal, then soon as
the principal is in default, the surety is likewise in default,
and may be sued immediately and before any proceedings
are had against the principal.41 Perforce, in accordance
with the rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with the rule that
his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law,
unless permitted by statute and in the absence of any
agreement limiting the application of the security, require
the creditor or obligee, before proceeding against the
surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are
equally bound.42
We agree with respondent corporation that its mere failure
to immediately sue petitioner on her obligation does not
release her from liability. Where a creditor refrains from
proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or
forbearance does not affect the creditor's rights vis-a-
vis the surety, unless the surety requires him by
appropriate notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge
the surety whether given at the principal's request or
without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is
only the result of passiveness. 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.43 And, in the absence of proof
of resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will not look to
the surety,44 or that he need not trouble himself.45 The
consequences of the delay, such as the subsequent
insolvency of the principal,46 or the fact that the remedies
against the principal may be lost by lapse of time, are
immaterial.47
The raison d'être for the rule is that there is nothing to
prevent the creditor from proceeding against the principal
at any time.48 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.49
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.50 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 which precludes the surety from
paying the debt.51
None of these elements are present in the instant case.
Verily, the mere fact that respondent corporation gave the
principal debtors an extended period of time within which
to comply with their obligation did not effectively absolve
here in petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein
petitioner, to show that she has been discharged by some
act of the creditor,52 herein respondent corporation, failing
in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her
liability is solidary, the interests and penalty charges on the
outstanding balance of the loan cannot be imposed for
being illegal and unconscionable. Petitioner additionally
theorizes that respondent corporation intentionally
delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is
misleading.
In an affidavit53 executed by petitioner, which was
attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn
that Merlyn Azarraga's loan has been released and that she
has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from
Merlyn and Osmeña Azarraga. At the same time, I offered
to pay MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and
Osmeña Azarraga. Mr. Banusing advised me not to worry
because he will try to collect first from Merlyn and Osmeña
Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of
Merlyn and Osmeña Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB Lending by
delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the
reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and
of the complaint filed against me by MB Lending before the
RTC-Iloilo. After learning that a complaint was filed against
me, I instructed Sheila Gatia to go to MB Lending and
reiterate my first offer to pay the outstanding balance of
the principal obligation of Merlyn Azarraga in the amount
of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who
referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña
Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be
deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of
circumstances which conjointly inveigh against her
aforesaid theory.
1. Respondent corporation cannot be faulted for not
immediately demanding payment from petitioner. It was
petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only
in case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there
was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she owned.
Respondent corporation was acting well within its rights
when it refused to accept the offer. The debtor of a thing
cannot compel the creditor to receive a different one,
although the latter may be of the same value, or more
valuable than that which is due.54 The obligee is entitled to
demand fulfillment of the obligation or performance as
stipulated. A change of the object of the obligation would
constitute novation requiring the express consent of the
parties.55
3. After the complaint was filed against her, petitioner
reiterated her offer to pay the outstanding balance of the
obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot
be blamed for refusing the amount being offered because
it fell way below the amount it had computed, based on
the stipulated interests and penalty charges, as owing and
due from herein petitioner. A debt shall not be understood
to have been paid unless the thing or service in which the
obligation consists has been completely delivered or
rendered, as the case may be.56 In other words, the
prestation must be fulfilled completely. A person entering
into a contract has a right to insist on its performance in all
particulars.57
Petitioner cannot compel respondent corporation to
accept the amount she is willing to pay because the
moment the latter accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, then the obligation shall be deemed
fully complied with.58 Precisely, this is what respondent
corporation wanted to avoid when it continually refused to
settle with petitioner at less than what was actually due
under their contract.
This notwithstanding, however, we find and so hold that
the penalty charge of 3% per month and attorney's fees
equivalent to 25% of the total amount due are highly
inequitable and unreasonable.
It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been
paid even before the filing of the present case. Article 1229
of the Civil Code provides that the court shall equitably
reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. And, even
if there has been no performance, the penalty may also be
reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise
involved private respondent M.B. Lending Corporation,
and which is substantially on all fours with the one at bar,
we decided to eliminate altogether the penalty interest for
being excessive and unwarranted under the following
rationalization:
Upon the matter of penalty interest, we agree with the
Court of Appeals that the economic impact of the penalty
interest of three percent (3 %) per month on total amount
due but unpaid should be equitably reduced. The purpose
for which the penalty interest is intended — that is, to
punish the obligor — will have been sufficiently served by
the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount
loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful)
regular compensatory interest, the penalty interest
stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being
imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this
Court has previously ruled that even with an agreement
thereon between the parties, the court may nevertheless
reduce such attorney's fees fixed in the contract when the
amount thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even necessary to
show, as in other contracts, that it is contrary to morals or
public policy.61 The grant of attorney's fees equivalent to
25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal
unpaid amount involved and the extent of the work
involved in this simple action for collection of a sum of
money. We, therefore, hold that the amount of P10,000.00
as and for attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award
of attorney's fees is reduced to P10,000.00.
SO ORDERED.
[G.R. No. 103066. April 25, 1996]
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs. HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE;
FAILURE TO OBJECT TO THE PRESENTATION OF PAROL
EVIDENCE CONSTITUTES A WAIVER THEREOF. - 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. 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.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE;
APPLICABLE IN CASE AT BAR. The trial court found that it
was to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC [Inter-Resin
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. 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-appellant 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.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE
CONSIDERATION NECESSARY TO SUPPORT A SURETY
OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY, A
CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS
SUFFICIENT. - Willex Plastic argues that the Continuing
Guaranty, being an accessory contract, cannot legally exist
because of the absence of a valid principal obligation. 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 Inter-Resin
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.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS
ORDINARILY NOT TO BE CONSTRUED AS RETROSPECTIVE,
IN THE END THE INTENTION OF THE PARTIES AS REVEALED
BY THE EVIDENCE IS CONTROLLING. - Willex Plastic
contends that the Continuing Guaranty cannot be
retroactively applied so as to secure the payments made
by Interbank under the two Continuing Surety Agreements.
Willex Plastic invokes the ruling in El Vencedor v. Canlas (44
Phil. 699 [1923]) and Dio v. Court of Appeals (216 SCRA 9
[1992]) 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 parties 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 Dio
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
contract of guaranty or suretyship should be prospective in
application. Indeed, as we also held in Bank of the
Philippine Islands v. Foerster, (49 Phil. 843 [1926]) 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 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 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.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.
DECISION
MENDOZA, J.:
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 courts resolution
of October 17, 1989 denying petitioners motion for
reconsideration.
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
accommodation, 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 Industrials 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
P687,500.00 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 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 formers 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) WILLEX is only a guarantor of the principal obligor, 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 obligor;
(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 Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 17% of the amount
due; and
(c) Attorneys fees and expenses of litigation equivalent to
20% 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 Appellants Brief. After its motion was
denied, Inter-Resin 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 Inter-Resin Industrials motion for
reception of evidence because the situation or situations in
which we could exercise the power under B.P. 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 Interbanks
predecessor-in-interest, Atrium Capital, to Manilabank
pursuant to the Continuing Surety Agreements made on
December 1, 1978. In denying liability to Interbank 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,
Interbanks 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 Plastics counsel
replied in the negative and manifested that the plaintiff in
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. Interbanks 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 [Inter-Resin 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 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 Inter-Resin 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 coco-shell 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 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 retroactively applied so as to secure the
payments made by Interbank under the two Continuing
Surety Agreements. Willex Plastic invokes the ruling m
El Vencedor v. Canlas[11] and Dio 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 parties 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 Dio 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
contract 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 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;
xxxxxxxxx
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. (italics 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 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 other hand, 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 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-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 Inter-Resin 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 Industrials 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.
G.R. No. 89775 November 26, 1992
JACINTO UY DIÑO 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 Diño 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 Diño 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 Diño agreed to be bound up
to the aggregate sum of P800,000.00.
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 Diño 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 Diño, 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, Diño, 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 him that the source of his liability is the
Continuing Suretyship which he executed on February 25,
1977.
As a rejoinder, Diño 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, Diño 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
Diño 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 Diño
(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 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. 51-54).
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 Diñoand 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 Diño 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.
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 Diño and Uy, being
strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño
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 Diño 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, Diño
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. 333-334). 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 DIÑO
and NORBERTO UY;
b) ordering the plaintiff to pay to Diño 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) 4
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
DIÑO 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 DIÑO 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 Diño 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 Diño 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 Diño and
Norberto Uy to pay, jointly and severally, to plaintiff
P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the Continuing
Suretyship Agreements separately 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 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 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 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 Diño contains identical provisions
except with respect to the guaranteed aggregate principal
amount which is EIGHT THOUSAND PESOS
14
(P800,000.00).
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 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 Diño and
(b) P300,000.00 for petitioner Uy.
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 Diño 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.
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.
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." 23This 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 Diño 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.
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 DIÑO 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.
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING
CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of
Davao, and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.
DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent
judge dated October 6, 1978 and November 7, 1978 in Civil
Case No. 11-154 of the Court of First Instance of Davao,
which granted the motion filed by private respondent to
dismiss the complaint of petitioner for a sum of money, on
the ground that the complaint states no cause of action as
against private respondent.
After the petition had been filed, petitioner, on December
14, 1978 mailed a manifestation and motion requesting the
special civil action for certiorari be treated as a petition for
review. 1 Said manifestation and motion was noted in the
resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and
Enrique Go, Sr. executed a comprehensive surety
agreements 3 to guaranty among others, any existing
indebtedness of Davao Agricultural Industries Corporation
(referred to therein as Borrower, and as Daicor in this
decision), and/or induce the bank at any time or from time
to time thereafter, to make loans or advances or to extend
credit in other manner to, or at the request, or for the
account of the Borrower, either with or without security,
and/or to purchase on discount, or to make any loans or
advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other evidences
of indebtedness (all hereinafter called "instruments") upon
which the Borrower is or may become liable, provided that
the liability shall not exceed at any one time the aggregate
principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of
P100,000.00 was issued in favor of petitioner payable on
June 13, 1977. Said note was signed by Enrique Go, Sr. in
his personal capacity and in behalf of Daicor. The
promissory note was not fully paid despite repeated
demands; hence, on June 30, 1978, petitioner filed a
complaint for a sum of money against Daicor, Enrique Go,
Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro
Chua on the ground that the complaint states no cause of
action as against him. 5 It was alleged in the motion that he
can not be held liable under the promissory note because
it was only Enrique Go, Sr. who signed the same in behalf
of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner
alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is
liable because said agreement covers not merely the
promissory note subject of the complaint, but is
continuing; and it encompasses every other indebtedness
the Borrower may, from time to time incur with petitioner
bank.
On October 6, 1978 respondent court rendered a decision
granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for reconsideration
dated October 12, 1978 and on November 7, 1978
respondent court issued an order denying the said
motion. 8
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by
the promissory note involved in the instant case, said
comprehensive surety agreement having been signed by
Enrique Go, Sr. and private respondent, binding
themselves as solidary debtors of said corporation not only
to existing obligations but to future ones. Respondent
court said that corollary to that agreement must be
another instrument evidencing the obligation in a form of
a promissory note or any other evidence of indebtedness
without which the said agreement serves no purpose; that
since the promissory notes, which is primarily the basis of
the cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of
respondent judge, the present petition was filed before
this Court assigning the following as errors committed by
respondent court:
1. That the respondent court erred in dismissing the
complaint against Chua simply on the reasons that 'Chua is
not a signatory to the promissory note" of April 29, 1977,
or that Chua could not be held liable on the note under the
provisions of the comprehensive surety agreement of
October 29, 1976; and/or
2. That the respondent court erred in interpreting the
provisions of the Comprehensive Surety Agreement
towards the conclusion that respondent Chua is not liable
on the promissory note because said note is not
conformable to the Comprehensive Surety Agreement;
and/or
3. That the respondent court erred in ordering that there is
no cause of action against respondent Chua in the
petitioner's complaint.
The main issue involved in this case is whether private
respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign,
in the light of the provisions of the comprehensive surety
agreement which petitioner and private respondent had
earlier executed on October 19, 1976.
We find for the petitioner. The comprehensive surety
agreement was jointly executed by Residoro Chua and
Enrique Go, Sr., President and General Manager,
respectively of Daicor, on October 19, 1976 to cover
existing as well as future obligations which Daicor may
incur with the petitioner bank, subject only to the proviso
that their liability shall not exceed at any one time the
aggregate principal sum of P100,000.00. Thus, paragraph I
of the agreement provides:
For and in consideration of any existing indebtedness to
you of Davao Agricultural Industries Corporation with
principal place of business and postal address at 530 J. P.
Cabaguio Ave., Davao City (hereinafter called the
"Borrower), and/or 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 he 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
evidenced 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
undersigned agrees to guarantee, and does hereby
guarantee in joint and several capacity, the punctual
payment at maturity 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 an such instruments or other
indebtedness or obligations hereinbefore referred to ...,
provided, however, that the liability of the undersigned
shag not exceed at any one time the aggregate principal
sum of P100,000.00 ...
The agreement was executed obviously to induce
petitioner to grant any application for a loan Daicor may
desire to obtain from petitioner bank. The guaranty is a
continuing one which shall remain in full force and effect
until the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force
and effect until written notice shall have been received by
you that it has been revoked by the undersigned, ... 9
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 coco-shell charcoal
and importation of activated carbon, 10 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
promisory 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 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 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.
In view of the foregoing, the decision (which should have
been a mere "order"), dismissing the complaint is reversed
and set side. The case is remanded to the court of origin
with instructions to set aside the motion to dismiss, and to
require defendant Residoro Chua to answer the complaint
after which the case shall proceed as provided by the Rules
of Court. No costs.
SO ORDERED.
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 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
1
become unenforceable. (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 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 set-off 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 xxx2
(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:
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 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 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
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;
(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 pre-existing
principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
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
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 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 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.
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.
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 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 non-payment 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 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.
[G.R. No. 112191. February 7, 1997]
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.
RODRIGUEZA, petitioners, vs. THE HONORABLE COURT
OF APPEALS and FILINVEST CREDIT
CORPORATION, respondents.
DECISION
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later
retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing
schemes whereby vehicles are delivered by the
manufacturer or assembler on the strength of trust
receipts or drafts executed by the car dealers, which are
backed up by sureties. These trust receipts or drafts are
then assigned and/or discounted by the manufacturer
to/with financing companies, which assume payment of
the vehicles but with the corresponding right to collect
such payment from the car dealers and/or the sureties. In
this manner, car dealers are able to secure delivery of their
stock-in-trade without having to pay cash therefor;
manufacturers get paid without any receivables/collection
problems; and financing companies earn their margins
with the assurance of payment not only from the dealers
but also from the sureties. When the vehicles are
eventually resold, the car dealers are supposed to pay the
financing companies -- and the business goes merrily
on. However, in the event the car dealer defaults in paying
the financing company, may the surety escape liability on
the legal ground that the obligations were
incurred subsequent to the execution of the surety
contract?
This is the principal legal question raised in this petition for
review (under Rule 45 of the Rules of Court) seeking to set
aside the Decision[1] of the Court of Appeals (Tenth
Division)[2] promulgated on September 30, 1993 in CA G.R.
CV No. 09136 which affirmed in toto the decision[3] of the
Regional Trial Court of Manila - Branch 11[4] in Civil Case
No. 83-21994, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendants, by ordering the latter
to pay, jointly and severally, the plaintiff the following
amounts:
1. The sum of P1,348,033.89, plus interest thereon at the
rate of P922.53 per day starting April 1, 1985 until the said
principal amount is fully paid;
2. The amount of P50,000.00 as attorneys fees and
another P50,000.00 as liquidated damages; and
3. That the defendants, although spared from paying
exemplary damages, are further ordered to pay, in
solidum, the costs of this suit.
Plaintiff therein was the financing company and the
defendants the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and
Petitioner Edgar Lee Rodrigueza (Petitioner Rodrigueza)
each executed an undated Surety
Undertaking[5] whereunder they absolutely,
unconditionally and solidarily guarantee(d) to Respondent
Filinvest Credit Corporation (Respondent Filinvest) and its
affiliated and subsidiary companies the full, faithful and
prompt performance, payment and discharge of any and
all obligations and agreements of Fortune Motors (Phils.)
Corporation (Petitioner Fortune) under or with respect to
any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise) of
the latter with Filinvest and its affiliated and subsidiary
companies now in force or hereafter made.
The following year or on April[6] 5, 1982, Petitioner Fortune,
Respondent Filinvest and Canlubang Automotive
Resources Corporation (CARCO) entered into an
Automotive Wholesale Financing Agreement[7] (Financing
Agreement) under which CARCO will deliver motor vehicles
to Fortune for the purpose of resale in the latters ordinary
course of business; Fortune, in turn, will execute trust
receipts over said vehicles and accept drafts drawn by
CARCO, which will discount the same together with the
trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for
Fortune. Under the same agreement, Petitioner Fortune,
as trustee of the motor vehicles, was to report and remit
proceeds of any sale for cash or on terms to Respondent
Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by
CARCO to Fortune, and trust receipts covered by demand
drafts and deeds of assignment were executed in favor of
Respondent Filinvest. However, when the demand drafts
matured, not all the proceeds of the vehicles which
Petitioner Fortune had sold were remitted to Respondent
Filinvest.Fortune likewise failed to turn over to Filinvest
several unsold motor vehicles covered by the trust
receipts. Thus, Filinvest through counsel, sent a demand
letter[8] dated December 12, 1983 to Fortune for the
payment of its unsettled account in the amount
of P1,302,811.00. Filinvest sent similar demand
[9]
letters separately to Chua and Rodrigueza as
sureties. Despite said demands, the amount was not
paid. Hence, Filinvest filed in the Regional Trial Court of
Manila a complaint for a sum of money with preliminary
attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court
declared that there was no factual issue to be resolved
except for the correct balance of defendants account with
Filinvest as agreed upon by the parties during pre-
trial.[10] Subsequently, Filinvest presented testimonial and
documentary evidence. Defendants (petitioners herein),
instead of presenting their evidence, filed a Motion for
Judgment on Demurrer to Evidence[11] anchored principally
on the ground that the Surety Undertakings were null and
void because, at the time they were executed, there was
no principal obligation existing. The trial court denied the
motion and scheduled the case for reception of defendants
evidence. On two scheduled dates, however, defendants
failed to present their evidence, prompting the court to
deem them to have waived their right to present
evidence. On December 17, 1985, the trial court rendered
its decision earlier cited ordering Fortune, Chua and
Rodrigueza to pay Filinvest, jointly and severally, the sum
of P1,348,033.83 plus interest at the rate of P922.53 per
day from April 1, 1985 until fully paid, P50,000.00 in
attorneys fees, another P50,000.00 in liquidated damages
and costs of suit.
As earlier mentioned, their appeal was dismissed by the
Court of Appeals (Tenth Division) which affirmed in
toto the trial courts decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed
Decision:
1. that the Court of Appeals erred in declaring that surety
can exist even if there was no existing indebtedness at the
time of its execution.
2. that the Court of Appeals erred when it declared that
there was no novation.
3. that the Court of Appeals erred when it declared, that
the evidence was sufficient to prove the amount of the
claim.[12]
Petitioners argue that future debts which can be
guaranteed under Article 2053 of the Civil Code refer only
to debts existing at the time of the constitution of the
guaranty but the amount thereof is unknown, and that a
guaranty being an accessory obligation cannot exist
without a principal obligation. Petitioners claim that the
surety undertakings cannot be made to cover the Financing
Agreement executed by Fortune, Filinvest and CARCO since
the latter contract was not yet in existence when said
surety contracts were entered into.
Petitioners further aver that the Financing Agreement
would effect a novation of the surety contracts since it
changed the principal terms of the surety contracts and
imposed additional and onerous obligations upon the
sureties.
Lastly, petitioners claim that no accounting of the
payments made by Petitioner Fortune to Respondent
Filinvest was done by the latter. Hence, there could be no
way by which the sureties can ascertain the correct
amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes estoppel
(by pleadings or by judicial admission) upon petitioners
when in their Motion to Discharge Attachment, they
admitted their liability as sureties thus:
Defendants Chua and Rodrigueza could not have
perpetrated fraud because they are only sureties of
defendant Fortune Motors x x x;
x x x The defendants (referring to Rodrigueza and Chua) are
not parties to the trust receipts agreements since they are
ONLY sureties x x x.[13]
In rejecting the arguments of petitioners and in holding
that they (Fortune and the sureties) were jointly and
solidarily liable to Filinvest, the trial court declared:
As to the alleged non-existence of a principal obligation
when the surety agreement was signed, it is enought (sic)
to state that a guaranty may also be given as security for
future debts, the amount of which is not known (Art. 2053,
New Civil Code). In the case of NARIC vs. Fojas, L-11517,
promulgated April 10, 1958, it was ruled that a bond
posted to secure additional credit that the principal debtor
had applied for, is not void just because the said bond was
signed and filed before the additional credit was extended
by the creditor. The obligation of the sureties on future
obligations of Fortune is apparent from a proviso under the
Surety Undertakings marked Exhs. B and C that the sureties
agree with the plaintiff as follows:
In consideration of your entering into an arrangement with
the party (Fortune) named above, x x x x by which you may
purchase or otherwise require from, and or enter into with
obligor x x x trust receipt x x x arising out of wholesale
and/or retail transactions by or with obligor, the
undersigned x x x absolutely, unconditionally, and
solidarily guarantee to you x x x the full, faithful and
prompt performance, payment and discharge of any and
all obligations x x x of obligor under and with respect to any
and all such contracts and any and all agreements (whether
by way of guaranty or otherwise) of obligor with you x x
x now in force or hereafter made. (Underlinings supplied).
On the matter of novation, this has already been ruled
upon when this Court denied defendants Motion to dismiss
on the argument that what happened was really an
assignment of credit, and not a novation of contract, which
does not require the consent of the debtors. The fact of
knowledge is enough. Besides, as explained by the plaintiff,
the mother or the principal contract was the Financing
Agreement, whereas the trust receipts, the sight drafts, as
well as the Deeds of assignment were only collaterals or
accidental modifications which do not extinguish the
original contract by way of novation. This proposition holds
true even if the subsequent agreement would provide for
more onerous terms for, at any rate, it is the principal or
mother contract that is to be followed.When the changes
refer to secondary agreements and not to the object or
principal conditions of the contract, there is no novation;
such changes will produce modifications of incidental facts,
but will not extinguish the original obligation (Tolentino,
Commentaries on Jurisprudence of the Civil Code of the
Philippines, 1973 Edition, Vol. IV, page 367; cited in
plaintiffs Memorandum of September 6, 1985, p. 3).
On the evidence adduced by the plaintiff to show the status
of defendants accounts, which took into consideration
payments by defendants made after the filing of the case,
it is enough to state that a statement was carefully
prepared showing a balance of the principal obligation plus
interest totalling P1,348,033.89 as of March 31, 1985 (Exh.
M). This accounting has not been traversed nor
contradicted by defendants although they had the
opportunity to do so. Likewise, there was absolute silence
on the part of defendants as to the correctness of the
previous statement of account made as of December 16,
1983 (referring to Exh. I), but more important, however, is
that defendants received demand letters from the plaintiff
stating that, as of December 1983 (Exhs. J, K and L), this
total amount of obligation was P1,302,811,00, and yet
defendants were not heard to have responded to said
demand letters, let alone have taken any exception
thereto. There is such a thing as evidence by silence (Sec.
23, Rule 130, Revised Rules of Court).[14]
The Court of Appeals, affirming the above decision of the
trial court, further explained:
x x x In the case at bar, the surety undertakings in question
unequivocally state that Chua and Rodrigueza absolutely,
unconditionally and solidarily guarantee to Filinvest the
full, faithful and prompt performance, payment and
discharge of any and all obligations and agreements of
Fortune under or with respect to any and all such contracts
and any and all other agreements (whether by way of
guaranty or otherwise) of the latter with Filinvest in force
at the time of the execution of the Surety Undertakings or
made thereafter. Indeed, if Chua and Rodrigueza did not
intend to guarantee all of Fortunes future obligation with
Filinvest, then they should have expressly stated in their
respective surety undertakings exactly what said surety
agreements guaranteed or to which obligations of Fortune
the same were intended to apply. For another, if Chua and
Rodrigueza truly believed that the surety undertakings
they executed should not cover Fortunes obligations under
the AWFA, then why did they not inform Filinvest of such
fact when the latter sent them the aforementioned
demand letters (Exhs. K and L) urging them to pay Fortunes
liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to
which they believe they are not liable, Chua and
Rodrigueza elected or chose not to answer said demand
letters. Then, too, considering that appellant Chua is the
corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or
in a separate document that the Surety Undertakings do
not cover Fortunes obligations in the aforementioned
AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have
executed the AWFA only after two (2) years from the date
of the Surety undertakings because Chua and Rodrigueza
were thereby made to wait for said number of years just to
know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the
Surety Undertakings did not provide that after a period of
time the same will lose its force and effect. In the second
place, if Chua and Rodrigueza did not want to guarantee
the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply
terminate the Surety Undertakings by serving ten (10) days
written notice to Filinvest as expressly allowed in said
surety agreements. It is highly plausible that the reason
why the Surety Undertakings were not terminated was
because the execution of the same was part of the
consideration why Filinvest and CARCO agreed to enter
into the AWFA with Fortune.[15]
The Courts Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance
Corporation vs. Court of Appeals[16] which reiterated our
rulings in National Rice and Corn Corporation (NARIC) vs.
Court of Appeals[17] and Rizal Commercial Banking
Corporation vs. Arro.[18] In Atok Finance, Sanyu Chemical as
principal, and Sanyu Trading along with individual private
stockholders of Sanyu Chemical, namely, spouses Daniel
and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo,
as sureties, executed a continuing suretyship agreement in
favor of Atok Finance as creditor. Under the agreement,
Sanyu Trading and the individual private stockholders and
officers of Sanyu Chemical jointly and severally
unconditionally guarantee(d) to Atok Finance Corporation
(hereinafter called Creditor), the full, faithful and prompt
payment and discharge of any and all indebtedness of
[Sanyu Chemical] x x x to the Creditor. Subsequently,
Sanyu Chemical assigned its trade receivables outstanding
with a total face value of P125,871.00 to Atok Finance in
consideration of receipt of the amount
of P105,000.00. Later, additional trade receivables with a
total face value of P100,378.45 were also assigned. Due to
nonpayment upon maturity, Atok Finance commenced
action against Sanyu Chemical, the Arrieta spouses,
Bermundo and Halili to collect the sum of P120,240.00 plus
penalty charges due and payable. The individual private
respondents contended that the continuing suretyship
agreement, being an accessory contract, was null and void
since, at the time of its execution, Sanyu Chemical had no
pre-existing obligation due to Atok Finance. The trial court
rendered a decision in favor of Atok Finance and ordered
defendants to pay, jointly and severally, aforesaid amount
to Atok.
On appeal, the then Intermediate Appellate Court reversed
the trial court and dismissed the complaint on the ground
that there was no proof that when the suretyship
agreement was entered into, there was a pre-existing
obligation which served as 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.
We ruled then that the appellate court was in serious
error. The distinction which said court sought to make with
respect to Article 2053 (that future debts referred to
therein 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) has previously been rejected, citing
the RCBC and NARIC cases. We further said:
x x x Of course, a surety is not bound under any particular
principal obligation until that 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 than
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.
Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and
commercial practice. A bank or 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
suretyship 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.
In Dio vs. Court of Appeals,[19] we again had occasion to
discourse on continuing guaranty/suretyship thus:
x x x 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. 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. 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 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.
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.[20]
We have no reason to depart from our uniform ruling in
the above-cited cases. The facts of the instant case bring us
to no other conclusion than that the surety undertakings
executed by Chua and Rodrigueza were continuing
guaranties or suretyships covering all future obligations of
Fortune Motors (Phils.) Corporation with Filinvest Credit
Corporation.This is evident from the written contract itself
which contained the words absolutely, unconditionally and
solidarily guarantee(d) to Respondent Filinvest and its
affiliated and subsidiary companies the full, faithful and
prompt performance, payment and discharge of any and
all obligations and agreements of Petitioner Fortune under
or with respect to any and all such contracts and any and
all other agreements (whether by way of guaranty or
otherwise) of the latter with Filinvest and its affiliated and
subsidiary companies now in force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew
exactly where they stood at the time they executed their
respective surety undertakings in favor of Fortune. As
stated in the petition:
Before the execution of the new agreement, Edgar L.
Rodrigueza and Joseph Chua were required to sign blank
surety agreements, without informing them how much
amount they would be liable as
sureties. However, because of the desire of petitioners,
Chua and Rodrigueza to have the cars delivered to
petitioner, Fortune, they signed the blank promissory
notes.[21] (underscoring supplied)
It is obvious from the foregoing that Rodrigueza and Chua
were fully aware of the business of Fortune, an automobile
dealer; Chua being the corporate president of Fortune and
even a signatory to the Financial Agreement with
Filinvest.[22] Both sureties knew the purpose of the surety
undertaking which they signed and they must have had an
estimate of the amount involved at that time. Their
undertaking by way of the surety contracts was critical in
enabling Fortune to acquire credit facility from Filinvest
and to procure cars for resale, which was the business of
Fortune. Respondent Filinvest, for its part, relied on the
surety contracts when it agreed to be the assignee of
CARCO with respect to the liabilities of Fortune with
CARCO. After benefiting therefrom, petitioners cannot
now impugn the validity of the surety contracts on the
ground that there was no pre-existing obligation to be
guaranteed at the time said surety contracts were
executed. They cannot resort to equity to escape liability
for their voluntary acts, and to heap injustice to Filinvest,
which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of
petitioners, Filinvest was made to believe that it can collect
from Chua and/or Rodrigueza in case of Fortunes
default. Filinvest relied upon the surety contracts when it
demanded payment from the sureties of the unsettled
liabilities of Fortune. A refusal to enforce said surety
contracts would virtually sanction the perpetration of
fraud or injustice.[23]
Second Issue: No Novation
Neither do we find merit in the averment of petitioners
that the Financing Agreement contained onerous
obligations not contemplated in the surety undertakings,
thus changing the principal terms thereof and effecting a
novation.
We have ruled previously that there are only two ways to
effect novation and thereby extinguish an obligation. First,
novation must be explicitly stated and declared in
unequivocal terms. Novation is never presumed. Second,
the old and new obligations must be incompatible on every
point. The test of incompatibility is whether the two
obligations can stand together, each one having its
independent existence. If they cannot, they are
incompatible and the latter obligation novates the
first.[24] Novation must be established either by the express
terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new
one. The will to novate, whether totally or partially, must
appear by express agreement of the parties, or by their acts
which are too clear and unequivocal to be mistaken.[25]
Under the surety undertakings however, the obligation of
the sureties referred to absolutely, unconditionally and
solidarily guaranteeing the full, faithful and prompt
performance, payment and discharge of all obligations of
Petitioner Fortune with respect to any and all contracts and
other agreements with Respondent Filinvest in force at
that time or thereafter made. There were no qualifications,
conditions or reservations stated therein as to the extent
of the suretyship. The Financing Agreement, on the other
hand, merely detailed the obligations of Fortune to CARCO
(succeeded by Filinvest as assignee). The allegation of
novation by petitioners is, therefore, misplaced. There is
no incompatibility of obligations to speak of in the two
contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit
and unequivocal act to manifest their agreement or
intention to novate their contract. Neither did the sureties
object to the Financing Agreement nor try to avoid liability
thereunder at the time of its execution. As aptly discussed
by the Court of Appeals:
x x x For another, if Chua and Rodrigueza truly believed
that the surety undertakings they executed should not
cover Fortunes obligations under the AWFA (Financing
Agreement), then why did they not inform Filinvest of such
fact when the latter sent them the aforementioned
demand letters (Exhs. K and L) urging them to pay Fortunes
liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to
which they are not liable, Chua and Rodrigueza elected or
chose not to answer said demand letters. Then, too,
considering that appellant Chua is the corporate president
of Fortune and a signatory to the AWFA, he should have
simply had it stated in the AWFA or in a separate document
that the Surety Undertakings do not cover Fortunes
obligations in the aforementioned AWFA, trust receipts or
demand drafts.[26]
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of
petitioners is a purely factual issue. It is an oft repeated
maxim that the jurisdiction of this Court in cases 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.[27]
In the case at bar, the findings of the trial court and the
Court of Appeals with respect to the assigned error are
based on substantial evidence which were not refuted with
contrary proof by petitioners. Hence, there is no necessity
to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition
is DENIED and the assailed Decision of the Court of Appeals
concurring with the decision of the trial court is
hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
[G. R. No. 135462. December 7, 2001]
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners, vs. BA FINANCE
CORPORATION, respondent.
DECISION
PARDO, J.:
The Case
The case is a petition to set aside the decision[1] of the
Court of Appeals, the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed Decision
(as amended by that Order of July 22, 1992) of the lower
court in Civil Case No. 21944 is hereby AFFIRMED with the
MODIFICATION that defendant-appellee South City
Homes, Inc. is hereby ordered to pay, jointly and severally,
with Fortune Motors Corporation, Palawan Lumber
Manufacturing Corporation and Joseph L. G. Chua, the
outstanding amounts due under the six (6) drafts and trust
receipts, with interest thereon at the legal rate from the
date of filing of this case until said amounts shall have been
fully paid, as follows:
Date of Draft Amount Balance Due
July 26, 1983 P 244,269.00 P 198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10
and the attorneys fees and costs of suit.
SO ORDERED.[2]
The Facts
The facts, as found by the Court of Appeals, are as follows:
The present controversy relates to the rights of an assignee
(financing company) of drafts and trust receipts backed up
by sureties, in the event of default by the debtor (car
dealer) to whom the assignor creditor (car manufacturer)
sold and delivered motor vehicles for resale. A consistent
ruling on these cases is hereby reiterated: that a surety
may secure obligations incurred subsequent to the
execution of the surety contract.
Prior to the transactions covered by the subject drafts and
trust receipts, defendant-appellant Fortune Motors
Corporation (Phils.) has been availing of the credit facilities
of plaintiff-appellant BA Finance Corporation. On January
17, 1983, Joseph L. G. Chua, President of Fortune Motors
Corporation, executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement, in which he jointly and
severally unconditionally guaranteed the full, faithful and
prompt payment and discharge of any and all indebtedness
of Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 21-22).
On February 3, 1983, Palawan Lumber Manufacturing
Corporation represented by Joseph L.G. Chua, George D.
Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed
in favor of plaintiff-appellant a Continuing Suretyship
Agreement in which, said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt
payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 19-20). On the same date, South
City Homes, Inc. represented by Edgar C. Rodrigueza and
Aurelio F. Tablante, likewise executed a Continuing
Suretyship
Agreement in which said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt
payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 17-18).
Subsequently, Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its own favor,
payable thirty (30) days after sight, charged to the account
of Fortune Motors Corporation, as follows:
Date of Draft Amount
July 26, 1983 P 244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
Fortune Motors Corporation thereafter executed trust
receipts covering the motor vehicles delivered to it by
CARCO under which it agreed to remit to the Entruster
(CARCO) the proceeds of any sale and immediately
surrender the remaining unsold vehicles (Folder of
Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust
receipts were assigned to plaintiff-appellant, under Deeds
of Assignment executed by CARCO (Folder of Exhibits, pp.
3, 6, 7-B, 10, 13 and 16).
Upon failure of the defendant-appellant Fortune Motors
Corporation to pay the amounts due under the drafts and
to remit the proceeds of motor vehicles sold or to return
those remaining unsold in accordance with the terms of
the trust receipt agreements, BA Finance Corporation sent
demand letter to Edgar C. Rodrigueza, South City Homes,
Inc., Aurelio Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito
C. Baltazar (Folder of Exhibits, pp. 29-37). Since the
defendants-appellants failed to settle their outstanding
account with plaintiff-appellant, the latter filed on
December 22, 1983 a complaint for a sum of money with
prayer for preliminary attachment, with the Regional Trial
Court of Manila, Branch 1, which was docketed as Civil Case
No. 83-21944 (Record, pp. 1-12). Plaintiff-appellant filed a
surety bond in the amount of P3,391,546.56 and
accordingly, Judge Rosalio C. Segundo ordered the
issuance of a writ of preliminary attachment on January 3,
1984 (Record, pp. 37-47). Defendants Fortune Motors
Corporation, South City Homes, Inc., Edgar C. Rodrigueza,
Aurelio F. Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito
C. Baltazar filed a Motion to Discharge Attachment, which
was opposed by plaintiff-appellant (Record, pp. 49-56). In
an Order dated January 11, 1984, Judge Segundo dissolved
the writ of attachment except as against defendant
Fortune Motors Corporation and set the said incident for
hearing (Record, p. 57). On January 19, 1984, the
defendants filed a Motion to Dismiss. Therein, they alleged
that conventional subrogation effected a novation without
the consent of the debtor (Fortune Motors Corporation)
and thereby extinguished the latters liability; that pursuant
to the trust receipt transaction, it was premature under P.
D. No. 115 to immediately file a complaint for a sum of
money as the remedy of the entruster is an action for
specific performance; that the suretyship agreements are
null and void for having been entered into without an
existing principal obligation; and that being such sureties
does not make them solidary debtors (Record, pp. 58-64).
After due hearing, the court denied the motion to
discharge attachment with respect to defendant Fortune
Motors Corporation as well as the motion to dismiss by the
defendants (Record, pp. 68 and 87). In their Answer,
defendants stressed that their obligations to the creditor
(CARCO) was extinguished by the assignment of the drafts
and trust receipts to plaintiff-appellant without their
knowledge and consent, and pursuant to legal provision on
conventional subrogation a novation was effected, thereby
extinguishing the liability of the sureties; that plaintiff-
appellant failed to immediately demand the return of the
goods under the trust receipt agreements or exercise the
courses of action by the entruster as provided for under P.
D. No. 115; and that at the time the suretyship agreements
were entered into, there were no principal obligations,
thus rendering them null and void. A counterclaim for the
award of actual, moral and exemplary damages was prayed
for by defendants (Record, pp. 91-110).
During the pre-trial, efforts to reach a compromise was not
successful, and in view of the retirement of Judge Rosalio
C. Segundo of RTC Manila, Branch 1, the case was-re-
raffled off to Branch XXXIII, presided over by Judge Felix V.
Barbers (Record, pp. 155-160).
Fortune Motors Corporation filed a motion to lift the writ
of attachment covering three (3) vehicles described in the
Third-Party Claim filed with the Office of Deputy Sheriff
Jorge C. Victorino (RTC, Branch 1) by Fortune Equipment,
Inc. which was opposed by plaintiff-appellant (Record, pp.
173-181). On June 15, 1984, Deputy Sheriff Jorge C.
Victorino issued a Notice of Levy Upon Personal Properties
Pursuant to Order of Attachment which was duly served on
defendant Fortune Motors Corporation (Record, pp. 191-
199). In an Order dated April 28, 1986, the
court a quo denied the motion to lift the writ of
attachment on three (3) vehicles described in the Third-
Party Claim filed by Fortune Equipment Inc. (Record, p.
207). On motion of their respective counsel, the trial court
granted the parties time to sit down and appraise the
machineries and spare parts owned by defendant Fortune
Motors Corporation which are now in the possession of
plaintiff corporation by virtue of the attachment. A series
of conferences was allowed by the court, as means toward
possible compromise agreement. In an Order dated June 2,
1987, the case was returned to Branch I, now presided over
by Judge Rebecca G. Salvador (Record, p. 237). The pre-
trial period was terminated and the case was set for trial
on the merits (Record, p. 259).
Acting on the motion to sell levied properties filed by
defendant George D. Tan, the trial court ordered the public
sale of the attached properties (Record, p. 406). The court
likewise allowed the complaint-in-intervention filed by
Fortune Equipment Inc. and South Fortune Motors
Corporation who claimed ownership of four (4) vehicles
earlier seized and attached (Record, p. 471-475). Plaintiff
corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so
attached but denied the rest of intervenors allegations
(Record, pp. 479-482). Thereafter, the parties submitted
their respective pre-trial briefs on the complaint-in-
intervention, and after the submission of evidence
thereon, the case was submitted for decision (Record, pp.
573-577).
On November 25, 1991, the lower court rendered its
judgment, the dispositive portion of which reads as
follows:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua, jointly and
severally to pay the plaintiff on the July 27, 1983 Draft, the
sum of P324,767.41 with the interest thereon at the legal
rate from the date of filing of this case, December 21, 1983
until the amount shall have been fully paid;
2. Ordering defendants Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the July 26, 1983 Draft,
the sum of P198,659.52 with interest thereon at the legal
rate from the date of filing of this case, until the amount
shall have been fully paid;
3. Ordering defendant Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the July 28, 1983 Draft
the sum of P1,138,941.00 with interest thereon at the legal
rate from the date of filing of this case, until the amount
shall have been fully paid;
4. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 2, 1983 Draft,
the sum of P244,269.00 with interest thereon at the legal
rate from the date of filing of this case, until the amount
shall have been fully paid;
5. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 5, 1983 Draft
the sum of P275,079.60 with interest thereon at the legal
rate from the date of the filing of this case, until the
amount shall have been fully paid;
6. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 8, 1983 Draft
the sum of P475,046.10 with interest thereon at legal rate
from the date of the filing of this case, until the amount
shall been fully paid;
7. Ordering defendant Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay the sum of P300,000.00 as attorneys fees
and the costs of this suit;
8. Dismissing plaintiffs complaint against South City
Homes, Aurelio Tablante, Joselito Baltazar, George Tan and
Edgar Rodrigueza and the latters counterclaim for lack of
basis;
9. Ordering Deputy Sheriff Jorge Victorino to return to
Intervenor Fortune Equipment the Mitsubishi Truck Canter
with Motor No. 310913 and Chassis No. 513234;
10. Dismissing the complaint-in-intervention in so far as
the three other vehicles mentioned in the complaint-in-
intervention are concerned for lack of cause of action;
11. Dismissing the complaint-in-intervention against
Fortune Motor for lack of basis; and
12. Ordering the parties-in-intervention to bear their
respective damages, attorneys fees and the costs of the
suit.
Upon execution, the sheriff may cause the judgment to be
satisfied out of the properties attached with the exception
of one (1) unit Mitsubishi Truck Canter with Motor No.
310913 and Chassis No. 513234, if they be sufficient for
that purpose. The officer shall make a return in writing to
the court of his proceedings. Whenever the judgment shall
have been paid, the officer, upon reasonable demand must
return to the judgment debtor the attached properties
remaining in his hand, and any of the proceeds of the
properties not applied to the judgment.
SO ORDERED.
On two (2) separate motions for reconsideration, one filed
by plaintiffs-intervenors dated December 18, 1991 and the
other by plaintiff dated December 26, 1991, the trial court
issued an Order dated July 22, 1992 amending its Decision
dated November 25, 1991. Specifically, said Order
amended paragraphs 9 and 10 thereof and deleted the last
paragraph of the said Decision.
Paragraphs 9 and 10 now read:
9. Ordering Deputy Sheriff Jorge C. Victorino to return to
Intervenor Fortune Equipment, Inc. the Mitsubishi Truck
Canter with Motor No. 310913 and Chassis No.
513234; Mitsubishi Truck Canter with Motor No. 4D30-
313012 and Chassis No. 513696, and Fuso Truck with
Motor No. 006769 and Chassis No. 20756, and to
Intervenor South Fortune Motors Corporation the Cimaron
Jeepney with Plate No. NET-849;
10. Ordering the plaintiff, in the event the motor vehicles
could no longer be returned to pay the estimated value
thereof, i.e., P750,000.00 for the three trucks, and
P5,000.00 for the Cimaron Jeepney, to the plaintiffs-
intervenors.
x x x (Records, pp. 664-665)
Plaintiffs BA Finance Corporation, defendants Fortune
Motors Corp. (Phils.) and Palawan Lumber Manufacturing
Corporation, and intervenors Fortune Equipment and
South Fortune Motors, interposed the present appeal and
filed their respective Briefs.[3]
On September 8, 1998, the Court of Appeals promulgated
a decision, the dispositive portion of which is quoted in the
opening paragraph of this decision.
Hence, this appeal.[4]
The Issues
The issues presented are: (1) whether the suretyship
agreement is valid; (2) whether there was a novation of the
obligation so as to extinguish the liability of the sureties;
and (3) whether respondent BAFC has a valid cause of
action for a sum of money following the drafts and trust
receipts transactions.[5]
The Courts Ruling
On the first issue, petitioners assert that the suretyship
agreement they signed is void because there was no
principal obligation at the time of signing as the principal
obligation was signed six (6) months later. The Civil Code,
however, allows a suretyship agreement to secure future
loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for
future debts, the amount of which is not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of
Appeals,[6] we held:
To fund their acquisition of new vehicles (which are later
retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing
schemes whereby vehicles are delivered by the
manufacturer or assembler on the strength of trust
receipts or drafts executed by the car dealers, which are
backed up by sureties. These trust receipts or drafts are
then assigned and/or discounted by the manufacturer
to/with financing companies, which assume payment of
the vehicles but with the corresponding right to collect
such payment from the car dealers and/or the
sureties. In this manner, car dealers are able to secure
delivery of their stock-in-trade without having to pay cash
therefor; manufacturers get paid without any
receivables/collection problems; and financing companies
earn their margins with the assurance of payment not only
from the dealers but also from the sureties. When the
vehicles are eventually resold, the car dealers are
supposed to pay the financing companies -- and the
business goes merrily on. However, in the event the car
dealer defaults in paying the financing company, may the
surety escape liability on the legal ground that the
obligations were incurred subsequent to the execution of
the surety contract?
x x x Of course, a surety is not bound under any particular
principal obligation until that 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 than
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.
Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and
commercial practice. A bank or 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
suretyship 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.
Petitioners next posit (second issue) that a novation, as a
result of the assignment of the drafts and trust receipts by
the creditor (CARCO) in favor of respondent BAFC without
the consent of the principal debtor (Fortune Motors),
extinguished their liabilities.
An assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation,
and without the consent of the debtor, transfers his credit
and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as
the assignor could enforce it against the debtor.[7] As a
consequence, the third party steps into the shoes of the
original creditor as subrogee of the latter. Petitioners
obligations were not extinguished. Thus:
x x x Moreover, in assignment, the debtors consent is not
essential for the validity of the assignment (Art. 1624 in
relation to Art. 1475, Civil Code), his knowledge thereof
affecting only the validity of the payment he might make
(Article 1626, Civil Code).
Article 1626 also shows that payment of an obligation
which is already existing does not depend on the consent
of the debtor. It, in effect, mandates that such payment of
the existing obligation shall already be made to the new
creditor from the time the debtor acquires knowledge of
the assignment of the obligation.
The law is clear that the debtor had the obligation to pay
and should have paid from the date of notice whether or
not he consented.
We have ruled in Sison & Sison vs. Yap Tico and Avancea,
37 Phil. 587 [1918] that definitely, consent is not necessary
in order that assignment may fully produce legal
effects. Hence, the duty to pay does not depend on the
consent of the debtor. Otherwise, all creditors would be
prevented from assigning their credits because of the
possibility of the debtors refusal to give consent.
What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. A creditor
may, therefore, validly assign his credit and its accessories
without the debtors consent (National Investment and
Development Co. v. De Los Angeles, 40 SCRA 489
[1971]. The purpose of the notice is only to inform that
debtor from the date of the assignment, payment should
be made to the assignee and not to the original creditor.[8]
Petitioners finally posit (third issue) that as an entruster,
respondent BAFC must first demand the return of the
unsold vehicles from Fortune Motors Corporation,
pursuant to the terms of the trust receipts. Having failed to
do so, petitioners had no cause of action whatsoever
against Fortune Motors Corporation and the action for
collection of sum of money was, therefore, premature. A
trust receipt is a security transaction intended to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of
the merchandise imported or purchased.[9] In the event of
default by the entrustee on his obligations under the trust
receipt agreement, it is not absolutely necessary that the
entruster cancel the trust and take possession of the goods
to be able to enforce his rights thereunder. We ruled:
x x x Significantly, the law uses the word may in granting to
the entruster the right to cancel the trust and take
possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative
action, such as a third party claim or a separate civil action
which it deems best to protect its right, at any time upon
default or failure of the entrustee to comply with any of the
terms and conditions of the trust agreement.[10]
The Judgment
WHEREFORE, the appealed decision is hereby 2110006557 798,010.00 12/18/2000 04/23/2001
AFFIRMED. However, the award of attorneys fees is
deleted. 2110100189 496,521.00 01/11/2001 05/07/20016

No costs.
SO ORDERED.
THIRD DIVISION
G.R. No. 203133, February 18, 2015
YULIM INTERNATIONAL COMPANY LTD., JAMES YU,
JONATHAN YU, AND ALMERICK TIENG
LIM, Petitioners, v. INTERNATIONAL EXCHANGE BANK
(NOW UNION BANK OF THE PHILIPPINES), Respondent.
DECISION
REYES, J.:
1
In the assailed Decision dated February 1, 2012 in CA-G.R.
CV No. 95522, the Court of Appeals (CA) modified the
Decision2 dated December 21, 2009 of the Regional Trial
Court (RTC) of Makati City, Branch 145, in Civil Case No. 02-
749, holding that James Yu (James), Jonathan Yu (Jonathan)
and Almerick Tieng Lim (Almerick), who were capitalist
partners in Yulim International Company Ltd. (Yulim),
collectively called as the petitioners, were jointly and
severally liable with Yulim for its loan obligations with
respondent International Exchange Bank (iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim,
a domestic partnership, a credit facility in the form of an
Omnibus Loan Line for P5,000,000.00, as evidenced by a
Credit Agreement3 which was secured by a Chattel
Mortgage4 over Yulim’s inventories in its merchandise
warehouse at 106 4th Street, 9th Avenue, Caloocan City. As
further guarantee, the partners, namely, James, Jonathan
and Almerick, executed a Continuing Surety Agreement5 in
favor of iBank.
Yulim availed of its aforesaid credit facility with iBank, as
follows:
Promissory Face Value PN Date Date of
Note No. Maturity
The above promissory notes (PN) were later consolidated
under a single promissory note, PN No. SADDK001014188,
for P4,246,310.00, to mature on February 28, 2002.7 Yulim
defaulted on the said note. On April 5, 2002, iBank sent
demand letters to Yulim, through its President, James, and
through Almerick,8 but without success. iBank then filed a
Complaint for Sum of Money with Replevin9 against Yulim
and its sureties. On August 8, 2002, the Court granted the
application for a writ of replevin. Pursuant to the Sheriff’s
Certificate of Sale dated November 7, 2002,10 the items
seized from Yulim’s warehouse were worth only
P140,000.00, not P500,000.00 as the petitioners have
insisted.11
On October 2, 2002, the petitioners moved to dismiss the
complaint insisting that their loan had been fully paid after
they assigned to iBank their Condominium Unit No. 141,
with parking space, at 20 Landsbergh Place in Tomas
Morato Avenue, Quezon City.12 They claimed that while
the pre-selling value of the condominium unit was P3.3
Million, its market value has since risen to P5.5
Million.13 The RTC, however, did not entertain the motion
to dismiss for non-compliance with Rule 15 of the Rules of
Court.
On May 16, 2006, the petitioners filed their Answer
reiterating that they have paid their loan by way of
assignment of a condominium unit to iBank, as well as
insisting that iBank’s penalties and charges were
exorbitant, oppressive and unconscionable.14
Ruling of the RTC
After trial on the merits, the RTC rendered judgment on
December 21, 2009, the dispositive portion of which reads,
as follows:
WHEREFORE, in view of the foregoing considerations, the
Court finds the individual defendants James Yu, Jonathan
Yu and Almerick Tieng Lim, not liable to the plaintiff, iBank,
hence the complaint against them is hereby DISMISSED for
insufficiency of evidence, without pronouncement as to
cost.

2110005852 P 10/26/2000 01/29/2001 This court, however, finds defendant corporation Yulim
1,298,926.00 International Company Ltd. liable; and it hereby orders
2110006026 1,152,963.00 11/18/2000 02/05/2001 defendant corporation to pay plaintiff the sum of
P4,246,310.00 with interest at 16.50% per annum from
2110006344 499,890.00 12/04/2000 03/12/2001 February 28, 2002 until fully paid plus cost of suit.
The counterclaims of defendants against plaintiff iBank are
hereby DISMISSED for insufficiency of evidence.
SO ORDERED.15
Thus, the RTC ordered Yulim alone to pay iBank the amount
of P4,246,310.00, plus interest at 16.50% per annum from
February 28, 2002 until fully paid, plus costs of suit, and
dismissed the complaint against petitioners James,
Jonathan and Almerick, stating that there was no iota of
evidence that the loan proceeds benefited their families.16
The petitioners moved for reconsideration on January 12,
2010;17 iBank on January 19, 2010 likewise filed a motion
for partial reconsideration.18 In its Joint Order19 dated
March 8, 2010, the RTC denied both motions.
Ruling of the CA
On March 23, 2010, Yulim filed a Notice of Partial Appeal,
followed on March 30, 2010 by iBank with a Notice of
Appeal.
Yulim interposed the following as errors of the court a quo:
I. THE LOWER COURT ERRED IN ORDERING [YULIM]
TO PAY [iBANK] THE AMOUNT OF P4,246,310.00
WITH INTEREST AT 16.5% PER ANNUM FROM
FEBRUARY 28, 2002 UNTIL FULLY PAID.
II. THE LOWER COURT ERRED IN NOT ORDERING
[iBANK] TO PAY ATTORNEY’S FEES, MORAL
DAMAGES AND EXEMPLARY DAMAGES.20
For its part, iBank raised the following as errors of the RTC:
I. THE TRIAL COURT ERRED IN NOT HOLDING
INDIVIDUAL [PETITIONERS JAMES, JONATHAN AND
ALMERICK] SOLIDARILY LIABLE WITH [YULIM] ON
THE BASIS OF THE CONTINUING SURETYSHIP
AGREEMENT EXECUTED BY THEM.
II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE
[PETITIONERS] LIABLE FOR PENALTY CHARGES
UNDER THE CREDIT AGREEMENT AND
PROMISSORY NOTES SUED UPON.
III. THE TRIAL COURT ERRED IN NOT HOLDING [THE
PETITIONERS] LIABLE TO [iBANK] FOR ATTORNEY’S
FEES AND INDIVIDUAL [PETITIONERS] JOINTLY AND
SEVERALLY LIABLE WITH [YULIM] FOR COSTS OF
SUIT INCURRED BY [iBANK] IN ORDER TO PROTECT
ITS RIGHTS.21
Chiefly, the factual issue on appeal to the CA, raised by
petitioners James, Jonathan and Almerick, was whether
Yulim’s loans have in fact been extinguished with the
execution of a Deed of Assignment of their condominium
unit in favor of iBank, while the corollary legal issue, raised
by iBank, was whether they should be held solidarily liable
with Yulim for its loans and other obligations to iBank.
The CA ruled that the petitioners failed to prove that they
have already paid Yulim’s consolidated loan obligations
totaling P4,246,310.00, for which it issued to iBank PN No.
SADDK001014188 for the said amount. It held that the
existence of a debt having been established, the burden to
prove with legal certainty that it has been extinguished by
payment devolves upon the debtors who have offered
such defense. The CA found the records bereft of any
evidence to show that Yulim had fully settled its obligation
to iBank, further stating that the so-called assignment by
Yulim of its condominium unit to iBank was nothing but a
mere temporary arrangement to provide security for its
loan pending the subsequent execution of a real estate
mortgage. Specifically, the CA found nothing in the Deed of
Assignment which could signify that iBank had accepted
the said property as full payment of the petitioners’ loan.
The CA cited Manila Banking Corporation v. Teodoro,
Jr.22 which held that an assignment to guarantee an
obligation is in effect a mortgage and not an absolute
conveyance of title which confers ownership on the
assignee.
Concerning the solidary liability of petitioners James,
Jonathan and Almerick, the CA disagreed with the trial
court’s ruling that it must first be shown that the proceeds
of the loan redounded to the benefit of the family of the
individual petitioners before they can be held liable. Article
161 of the Civil Code and Article 121 of the Family Code
cited by the RTC apply only where the liability is sought to
be enforced against the conjugal partnership itself. In this
case, regardless of whether the loan benefited the family
of the individual petitioners, they signed as sureties, and
iBank sought to enforce the loan obligation against them
as sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and
denied that of the petitioners, as follows:
WHEREFORE, the foregoing considered, [iBank’s] appeal
is PARTLY GRANTED while [the petitioners’] appeal
is DENIED. Accordingly, the appealed decision is
hereby MODIFIED in that [petitioners] James Yu, Jonathan
Yu and A[l]merick Tieng Lim are hereby held jointly and
severally liable with defendant-appellant Yulim for the
payment of the monetary awards. The rest of the assailed
decision is AFFIRMED.
SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are
before this Court:
1. The CA erred in ordering petitioners James, Jonathan
and Almerick jointly and severally liable with petitioner
Yulim to pay iBank the amount of P4,246,310.00 with
interest at 16.5% per annum from February 28, 2002 until
fully paid.
2. The CA erred in not ordering iBank to pay the petitioners
moral damages, exemplary damages, and attorney’s fees.24
The petitioners insist that they have paid their loan to
iBank. They maintain that the letter of iBank to them dated
May 4, 2001, which “expressly stipulated that the
petitioners shall execute a Deed of Assignment over one
condominium unit No. 141, 3rd Floor and a parking slot
located at 20 Landsbergh Place, Tomas Morato Avenue,
Quezon City,” was with the understanding that the Deed of
Assignment, which they in fact executed, delivering also to
iBank all the pertinent supporting documents, would serve
to totally extinguish their loan obligation to iBank. In
particular, the petitioners state that it was their
understanding that upon approval by iBank of their Deed
of Assignment, the same “shall be considered as full and
final payment of the petitioners’ obligation.” They further
assert that iBank’s May 4, 2001 letter expressly carried the
said approval.
The petitioner invoked Article 1255 of the Civil Code,
on payment by cession, which provides:
Art. 1255. The debtor may cede or assign his property to
his creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the
debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors
shall be governed by special laws.
Ruling of the Court
The petition is bereft of merit.
Firstly, the individual petitioners do not deny that they
executed the Continuing Surety Agreement, wherein they
“jointly and severally with the PRINCIPAL [Yulim], hereby
unconditionally and irrevocably guarantee full and
complete payment when due, whether at stated maturity,
by acceleration, or otherwise, of any and all credit
accommodations that have been granted” to Yulim by
iBank, including interest, fees, penalty and other
charges.25 Under Article 2047 of the Civil Code, these
words are said to describe a contract of suretyship. It
states:
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.
In a contract of suretyship, one lends his credit by joining
in the principal debtor’s obligation so as to render himself
directly and primarily responsible with him without
reference to the solvency of the principal.26 According to
the above Article, if a person binds himself solidarily with
the principal debtor, the provisions of Articles 1207 to
1222, or Section 4, Chapter 3, Title I, Book IV of the Civil
Code on joint and solidary obligations, shall be observed.
Thus, where there is a concurrence of two or more
creditors or of two or more debtors in one and the same
obligation, Article 1207 provides that among
them, “[t]here is a solidary liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.”
“A surety is considered in law as being the same party as
the debtor in relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are interwoven
as to be inseparable.”27 And it is well settled that when the
obligor or obligors undertake to be “jointly and severally”
liable, it means that the obligation is solidary,28 as in this
case. There can be no mistaking the same import of Article
I of the Continuing Surety Agreement executed by the
individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the
PRINCIPAL, hereby unconditionally and irrevocably
guarantee full and complete payment when due, whether
at stated maturity, by acceleration, or otherwise, of any
and all credit accommodations that have been granted or
may be granted, renewed and/or extended by the BANK to
the PRINCIPAL.
The liability of the SURETIES shall not be limited to the
maximum principal amount of FIVE MILLION PESOS
(P5,000,000.00) but shall include interest, fees, penalty
and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of
payment and not merely of collection and is intended to be
a perfect and continuing indemnity in favor of the BANK for
the amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and
not contingent upon the pursuit of the BANK of whatever
remedies it may have against the PRINCIPAL of the other
securities for the Accommodation.29
Thereunder, in addition to binding themselves “jointly and
severally” with Yulim to “unconditionally and irrevocably
guarantee full and complete payment” of any and all credit
accommodations that have been granted to Yulim, the
petitioners further warrant that their liability as sureties
“shall be direct, immediate and not contingent upon the
pursuit [by] the BANK of whatever remedies it may have
against the PRINCIPAL of other securities.” There can thus
be no doubt that the individual petitioners have bound
themselves to be solidarily liable with Yulim for the
payment of its loan with iBank.
As regards the petitioners’ contention that iBank in its
letter dated May 4, 2001 had “accepted/approved” the
assignment of its condominium unit in Tomas Morato
Avenue as full and final payment of their various loan
obligations, the Court is far from persuaded. On the
contrary, what the letter accepted was only the collaterals
provided for the loans, as well as the consolidation of the
petitioners’ various PN’s under one PN for their aggregate
amount of P4,246,310.00. The letter goes on to spell out
the terms of the new PN, such as, that its expiry would be
February 28, 2002 or a term of 360 days, that interest
would be due every 90 days, and that the rate would be
based on the 91-day Treasury Bill rate or other market
reference.
Nowhere can it be remotely construed that the letter even
intimates an understanding by iBank that the Deed of
Assignment would serve to extinguish the petitioners’ loan.
Otherwise, there would have been no need for iBank to
mention therein the three “collaterals” or “supports”
provided by the petitioners, namely, the Deed of
Assignment, the Chattel Mortgage and the Continuing
Surety Agreement executed by the individual petitioners.
In fact, Section 2.01 of the Deed of Assignment expressly
acknowledges that it is a mere “interim security for the
repayment of any loan granted and those that may be
granted in the future by the BANK to the ASSIGNOR and/or
the BORROWER, for compliance with the terms and
conditions of the relevant credit and/or loan documents
thereof.”30 The condominium unit, then, is a mere
temporary security, not a payment to settle their
promissory notes.31
Even more unmistakably, Section 2.02 of the Deed of
Assignment provides that as soon as title to the
condominium unit is issued in its name, Yulim
shall “immediately execute the necessary Deed of Real
Estate Mortgage in favor of the BANK to secure the loan
obligations of the ASSIGNOR and/or the
32
BORROWER.” This is a plain and direct acknowledgement
that the parties really intended to merely constitute a real
estate mortgage over the property. In fact, the Deed of
Assignment expressly states, by way of a resolutory
condition concerning the purpose or use of the Deed of
Assignment, that after the petitioners have delivered or
caused the delivery of their title to iBank, the Deed of
Assignment shall then become null and void. Shorn of its
legal efficacy as an interim security, the Deed of
Assignment would then become functus officio once title
to the condominium unit has been delivered to iBank. This
is so because the petitioners would then execute a Deed of
Real Estate Mortgage over the property in favor of iBank as
security for their loan obligations.
Respondent iBank certainly does not share the petitioners’
interpretation of its May 4, 2001 letter. Joy Valerie Gatdula,
Senior Bank Officer of iBank and the Vice President of
iBank’s Commercial Banking Group, declared in her
testimony that the purpose of the Deed of Assignment was
merely to serve as collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,]
was negotiating with your bank, [is it] not a fact that the
defendant offered to you a [condominium] unit so that –
that will constitute full payment of his obligation?
A: No ma’am. It was not offered that way. It was offered as
security or collateral to pay the outstanding loans. But the
premise is, that he will pay x x x in cash. So, that property
was offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the
document was signed. It was worded out[.]
 This is a petition for review on certiorari of the decision (pp
x x x x 21-31, Rollo) of the Intermediate Appellate Court (now
Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which
Q: Do you remember if a real estate mortgage was modified the decision of the trial court against herein
executed over this property that was being assigned to the private respondent Roberto Regala, Jr., one of the
plaintiff? defendants in the case for sum of money filed by Pacific
Banking Corporation.
A: To my recollection, none at all.
The facts of the case as adopted by the respondent
Q: Madam Witness, this Deed of Assignment was appellant court from herein petitioner's brief before said
considered as full payment by the plaintiff bank, what court are as follows:
document was executed by the plaintiff bank? On October 24, 1975, defendant Celia Syjuco Regala
(hereinafter referred to as Celia Regala for brevity), applied
A: It should have been a Dacion en Pago. for and obtained from the plaintiff the issuance and use of
Pacificard credit card (Exhs. "A", "A-l",), under the Terms
Q: Was there such document executed in this account? and Conditions Governing the Issuance and Use of
Pacificard (Exh. "B" and hereinafter referred to as Terms
A: None.33 and Conditions), a copy of which was issued to and
received by the said defendant on the date of the
To stress, the assignment being in its essence a mortgage, application and expressly agreed that the use of the
Pacificard is governed by said Terms and Conditions. On
it was but a security and not a satisfaction of the
the same date, the defendant-appelant Robert Regala, Jr.,
petitioners’ indebtedness.34 Article 125535 of the Civil Code
invoked by the petitioners contemplates the existence of spouse of defendant Celia Regala, executed a "Guarantor's
two or more creditors and involves the assignment of the Undertaking" (Exh. "A-1-a") in favor of the appellee Bank,
entire debtor’s property, not a dacion en pago.36 Under whereby the latter agreed "jointly and severally of Celia
Article 1245 of the Civil Code, “[d]ation in payment, Aurora Syjuco Regala, to pay the Pacific Banking
whereby property is alienated to the creditor in Corporation upon demand, any and all indebtedness,
satisfaction of a debt in money, shall be governed by the obligations, charges or liabilities due and incurred by said
law on sales.” Nowhere in the Deed of Assignment can it Celia Aurora Syjuco Regala with the use of the Pacificard,
be remotely said that a sale of the condominium unit was or renewals thereof, issued in her favor by the Pacific
Banking Corporation". It was also agreed that "any changes
contemplated by the parties, the consideration for which
would consist of the amount of outstanding loan due to of or novation in the terms and conditions in connection
iBank from the petitioners. with the issuance or use of the Pacificard, or any extension
of time to pay such obligations, charges or liabilities shall
WHEREFORE, premises considered, the petition is DENIED. not in any manner release me/us from responsibility
hereunder, it being understood that I fully agree to such
SO ORDERED. charges, novation or extension, and that this
understanding is a continuing one and shall subsist and
bind me until the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid.
G.R. No. 72275 November 13, 1991
Plaintiff-appellee Pacific Banking Corporation has
PACIFIC BANKING CORPORATION, petitioner, contracted with accredited business establishments to
vs. honor purchases of goods and/or services by Pacificard
HON INTERMEDIATE APPELLATE COURT AND ROBERTO holders and the cost thereof to be advanced by the
REGALA, JR., respondents. plaintiff-appellee for the account of the defendant
Ocampo, Dizon & Domingo for petitioner. cardholder, and the latter undertook to pay any
statements of account rendered by the plaintiff-appellee
Angara, Concepcion, Regala & Cruz for private respondent. for the advances thus made within thirty (30) days from the
date of the statement, provided that any overdue account
shall earn interest at the rate of 14% per annum from date
of default.
MEDIALDEA, J.:
The defendant Celia Regala, as such Pacificard holder, had
purchased goods and/or services on credit (Exh. "C", "C-l"
to "C-112") under her Pacificard, for which the plaintiff
advanced the cost amounting to P92,803.98 at the time of
the filing of the complaint.
In view of defendant Celia Regala's failure to settle her
account for the purchases made thru the use of the
Pacificard, a written demand (Exh. "D") was sent to the
latter and also to the defendant Roberto Regala, Jr. (Exh. "
") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for
defendant's (sic) repeated failure to settle their obligation.
Defendant Celia Regala was declared in default for her
failure to file her answer within the reglementary period.
Defendant-appellant Roberto Regala, Jr., on the other
hand, filed his Answer with Counterclaim admitting his
execution of the "Guarantor's Understanding", "but with
the understanding that his liability would be limited to
P2,000.00 per month."
In view of the solidary nature of the liability of the parties,
the presentation of evidence ex-parte as against the
defendant Celia Regala was jointly held with the trial of the
case as against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and
documentary evidence, fire struck the City Hall of Manila,
including the court where the instant case was pending, as
well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the
records of the instant case were duly reconstituted.
Thereafter, the case was set for pre-trial conference with
respect to the defendant-appellant Roberto Regala on
plaintiff-appellee's motion, after furnishing the latter a
copy of the same. No opposition thereto having been
interposed by defendant-appellant, the trial court set the
case for pre-trial conference. Neither did said defendant-
appellant nor his counsel appear on the date scheduled by
the trial court for said conference despite due notice.
Consequently, plaintiff-appellee moved that the
defendant-appellant Roberto Regala he declared as in
default and that it be allowed to present its evidence ex-
parte, which motion was granted. On July 21, 1983,
plaintiff-appellee presented its evidence ex-parte. (pp. 23-
26, Rollo)
After trial, the court a quo rendered judgment on
December 5, 1983, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff
and against the defendants condemning the latter, jointly
and severally, to pay said plaintiff the amount of
P92,803.98, with interest thereon at 14% per annum,
compounded annually, from the time of demand on
November 17, 1978 until said principal amount is fully paid;
plus 15% of the principal obligation as and for attorney's
fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is
dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a
quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered
judgment modifying the decision of the trial court. Private
respondent Roberto Regala, Jr. was made liable only to the
extent of the monthly credit limit granted to Celia
Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October
29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated
December 5, 1983 is modified only as to appellant Roberto
Regala, Jr., so as to make him liable only for the purchases
made by defendant Celia Aurora Syjuco Regala with the use
of the Pacificard from October 29, 1975 up to October 29,
1976 up to the amount of P2,000.00 per month only, with
interest from the filing of the complaint up to the payment
at the rate of 14% per annum without pronouncement as
to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking
Corporation which the respondent appellate court denied
for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The
petitioner contends that while the appellate court
correctly recognized Celia Regala's obligation to Pacific
Banking Corp. for the purchases of goods and services with
the use of a Pacificard credit card in the total amount of
P92,803.98 with 14% interest per annum, it erred in
limiting private respondent Roberto Regala, Jr.'s liability
only for purchases made by Celia Regala with the use of the
card from October 29, 1975 up to October 29, 1976 up to
the amount of P2,000.00 per month with 14% interest from
the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking"
which private respondent Roberto Regala, Jr. signed in
favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally
with Celia Syjuco Regala to pay the Pacific Banking
Corporation upon demand any and all indebtedness,
obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of the Pacificard or
renewals thereof issued in his favor by the Pacific Banking
Corporation. Any changes of or Novation in the terms and
conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and
bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although
denominated "Guarantor's Undertaking," was in substance
a contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor only in case
the latter should fail to do so, in a contract of suretyship,
the surety binds himself solidarily with the principal debtor
(Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and
extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to
Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the
joint and several signature of a third party and as such, the
Pacificard holder and the guarantor assume joint and
several liabilities for any and all amount arising out of the
use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other
rights of the guarantor are not thereby lost by the
guarantor becoming liable solidarily and therefore a
surety." It further ruled that although the surety's liability
is like that of a joint and several debtor, it does not make
him the debtor but still the guarantor (or the surety),
relying on the case of Government of the Philippines v.
Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
Consequently, Article 2054 of the Civil Code providing for a
limited liability on the part of the guarantor or debtor still
applies.
It is true that under Article 2054 of the Civil Code, "(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. 2 It is likewise not
disputed by the parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia Regala
succeeded in using the card beyond the original period of
its effectivity, October 29, 1979. We do not agree however,
that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of the
debtor's (Celia) indebtedness likewise expressly waiving
any "discharge in case of any change or novation of the
terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been fully
paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions
in connection with the issuance or use of said Pacificard, or
any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid. (p. 12, supra; emphasis
supplied)
Private respondent Roberto Regala, Jr. had been made
aware by the terms of the undertaking of future changes in
the terms and conditions governing the issuance of the
credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty,
a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see
Article 2053, supra).
The application by respondent court of the ruling in
Government v. Tizon, supra is misplaced. It was held in that
case that:
. . . although the defendants bound themselves in solidum,
the liability of the Surety under its bond would arise only if
its co-defendants, the principal obligor, should fail to
comply with the contract. To paraphrase the ruling in the
case of Municipality of Orion vs. Concha, the liability of the
Surety is "consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the Surety
"is considered in law as being the same party as the debtor
in relation to whatever is adjudged, touching the obligation
of the latter"; or the liabilities of the two defendants herein
"are so interwoven and dependent as to be inseparable."
Changing the expression, if the defendants are held liable,
their liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does not
incur liability unless and until the principal debtor is held
liable.
A guarantor or surety does not incur liability unless the
principal debtor is held liable. It is in this sense that a
surety, although solidarily liable with the principal debtor,
is different from the debtor. It does not mean, however,
that the surety cannot be held liable to the same extent as
the principal debtor. The nature and extent of the liabilities
of a guarantor or a surety is determined by the clauses in
the contract of suretyship(see PCIB v. CA, L-34959, March
18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned
decision of respondent appellate court is SET ASIDE and the
decision of the trial court is REINSTATED.
SO ORDERED.
G.R. No. 188539 March 12, 2014
MARIANO LIM, Petitioner,
vs.
SECURITY BANK CORPORATION,* Respondent.
DECISION
PERALTA, J.:
This deals with the Petition for Review on Certiorari under
Rule 45 of the Rules of Court praying that the Decision1of
the Court of Appeals (CA), promulgated on July 30, 2008,
and the Resolution2 dated June 1, 2009, denying
petitioner's motion for reconsideration thereof, be
reversed and set aside.
Petitioner executed a Continuing Suretyship in favor of
respondent to secure "any and all types of credit
accommodation that may be granted by the bank hereinto
and hereinafter" in favor of Raul Arroyo for the amount of
₱2,000,000.00 which is covered by a Credit
Agreement/Promissory Note.3 Said promissory note stated
that the interest on the loan shall be 19% per annum,
compounded monthly, for the first 30 days from the date
thereof, and if the note is not fully paid when due, an
additional penalty of 2% per month of the total
outstanding principal and interest due and unpaid, shall be
imposed.
In turn, the Continuing Suretyship4 executed by petitioner
stipulated that:
3. Liability of the Surety. - The liability of the Surety is
solidary and not contingent upon the pursuit of the Bank
of whatever remedies it may have against the Debtor or
the collaterals/liens it may possess. If any of the
Guaranteed Obligations is not paid or performed on due
date (at stated maturity or by acceleration), the Surety
shall, without need for any notice, demand or any other act
or deed, immediately become liable therefor and the
Surety shall pay and perform the same.5
Guaranteed Obligations are defined in the same document
as follows:
a) "Guaranteed Obligations" - the obligations of the Debtor
arising from all credit accommodations extended by the
Bank to the Debtor, including increases, renewals, roll-
overs, extensions, restructurings, amendments or
novations thereof, as well as (i) all obligations of the Debtor
presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or
indirect, and (ii) any and all expenses which the Bank may
incur in enforcing any of its rights, powers and remedies
under the Credit Instruments as defined hereinbelow.6
The debtor, Raul Arroyo, defaulted on his loan obligation.
Thereafter, petitioner received a Notice of Final Demand
dated August 2, 2001, informing him that he was liable to
pay the loan obtained by Raul and Edwina Arroyo, including
the interests and penalty fees amounting to
₱7,703,185.54, and demanding payment thereof. For
failure of petitioner to comply with said demand,
respondent filed a complaint for collection of sum of
money against him and the Arroyo spouses. Since the
Arroyo spouses can no longer be located, summons was
not served on them, hence, only petitioner actively
participated in the case.
After trial, the Regional Trial Court of Davao (RTC) rendered
judgment against petitioner.7 The dispositive portion of
the RTC Decision reads as follows:
Wherefore, judgment is hereby rendered ordering
defendant Lim to pay the following sums.
1. The principal sum of two million pesos plus nineteen
percent interest of the outstanding principal interest due
and unpaid to be computed from January 28, 1997 until
fully paid, plus two percent interest per month as penalty
to be computed from February 28, 1997 until fully paid.
2. Four hundred thousand pesos as attorney's fees.
3. Thirty thousand pesos as litigation expenses.
SO ORDERED.8
Petitioner appealed to the CA, but the appellate court, in
its Decision dated July 30, 2008, affirmed the RTC judgment
with the modification that interest be computed from
August 1, 1997; the penalty should start only from August
28, 1997; the award of attorney's fees is set at 10% of the
total amount due; and the award for litigation expenses
increased to ₱92,321.10.9
Petitioner's motion for reconsideration of the CA Decision
was denied per Resolution dated June 1, 2009.
Petitioner then elevated the matter to this Court via a
petition for review on certiorari, where the main issue is
whether petitioner may validly be held liable for the
principal debtor's loan obtained six months after the
execution of the Continuing Suretyship.
The other issues, such as the proper computation of the
total indebtedness and the amount of litigation expenses
are factual matters that had been satisfactorily addressed
by the CA, to wit: (1) the CA ruled that respondent should
recompute the total amount due, since the proceeds from
the foreclosure of the real estate and chattel mortgages
were deducted only on June 20, 2001, when the public
auctions were conducted on August 26, 1998 and
September 7, 1999, respectively, thus, the amount of the
proceeds from the foreclosure of the mortgaged
properties should have been deducted from the amount of
indebtedness on the date the public auction was held; and
(2) the CA likewise pointed out that as can be seen from
the Legal Fees Form,10 the litigation expense incurred by
respondent was ₱92,321.10, the amount it paid as filing
fee. It is hornbook principle that this Court is not a trier of
facts, hence, such issues will not be revisited by this Court
in the present petition. With regard to the propriety of
making petitioner a hostile witness, respondent is correct
that the issue cannot be raised for the first time on appeal.
Thus, the Court will no longer address these issues which
had been improperly raised in this petition for review on
certiorari.
The main issue deserves scant consideration, but the
matter of the award of attorney's fees deserves
reexamination.
The nature of a suretyship is elucidated in Philippine
Charter Insurance Corporation v. Petroleum Distributors &
Service Corporation11 in this wise:
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 another party, called the obligee.
Although the contract of a surety is secondary only to a
valid principal obligation, the 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
any benefit therefrom. This was explained in the case of
Stronghold Insurance Company, Inc. v. Republic-Asahi
Glass Corporation, where it was written:
The surety's obligation is not an original and direct one for
the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said
to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal.
xxxx
Thus, suretyship arises upon the solidary binding of a
person deemed the surety with the principal debtor for the
purpose of fulfilling an obligation. A surety is considered in
law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable. x x
x.12
In this case, what petitioner executed was a Continuing
Suretyship, which the Court described in Saludo, Jr. v.
Security Bank Corporation13 as follows:
The essence of a continuing surety has been highlighted in
the case of Totanes v. China Banking Corporation in this
wise:
Comprehensive or continuing surety agreements are, in
fact, quite commonplace in present day financial and
commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with
a particular company, normally 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
suretyship 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.14
The terms of the Continuing Suretyship executed by
petitioner, quoted earlier, are very clear.1âwphi1 It states
that petitioner, as surety, shall, without need for any
notice, demand or any other act or deed, immediately
become liable and shall pay "all credit accommodations
extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings,
amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to
the Bank, as appears in the accounts, books and records of
the Bank, whether direct or indirect, and
(ii) any and all expenses which the Bank may incur in
enforcing any of its rights, powers and remedies under the
Credit Instruments as defined hereinbelow."15 Such
stipulations are valid and legal and constitute the law
between the parties, as Article 2053 of the Civil Code
provides that "[a] guaranty may also be given as security
for future debts, the amount of which is not yet known; x x
x." Thus, petitioner is unequivocally bound by the terms of
the Continuing Suretyship. There can be no cavil then that
petitioner is liable for the principal of the loan, together
with the interest and penalties due thereon, even if said
loan was obtained by the principal debtor even after the
date of execution of the Continuing Suretyship.
With regard to the award of attorney's fees, it should be
noted that Article 2208 of the Civil Code does not prohibit
recovery of attorney's fees if there is a stipulation in the
contract for payment of the same. Thus, in Asian
Construction and Development Corporation v. Cathay
Pacific Steel Corporation (CAPASCO),16 the Court, citing
Titan Construction Corporation v. Uni-Field Enterprises,
Inc.,17 expounded as follows:
The law allows a party to recover attorney's fees under a
written agreement. In Barons Marketing Corporation v.
Court of Appeals, the Court ruled that:
[T]he attorney's fees here are in the nature of liquidated
damages and the stipulation therefor is aptly called a penal
clause. It has been said that so long as such stipulation does
not contravene law, morals, or public order, it is strictly
binding upon defendant. The attorney's fees so provided
are awarded in favor of the litigant, not his counsel.
On the other hand, the law also allows parties to a contract
to stipulate on liquidated damages to be paid in case of
breach. A stipulation on liquidated damages is a penalty
clause where the obligor assumes a greater liability in case
of breach of an obligation. The obligor is bound to pay the
stipulated amount without need for proof on the existence
and on the measure of damages caused by the breach.18
However, even if such attorney's fees are allowed by law,
the courts still have the power to reduce the same if it is
unreasonable. In Trade & Investment Corporation of the
Philippines v. Roblett Industrial Construction Corp.,19 the
Court equitably reduced the amount of attorney's fees to
be paid since interests and penalties had ballooned to
thrice as much as the principal debt. That is also the case
here. The award of attorney's fees amounting to ten
percent (10%) of the principal debt, plus interest and
penalty charges, would definitely exceed the principal
amount; thus, making the attorney's fees manifestly
exorbitant. Hence, we reduce the amount of attorney's
fees to ten percent (10%) of the principal debt only.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals, dated July 30, 2008, in CA-
G.R. CV No. 00462, is AFFIRMED with MODIFICATION in
that the award of attorney's fees is reduced to ten percent
(10%) of the principal debt only.
SO ORDERED.
[G.R. No. 136780. August 16, 2001]
JEANETTE D. MOLINO, petitioner, vs. SECURITY DINERS
INTERNATIONAL CORPORATION, respondent.
DECISION
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the
decision of the Court of Appeals dated September 28,
1998[1] which held petitioner liable as surety for the
outstanding credit card debts of Danilo Alto with herein
respondent corporation.
The decision of the Court of Appeals satisfactorily sums up
the facts that led to the filing of this case:
The Security Diners International Corporation (SDIC)
operates a credit card system under the name of Diners
Club through which it extends credit accommodation to its
cardholders for the purchase of goods and payment of
services from its member establishments to be reimbursed
later on by the cardholder upon proper billing. There are
two types of credit cards issued: one, the Regular (Local)
Card which entitles the cardholder to purchase goods and
pay services from member establishments in an amount
not exceeding P10,000.00; and two, the Diamond (Edition)
Card which entitles the cardholder to purchase goods and
pay services from member establishments in unlimited
amounts. One of the requirements for the issuance of
either of these cards is that an applicant should have a
surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local)
Card with SDIC. He got as his surety his own sister-in-law
Jeanette Molino Alto. Thus, Danilo signed the printed
application form (Exhibit A) and Jeanette signed the Surety
Undertaking (Exhibit A-5). Attached to the Application
Form was an Agreement (Use of Diners Club Card),
paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an adequate
surety or sureties acceptable to Security Diners who shall
be jointly and severally liable with the cardholder to pay
Security Diners all the obligations and charges incurred and
credit extended on the basis of the card. In the event the
surety/sureties furnished the cardholder are discharged
the cardholder must furnish a new surety or sureties
acceptable to Security Diners within thirty (30)
days. Otherwise the cardholders privileges shall be
automatically terminated in accordance with Section 11
hereof.
The Surety Undertaking signed by Jeanette states:
I/WE, the undersigned, bind myself/ourselves jointly and
severally with Mr. Danilo Alto to pay SECURITY DINERS
INTERNATIONAL CORPORATION, hereinafter referred to as
Security Diners all the obligations and charges including
but not limited to fees, interest, attorneys fees and all
other costs incurred by him/her in connection with the use
of the DINERS CLUB CARD in accordance with the terms
and conditions governing the issuance and use of the
Diners Club Card. Any change or novation in the agreement
or any extension of time granted by SECURITY DINERS to
pay such obligations, charges and fees, shall not release
me/us from this Surety Undertaking, it being understood
that said undertaking is a continuing one and shall subsist
and bind me/us until all such obligations, charges and fees
have been fully paid and satisfied.
It is understood that the indication of a credit limit to the
cardholder shall not relieve me/us of liability for charges
and all other amounts voluntarily incurred by the
cardholder in excess of the credit limit.
On the basis of the completed and signed Application Form
and Surety Undertaking, the SDIC issued to Danilo Diners
Card No. 36510293216-0006. The latter used this card and
initially paid his obligations to SDIC. On February 8, 1988,
Danilo wrote SDIC a letter (Exhibit B) requesting it to
upgrade his Regular (Local) Diners Club Card to a Diamond
(Edition) one. As a requirement of SDIC, Danilo secured
from Jeanette her approval. The latter obliged and so on
March 2, 1988, she signed a Note (Exhibit C) which states:
This certifies that I, Jeanette D. Molino, approve of the
request of Danilo and Gloria Alto with Card No. 3651-
203216-0006 and 3651-203412-5007 to upgrade their card
from regular to diamond edition.
Danilos request was granted and he was issued a Diamond
(Edition) Diners Club Card. He used this card and made
purchases (Exhibits D, D-1 to D-7) from member
establishments. On October 1, 1988 Danilo had incurred
credit charged plus appropriate interest and service
charges in the aggregate amount of P166,408.31. He
defaulted in the payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said
obligation but they did not pay. So, on November 9, 1988,
SDIC filed an action to collect said indebtedness against
Danilo and Jeanette. This was docketed in the Regional
Trial Court of Makati, Branch 145 as Civil Case No. 88-2381.
xxx [2]
Defendant Danilo Alto failed to file an Answer, and during
the pre-trial conference respondent moved to have the
complaint dismissed against him, without prejudice to a
subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed
with the RTC, petitioner claimed that her liability under the
Surety Undertaking was limited to P10,000.00 and that she
did not expressly and categorically agree to act as surety
for Danilo in an amount higher than P10,000.00.[3] By way
of counterclaim, she asked for moral and exemplary
damages.
On August 19, 1991, the trial court rendered a decision
dismissing the complaint for failure of respondent to prove
its case by a preponderance of the evidence. It found that
while petitioner clearly bound herself as surety under the
terms of Danilo Altos Regular Diners Club Card, there was
no evidence that after the card had been upgraded to
Diamond (Edition) petitioner consented or agreed to act as
surety for Danilo. Exhibit C or Exhibit 1, inter alia, which
was a note bearing petitioners signature certifying to her
approval of Danilos request to have his card upgraded
should be read simply as a statement of no objection to his
request for upgrading, and not as an assumption of liability
for the debts that Danilo may later owe through the said
card.[4] The trial court also took note of the testimony of
Alfredo Vicente, an officer of respondent, who opined that
the consent to be bound as surety to an upgraded card
should be categorical[5] and not in a simple no objection
form.
The trial court went on further to state that petitioner was
not liable for any amount, not even for P10,000.00 which
is the maximum credit limit for Regular Diners Club Cards,
since at the time of the upgrading Danilo had no
outstanding credit card debts.[6] This is evident from the
fact that Danilos request for upgrading was approved,
since one of the requirements for the approval of a request
for the upgrading of a credit card from Regular to Diamond
is that the applicant must have paid all his billings for the
last three months prior to his request.
Hence, the trial court disposed of the case with these
pronouncements:
WHEREFORE, judgment is rendered dismissing the
complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear
preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.[7]
The Court of Appeals found contrary to the lower court,
and declared that the Surety Undertaking signed by
petitioner when Danilo Alto first applied for a Regular
Diners Club Card clearly applied to the unpaid purchases of
Danilo Alto under the Diamond card. In holding thus, the
Court of Appeals referred to the terms of the said Surety
Undertaking, which stated that any change or novation in
the agreement on the use of the Diners Club card does not
release the surety from his obligations, it being understood
that the undertaking is a continuing one which subsists
until all obligations and charges under the subject credit
card are paid and satisfied. It also cited Pacific Banking
Corporation vs. Intermediate Appellate Court,[8] a 1991
decision which held the surety liable to the extent of the
credit cardholders indebtedness, under the clear terms of
the Guarantors Undertaking that the surety signed with the
credit card company.
The Court of Appeals further declared that it was
erroneous of the trial court to conclude that petitioner was
completely relieved of liability under Danilo Altos credit
card since the Surety Undertaking she signed remained
valid and enforceable even after the upgrading of the said
card; besides, petitioner herself admitted that she was
liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorneys
fees (stipulated in the Agreement for the Use of Diners
Club Card) from 25% to 10% of the amount due, judging
this to be a more reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of
Appeals reads:
WHEREFORE, the appealed Decision is REVERSED and one
is rendered ordering defendant-appellee Jeanette D.
Molino-Alto to pay plaintiff-appellant Security Diners
International, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum
and 2% per month from November 9, 1988 until the
obligation is fully paid;
2. The amount equivalent to 10% of the obligation
mentioned in the preceding paragraph as attorneys fees;
and
3. Costs.
SO ORDERED.[9]
Petitioners motion for reconsideration of the above
decision was denied for lack of merit on December 1,
1998. Hence, the petition before us, which assigns the
following errors:
I There is no doubt that the upgrading was a novation of the
The material findings of the Court of Appeals, which are
contrary to those of the lower court, are erroneous.
II
The findings of the Court of Appeals are conflicting and/or
without citation of specific evidence on which they are
based.
III
The Court of Appeals erred in disregarding the applicable
legal principle established by this Honorable Court that,
unlike in ordinary solidary debtors, the surety does not
incur liability unless the principal debtor is held liable.[10]
Petitioner posits that she did not expressly give her
consent to be bound as surety under the upgraded
card. She points out that the note she signed, marked as
Exhibit C, registering her approval of the request of Danilo
Alto to upgrade his card, renders the Surety Undertaking
she signed under the terms of the previous card without
probative value, immaterial and irrelevant as it covers only
the liability of the surety in the use of the regular credit
card by the principal debtor xxx .[11] She argues further that
because the principal debtor, Danilo Alto, was not held
liable, having been dropped as a defendant, she could not
be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety
under the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. Was the upgrading a
novation of the original agreement governing the use of
Danilo Altos first credit card, as to extinguish that
obligation and the Surety Undertaking which was simply
accessory to it?
Novation, as a mode of extinguishing obligations, may be
done in two ways: by explicit declaration, or by material
incompatibility (implied novation). As we stated in Fortune
Motors vs. Court of Appeals, supra:
xxx The test of incompatibility is whether the two
obligations can stand together, each one having its
independent existence. If they cannot, they are
incompatible and the latter obligation novates the
first. Novation must be established either by the express
terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new
one. The will to novate, whether totally or partially, must
appear by express agreement of the parties, or by their acts
which are too clear or unequivocal to be mistaken.
original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the
intent of cancelling and replacing the said card. However,
the novation did not serve to release petitioner from her
surety obligations because in the Surety Undertaking she
expressly waived discharge in case of change or novation
in the agreement governing the use of the first credit card.
The nature and extent of petitioners obligations are set out
in clear and unmistakable terms in the Surety Undertaking.
Thus:
1. She bound herself jointly and severally with Danilo Alto
to pay SDIC all obligations and charges in the use of the
Diners Club Card, including fees, interest, attorneys fees,
and costs;
2. She declared that any change or novation in the
Agreement or any extension of time granted by SECURITY
DINERS to pay such obligation, charges, and fees, shall not
release (her) from this Surety Undertaking;
3. (S)aid undertaking is a continuous one and shall subsist
and bind (her) until all such obligations, charges and fees
have been fully paid and satisfied; and
4. The indication of a credit limit to the cardholder shall not
relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said
credit limit.[12]
We cannot give any additional meaning to the plain
language of the subject undertaking. The extent of a
suretys liability is determined by the language of the
suretyship contract or bond itself.[13] Article 1370 of the
Civil Code provides: If the terms of a contract are clear and
leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
This case is no different from Pacific Banking Corporation
vs. IAC, supra, correctly applied by the Court of Appeals,
which involved a Guarantors Undertaking (although thus
denominated, it was in substance a contract of surety)
signed by the husband for the credit card application of his
wife. Like herein petitioner, the husband also argued that
his liability should be limited to the credit limit allowed
under his wifes card but the Court declared him liable to
the full extent of his wifes indebtedness. Thus:
We need not look elsewhere to determine the nature and
extent of private respondent Roberto Regala, Jr.s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation. xxx
xxxxxxxxxxx
It is likewise not disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979. We do
not agree, however, that Roberto Jr.s liability should be
limited to that extent. Private respondent Roberto Regala,
Jr., as surety of his wife, expressly bound himself up to the
extent of the debtors (Celias) indebtedness likewise
expressly waiving any discharge in case of any change or
novation of the terms and conditions in connection with the
issuance of the Pacificard credit card. Roberto, in fact,
made his commitment as a surety a continuing one,
binding upon himself until all the liabilities of Celia Regala
have been fully paid. All these were clear under the
Guarantors Undertaking Roberto signed, thus:
x x x. Any changes of or novation in the terms and
conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and
bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisified or paid. (italics supplied)
As a last-ditch measure, petitioner asseverates that, being
merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can
be proceeded against. The argument, which is hinged upon
the dropping of Danilo as defendant in the complaint, is
bereft of merit.
The Surety Undertaking expressly provides that petitioners
liability is solidary. A surety is considered in law as being
the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.[14] Although
the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor is
direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct
or personal interest over the obligations nor does he
receive any benefit therefrom.[15] There being no question
that Danilo Alto incurred debts of P166,408.31 in credit
card advances, an obligation shared solidarily by
petitioner, respondent was certainly within its rights to
proceed singly against petitioner, as surety and solidary
debtor, without prejudice to any action it may later file
against Danilo Alto, until the obligation is fully
satisfied. This is so provided under Article 1216 of the Civil
Code:
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 be subsequently directed against the
others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and
possesses considerable work experience in several
banks. She knew the full import and consequence of the
Surety Undertaking that she executed. She had the option
to withdraw her suretyship when Danilo upgraded his card
to one that permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the
financial predicament she now faces, it is also evident that
the liability she incurred is only the legitimate consequence
of an undertaking that she freely and intelligently obliged
to. Prospective sureties to credit card applicants would be
well-advised to study carefully the terms of the
agreements prepared by the credit card companies before
giving their consent, and pay heed to stipulations that
could lead to onerous effects, like in the present case
where the credit applied for was limitless. At the same
time, it bears articulating that although courts in
appropriate cases may equitably reduce the award for
penalty as provided under such suretyship agreements if
the same is iniquitous or unconscionable,[16] we are unable
to give relief to petitioner by way of reducing the amount
of the principal liability as surety under the circumstances
of this case.
WHEREFORE, the petition is dismissed for lack of
merit. The decision of the Court of Appeals is AFFIRMED in
all respects.
SO ORDERED.
G.R. No. 172041 December 18, 2008
GATEWAY ELECTRONICS CORPORATION and GERONIMO
B. DELOS REYES, JR., petitioners,
vs.
ASIANBANK CORPORATION, respondent.
DECISION
VELASCO, JR., J.:
This petition for review under Rule 45 seeks to nullify and
set aside the Decision1 dated October 28, 2005 of the Court
of Appeals (CA) in CA-G.R. CV No. 80734 and its
Resolution2 of March 17, 2006 denying petitioners’ motion
for reconsideration.
The Facts
Petitioner Gateway Electronics Corporation (Gateway) is a
domestic corporation that used to be engaged in the semi-
conductor business. During the period material, petitioner
Geronimo B. delos Reyes, Jr. was its president and one
Andrew delos Reyes its executive vice-president.
On July 23, 1996, Geronimo and Andrew executed separate
but almost identical deeds of suretyship for Gateway in
favor of respondent Asianbank Corporation (Asianbank),
pertinently providing:
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the
ASIANBANK CORPORATION, x x x due and punctual
payment by the following individuals/companies/firms,
hereinafter called the DEBTOR(S), of such amounts
whether due or not, as indicated opposite their respective
names, to wit:
NAME OF DEBTOR
GATEWAY ELECTRONICS *P10,000,000.00
CORPORATION *DOMESTIC
[PURCHASED LINE
owing to the said ASIANBANK CORPORATION, hereafter
called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other [credit] obligations of every kind and
nature contracted/incurred by said DEBTOR(S) in favor of
said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay
the whole part of said
indebt nbsp nbsp nbsp nbsp erein
secured at maturity, I/WE BR
vs.
and severally agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, x x x of such
notes, drafts, overdrafts and other credit obligations on
which the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR, together
with all interests, penalty and other bank charges as may
accrue thereon x x x.
I/WE further warrant the due and faithful performance by
the DEBTOR(S) of all obligations to be performed under any
contracts evidencing indebtedness/obligations and any
supplements, amendments, changes or modifications
made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).
MY/OUR liability on this Deed of Suretyship shall be
solidary, direct and immediate and not contingent upon
the pursuit by the CREDITOR x x x of whatever remedies it
or they may have against the DEBTOR(S) or the securities
or liens it or they may possess; and I/WE hereby agree to
be and remain bound upon this suretyship, x x x and
notwithstanding also that all obligations of the DEBTOR(S)
to you outstanding and unpaid at any time may exceed the
aggregate principal sum hereinabove stated.3
Later developments saw Asianbank extending to Gateway
several export packing loans in the total aggregate amount
of USD 1,700,883.48. This loan package was later
consolidated with Dollar Promissory Note (PN) No. FCD-
0599-27494 for the amount of USD 1,700,883.48 and
secured by a chattel mortgage over Gateway’s equipment
for USD 2 million.
Gateway initially made payments on its loan obligations,
but eventually defaulted. Upon Gateway’s request,
Asianbank extended the maturity dates of the loan several
times. These extensions bore the conformity of three of
Gateway’s officers, among them Andrew.
On July 15 and 30, 1999, Gateway issued two Philippine
Commercial International Bank checks for the amounts of
USD 40,000 and USD 20,000, respectively, as payment for
its arrearages and interests for the periods June 30 and July
30, 1999; but both checks were dishonored for
insufficiency of funds. Asianbank’s demands for payment
made upon Gateway and its sureties went unheeded. As of
November 23, 1999, Gateway’s obligation to Asianbank,
inclusive of principal, interest, and penalties, totaled USD
2,235,452.17.
Thus, on December 15, 1999, Asianbank filed with the
Regional Trial Court (RTC) in Makati City a complaint for a
sum of money against Gateway, Geronimo, and Andrew.
The complaint, as later amended, was eventually raffled to
Branch 60 of the court and docketed as Civil Case No. 99-
2102 entitled Asian Bank Corporation v. Gateway
Electronics Corporation, Geronimo B. De Los Reyes, Jr. and
Andrew S. De Los Reyes.
In its answer to the amended complaint, Gateway traced
the cause of its financial difficulties, described the steps it
had taken to address its mounting problem, and faulted
Asianbank for trying to undermine its efforts toward
recovery.
Andrew also filed an answer alleging, among other things,
that the deed of suretyship he executed covering the PhP
10 million-Domestic Bills Purchased Line and the USD 3
million-Omnibus Credit Line did not include PN No. FCD-
0599-2749, the payment of which was extended several
times without his consent.
Geronimo, on the other hand, alleged that the subject
deed of suretyship, assuming the authenticity of his
signature on it, was signed without his wife’s consent and
should, thus, be considered as a mere continuing offer. Like
Andrew, Geronimo argued that he ought to be relieved of
his liability under the surety agreement inasmuch as he too
never consented to the repeated loan maturity date
extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment dated
October 7, 20035 in favor of Gateway, the dispositive
portion of which states:
WHEREFORE then, in view of the foregoing, judgment is
rendered holding defendants Gateway Electronics
Corporation, Geronimo De Los Reyes and Andrew De Los
Reyes jointly and severally liable to pay the plaintiff the
following:
a) The sum of $2,235,452.17 United States Currency with
interest to be added on at the prevailing market rate over
a given thirty day London Interbank Offered Rate (LIBOR)
plus a spread of 5.5358 percent or ten and
[45,455/100,000] percent per annum for the first 35 days
and every thirty days beginning November 23, 1999 until
fully paid;
b) a penalty charge after November 23, 1999 of two
percent (2%) per month until fully paid;
c) attorney’s fees of twenty percent (20%) of the total
amount due and unpaid; and
d) costs of the suit.
SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to
the CA, their recourse docketed as CA-G.R. CV No. 80734.
Following the filing of its and Geronimo’s joint appellants’
brief, Gateway filed on November 10, 2004 a petition for
voluntary insolvency6 with the RTC in Imus, Cavite, Branch
22, docketed as SEC Case No. 037-04, in which Asianbank
was listed in the attached Schedule of Obligations as one
of the creditors. On March 16, 2005, Metrobank, as
successor-in-interest of Asianbank, via a Notice of
Creditor’s Claim, prayed that it be allowed to participate in
the Gateways’s creditors’ meeting.
In its Decision dated October 28, 2005, the CA affirmed the
decision of the Makati City RTC. In time, Gateway and
Geronimo interposed a motion for reconsideration. This
was followed by a Supplemental Motion for
Reconsideration dated January 20, 2006, stating that in SEC
Case No. 037-04, the RTC in Imus, Cavite had issued an
Order dated December 2, 2004, declaring Gateway
insolvent and directing all its creditors to appear before the
court on a certain date for the purpose of choosing among
themselves the assignee of Gateway’s estate which the
court’s sheriff has meanwhile placed in custodia
legis.7 Gateway and Geronimo thus prayed that the
assailed decision of the Makati City RTC be set aside, the
insolvency court having acquired exclusive jurisdiction over
the properties of Gateway by virtue of Section 60 of Act No.
1956, without prejudice to Asianbank pursuing its claim in
the insolvency proceedings.
In its March 17, 2006 Resolution, however, the CA denied
the motion for reconsideration and its supplement.
Hence, Gateway and Geronimo filed this petition anchored
on the following grounds:
I
The [CA] erred in disregarding the established rule that an
action commenced by a creditor against a judicially
declared insolvent for the recovery of his claim should be
dismissed and referred to the insolvency court. Where,
therefore, as in this case, petitioner GEC [referring to
Gateway] has been declared insolvent x x x, respondent
Asianbank’s claim for the payment of GEC’s loans should
be ventilated before the insolvency court x x x.
II
The [CA] erred in admitting as evidence the Deed of Surety
purportedly signed by petitioner GBR [referring to
Geronimo] despite the unexplained failure of respondent
Asianbank to present the originals of the Deed of Surety
during the trial.
III
The [CA] erred in holding that the repeated extensions
granted by respondent Asianbank to GEC without notice to
and the express consent of petitioner GBR did not
discharge petitioner GBR from his liabilities as surety GEC
in that:
A. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty.
B. The [CA] interpreted the supposed Deed of Surety of
petitioner GBR as "too comprehensive and all
encompassing as to amount to absurdity."
C. The repeated extensions granted by Asianbank to GEC
prevented petitioner GBR from exercising his right of
subrogation under Article 2080 of the Civil Code. As such,
petitioner GBR should be released from his obligations as
surety of GEC.
IV
It is a well-settled rule that when a bank deviates from
normal banking practice in a transaction and sustains injury
as a result thereof, the bank is deemed to have assumed
the risk and no right of payment accrues to the latter
against any party to the transaction. By repeatedly
extending the period for the payment of GEC’s obligations
and granting GEC other loans after the suretyship
agreement despite GEC’s default and in failing to foreclose
the chattel mortgage constituted as security for GEC’s loan
contrary to normal banking practices, Asianbank failed to
exercise reasonable caution for its own protection and
assumed the risk of non-payment through its own acts, and
thus has no right to proceed against petitioner GBR as
surety for the payment of GEC’s loans.
V
In Agcaoili v. GSIS, this Honorable Court had occasion to
state that in determining the precise relief to give, the
court will "balance the equities" or the respective interests
of the parties and take into account the relative hardship
that one relief or another may occasion to them. Upon a
balancing of interests of both petitioner GBR and
respondent Asianbank, greater and irreparable harm and
injury would be suffered by petitioner GBR than
respondent Asianbank if the assailed Decision and
Resolution of the [CA] would be upheld x x x. This
Honorable Court x x x should thus exercise its equity
jurisdiction in the instant case to the end that it may render
complete justice to both parties and declare petitioner GBR
as released and discharged from any liability in respect of
respondent Asianbank’s claims.8
The Ruling of the Court
Gateway May Be Discharged from Liability But Not
Geronimo
Gateway, having been declared insolvent, argues that
jurisdiction over all claims against all of its properties and
assets properly pertains to the insolvency court.
Accordingly, Gateway adds, citing Sec. 60 of Act No.
1956,9 as amended, or the Insolvency Law, any pending
action against its properties and assets must be dismissed,
the claimant relegated to the insolvency proceedings for
the claimant’s relief.
The contention, as formulated, is in a qualified sense
meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after
the insolvency court finds the corresponding petition for
insolvency to be meritorious shall stay all pending civil
actions against the petitioner’s property. For reference,
said Sec. 18, setting forth the effects and contents of a
voluntary insolvency order,10 pertinently provides:
Section 18. Upon receiving and filing said petition,
schedule, and inventory, the court x x x shall make an order
declaring the petitioner insolvent, and directing the sheriff
of the province or city in which the petition is filed to take
possession of, and safely keep, until the appointment of a
receiver or assignee, all the deeds, vouchers, books of
account, papers, notes, bonds, bills, and securities of the
debtor and all his real and personal property, estate and
effects x x x. Said order shall further forbid the payment to
the creditor of any debts due to him and the delivery to the
debtor, or to any person for him, of any property belonging
to him, and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate. Said order
shall [be published] x x x. Upon the granting of said order,
all civil proceedings pending against the said insolvent
shall be stayed. When a receiver is appointed, or an
assignee chosen, as provided in this Act, the sheriff shall
thereupon deliver to such receiver or assignee, as the case
may be all the property, assets, and belongings of the
insolvent which have come into his possession x x x.
(Emphasis supplied.)
Complementing Sec. 18 which appropriately comes into
play "upon the granting of [the] order" of insolvency is the
succeeding Sec. 60 which properly applies to the period
"after the commencement of proceedings in insolvency."
The two provisions may be harmonized as follows: Upon
the filing of the petition for insolvency, pending civil actions
against the property of the petitioner are not ipso
facto stayed, but the insolvent may apply with the court in
which the actions are pending for a stay of the actions
against the insolvent’s property. If the court grants such
application, pending civil actions against the petitioner’s
property shall be stayed; otherwise, they shall continue.
Once an order of insolvency nevertheless issues, all civil
proceedings against the petitioner’s property are, by
statutory command, automatically stayed. Sec. 60 is
reproduced below:
SECTION 60. Creditors proving claims cannot sue; Stay of
action.–No creditor, proving his debt or claim, shall be
allowed to maintain any suit therefor against the debtor,
but shall be deemed to have waived all right of action and
suit against him, and all proceedings already commenced,
or any unsatisfied judgment already obtained thereon,
shall be deemed to be discharged and surrendered
thereby; and after the debtor’s discharge, upon proper
application and proof to the court having jurisdiction, all
such proceedings shall be, dismissed, and such unsatisfied
judgments satisfied of record: Provided, x x x. A creditor
proving his debt or claim shall not be held to have waived
his right of action or suit against the debtor when a
discharge has have been refused or the proceedings have
been determined to the without a discharge. No creditor
whose debt is provable under this Act shall be allowed,
after the commencement of proceedings in insolvency, to
prosecute to final judgment any action therefor against
the debtor until the question of the debtor’s discharge
shall have been determined, and any such suit proceeding
shall, upon the application of the debtor or of any
creditor, or the assignee, be stayed to await the
determination of the court on the question of discharge:
Provided, That if the amount due the creditor is in dispute,
the suit, by leave of the court in insolvency, may proceed
to judgment for purpose of ascertaining the amount
due, which amount, when adjudged, may be allowed in the
insolvency proceedings, but execution shall be stayed
aforesaid. (Emphasis supplied.)
Applying the aforequoted provisions, it can rightfully be
said that the issuance of the insolvency order of December
2, 2004 had the effect of automatically staying the civil
action for a sum of money filed by Asianbank against
Gateway. In net effect, the proceedings before the CA in
CA-G.R. CV No. 80734, but only insofar as the claim against
Gateway was concerned, was, or ought to have been,
suspended after December 2, 2004, Asianbank having been
duly notified of and in fact was a participant in the
insolvency proceedings. The Court of course takes stock of
the proviso in Sec. 60 of Act No. 1956 which in a way
provided the CA with a justifying tool to continue and to
proceed to judgment in CA-G.R. CV No. 80734, but only for
the purpose of ascertaining the amount due from
Gateway. At any event, on the postulate that jurisdiction
over the properties of the insolvent-declared Gateway lies
with the insolvency court, execution of the CA insolvency
judgment against Gateway can only be pursued before the
insolvency court. Asianbank, no less, tends to agree to this
conclusion when it stated: "[E]ven it if is assumed that the
declaration of insolvency of petitioner Gateway can be
taken cognizance of, such fact does relieve petitioner
Geronimo and/or Andrew delos Reyes from performing
their obligations based on the Deeds of Suretyship x x x."11
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against
Gateway is without bearing on the liability of Geronimo as
a surety, adding that claims against a surety may proceed
independently from that against the principal debtor.
Pursuing the point, Asianbank avers that Geronimo may
not invoke the insolvency of Gateway as a defense to evade
liability.
Geronimo counters with the argument that his liability as a
surety cannot be separated from Gateway’s liability. As
surety, he continues, he is entitled to avail himself of all the
defenses pertaining to Gateway, including its insolvency,
suggesting that if Gateway is eventually released from
what it owes Asianbank, he, too, should also be so relieved.
Geronimo’s above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code,
which states:
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.
The Court’s disquisition in Palmares v. Court of Appeals on
suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor is
an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid x x x. Stated
differently, a surety promises to pay the principal’s debt if
the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to
pay. A surety binds himself to perform if the principal does
not, without regard to his ability to do so. x x x In other
words, a surety undertakes directly for the payment and is
so responsible at once if the principal debtor makes default
x x x.
xxxx
A creditor’s right to proceed against the surety exists
independently of his right to proceed against the
principal. Under Article 1216 of the Civil Code, the creditor
may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is
that if the obligation is joint and several, the creditor has
the right to proceed even against the surety alone. Since,
generally, it is not necessary for the creditor to proceed
against a principal in order to hold the surety liable, where,
by the terms of the contract, the obligation of the surety is
the same as that of the principal, then soon as the principal
is in default, the surety is likewise in default, and may be
sued immediately and before any proceedings are had
against the principal. Perforce, x x x a surety is primarily
liable, and with the rule that his proper remedy is to pay
the debt and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute and in the
absence of any agreement limiting the application of the
security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies
against the principal, particularly where both principal and
surety are equally bound.12
Clearly, Asianbank’s right to collect payment for the full
amount from Geronimo, as surety, exists independently of
its right against Gateway as principal debtor;13 it could thus
proceed against one of them or file separate actions
against them to recover the principal debt covered by the
deed on suretyship, subject to the rule prohibiting double
recovery from the same cause.14 This legal postulate
becomes all the more cogent in case of an insolvency
situation where, as here, the insolvency court is bereft of
jurisdiction over the sureties of the principal debtor. As
Asianbank aptly points out, a suit against the surety,
insofar as the surety’s solidary liability is concerned, is not
affected by an insolvency proceeding instituted by or
against the principal debtor. The same principle holds true
with respect to the surety of a corporation in distress which
is subject of a rehabilitation proceeding before the
Securities and Exchange Commission (SEC). As we held
in Commercial Banking Corporation v. CA, a surety of the
distressed corporation can be sued separately to enforce
his liability as such, notwithstanding an SEC order declaring
the former under a state of suspension of payment.15
Geronimo also states that, as things stand, his liability, as
compared to that of Gateway, is contextually more
onerous and burdensome, precluded as he is from seeking
recourse against the insolvent corporation. From this
premise, Geronimo claims that since Gateway cannot,
owing to the order of insolvency, be made to pay its
obligation, he, too, being just a surety, cannot also be made
to pay, obviously having in mind Art. 2054 of the Civil Code,
as follows:
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.
The Court is not convinced. The above article enunciates
the rule that the obligation of a guarantor may be less, but
cannot be more than the obligation of the principal debtor.
The rule, however, cannot plausibly be stretched to mean
that a guarantor or surety is freed from liability as such
guarantor or surety in the event the principal debtor
becomes insolvent or is unable to pay the obligation. This
interpretation would defeat the very essence of a
suretyship contract which, by definition, refers to an
agreement whereunder one person, the surety, engages to
be answerable for the debt, default, or miscarriage of
another known as the principal.16 Geronimo’s position that
a surety cannot be made to pay when the principal is
unable to pay is clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA
erred in admitting the Deed of Suretyship purportedly
signed by him, given that Asianbank failed to present its
original copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbank’s complaint
alleged the following:
6. The loan was secured by the Deeds of Suretyship dated
July 23, 1996 that were executed by defendants Geronimo
B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached
as Annexes "B" and "C," respectively, are photocopies of
the Deeds of Suretyship executed by defendants Geronimo
B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
Subsequently, a chattel mortgage over defendant
Gateway’s equipment for $2 million, United States
currency, was executed.17
Geronimo traversed in his answer the foregoing allegation
in the following wise: "2.5. Paragraph 6 is denied, subject
to the special and affirmative defenses and allegations
hereinafter set forth."
The ensuing special and affirmative defenses were raised
in Gateway’s answer:
15. Granting even that [Geronimo] signed the Deed of
Suretyship, his wife x x x had not given her consent thereto.
Accordingly, the security created by the suretyship shall be
construed only as a continuing offer on the part of
[Geronimo] and plaintiff and may only be perfected as a
binding contract upon acceptance by Mrs. Delos Reyes. x x
x material and shall deny only the remainder. Where a
17. Moreover, assuming, gratia argumenti, that
[Geronimo] may be bound by the suretyship agreement,
there is no showing that he has consented to the repeated
extensions made by plaintiff in favor of GEC or to a waiver
of notice of such extensions. It should be pointed out that
Mr. Geronimo delos Reyes executed the suretyship
agreement in his personal capacity and not in his capacity
as Chairman of the Board of GEC. His consent, insofar as
the continuing application of the suretyship agreement to
GEC’s obligations in view of the repeated extension
extended by plaintiff [is concerned], is therefore necessary.
Obviously, plaintiff cannot now hold him liable as a surety
to GEC’s obligations.18
The Rules of Court prescribes, under its Secs. 7 and 8, Rule
8, the procedure should a suit or defense is predicated on
a written document, thus:
Sec. 7. Action or defense based on document.–Whenever
an action or defense is based upon a written instrument or
document, the substance of such instrument or document
shall be set forth in the pleading, and the original or a copy
thereof shall be attached to the pleading as an exhibit,
which shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.–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; but the
requirement of an oath does not apply when the adverse
party does not appear to be a party to the instrument or
when compliance with an order for an inspection of the
original instrument is refused. (Emphasis supplied.)
Given the above perspective, Asianbank, by attaching a
photocopy of the Deed of Suretyship to its underlying
complaint, hewed to the requirements of the above twin
provisions. Asianbank, thus, effectively alleged the due
execution and genuineness of the said deed. From that
point, Geronimo, if he intended to contest the surety deed,
should have specifically denied the due execution and
genuineness of the deed in the manner provided by Sec.
10, Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.–A defendant must specify each
material allegation of fact the truth of which he does not
admit and, whenever practicable, shall set forth the
substance of the matters upon which he relies to support
his denial. Where a defendant desires to deny only a part
of an averment, he shall specify so much of it as is true and
defendant is without knowledge or information sufficient
to form a belief as to the truth of a material averment
made in the complaint, he shall so state, and this shall have
the effect of a denial. (Emphasis supplied.)
In the instant case, Geronimo should have categorically
stated that he did not execute the Deed of Suretyship and
that the signature appearing on it was not his or was
falsified. His Answer does not, however, contain any such
statement. Necessarily then, Geronimo had not specifically
denied, and, thus, is deemed to have admitted, the
genuineness and due execution of the deed in question. In
this regard, Sec. 11, Rule 8 of the Rules of Court states:
Sec. 11. Allegations not specifically denied deemed
admitted.–Material averment in the complaint, other than
those as to the amount of unliquidated damages, shall be
deemed admitted when not specifically denied. x x x
Owing to Geronimo’s virtual admission of the genuineness
and due execution of the deed of suretyship, Asianbank,
contrary to the view of Gateway and Geronimo, need not
present the original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.–An admission, verbal or
written, made by the party in the course of the
proceedings in the same case, does not require proof. The
admission may be contradicted only by showing that it was
made through palpable mistake or that no such admission
was made. (Emphasis supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue
of the coverage of the suretyship. Preliminarily, an
overview on the process of taking out loans should first be
made. Generally, especially for large loans, banks first
approve a line or facility out of which a client may avail
itself of loans in the form of promissory notes without need
of further processing and/or approval every time a draw
down is made. In the instant case, Asianbank approved in
favor of Gateway the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus Credit Line.
Asianbank approved these credit lines which were covered
by a chattel mortgage as well as the deeds of suretyship,
such that loans extended from these lines would already
be secured and pre-approved. In other words, these
facilities are not financial obligations yet. Asianbank did not
yet lend out any money to Gateway with the approval of
these lines. The loan transaction occurred or the principal
obligation, as secured by a surety agreement, was born
after the execution of loan documents, such as PN No. FCD-
0599-2749.
Geronimo now excepts from the ruling that the deed of
suretyship he executed covered PN No. FCD-0599-2749
which embodied several export packing loans issued by
Asianbank to Gateway. He claims that the deed only
secured the PhP 10 million-Domestic Bills Purchased Line
and the USD 3 million-Omnibus Credit Line. Geronimo
describes as absurd the notion that a deed of suretyship
would secure a loan obligation contracted three (3) years
after the execution of the surety deed.
Geronimo’s thesis that the deed in question cannot be
accorded prospective application is erroneous. To be sure,
the provisions of the subject deed of suretyship indicate a
continuing suretyship. In Fortune Motors (Phils.) v. Court of
Appeals,19 the Court, citing cases, defined and upheld the
validity of a continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any particular
principal obligation until that 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 than 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.
Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and
commercial practice. A bank or 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 suretyship 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."20
In Diño vs. Court of Appeals,21 we again had occasion to
discourse on continuing guaranty/suretyship thus:
"x x x 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. 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. 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 x x
x.
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." (Emphasis supplied.)
By its nature, a continuing suretyship covers current and
future loans, provided that, with respect to future loan
transactions, they are, to borrow from Diño, as cited
above, "within the description or contemplation of the
contract of guaranty." The Deed of Suretyship Geronimo
signed envisaged a continuing suretyship when, by the
express terms of the deed, he warranted payment of the
PhP 10 million-Domestic Bills Purchased Line and the USD
3 million-Omnibus Credit Line, as evidenced by:
x x x notes, drafts, overdrafts and other credit obligations
on which the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR, together
with all interests, penalty and other bank charges as may
accrue thereon and all expenses which may be incurred by
the latter in collecting any or all such instruments.22
Evidently, under the deed of suretyship, Geronimo
undertook to secure all obligations obtained under the
Domestic Bills Purchased Line and Omnibus Credit Line,
without any specification as to the period of the loan.
Geronimo’s application of Garcia v. Court of Appeals, a
case covering two separate loans, denominated as SWAP
Loan and Export Loan, is quite misplaced. There, the Court
ruled that the continuing suretyship only covered the
SWAP Loan as it was only this loan that was referred to in
the continuing suretyship. The Court wrote in Garcia:
Particular attention must be paid to the statement
appearing on the face of the Indemnity [Suretyship]
Agreement x x x "evidenced by those certain loan
documents dated April 20, 1982" x x x. From this
statement, it is clear that the Indemnity Agreement refers
only to the loan document of April 20, 1982 which is the
SWAP loan. It did not include the EXPORT loan. Hence,
petitioner cannot be held answerable for the EXPORT
loan.23 (Emphasis supplied.)
The Indemnity Agreement in Garcia specifically identified
loan documents evidencing obligations of the debtor that
the agreement was intended to secure. In the present case,
however, the suretyship Geronimo assumed did not limit
itself to a specific loan document to the exclusion of
another. The suretyship document merely mentioned the
Domestic Bills Purchased Line and Omnibus Credit Line as
evidenced by "all notes, drafts x x x contracted/incurred by
[Gateway] in favor of [Asianbank]."24 As explained earlier,
such credit facilities are not loans by themselves. Thus, the
Deed of Suretyship was intended to secure future loans for
which these facilities were opened in the first place.
Lest it be overlooked, both the trial and appellate courts
found the Omnibus Credit Line referred to in the Deed of
Suretyship as covering the export packing credit loans
Asianbank extended to Gateway. We agree with this
factual determination. By the very use of the term
"omnibus," and in practice, an omnibus credit line refers to
a credit facility whence a borrower may avail of various
kinds of credit loans. Defined as such, an omnibus line is
broad enough to refer to or cover an export packing credit
loan.
Geronimo’s allegation that an export packing credit loan is
separate and distinct from an omnibus credit line is but a
bare and self-serving assertion bereft of any factual or legal
basis. One who alleges something must prove it: a mere
allegation is not evidence.25 Geronimo has not discharged
his burden of proof. His contention cannot be given any
weight.
As a final and major ground for his release as surety,
Geronimo alleges that Asianbank repeatedly extended the
maturity dates of the obligations of Gateway without his
knowledge and consent. Pressing this point, he avers that,
contrary to the findings of the CA, he did not waive his right
to notice of extensions of Gateway’s obligations.
Such contention is unacceptable as it glosses over the fact
that the waiver to be notified of extensions is embedded in
surety document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S) to pay
the whole part of said indebtedness herein secured at
maturity, I/WE jointly and severally, agree and engage to
the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR
of such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other
bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all
such instruments.26 (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his
right to notice of the maturity of notes, drafts, overdraft,
and other credit obligations for which Gateway shall
become indebted. This waiver necessarily includes new
agreements resulting from the novation of previous
agreements due to changes in their maturity dates.
Additionally, Geronimo’s lament about losing his right to
subrogation is erroneous. He argues that by virtue of the
order of insolvency issued by the insolvency court, title and
right to possession to all the properties and assets of
Gateway were vested upon Gateway’s assignee in
accordance with Sec. 32 of the Insolvency Law.
The transfer of Gateway’s property to the insolvency
assignee, if this be the case, does not negate Geronimo’s
right of subrogation, for such right may be had or exercised
in the insolvency proceedings. The possibility that he may
only recover a portion of the amount he is liable to pay is
the risk he assumed as a surety of Gateway. Such loss does
not, however, render ineffectual, let alone invalidate, his
suretyship.
Geronimo’s other arguments to escape liability are puerile
and really partake more of a plea for liberality. They need
not detain us long. In gist, Geronimo argues: first, that he
is a gratuitous surety of Gateway; second, Asianbank
deviated from normal banking practice, such as when it
extended the period for payment of Gateway’s obligation
and when it opted not to foreclose the chattel mortgage
constituted as guarantee of Gateway’s loan obligation;
and third, implementing the appealed CA’s decision would
cause him great harm and injury.
Anent the first argument, suffice it to state that Geronimo
was then the president of Gateway and, as such, was
benefited, albeit perhaps indirectly, by the loan thus
granted by Asianbank. And as we said in Security Pacific
Assurance Corporation, the surety is liable for the debt of
another although the surety possesses no direct or
personal interest over the obligation nor does the surety
receive any benefit from it.27
Whether or not Asianbank really deviated from normal
banking practice by extending the period for Gateway to
comply with its loan obligation or by not going after the
chattel mortgage adverted to is really of no moment. Banks
are primarily in the business of extending loans and earn
income from their lending operations by way of service and
interest charges. This is why Asianbank opted to give
Gateway ample opportunity to pay its obligations instead
of foreclosing the chattel mortgage and in the process
holding on to assets of which the bank has really no direct
use.
The following excerpts from Palmares are in point:
We agree with respondent corporation that its mere failure
to immediately sue petitioner on her obligation does not
release her from liability. Where a creditor refrains from
proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or
forbearance does not affect the creditor’s rights vis-à-
vis the surety, unless the surety requires him by
appropriate notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge
the surety whether given at the principal’s request or
without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal x x x.
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. And, in the absence of proof of resultant injury,
a surety is not discharged by the creditor’s mere statement
that the creditor will not look to the surety, or that he need
not trouble himself. The consequences of the delay, such
as the subsequent insolvency of the principal, or the fact
that the remedies against the principal may be lost by lapse
of time, are immaterial.28
The Court’s Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him
from any liability arising from Asianbank’s claims if what he
terms as "complete justice" is to be served. He cites, as
supporting reference, Agcaoili v. GSIS,29 presenting in the
same breath the following arguments: first, the Deed of
Suretyship is a gratuitous contract from which he did not
benefit; second, Asianbank assured him that the deed
would not be enforced against him; third, the enforcement
of the judgment of the CA would reduce Geronimo and his
family to a life of penury; and fourth, Geronimo would be
unable to exercise his right of subrogation, Gateway having
already been declared as insolvent.
The first and last arguments have already been addressed
and found to be without merit. The second argument is a
matter of defense which has remained unproved and even
belied by Asianbank by its filing of the complaint. We see
no need to further belabor any of them.
As regards the third allegation, suffice it to state that the
predicament Geronimo finds himself in is his very own
doing. His misfortune is but the result of the
implementation of a bona fide contract he freely executed,
the terms of which he is presumed to have thoroughly
examined. He was not at all compelled to act as surety; he
had a choice. It may be more offensive to public policy or
good customs if he be allowed to go back on his
undertaking under the surety contract. The Court cannot
be a party to the contract’s impairment and relieve a surety
from the effects of an unwise but nonetheless a valid
surety contract.
WHEREFORE, the instant petition is hereby DENIED. The
appealed Decision dated October 28, 2005 of the CA and
its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are
hereby AFFIRMED with the modification that any claim of
Asianbank or its successor-in-interest against Gateway, if
any, arising from the judgment in this suit shall be pursued
before the RTC, Branch 22 in Imus, Cavite as the insolvency
court.
Costs against petitioners.
SO ORDERED.
[G.R. No. 138544. October 3, 2000]
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
Decision[1] 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.
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;
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:
xxxxxxxxx
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 defendant-
appellant 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. 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-3599-81 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 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 NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(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 defendant-appellant 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.
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
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;
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 pro-forma;
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]
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. Ricafort[13] 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 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
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 officer[20] 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
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
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 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, 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
[34]
accommodation. 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.
In the present case, there is no such express stipulation. 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 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 Spouses Ernesto and Flerida Marcelo and Spouses Sergio
bank to insist on the JSS of one who was in a position to and Margarita Ortiz-Luis. Under the Continuing Suretyship
ensure the payment of the loan. Even a perfunctory Agreement, the sureties agreed to be bound by the
attempt at credit investigation would have revealed that provisions of the Credit Agreement and to be jointly and
respondent was no longer connected with the corporation severally liable with Erma in case the latter defaults in any
at the time. As it is, the bank is now relying on an unclear of its payments with Security Bank.
Indemnity Agreement in order to collect an obligation that
could have been secured by a fairly obtained surety. For its Following the execution of the two agreements and during
defeat in this litigation, the bank has only itself to blame. the period covering May 1992 to July 1993, Erma obtained
various peso and dollar denominated loans from Security
In sum, we hold that the 1989 Loan Agreement Bank evidenced by promissory notes,8 as follows:
extinguished by novation the obligation under the 1980 P8
million credit accommodation. Hence, the Indemnity
Date
Agreement, which had been an accessory to the 1980
Principal Loan Maturit
credit accommodation, was also Promissory
Amount was y Date
extinguished. Furthermore, we reject petitioners Note No.
Loaned obtaine
submission that respondent waived his right to be notified
d
of, or to give consent to, any modification or extension of
the 1980 credit accommodation.
(Batch One)
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. FCDL/82/013/9 US$175,000.0
5/14/92 8/10/92
2 0
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
FCDL/82/022/9 US$135,000.0
11/3/92 1/29/93
SO ORDERED. 2 0

OACL/82/490/9 P7,300,000.0 10/25/9

THIRD DIVISION 7/26/93
3 0 3
G.R. No. 191274, December 06, 2017
OACL/82/509/9 P3,000,000.0
ERMA INDUSTRIES, INC., ERNESTO B. MARCELO AND 11/9/92 1/29/93
2 0
FLERIDA O. MARCELO, Petitioners, v.SECURITY BANK
CORPORATION AND SERGIO ORTIZ-LUIS,
JR., Respondents. OACL/82/520/9 P1,700,000.0 11/13/9
1/29/93
2 0 2
DECISION
LEONEN, J.: OACL/82/548/9 P2,000,000.0 11/25/9
1/29/93
This Petition for Review1 is an appeal from the Court of 2 0 2
Appeals: (1) Decision2 dated June 17, 2009, which affirmed
in toto the Decision3 dated May 31, 2004 of Branch 64, (Batch Two)
Regional Trial Court, Makati City; and (2) Resolution4 dated
February 3, 2010, which denied petitioners' motion for
OACL/82/179/9 P5,580,000.0
reconsideration. 8/10/92 11/8/92
2 0
On May 5, 1992, Erma Industries, Inc. (Erma) obtained from
Security Bank Corporation (Security Bank) a credit facility, OACL/82/341/9
P350,000.00 5/31/93 7/7/93
the conditions for which are embodied in the Credit 3
Agreement5 executed between the parties.6

On the same date, a Continuing Suretyship7 agreement

was executed in favor of Security Bank, and signed by

OACL/82/347/9
P120,000.00 6/2/93 7/7/93
3
OACL/82/352/9
P479,000.00 6/3/93 7/7/939
3 restructuring,"20 Erma requested the return of the TCT in
The promissory notes uniformly contain the following
stipulations:
1. Interest on the principal at varying rates (7.5% per
annum for dollar obligation and 16.75% or 21% per
annum on peso obligation);
2. Interest not paid when due shall be compounded
monthly from due date;
3. Penalty charge of 2% per month of the total
outstanding principal and interest due and unpaid;
and
4. Attorney's fees equivalent to 20% of the total
amount due plus expenses and costs of
collection.10
After defaulting in the payment of the loans, Erma, through
its President, Ernesto Marcelo, wrote a letter11 dated
February 2, 1994 to Security Bank, requesting for the
restructuring of the whole of Erma's obligations and
converting it into a five-year loan.12 A certain property
valued at P12 million covered by TCT No. M-7021 and
registered in the name of petitioner Ernesto Marcelo was
also offered as security.13The title was received by Security
Bank and has since then remained in its possession.14
In a letter15 dated April 27, 1994, Security Bank approved
the partial restructuring of the loans or only up to P5
million.16
On May 10, 1994, Erma reiterated its request for the
restructuring of the entire obligation. Erma also stated that
the property they offered as collateral could answer for a
far bigger amount than what Security Bank had
recommended. Nevertheless, Erma suggested that it could
add another property as additional security so long as the
entire obligation is covered.17
Through a letter18 dated November 8, 1994, Security Bank
demanded payment, from Erma and the sureties, of Erma's
outstanding peso and dollar obligations in the total
amounts of P17,995,214.47 and US$289,730.10,
respectively, as of October 31, 1994.
On January 10, 1995, Security Bank filed a Complaint19 with
the Regional Trial Court of Makati City, for payment of
Erma's outstanding loan obligation plus interests and
penalties.
Upon the filing of said Complaint and as "it became clear
that the Bank would agree only to partial
its letter dated June 10, 1996.21 However, Security Bank
retained possession of TCT M-7021.
On June 24, 1999 (after the case was reraffled to Branch 64
from Branch 143),22 Security Bank filed its Amended
Complaint23 for Sum of Money praying that Erma, Spouses
Marcelo, and Spouses Ortiz be compelled to execute a Real
Estate Mortgage in its favor over the property covered by
TCT M-7021.
In Erma and Spouses Marcelo's Amended Answer24 dated
November 9, 1999, a counterclaim against Security Bank
was included for the return of said title to its rightful
owner, petitioner Ernesto Marcelo.
Spouses Ortiz, for their part, essentially denied liability.
Sergio claimed that he signed the Suretyship Agreement
only as an accommodation party and nominal surety; and
his obligation, if any, was extinguished by novation when
the loan was restructured without his knowledge and
consent. Margarita, on the other hand, claimed that she
signed the Suretyship Agreement only to signify her marital
consent.25
After trial, the Regional Trial Court rendered its
Decision26 dated May 31, 2004, where it adjudged Erma
liable to pay Security Bank the amounts of P17,995,214.47
and US$289,730.10, inclusive of the stipulated interest and
penalty as of October 31, 1994, plus legal interest of 12%
per annum from November 1, 1994 until full payment is
made.27 Given Erma's partial payments of its loan
obligation, and the serious slump suffered by its export
business, the trial court considered iniquitous to still
require Erma to pay 2% penalty per month and legal
interest on accrued interest after October 1994.28 The
Regional Trial Court further denied Security Bank's prayer
for attorney's fees on the ground that "there was no
conscious effort to evade payment of the obligation."29 It
likewise denied Erma's prayer for attorney's fees.30
Ernesto Marcelo and Sergio Ortiz-Luis were also held liable
to Security Bank as sureties.31 Their spouses, on the other
hand, were not held liable as sureties as they affixed their
signatures in the Continuing Suretyship Agreement only to
signify their marital consent.32 The trial court further held
that there was no novation because the restructuring of
Erma's loan obligation whether total or partial, did not
materialize.33 Consequently, Security Bank was ordered to
return TCT No. M-7021 to Spouses Marcelo.34
The Court of Appeals affirmed the Regional Trial Court's
Decision in toto.35 It held that there was no perfected
agreement on the restructuring of the loans because Erma
never complied with the condition to submit documentary
requirements;36 and Erma did not accept the partial
restructuring of the loan offered by Security Bank.37 On the
issue of Sergio Ortiz's liability, the Court of Appeals held
that under the terms of the Continuing Suretyship
agreement, Sergio Ortiz undeniably bound himself jointly
and severally with Ernesto Marcelo for the obligations of
Erma.38
Finally, the Court of Appeals agreed with the Regional Trial
Court that "the 2% penalty per month ... imposed by the
[B]ank: on top of the 20% interest per annum on the peso
obligation and 7.5% interest per annum on the dollar
obligation was iniquitous[.]"39 Consequently, the Court of
Appeals held that a straight 12% per annum interest on the
total amount due would be fair and equitable. In this
regard, Erma's prayer to remand the case to the court a
quo for reception of additional evidence that would further
reduce their outstanding obligation was rejected by the
Court of Appeals on the grounds that Erma should have
presented all evidence at the trial and that it would unduly
delay the case even further.40
On April 5, 2010, Erma and Spouses Marcelo filed their
Petition for Review. In a Resolution41 dated April 28, 2010,
the Court denied the petition for failure:
(1) to state the material dates when the assailed
decision of the Court of Appeals was received and
when petitioners' motion for reconsideration was
filed, in violation of Sections 4(b) and 5, Rule 45 in
relation to Section 5(d), Rule 56 of the 1997 Rules
of Civil Procedure, as amended; and
(2) to sufficiently show any reversible error
committed by the Court of Appeals in its decision
and resolution.
However, in a Resolution dated September 27, 2010, the
Court granted petitioners' Motion for Reconsideration and
reinstated the Petition. Security Bank Corporation and
Sergio R. Ortiz-Luis, Jr. filed their respective Comments;
and petitioners their Consolidated Reply.42
In compliance with the Court's Resolution43 dated October
8, 2012, petitioners and respondents filed their respective
memoranda.
The issues for resolution are:
First, whether the Court of Appeals and the Regional Trial
Court erred in finding that petitioners are liable to pay
respondent Bank the amounts of P17,995,214.47 and
US$289,730.10, inclusive of interests and penalty charge as
of October 31, 1994;
Second, whether the Court of Appeals and the Regional
Trial Court erred in finding that petitioners are liable to pay
respondent Bank legal interest of twelve percent (12%) per
annum from October 1994 until full payment is made;
Third, whether petitioners are entitled to attorney's fees;
and
Fourth, whether the Court of Appeals erred in holding
respondent Sergio Ortiz - Luis, Jr. solidarily liable with the
petitioners to pay the sums of P17,995,214.47 and
US$289,730.10 plus 12% legal interest.
We deny the petition. The Court of Appeals committed no
reversible error in affirming in toto the decision of the
Regional Trial Court.
I
In its Amended Complaint, Security Bank claimed for
payment of the total outstanding peso obligation of
P17,995,214.47 and total outstanding dollar obligation of
US$289,730.10 as of October 31, 1994. The Bank
additionally claimed for:
(1) Interest of 20% per annum on the peso obligation
and 7.5% per annum on the dollar obligation from
November 1, 1994 until fully paid;
(2) Penalty charges of 2% per month on the total
outstanding obligation from November 1, 1994
until fully paid;

(3) Legal interest on the accrued interest from the
filing of the Complaint until fully paid; and
(4) Attorney's fees equivalent to 20% of total
outstanding obligations, including interests and
penalties.44
The Regional Trial Court denied Security Bank's additional
claims for interests and penalty charges for being
iniquitous, and imposed instead a 12% legal interest on the
total outstanding obligation. Agreeing with the trial court,
the Court of Appeals explained that it would only be fair
and equitable to impose a straight 12% per annum on the
total amount due starting October 1994, rather than the
2% penalty per month on top of the 20% and 7.5% interest
on the peso and dollar obligation, respectively, being
demanded by the Bank.
Petitioners now contend that since the trial and appellate
courts found the stipulated interests and penalty charges
to be excessive and iniquitous,45 then the amounts of
P17,995,214.47 and US$289,730.10 adjudged against
them (which already incorporated the interests and
penalty charges) should have been reduced to the actual
unpaid principals of P12,957,500.00 and US$209,941.55,
respectively, devoid of any interests and penalty charges.46
Security Bank counters that petitioners raise purely factual
questions, which are not proper in a Rule 45 petition
before this Court;47 and petitioners' arguments were a
mere rehash of their arguments before the Court of
Appeals, which have already been judiciously passed
upon.48
Petitioners are mistaken.
The Regional Trial Court did not delete altogether the 2%
monthly penalty charges and stipulated interests of 7.5%
(on the dollar obligations) and 20% (on peso obligations).
The trial court, in fact, adjudged petitioner Erma liable to
pay the amounts of P17,995,214.47 and US$289,730.10,
inclusive of the stipulated interest and penalty as of
October 31, 1994, on the basis of Article 130849 of the Civil
Code and jurisprudential pronouncements on the
obligatory force of contracts - not otherwise contrary to
law, morals, good customs or public policy - between
contracting parties.50
The stipulated 7.5% or 21% per annum interest constitutes
the monetary or conventional interest for borrowing
money and is allowed under Article 1956 of the New Civil
Code.51 On the other hand, the penalty charge of 2% per
month accrues from the time of Erma's default in the
payment of the principal and/or interest on due
date.52 This 2% per month charge is penalty or
compensatory interest for the delay in the payment of a
fixed sum of money, which is separate and distinct from
the conventional interest on the principal of the loan.53 In
this connection, this Court, construing Article 220954 of he
Civil Code, held that:
[T]he appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a
sum or money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a
particular rate of penalty interest, then the payment of
additional interest at a rate equal to the regular monetary
interest; and if no regular interest had been agreed upon,
then payment of legal interest or six percent (6%) per
annum.55
Furthermore, the promissory notes provide for monthly
compounding of interest: "Interest not paid when due shall
be compounded monthly from due date."56 Compounding
is sanctioned under Article 1959 of the Civil Code:
Article 1959. Without prejudice to the provisions of Article
2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest. (Emphasis
supplied)
What the trial court did was to stop the continued accrual
of the 2% monthly penalty charges on October 31, 1994,
and to thereafter impose instead a straight 12% per annum
on the total outstanding amounts due. In making this
ruling, the Regional Trial Court took into account the partial
payments made by petitioners, their efforts to
settle/restructure their loan obligations and the serious
slump in their export business in 1993. The Regional Trial
Court held that, under those circumstances, it would be
"iniquitous, and tantamount to merciless forfeiture of
property"57 if the interests and penalty charges would be
continually imposed. The Regional Trial Court held:
It is no longer disputed that defendant ERMA was paying
interest on its loan obligation until October 1994; that
defendant ERMA exerted efforts to settle its obligation to
SBC, as in fact it proposed to SBC the restructuring of its
loan; and delivered to SBC, TCT No. M-7021 to manifest its
sincere effort to settle the obligation by way of
restructuring its loan obligation into five-year term loan.
Additionally, plaintiff ERMA's export business suffered
serious slump in 1993 which prompted it to seek a
restructuring of its entire loan. Were it not for said financial
crisis, defendant ERMA would not have defaulted in the
payment of its obligation, or at least the interest thereon.
Recognizing the predicament which ERMA found itself, it is
considered iniquitous, and tantamount to merciless
forfeiture of property to require defendant ERMA to
continue paying 2% penalty per month as well as payment
of legal interest upon all accrued interest after October
1994. This court therefore finds plaintiff SBC not entitled to
the recovery of the amount corresponding to 2% penalty
per month and to the legal interest on the accrued
interest.58
The Regional Trial Court, as affirmed by the Court of
Appeals, acted in accordance with Article 1229 of the Civil
Code, which allows judges to equitably reduce the penalty
when there is partial or irregular compliance with the
principal obligation, or when the penalty is iniquitous or
unconscionable.
Whether a penalty charge is reasonable or iniquitous is
addressed to the sound discretion of the courts and
determined according to the circumstances of the
case.59 The reasonableness or unreasonableness of a
penalty would depend on such factors as "the type, extent
and purpose of the penalty, the nature of the obligation,
the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties[.]"60
For instance, in Palmares v. Court of Appeals,61 the Court
eliminated altogether the payment of the penalty charge
of 3% per month for being inequitable and unreasonable.
It ruled that the purpose of the penalty interest - that is to
punish the obligor - have been sufficiently served by the
compounded interest of 6% per month on the P30,000
loan.62
In Tan v. Court of Appeals,63 the continued monthly accrual
of the 2% penalty on the total amount due of about P7.996
million was held to be unconscionable. Considering the
debtor's partial payments and offer to settle his
outstanding loan in good faith, the Court found it fair and
equitable to reduce the 2% penalty charge, compounded
monthly, to a straight twelve (12%) per annum.64
Similarly, in this case, the Regional Trial Court and the
Court of Appeals found it reasonable to reduce the 2%
penalty charges, compounded monthly as to interests due
and unpaid, to 12% per annum of the total outstanding
obligations, in light of petitioners' partial payments and
their good faith to settle their obligations. This reduction is
essentially discretionary with the trial court and, in the
absence of any abuse of discretion will not be disturbed.
Furthermore, we find no cogent reason to disturb the sums
of Pl7,995,214.47 and US$289,730.10 adjudged against the
petitioners in favor of Security Bank. Time and again, this
Court has held that factual determinations of the Regional
Trial Court, especially when adopted and confirmed by the
Court of Appeals, are final and conclusive65 barring a
showing that the findings were devoid of support or that a
substantial matter had been overlooked by the lower
courts, which would have materially affected the result if
considered. This case does not fall within any of the
recognized exceptions justifying a factual review in a Rule
45 petition.66
Petitioners further assert that they should be awarded at
least P50,000.00 as attorney's fees for having been forced
to defend themselves in needless litigation.67
The Court is not persuaded.
The award of attorney's fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification.
Even when a claimant is compelled to litigate to defend
himself/herself, still attorney's fees may not be awarded
where there is no sufficient showing of bad faith of the
other party.68 It is well within Security Bank's right to
institute an action for collection and to claim full
payment.69 Absent any proof that respondent Bank
intended to prejudice or injure petitioners when it rejected
petitioners' offer and filed the action for collection, we find
no basis to grant attorney's fees.
II
For his part, respondent Sergio Ortiz-Luis, Jr. insists that he
is not liable to Security Bank because he merely signed the
Suretyship Agreement as an accommodation party being
the Administrative Vice President of Erma at that time; and
there was novation of the Credit Agreement.70
Respondent Ortiz's position had been consistently rejected
by the Regional Trial Court and the Court of Appeals. The
lower courts found that while respondent Ortiz signed the
Credit Agreement as an officer of Erma, as shown by his
signature under Erma Industries Inc. (Borrower),71 this
does not absolve him from liability because he
subsequently executed a Continuing Suretyship
agreement72 wherein he guaranteed the "due and full
payment and performance"73 of all credit accommodations
granted to Erma and bound himself solidarily liable with
Ernesto Marcelo for the obligations of Erma. Sections 3 and
11 of the Continuing Suretyship clearly state as follows:
3. Liability of the Surety. - The liability of the Surety is
solidary and not contingent upon the pursuit by the Bank
of whatever remedies it may have against the Debtor or
the collateralslliens it may possess. If any of the
Guaranteed Obligations is- not paid or performed on due
date (at stated maturity or by acceleration), the Surety
shall, without need for any notice, demand or any other act
or deed, immediately become liable therefor and the
Surety shall pay and perform the same.
....
11. Joint and Several Suretyship. - If the Surety is more than
one person, all of their obligations under this Suretyship
shall be joint and several with the Debtor and with each
other. The Bank may proceed under this Suretyship against
any of the sureties for the entire Guaranteed Obligations,
without first proceeding against the Debtor or any other
surety or sureties of the Guaranteed Obligations, and
without exhausting the property of the Debtor, the Surety
hereby expressly waiving all benefits under Article 2058
and Article 2065 and Articles 2077 to 2081, inclusive, of the
Civil Code.74 (Emphasis supplied)
Furthermore, respondent Ortiz's claim that he is a mere
accommodation party is immaterial and does not discharge
him as a surety. He remains to be liable according to the
character of his undertaking and the terms and conditions
of the Continuing Suretyship, which he signed in his
personal capacity and not in representation of Erma.
The Court has elucidated on the distinction between an
accommodation and a compensated surety and the
reasons for treating them differently:
The law has authorized the formation of corporations for
the purpose of conducting surety business, and the
corporate surety differs significantly from the individual
private surety. First, unlike the private surety, the
corporate surety signs for cash and not for friendship. The
private surety is regarded as someone doing a rather
foolish act for praiseworthy motives; the corporate surety,
to the contrary, is in business to make a profit and charges
a premium depending upon the amount of guaranty and
the risk involved. Second, the corporate surety, like an
insurance company, prepares the instrument, which is a
type of contract of adhesion whereas the private surety
usually does not prepare the note or bond which he signs.
Third, the obligation of the private surety often is assumed
simply on the basis of the debtor's representations and
without legal advice, while the corporate surety does not
bind itself until a full investigation has been made. For
these reasons, the courts distinguish between the
individual gratuitous surety and the vocational corporate
surety. In the case of the corporate surety, the rule
of strictissimi juris is not applicable, and courts apply the
rules of interpretation . . . of appertaining to contracts of
insurance.75
Consequently, the rule of strict construction of the surety
contract is commonly applied to an accommodation surety
but is not extended to favor a compensated corporate
surety.
The rationale of this doctrine is reasonable; an
accommodation surety acts without motive of pecuniary
gain and, hence, should be protected against unjust
pecuniary impoverishment by imposing on the principal
duties akin to those of a fiduciary. This cannot be said of a
compensated corporate surety which is a business
association organized for the purpose of assuming
classified risks in large numbers, for profit and on an
impersonal basis, through the medium of standardized
written contractual forms drawn by its own
representatives with the primary aim of protecting its own
interests.76
The nature and extent of respondent Ortiz's liability are set
out in clear and unmistakable terms in the Continuing
Suretyship agreement. Under its express terms,
respondent Ortiz, as surety, is "bound by all the terms and
conditions of the credit instruments."77 His liability is
solidary with the debtor and co-sureties; and the surety
contract remains in full force and effect until full payment
of Erma's obligations to the Bank.78
Respondent Ortiz's claim of novation was likewise rejected
by the lower courts. The Regional Trial Court and the Court
of Appeals were in agreement that while there were
ongoing negotiations between Erma and Security Bank for
the restructuring of the loan, the same did not
materialize.79 Erma offered to restructure its entire
outstanding obligation and delivered TCT No. M-7021 as
collateral, to which Security Bank counter-offered a partial
restructuring or only up to P5,000,000. This counter-offer
was not accepted by Erma. There was no new contract
executed between the parties evidencing the restructured
loan. Neither did Erma execute a real estate mortgage over
the property covered by TCT No. M-7021.
WHEREFORE, the Petition is DENIED. The Decision dated
June 17, 2009 and Resolution dated February 3, 2010 of the
Court of Appeals are AFFIRMED.
SO ORDERED.
G.R. No. 163116 June 29, 2015
ALLIED BANKING CORPORATION, Petitioner,
vs.
JESUS S. YUJUICO (DECEASED), REPRESENTED BY
BRENDON V. YUJUICO, Respondent.
DECISION
BERSAMIN, J.:
This appeal assails the decision promulgated on May 30,
2003,1 whereby the Court of Appeals (CA) affirmed the
decision rendered on November 19, 1997 by the Regional
Trial Court (RTC), Branch 13, in Manila dismissing its
complaint for the collection of a debt brought against
respondent Jesus S. Yujuico and several others (docketed
as Civil Case No. R-82-8211 entitled Allied Banking
Corporation v. Yujuico Logging & Trading Corporation,
Clarencio S. Yujuico, Jesus S. Yujuico and Gregoria Y
Paredes).2
Civil Case No. R-82-8211 was commenced in the Court of
First Instance of Manila on November 7, 19783 to demand
the principal sum of 1!6,020,000.00 representing· the total
obligations of Yujuico Logging & Trading Corporation
(YLTC) under five promissory notes. In their answer,4 Jesus
S. Yujuico and Gregoria Y. Paredes denied that they were
parties to the loan agreements of YLTC; and averred that
any liability each could incur under the continuing
guaranties had been extinguished or revoked through
payment, novation, and prescription. Each presented a
counterclaim for damages against the plaintiff.
In time course of the proceedings, the RTC, which in the
meantime replaced the defunct Court of First Instance,
dismissed the action against YLTC and Clarencio S. Yujuico
because the summons could not be successfully served
upon them despite the lapse of 13 years, and there was no
prospect of making a successful service thereafter. The R
TC also dismissed the case against Gregoria Y. Paredes
because of her intervening demise, without prejudice to
the bringing of the proper claim against her estate. The trial
continued only against Jesus S. Yujuico.
On September 22, 2003, Jesus died in San Mateo,
California, United States of America.5 On February 28,
2005, the Court noted the "confirmation of authority of
Brendon V. Yujuico to represent all the legal heirs of Jesus
S. Yujuico" in this case.6
Antecedents
The CA summed up the following factual antecedents,7 viz.:
On January 10, 1966, the board of directors of General
Bank & Trust Company (Genbank, for brevity) approved a
resolution granting YLTC an Omnibus Credit Line in the
amount of ₱800,000.00 to be made available by overdrafts,
loans and advances upon condition that the principals of
YLTC would personally bind themselves in a Continuing
Guarantee to secure payment of obligations drawn on said
credit extended by Genbank. On February 6, 1968, in order
to secure punctual payment at maturity of YLTC's
obligations, defendants-appellees Gregoria Y. Paredes,
Clarencio S. Yujuico and defendant-appellee Jesus S.
Yujuico, principal stockholders of YLTC as sureties,
executed a Continuing Guarantee for the amount of
₱800,000 binding themselves in their personal capacities
as required by Genbank.
Following the expiration of the first credit line, on January
9, 1967, Genbank passed a board resolution granting YLTC
a credit line of ₱1.5M which included the preceding
₱800,000-credit line. Pursuant to bank requirements,
defendant-appellee Jesus S. Yujuico, Gregoria S. Paredes
and Clarencio S. Yujuico again executed a Continuing
Guarantee for the entire amount of ₱1.5M. This replaced
the previous Continuing Guarantee.
After the second credit line expired, Genbank passed a
board resolution on April 4, 1968 approving the renewal of
YLTC's credit line of Pl .S M for another year or "up to
statutory limits" and "under existing terms and conditions"
covered again by the Continuing Guarantee of ₱1.5M.
YLTC's credit line was renewed successively for the
following years 1969, 1970, 1971, 1972 and 1973.
On January 7, 1974, Genbank's board of directors passed a
resolution granting YLTC a credit line of PS M or "up to
statutory limits", whichever is higher. To cover that credit
line, on February 6, 1974, Clarence S. Yujuico, as lone
surety, executed a Continuing Guarantee to secure
payment of YLTC's loan obligations in an amount not
exceeding PSM or up to statutory limits allowed by law,
whichever is higher. Said credit line included the previous
Pl.SM credit accommodation. On January 7, 197S, Genbank
passed a board resolution which continued the effectivity
of YLTC's !!SM-credit line for the year 197S. On December
8, 197S, Genbank passed a board resolution renewing the
time loan of PS.2M for another year or up to December 31,
1976.
Meanwhile, loans contracted by YLTC in 1975 and 1976
evidenced by the following promissory notes became due
and demandable:
Date Amount Maturity Date
April 30, 1975 ₱5.2 M December 31, 1975
June 4, 1976 P0.4 M December 1, 1976
July 8, 1976 P0.2 M October 6, 1976
October 5, 1976 P0.2 M January 4, 1977
December 1, 1976 ₱20,184.90 March 1, 1977
Total ₱6,020,18[4].90
Genbank was placed under liquidation by the Monetary
Board. Pursuant to a Memorandum of Agreement
executed between the duly appointed bank liquidator and
here plaintiff-appellant Allied Banking Corporation, the
latter acquired all assets and liabilities of Genbank.
Plaintiff-appellant, as successor-in-interest of Genbank,
sought to collect the amount covered by the promissory
notes. YLTC failed to pay constraining plaintiff-appellant to
file the instant collection suit in court. Judgment of the RTC
On November 19, 1997, the RTC rendered judgment
dismissing the complaint against Jesus, as well as his
counterclaim.8 It considered Exhibit B, the second
continuing guarantee executed by Jesus on February 22,
1967, as pivotal inasmuch as the credit guaranteed by the
first continuing guarantee executed on February 8, 1966
had become "part of the credit under the second
agreement," observing that Jesus had not been sued "for
any availment by YLTC under Exhibit B, but for those
obtained by YLTC
after the third guaranty agreement, Exhibit CC, was
executed," to which Jesus was not a signatory. It found:
There is on record a xerox copy of a letter dated November
27, 1973 signed by Teodoro Presa for defendant Yujuico
and addressed to the Board of Directors of Genbank and
received by Atty. Rodolfo Santiago (Exh. 4, previously
marked Exhibit 1, appearing as page 393 of Vol. 1 of the
records). The paper bore the title "notice of revocation of
continuing guaranty" and stated that defendant Yujuico
was revoking the continuing guaranty of ₱800,000 (Exhibit
A), and of the Pl.5 million (Exhibit B) that was said to have
absorbed and cancelled the former. Mr. Presa was a
financial consultant of defendant Yujuico on the date
specified in the letter, being under him in a company
known as General Textiles (Gentex). Presa testified that
upon his advice, defendant Yujuico decided to revoke all
his outstanding guaranties as a means to improve his credit
standing with the banks and enable him to support
Gentex's expansion program. Yujuico specifically
instructed him to prepare the letter Exhibit 4 which
revoked the latter's guaranty in favor of YLTC (tsn March
25, 1996, at 5). Atty. Santiago, Genbank's corporate
secretary, admitted receiving this letter and said that he
had presented it to the board of directors which proceeded
to renew YLTC's loan without defendant Yujuico's signature
(tsn July 9, 1996, at 10, 15). Atty. Rafael Durian,
defendant's counsel, stated that he had custody of the
carbon original of Exhibit 4, but it was mistakenly included
among the old records of their office and destroyed. He
affirmed that Exhibit 4 was the xerox copy of the carbon
original (tsn April 16, 1996, at 3-4). On the strength of these
testimonies, the Court issatisfied of the existence of a
letter of revocation sent by defendant Yujuico to Genbank
in 1973 and that the xerox copy (sic) Exhibit 4 was a faithful
reproduction of that lost communication. Against this
evidence plaintiff merely raised the speculation that Atty.
Santiago is biased in favor of defendant became (sic) the
latter is the uncle of his (Atty. Santiago's) wife. But
relationship alone is not enough to discredit the testimony
of a witness if it is otherwise clear and convincing, and
corroborated by other facts and circumstances, in this case
by the testimonies of Mr. Presa and Atty. Durian, People
vs. Puesca 87 SCRA 130.9
In view of the revocation letter executed by Teodoro Presa
in the name and behalf of Jesus being considered existing
and valid, the R TC laid down the following consequences
of the revocation letter:
In the continuing guaranty Exhibit B, the following is stated:
"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 (referring
to the guarantors), but any such notice shall not release 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" (underscoring
supplied.)
Pursuant to this provision, defendant Yujuico may continue
to be held responsible only for loans and obligations of
YLTC already contacted (sic) as of the time the letter or
revocation Exhibit 4 was sent. But the accounts sued upon
by plaintiff, that is, Exhibit D, E, F, G, H, came into existence
in 1975 and 1976, after the revocations (sic) was made. It
follows that defendant Yujuico cannot be held liable for
them.10
The RTC also ruled that the increase in credit line had
novated the continuing guaranty executed by Jesus, to wit:
It is clear, moreover, that as a result of the increase of the
credit line of YLTC from Pl,500,000 to P.5,000,000, a
novation of the loan agreement of YLTC with Genbank had
taken place. This because the old obligations had been
merged into the new one, the amount increased, and new
date specified for its performance. There is, in effect, a new
contract that substitutes and replaces the old, and
becomes the sole source of the rights and obligations of
the parties. In such a juridical situation, the accessory
obligations under the old contracts, such as those of
guarantors and sureties, are deemed released unless the
latter agree to the change. Tolentino, Civil Code of the
Philippines Vol. IV, 1962, at 365. Since, in the case at bar,
defendant Yujuico as a guarantor did not consent to the
novation of the credit agreement between Genbank and
YLTC, but on the contrary, revoked his guaranty under the
old credit line, he should be released from his
undertaking.11
Decision of the CA
On appeal, the petitioner assigned the following errors,
namely:
I Yujuico and Gregoria Paredes had executed in 1967. The
THE TRIAL COURT ERRED IN FINDING THAT APPELLEE HAD
ALREADY REVOKED HIS CONTINUING GUARANTEES AND
NOTIFIED GENBANK OF SUCH REVOCATION, HENCE,
COULD NO LONGER BE HELD LIABLE AS A SURETY OF THE
OBLIGATIONS SUED UPON.
II
THE TRIAL COURT ERRED IN FINDING THAT APPELLEE'S
OBLIGATION AS A SURETY UNDER THE CONTINUING
GUARANTY DATED FEBRUARY 22, 1967 WAS
EXTINGUISHED BY NOV A TION WHEN YLTC'S CREDIT LINE
WAS INCREASED FROM Pl,500,000.00 TO P.5,000,000.00
PURSUANT TO THE CONTINUING GUARANTY DATED
FEBRUARY 6, 1974.12
By its assailed decision, the CA affirmed the RTC, to wit: The
appeal has no merit.
On the first error assigned by plaintiff-appellant, it is urged
that the record is bereft of credible evidence that Genbank
received the letter of revocation. Furthermore, the letter
of revocation was signed by Mr. Teodoro Presa, a financial
consultant of General Textiles, a company that had nothing
to do with the debtor YLTC, and hence was ineffectual as a
letter of revocation.
The contention deserves no consideration. We are
convinced that Mr. Presa wrote the letter of revocation
under the express instructions of defendant-appellee for
the latter would not have presented the letter of
revocation in his defense had he not actually authorized its
preparation. Corroborative of this is Atty. Santiago's
testimony that he received such a letter and that at a
meeting attended by him, Genbank's board of directors
allowed the revocation of the Continuing Guarantee
defendant-appellee signed in 1967. Defendant-appellee
was no longer required to execute a continuing guarantee
thereafter. In civil cases, it is a well settled rule that the
appellate court will not reverse a finding of fact by the trial
court depending largely upon the credibility of witnesses
who testified in the presence of the court, unless the court
failed to take into consideration some material fact or
circumstance or to weigh accurately all of the material
facts and circumstances presented to it for consideration.
In the instant case, We do not see any reason for the
application of the exception to the just cited rule.
On the second assigned error, it is contended that
defendant-appellee Jesus Yujuico should not have been
discharged from liability as a surety because there was no
indication that the Continuing Guarantee. executed by
Clarence Yujuico alone was intended to replace the
Continuing Guarantee defendant-appellee, Clarencio
non-inclusion of defendant-appellee in suretyship
agreements subsequent to the revocation made at his
instance and the absorption of the ₱1.5M credit line in the
subsequent ₱5M-credit line, clearly evince the intent of
superseding the previous surety agreement under the
.₱1.5M-credit line. In 1974, it was Clarence Yujuico alone
who executed a Continuing Guarantee to secure payment
of loans contracted under the .PSM-credit line. Notably, in
the course of his testimony, Francis Pasatiempo, a bank
officer of plaintiff-appellant bank and formerly connected
with Genbank, admitted that the .PSM-credit line already
absorbed the ₱1.5M credit line under which defendant-
appellee was previously held bound. Thus, the lower court
seasonably held that defendant-appellee is not bound to
answer as surety for loans contracted after the revocation
such as those sought to be collected by plaintiff-appellant
in this case.
WHEREFORE, finding no reversible error in the decision
appealed from, the same is hereby AFFIRMED.
SO ORDERED.13
On March 31, 2004, the CA denied the petitioner's motion
for reconsideration.14
Issues
The petitioner charges the CA with grave error for declaring
that: (a) the revocation letter had released Jesus from his
obligations as surety; and (b) there was competent
evidence to show that the continuing guaranty was
extinguished by novation. It contends that the CA, in
pointing out that Jesus "would not have presented the
letter of revocation in his defense had he not actually
authorized its preparation," ignored that Jesus "never
testified under oath to affirm that the letter of revocation
signed by Mr. Teodoro Presa had been executed pursuant
to his instructions." It argues that the testimony of Presa
on the revocation letter was self-serving; hence, the CA
erred in giving such testimony due weight and
consideration. It stresses that there was no competent
showing that the revocation letter had ,emanated from
Jesus.15
The petitioner argues that the CA erred in holding that the
revocation letter was executed upon the instruction of
Jesus because there was no evidence that he had executed
a special power of attorney in favor of Presa; that Jesus did
not present the original copy of the revocation letter to
show its receipt by the petitioner; that there was no proof
showing that the original copy of the revocation letter had
been lost; that Atty. Santiago was a biased witness whose
testimony should not be given full faith and credit
considering that Jesus was the uncle of his wife; that Atty.
Santiago also had no personal knowledge of the actual
receipt of the revocation letter by the petitioner; and that
Presa was not even certain on who had received the
revocation letter.
Ruling of the Court
The appeal lacks merit.
I or guarantee in the caption of the documents, or of the
The undertaking of Jesus was that of a surety, not a
guarantor
Written on Genbank letterhead, the continuing guaranty
dated February 8, 196616 and the continuing guaranty
dated February 22, 196717 contained identical principal
provisions to the effect that: (a) he had guaranteed the
"punctual payment at maturity" of the loans secured by the
continuing guaranty; (b) Gen bank, as the creditor bank of
YLTC, could "make or cause" payments under the terms
and conditions of their loan agreement; (c) under
paragraph II, Jesus had offered as security for the loans of
YLTC his own properties in the possession of Genbank or
for which Genbank had attached a lien, which, upon
default by YLTC in paying the loan, Genbank, "without
demand or notice" upon respondent, would have the full
power and authority to sell; (d) should YLTC incur in default
in the payment of the loans, Genbank could "proceed
directly" against Jesus
"without exhausting the property" of YLTC; and (e)
paragraph XII expressly stated that the liability of the
signatory or signatories to the continuing guaranty would
be "joint and several."
It is apparent that the courts below, as well as the
petitioner, interchangeably used the terms guaranty and
surety in characterizing the undertakings of Jesus under
the continuing guaranties. The terms are distinct from each
other, however, and the distinction is expressly delineated
in the Civil Code, to wit:
Article 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.
Thus, in guaranty, the guarantor "binds himself to the
creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so." The liability of the
guarantor is secondary to that of the principal debtor
because he "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."18 In contrast, the surety is solidarily bound to
the obligation of the principal debtor.19
Although the first part of the continuing guaranties showed
that Jesus as the signatory had agreed to be bound "either
as guarantor or otherwise,"20 the usage of term guaranty
word guarantor in the contents of the documents did not
conclusively characterize the nature of the obligations
assumed therein. What properly characterized and defined
the undertakings were the contents of the documents and
the intention of the parties.21 In holding that the continuing
guaranty executed in E. Zobel, Inc. v. Court of Appeals was
a surety instead of a guaranty, the Court accented the
distinctions between them, viz.:
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 does not pay the debt.
Strictly speaking, guaranty and surety are nearly related,
and many of the principles are common to
both.1âwphi1 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.
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. 22
(Italics in the original; emphasis and bold italics supplied.)
With the stipulations in the continuing guaranties
indicating that he was the surety of the credit line extended
to YLTC, Jesus was solidarily liable to Genbank for the
indebtedness of YLTC. In other words, he thereby rendered
himself "directly and primarily responsible" with YLTC,
"without reference to the solvency of the principal. "23
II
Jesus was no longer liable as
a surety due to the non-renewal
of the continuing guaranties
Be that as it may, the continuing guaranties could not
answer for the promissory notes amounting to ₱6,020,
184.90 that the petitioner sought to judicially recover from
Jesus as surety.
The courts below found and declared that the continuing
guaranties of February 8, 1966 and February 22, 1967 were
not renewed after the expiration of the credit line.24
The petitioner did not establish that another suretyship by
Jesus ensured the payment of the credit line issued on April
4, 1968 upon the expiration of the credit line for 1967.
What was shown instead is that on February 6, 1974,25or
about seven years after the expiration of the continuing
guaranty of February 22, 1967, it was Clarencio who
executed a continuing guaranty for ₱5,000,000.00. Since
Genbank accepted the promissory note of ₱5,200,000.00
on April 30, 1975,26 the continuing guaranty that Clarencio
executed about two months earlier covered that amount.
Based on the records, the practice was for the sureties to
ensure credit lines issued by Genbank annually with the
new sureties absorbing the earlier surety agreements.
Considering that no new sureties covered the credit lines
from 1968 to 197 4, and in view of the fact that the
suretyships were continuing, Jesus was solidarily liable for
the credit lines Genbank issued for seven years, or until
February 6, 1974 when Clarencio assumed the suretyship.
Hence, Clarencio, not Jesus, was the party solidarily liable
for the indebtedness incurred after February 6, 1974
starting with the promissory note dated April 30, 1975.
Obviously, the petitioner sued to recover the indebtedness
of YLTC from Jesus because he was the only available
surety after one had died and the other had absconded.
Yet, it could not recover from Jesus whose suretyship had
been superseded by Clarencio's continuing guaranty for
the promissory notes executed subsequent to the new
suretyship.
In view of the result reached, the Court will not dwell
anymore on the other issues raised for our consideration.
WHEREFORE, the Court AFFIRMS the decision promulgated
on May 30, 2003 absolving the estate of the late Jesus S.
Yujuico from liability under the continuing guaranties
executed on February 8, 1966 and February 22, 1967; and
ORDERS the petitioner to pay the costs of suit.
SO ORDERED.
G.R. No. 94566 July 3, 1992
BA FINANCE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and TRADERS ROYAL
BANK, respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of
the respondent appellate court which reversed the ruling
of the trial court dismissing the case against petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business
under the name Gebbs International, applied for and was
granted a loan with respondent Traders Royal Bank in the
amount of P60,000.00. As security for the payment of said
loan, the Gaytano spouses executed a deed of suretyship
whereby they agreed to pay jointly and severally to
respondent bank the amount of the loan including
interests, penalty and other bank charges.
In a letter dated December 5, 1980 addressed to
respondent bank, Philip Wong as credit administrator of BA
Finance Corporation for and in behalf of the latter,
undertook to guarantee the loan of the Gaytano spouses.
The letter reads:
This is in reference to the application of Gebbs
International for a twenty-five (25) month term loan of
60,000.00 with your Bank.
In this connection, please be advised that we
unconditionally guarantee full payment in peso value the
said accommodation (sic) upon non-payment by subject up
to a maximum amount of P60,000.00.
Hoping this would meet your requirement and expedite
the early processing of their application.
Thank you.
Very truly yours,
BA FINANCE CORPORATION
(signed)
PHILIP H. WONG
Credit Administrator
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid
balance in the amount of P85,807.25. Since the Gaytano
spouses refused to pay their obligation, respondent bank
filed with the trial court complaint for sum of money
against the Gaytano spouses and petitioner corporation as
alternative defendant.
The Gaytano spouses did not present evidence for their
defense. Petitioner corporation, on the other hand, raised
the defense of lack of authority of its credit administrator
to bind the corporation.
On December 12, 1988, the trial court rendered a decision
the dispositive portion of which states:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
in favor of plaintiff and against defendants/Gaytano
spouses, ordering the latter to jointly and severally pay the
plaintiff the following:
1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND
25/100 (P85,807.25), representing the total unpaid
balance with accumulated interests, penalties and bank
charges as of September 22, 1987, plus interests, penalties
and bank charges thereafter until the whole obligation
shall have been fully paid.
2) Attorney's fees at the stipulated rate of ten (10%)
percent computed from the total obligation; and
3) The costs of suit.
The dismissal of the case against defendant BA Finance
Corporation is hereby ordered without pronouncement as
to cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed
with the Court of Appeals. On March 13, 1990, respondent
appellate court rendered judgment modifying the decision
of the trial court as follows:
In view of the foregoing, the judgment is hereby rendered
ordering the defendants Gaytano spouses and alternative
defendant BA Finance Corporation, jointly and severally, to
pay the plaintiff the amount of P85,807.25 as of September
8, 1987, including interests, penalties and other back (sic)
charges thereon, until the full obligation shall have been
fully paid. No pronouncement as to costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning
the following errors committed by respondent appellate
court:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED
IN RULING THAT PETITIONER IS JOINTLY AND SEVERALLY
LIABLE WITH GAYTANO SPOUSES DESPITE ITS FINDINGS
THAT THE LETTER GUARANTY (EXH. "C") IS "INVALID AT ITS
INCEPTION";
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED
IN RULING THAT THE PETITIONER WAS GUILTY OF
ESTOPPEL DESPITE THE FACT THAT IT NEVER KNEW OF
SUCH ALLEGED LETTER-GUARANTY;
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED
IN NOT RULING THAT SUCH LETTER GUARANTY (EXHIBIT
"C") BEING PATENTLY ULTRA VIRES, IS UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING RELIEF ON PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss
them jointly.
Petitioner contends that the letter guaranty is ultra vires,
and therefore unenforceable; that said letter-guaranty was
issued by an employee of petitioner corporation beyond
the scope of his authority since the petitioner itself is not
even empowered by its articles of incorporation and by-
laws to issue guaranties. Petitioner also submits that it is
not guilty of estoppel to make it liable under the letter-
guaranty because petitioner had no knowledge or notice of
such letter-guaranty; that the allegation of Philip Wong,
credit administrator, that there was an audit was not
supported by evidence of any audit report or record of
such transaction in the office files.
We find the petitioner's contentions meritorious. It is a
settled rule that persons dealing with an assumed agent,
whether the assumed agency be a general or special one
are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to
establish it (Harry Keeler v. Rodriguez, 4 Phil. 19). Hence,
the burden is on respondent bank to satisfactorily prove
that the credit administrator with whom they transacted
acted within the authority given to him by his principal,
petitioner corporation. The only evidence presented by
respondent bank was the testimony of Philip Wong, credit
administrator, who testified that he had authority to issue
guarantees as can be deduced from the wording of the
memorandum given to him by petitioner corporation on
his lending authority. The said memorandum which
allegedly authorized Wong not only to approve and grant
loans but also to enter into contracts of guaranty in behalf
of the corporation, partly reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your capacity as Credit
Administrator the following lending limits:
a) P650,000.00 — Secured Loans
b) P550,000.00 — Supported Loans
c) P350,000.00 — Truck Loans/Contracts/Leases
d) P350,000.00 — Auto Loan Contracts/Leases
e) P350,000.00 — Appliance Loan Contracts
f) P350,000.00 — Unsecured Loans
Total loans and/or credits [combination of (a) thru (f)
extended to any one borrower including parents, affiliates
and/or subsidiaries, should not exceed P750,000.00. In
exercising the limits aforementioned, both direct
and contingent commitments to the borrower(s) should be
considered.
All loans must be within the Company's established lending
guideline and policies.
xxx xxx xxx
LEVELS OF APPROVAL
All transactions in excess of any branch's limit must be
recommended to you through the Official Credit Report for
approval. If the transaction exceeds your limit, you must
concur in application before submitting it to the Vice
President, Credit Administration for approval or
concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans
even up to P350,000.00 without any security requirement,
which is far above the amount subject of the guaranty in
the amount of P60,000.00, nothing in the said
memorandum expressly vests on the credit administrator
power to issue guarantees. We cannot agree with
respondent's contention that the phrase "contingent
commitment" set forth in the memorandum means
guarantees. It has been held that a power of attorney or
authority of an agent should not be inferred from the use
of vague or general words. Guaranty is not presumed, it
must be expressed and cannot be extended beyond its
specified limits (Director v. Sing Juco, 53 Phil. 205). In one
case, where it appears that a wife gave her husband power
of attorney to loan money, this Court ruled that such fact
did not authorize him to make her liable as a surety for the
payment of the debt of a third person (Bank of Philippine
Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the
absence of any other proof that he is authorized to bind
petitioner in a contract of guaranty with third persons
should not be given weight. The representation of one who
acts as agent cannot by itself serve as proof of his authority
to act as agent or of the extent of his authority as agent
(Velasco v. La Urbana, 58 Phil. 681). Wong's testimony that
he had entered into similar transactions of guaranty in the
past for and in behalf of the petitioner, lacks credence due
to his failure to show documents or records of the alleged
past transactions. The actuation of Wong in claiming and
testifying that he has the authority is understandable. He
would naturally take steps to save himself from personal
liability for damages to respondent bank considering that
he had exceeded his authority. The rule is clear that an
agent who exceeds his authority is personally liable for
damages (National Power Corporation v. National
Merchandising Corporation, Nos. L-33819 and
L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that
petitioner is estopped from alleging lack of authority due
to its failure to cancel or disallow the guaranty, We find
that the said conclusion has no basis in fact. Respondent
bank had not shown any evidence aside from the
testimony of the credit administrator that the disputed
transaction of guaranty was in fact entered into the official
records or files of petitioner corporation, which will show
notice or knowledge on the latter's part and its consequent
ratification of the said transaction. In the absence of clear
proof, it would be unfair to hold petitioner corporation
guilty of estoppel in allowing its credit administrator to act
as though the latter had power to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed
decision of the respondent appellate court dated March
13, 1990 is hereby REVERSED and SET ASIDE and another
one is rendered dismissing the complaint for sum of money
against BA Finance Corporation.
SO ORDERED.
G.R. No. 185945 December 05, 2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review
on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to annul and set aside the
Decision1 dated March I 8, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 100021, which reversed the
Decision2 dated April 3, 2007 of the Regional Trial Court
(RTC) of Dagupan City, Branch 40, in Criminal Case Nos.
2006-0559-D to 2006-0569-D and entered a new
judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED and the
assailed Joint Decision dated April 3, 2007 of the RTC of
Dagupan City, Branch 40, and its Order dated June 12, 2007
are REVERSED AND SET ASIDE and a new one is entered
ordering private respondent Fideliza J. Aglibot to pay
petitioner the total amount of ₱3,000,000.00 with 12%
interest per annum from the filing of the Informations until
the finality of this Decision, the sum of which, inclusive of
interest, shall be subject thereafter to 12% annual interest
until fully paid.
SO ORDERED.3
On December 23, 2008, the appellate court denied herein
petitioner’s motion for reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia
(Santia) loaned the amount of ₱2,500,000.00 to Pacific
Lending & Capital Corporation (PLCC), through its
Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan
was evidenced by a Promissory Note dated July 1, 2003,
issued by Aglibot in behalf of PLCC, payable in one year
subject to interest at 24% per annum. Allegedly as a
guaranty or security for the payment of the note, Aglibot
also issued and delivered to Santia eleven (11) post-dated
personal checks drawn from her own demand account
maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27
Casimiro Townhouse, Casimiro Avenue, Zapote, Las Piñas,
Metro Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment,
they were dishonored by the bank for having been drawn
against insufficient funds or closed account. Santia thus
demanded payment from PLCC and Aglibot of the face
value of the checks, but neither of them heeded his
demand. Consequently, eleven (11) Informations for
violation of Batas Pambansa Bilang 22 (B.P. 22),
corresponding to the number of dishonored checks, were
filed against Aglibot before the Municipal Trial Court in
Cities (MTCC), Dagupan City, Branch 3, docketed as
Criminal Case Nos. 47664 to 47674. Each Information,
except as to the amount, number and date of the checks,
and the reason for the dishonor, uniformly alleged, as
follows:
That sometime in the month of September, 2003 in the City
of Dagupan, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, FIDELIZA J.
AGLIBOT, did then and there, willfully, unlawfully and
criminally, draw, issue and deliver to one Engr. Ingersol L.
Santia, a METROBANK Check No. 0006766, Camiling Tarlac
Branch, postdated November 1, 2003, in the amount
of ₱50,000.00, Philippine Currency, payable to and in
payment of an obligation with the complainant, although
the said accused knew fully well that she did not have
sufficient funds in or credit with the said bank for the
payment of such check in full upon its presentment, such
that when the said check was presented to the drawee
bank for payment within ninety (90) days from the date
thereof, the same was dishonored for reason "DAIF", and
returned to the complainant, and despite notice of
dishonor, accused failed and/or refused to pay and/or
make good the amount of said check within five (5) days
banking days [sic], to the damage and prejudice of one
Engr. Ingersol L. Santia in the aforesaid amount of
₱50,000.00 and other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did
obtain a loan from Santia, but claimed that she did so in
behalf of PLCC; that before granting the loan, Santia
demanded and obtained from her a security for the
repayment thereof in the form of the aforesaid checks, but
with the understanding that upon remittance in cash of the
face amount of the checks, Santia would correspondingly
return to her each check so paid; but despite having
already paid the said checks, Santia refused to return them
to her, although he gave her assurance that he would not
deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she
did not receive any notice of dishonor of the checks; that
for want of notice, she could not be held criminally liable
under B.P. 22 over the said checks; and that the reason
Santia filed the criminal cases against her was because she
refused to agree to his demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed
as follows:
WHEREFORE, in view of the foregoing, the
accused, FIDELIZA J. AGLIBOT, is hereby ACQUITTED of all
counts of the crime of violation of the bouncing checks law
on reasonable doubt. However, the said accused is ordered
to pay the private complainant the sum
of ₱3,000,000.00 representing the total face value of the
eleven checks plus interest of 12% per annum from the
filing of the cases on November 2, 2004 until fully paid,
attorney’s fees of ₱30,000.00 as well as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007
in Criminal Case Nos. 2006-0559-D to 2006-0569-D, which
further absolved Aglibot of any civil liability towards Santia,
to wit:
WHEREFORE, premises considered, the Joint Decision of
the court a quo regarding the civil aspect of these cases is
reversed and set aside and a new one is entered dismissing
the said civil aspect on the ground of failure to fulfill, a
condition precedent of exhausting all means to collect
from the principal debtor.
SO ORDERED.7
Santia’s motion for reconsideration was denied in the
RTC’s Order dated June 12, 2007.8 On petition for review to
the CA docketed as CA-G.R. SP No. 100021, Santia
interposed the following assignment of errors, to wit:
"In brushing aside the law and jurisprudence on the
matter, the Regional Trial Court seriously erred:
1. In reversing the joint decision of the trial court by
dismissing the civil aspect of these cases;
2. In concluding that it is the Pacific Lending and Capital
Corporation and not the private respondent which is
principally responsible for the amount of the checks being
claimed by the petitioner;
3. In finding that the petitioner failed to exhaust all
available legal remedies against the principal debtor Pacific
Lending and Capital Corporation;
4. In finding that the private respondent is a mere
guarantor and not an accommodation party, and thus,
cannot be compelled to pay the petitioner unless all legal
remedies against the Pacific Lending and Capital
Corporation have been exhausted by the petitioner;
5. In denying the motion for reconsideration filed by the
petitioner."9
In its now assailed decision, the appellate court rejected
the RTC’s dismissal of the civil aspect of the aforesaid B.P.
22 cases based on the ground it cited, which is that the
"failure to fulfill a condition precedent of exhausting all
means to collect from the principal debtor." The appellate
court held that since Aglibot’s acquittal by the MTCC in
Criminal Case Nos. 47664 to 47674 was upon a reasonable
doubt10 on whether the prosecution was able to
satisfactorily establish that she did receive a notice of
dishonor, a requisite to hold her criminally liable under B.P.
22, her acquittal did not operate to bar Santia’s recovery of
civil indemnity.
It is axiomatic that the "extinction of penal action does not
carry with it the eradication of civil liability, unless the
extinction proceeds from a declaration in the final
judgment that the fact from which the civil liability might
arise did not exist. Acquittal will not bar a civil action in the
following cases: (1) where the acquittal is based on
reasonable doubt as only preponderance of evidence is
required in civil cases; (2) where the court declared the
accused’s liability is not criminal but only civil in nature[;]
and (3) where the civil liability does not arise from or is not
based upon the criminal act of which the accused was
acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia
₱3,000,000.00 with interest at 12% per annum, from the
filing of the Informations until the finality of its decision.
Thereafter, the sum due, to be compounded with the
accrued interest, will in turn be subject to annual interest
of 12% from the finality of its judgment until full payment.
It thus modified the MTCC judgment, which simply
imposed a straight interest of 12% per annum from the
filing of the cases on November 2, 2004 until the
₱3,000,000.00 due is fully paid, plus attorney’s fees of
₱30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error
for the appellate court to adjudge her personally liable for
issuing her own eleven (11) post-dated checks to Santia,
since she did so in behalf of her employer, PLCC, the true
borrower and beneficiary of the loan. Still maintaining that
she was a mere guarantor of the said debt of PLCC when
she agreed to issue her own checks, Aglibot insists that
Santia failed to exhaust all means to collect the debt from
PLCC, the principal debtor, and therefore he cannot now
be permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the
face of the Promissory Note x x x that the accused-
appellant signed the same on behalf of PLCC as Manager
thereof and nowhere does it appear therein that she
signed as an accommodation party."12 The RTC further
ruled that what Aglibot agreed to do by issuing her
personal checks was merely to guarantee the indebtedness
of PLCC. So now petitioner Aglibot reasserts that as a
guarantor she must be accorded the benefit of excussion –
prior exhaustion of the property of the debtor – as
provided under Article 2058 of the Civil Code, to wit:
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.
It is settled that the liability of the guarantor is only
subsidiary, and all the properties of the principal debtor,
the PLCC in this case, must first be exhausted before the
guarantor may be held answerable for the debt.13 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."14 This rule is contained in Article
206215 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 mentioned in
Article 205916 when the action may be brought against
both the guarantor and the principal debtor.
The Court must, however, reject Aglibot’s claim as a mere
guarantor of the indebtedness of PLCC to Santia for want
of proof, in view of Article 1403(2) of the Civil Code,
embodying the Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
xxxx
(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, or 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 purchasers and person on whose account
the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one
year, or for the sale of real property or of an interest
therein;
f) A representation to the credit of a third person. (Italics
ours)
Under the above provision, concerning a guaranty
agreement, which is a promise to answer for the debt or
default of another,17 the law clearly requires that it, or
some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless
ratified,18 although under Article 135819 of the Civil Code, a
contract of guaranty does not have to appear in a public
document.20 Contracts are generally obligatory in
whatever form they may have been entered into, provided
all the essential requisites for their validity are present, and
the Statute of Frauds simply provides the method by which
the contracts enumerated in Article 1403(2) may be
proved, but it does not declare them invalid just because
they are not reduced to writing. Thus, the form required
under the Statute is for convenience or evidentiary
purposes only.21
On the other hand, Article 2055 of the Civil Code also
provides that a guaranty is not presumed, but must be
express, and cannot extend to more than what is stipulated
therein. This is the obvious rationale why a contract of
guarantee is unenforceable unless made in writing or
evidenced by some writing. For as pointed out by Santia,
Aglibot has not shown any proof, such as a contract, a
secretary’s certificate or a board resolution, nor even a
note or memorandum thereof, whereby it was agreed that
she would issue her personal checks in behalf of the
company to guarantee the payment of its debt to Santia.
Certainly, there is nothing shown in the Promissory Note
signed by Aglibot herself remotely containing an
agreement between her and PLCC resembling her
guaranteeing its debt to Santia. And neither is there a
showing that PLCC thereafter ratified her act of
"guaranteeing" its indebtedness by issuing her own checks
to Santia.
Thus did the CA reject the RTC’s ruling that Aglibot was a
mere guarantor of the indebtedness of PLCC, and as such
could not "be compelled to pay [Santia], unless the latter
has exhausted all the property of PLCC, and has resorted to
all the legal remedies against PLCC x x x."22
Aglibot is an accommodation party and therefore liable to
Santia
Section 185 of the Negotiable Instruments Law defines a
check as "a bill of exchange drawn on a bank payable on
demand," while Section 126 of the said law defines a bill of
exchange as "an unconditional order in writing addressed
by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum
certain in money to order or to bearer."
The appellate court ruled that by issuing her own post-
dated checks, Aglibot thereby bound herself personally
and solidarily to pay Santia, and dismissed her claim that
she issued her said checks in her official capacity as PLCC’s
manager merely to guarantee the investment of Santia. It
noted that she could have issued PLCC’s checks, but
instead she chose to issue her own checks, drawn against
her personal account with Metrobank. It concluded that
Aglibot intended to personally assume the repayment of
the loan, pointing out that in her Counter-Affidavit, she
even admitted that she was personally indebted to Santia,
and only raised payment as her defense, a clear admission
of her liability for the said loan.
The appellate court refused to give credence to Aglibot’s
claim that she had an understanding with Santia that the
checks would not be presented to the bank for payment,
but were to be returned to her once she had made cash
payments for their face values on maturity. It noted that
Aglibot failed to present any proof that she had indeed paid
cash on the above checks as she claimed. This is precisely
why Santia decided to deposit the checks in order to obtain
payment of his loan.
The facts below present a clear situation where Aglibot, as
the manager of PLCC, agreed to accommodate its loan to
Santia by issuing her own post-dated checks in payment
thereof. She is what the Negotiable Instruments Law calls
an accommodation party.23 Concerning the liability of an
accommodation party, Section 29 of the said law provides:
Sec. 29. Liability of an 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.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the
instrument as maker, drawer, indorser, without receiving
value therefor and for the purpose of lending his name to
some other person. Such person is liable on the instrument
to a holder for value, notwithstanding such holder, at the
time of the taking of the instrument knew him to be only
an accommodation party. In lending his name to the
accommodated party, the accommodation party is in
effect a surety for the latter. He lends his name to enable
the accommodated party to obtain credit or to raise
money. He receives no part of the consideration for the
instrument but assumes liability to the other parties
thereto because he wants to accommodate another. x x
x.25 (Citation omitted)
The relation between an accommodation party and the
party accommodated is, in effect, one of principal and
surety — the accommodation party being the surety. It is a
settled rule that a surety is bound equally and absolutely
with the principal and is deemed an original promisor and
debtor from the beginning. The liability is immediate and
direct.26 It is not a valid defense that the accommodation
party did not receive any valuable consideration when he
executed the instrument; nor is it correct to say that the
holder for value is not a holder in due course merely
because at the time he acquired the instrument, he knew
that the indorser was only an accommodation
party.27 1âwphi1
Moreover, it was held in Aruego that 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.
The mere fact, then, that Aglibot issued her own checks to
Santia made her personally liable to the latter on her
checks without the need for Santia to first go after PLCC for
the payment of its loan.28 It would have been otherwise
had it been shown that Aglibot was a mere guarantor,
except that since checks were issued ostensibly in payment
for the loan, the provisions of the Negotiable Instruments
Law must take primacy in application.
WHEREFORE, premises considered, the Petition for Review
on Certiorari is DENIED and the Decision dated March 18,
2008 of the Court of Appeals in CA-G.R. SP No. I 00021 is
hereby AFFIRMED.
SO ORDERED.
G.R. No. L-47495 August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,
vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso
were sued by the Texas Company (P.I.), Inc. in the Court of
First Instance of Cebu for the recovery of the sum of P629,
unpaid balance of the account of Leonora S. Bantug in
connection with the agency contract with the Texas
Company for the faithful performance of which Tomas
Alonso signed the following:
For value received, we jointly and severally do hereby bind
ourselves and each of us, in solidum, with Leonor S. Bantug
the agent named in the within and foregoing agreement,
for full and complete performance of same hereby waiving
notice of non-performance by or demand upon said agent,
and the consent to any and all extensions of time for
performance. Liability under this undertaking, however,
shall not exceed the sum of P2,000, Philippine currency.
Witness the hand and seal of the undersigned affixed in the
presence of two witness, this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her
failure to appear or answer, but Tomas Alonso filed an
answer setting up a general denial and the special defenses
that Leonor S. Bantug made him believe that he was merely
a co-security of one Vicente Palanca and he was never
notified of the acceptance of his bond by the Texas
Company. After trial, the Court of First Instance of Cebu
rendered judgment on July 10, 1973, which was amended
on February 1, 1938, sentencing Leonor S. Bantug and
Tomas Alonso to pay jointly and severally to the Texas
Company the sum of P629, with interest at the rate of six
per cent (6%) from the date of filing of the complaint, and
with proportional costs. Upon appeal by Tomas Alonso, the
Court of Appeals modified the judgment of the Court of
First Instance of Cebu in the sense that Leonor S. Bantug
was held solely liable for the payment of the aforesaid sum
of P629 to the Texas Company, with the consequent
absolution of Tomas Alonso. This case is now before us on
petition for review by certiorari of the decision of the Court
of Appeals. It is contended by the petitioner that the Court
of Appeals erred in holding that there was merely an offer
of guaranty on the part of the respondent, Tomas Alonso,
and that the latter cannot be held liable thereunder
because he was never notified by the Texas Company of its
acceptance.
The Court of Appeals has placed reliance upon our decision
in National Bank vs. Garcia (47 Phil., 662), while the
petitioner invokes the case of National Bank vs. Escueta,
(50 Phil., 991). In the first case, it was held that there was
merely an offer to give bond and, as there was no
acceptance of the offer, this court refused to give effect to
the bond. In the second case, the sureties were held liable
under their surety agreement which was found to have
been accepted by the creditor, and it was therein ruled that
an acceptance need not always be express or in writing. For
the purpose of this decision, it is not indispensable for us
to invoke one or the other case above cited. The Court of
Appeals found as a fact, and this is conclusive in this
instance, that the bond in question was executed at the
request of the petitioner by virtue of the following clause
of the agency contract:
Additional Security. — The Agent shall whenever
requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of this
contract, in such individuals of firms as joint and several
sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law
between the parties, it is obvious that, before a bond is
accepted by the petitioner, it has to be in such form and
amount and with such sureties as shall be satisfactory
hereto; in other words, the bond is subject to petitioner's
approval. The logical implication arising from this
requirement is that, if the petitioner is satisfied with any
such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest,
namely, the surety or guarantor. In this connection, we are
likewise bound by the finding of the Court of Appeals that
there is no evidence in this case tending to show that the
respondent, Tomas Alonso, ever had knowledge of any act
on the part of petitioner amounting to an implied
acceptance, so as to justify the application of our decision
in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few
words explanatory of the rule regarding the necessity of
acceptance in case of bonds. Where there is merely an
offer of, or proposition for, a guaranty, or merely a
conditional guaranty in the sense that it requires action by
the creditor before the obligation becomes fixed, it does
not become a binding obligation until it is accepted and,
unless there is a waiver of notice of such acceptance is
given to, or acquired by, the guarantor, or until he has
notice or knowledge that the creditor has performed the
conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am.
Jur., sec. 37, p. 899.) The acceptance need not necessarily
be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50
Phil., 991.) Where, upon the other hand, the transaction is
not merely an offer of guaranty but amounts to direct or
unconditional promise of guaranty, unless notice of
acceptance is made a condition of the guaranty, all that is
necessary to make the promise binding is that the promise
should act upon it, and notice of acceptance is not
necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p.
899), the reason being that the contract of guaranty is
unilateral (Visayan Surety and Insurance Corporation vs.
Laperal, G.R. No. 46515, promulgated June 14, 1940).
The decision appealed from will be, as the same is hereby,
affirmed, with costs of this instance against the petitioner.
So ordered.
[G. R. No. 127261. September 7, 2001]
VISAYAN SURETY & INSURANCE
CORPORATION, petitioner,
vs. THE HONORABLE COURT OF APPEALS, SPOUSES JUN
BARTOLOME+ and SUSAN BARTOLOME and DOMINADO
R V. IBAJAN,+ respondents.
DECISION
PARDO, J.:
The Case
The case is a petition to review and set aside a
decision[1] of the Court of Appeals affirming that of the
Regional Trial Court, Bian, Laguna, Branch 24, holding the
surety liable to the intervenor in lieu of the principal on a
replevin bond.
The Facts
The facts, as found by the Court of Appeals,[2] are as
follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila
Ambe Ibajan filed with the Regional Trial Court, Laguna,
Bian a complaint against spouses Jun and Susan Bartolome,
for replevin to recover from them the possession of an
Isuzu jeepney, with damages. Plaintiffs Ibajan alleged that
they were the owners of an Isuzu jeepney which was
forcibly and unlawfully taken by defendants Jun and Susan
Bartolome on December 8, 1992, while parked at their
residence.
On February 8, 1993, plaintiffs filed a replevin bond
through petitioner Visayan Surety & Insurance
Corporation. The contract of surety provided thus:
WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and
the VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu,
with branch office at Manila, jointly and severally bind
ourselves in the sum of Three Hundred Thousand Pesos
(P300,000.00) for the return of the property to the
defendant, if the return thereof be adjudged, and for the
payment to the defendant of such sum as he/she may
recover from the plaintiff in the action.[3]
On February 8, 1993, the trial court granted issuance of a
writ of replevin directing the sheriff to take the Isuzu
jeepney into his custody. Consequently, on February 22,
1993, Sheriff Arnel Magat seized the subject vehicle and
turned over the same to plaintiff spouses Ibajan.[4]
On February 15, 1993, the spouses Bartolome filed with
the trial court a motion to quash the writ of replevin and to
order the return of the jeepney to them.
On May 3, 1993, Dominador V. Ibajan, father of plaintiff
Danilo Ibajan, filed with the trial court a motion for leave
of court to intervene, stating that he has a right superior to
the plaintiffs over the ownership and possession of the
subject vehicle.
On June 1, 1993, the trial court granted the motion to
intervene.
On August 8, 1993, the trial court issued an order granting
the motion to quash the writ of replevin and ordering
plaintiff Mila Ibajan to return the subject jeepney to the
intervenor Dominador Ibajan.[5]
On August 31, 1993, the trial court ordered the issuance of
a writ of replevin directing the sheriff to take into his
custody the subject motor vehicle and to deliver the same
to the intervenor who was the registered owner.[6]
On September 1, 1993, the trial court issued a writ of
replevin in favor of intervenor Dominador Ibajan but it was
returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with
the trial court a motion/application for judgment against
plaintiffs bond.
On June 6, 1994, the trial court rendered judgement the
dispositive portion of which reads:
WHEREFORE, in the light of the foregoing premises,
judgment is hereby rendered in favor of Dominador Ibajan
and against Mila Ibajan and the Visayan Surety and
Insurance Corporation ordering them to pay the former
jointly and severally the value of the subject jeepney in the
amount of P150,000.00 and such other damages as may be
proved by Dominador Ibajan plus costs.[7]
On June 28, 1994, Visayan Surety and Insurance
Corporation and Mila Ibajan filed with the trial court their
respective motions for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance
Corporation (hereafter Visayan Surety) appealed the
decision to the Court of Appeals.[8]
On August 30, 1996, the Court of Appeals promulgated its
decision affirming the judgment of the trial court.[9] On
September 19, 1996, petitioner filed a motion for
reconsideration.[10] On December 2, 1996, the Court of
Appeals denied the motion for reconsideration for lack of
merit.[11]
Hence, this petition.[12]
The Issue
The issue in this case is whether the surety is liable to an
intervenor on a replevin bond posted by petitioner in favor
of respondents.[13]
Respondent Dominador Ibajan asserts that as intervenor,
he assumed the personality of the original defendants in
relation to the plaintiffs bond for the issuance of a writ of
replevin.
Petitioner Visayan Surety contends that it is not liable to
the intervenor, Dominador Ibajan, because the
intervention of the intervenor makes him a party to the
suit, but not a beneficiary to the plaintiffs bond. The
intervenor was not a party to the contract of surety, hence,
he was not bound by the contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in
litigation, or in the success of either of the parties, or an
interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property
in the custody of the court or of an officer thereof.[14]
May an intervenor be considered a party to a contract of
surety which he did not sign and which was executed by
plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the
parties who had entered into it; it cannot favor or prejudice
a third person.[15] Contracts take effect between the
parties, their assigns, and heirs, except in cases where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law.[16]
A contract of surety is an agreement where 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 person called the
obligee.[17] Specifically, suretyship is a contractual relation
resulting from an agreement whereby one person, the
surety, engages to be answerable for the debt, default or
miscarriage of another, known as the principal.[18]
The obligation of a surety cannot be extended by
implication beyond its specified limits.[19] When a surety
executes a bond, it does not guarantee that the plaintiffs
cause of action is meritorious, and that it will be
responsible for all the costs that may be adjudicated
against its principal in case the action fails. The extent of a
suretys liability is determined only by the clause of the
contract of suretyship.[20] A contract of surety is not
presumed; it cannot extend to more than what is
stipulated.[21]
Since the obligation of the surety cannot be extended by
implication, it follows that the surety cannot be held liable
to the intervenor when the relationship and obligation of
the surety is limited to the defendants specified in the
contract of surety.
WHEREFORE, the Court REVERSES and sets aside the
decision of the Court of Appeals in CA-G. R. CV No.
49094. The Court rules that petitioner Visayan Surety &
Insurance Corporation is not liable under the replevin bond
to the intervenor, respondent Dominador V. Ibajan.
No costs.
SO ORDERED.
EN BANC
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY
CO., INC., claimant-Appellant.
DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court
of First Instance of Rizal, presided by Judge Hermogenes
Caluag, dismissing its claim against the Estate of K. H.
Hemady (Special Proceeding No. Q-293) for failure to state
a cause of action.
The Luzon Surety Co. had filed a claim against the Estate
based on twenty different indemnity agreements, or
counter bonds, each subscribed by a distinct principal and
by the deceased K. H. Hemady, a surety solidary guarantor)
in all of them, in consideration of the Luzon Surety Co.’s of
having guaranteed, the various principals in favor of
different creditors. The twenty counterbonds, or
indemnity agreements, all contained the following
stipulations:chanroblesvirtuallawlibrary
“Premiums. — As consideration for this suretyship, the
undersigned jointly and severally, agree to pay the
COMPANY the sum of ________________ (P______)
pesos, Philippines Currency, in advance as premium there
of for every __________ months or fractions thereof, this
________ or any renewal or substitution thereof is in
effect.
Indemnity. — The undersigned, jointly and severally, agree
at all times to indemnify the COMPANY and keep it
indemnified and hold and save it harmless from and
against any and all damages, losses, costs, stamps, taxes,
penalties, charges, and expenses of whatsoever kind and
nature which the COMPANY shall or may, at any time
sustain or incur in consequence of having become surety
upon this bond or any extension, renewal, substitution or
alteration thereof made at the instance of the undersigned
or any of them or any order executed on behalf of the
undersigned or any of them; chan
roblesvirtualawlibraryand to pay, reimburse and make
good to the COMPANY, its successors and assigns, all sums
and amount of money which it or its representatives shall
pay or cause to be paid, or become liable to pay, on
account of the undersigned or any of them, of whatsoever
kind and nature, including 15% of the amount involved in
the litigation or other matters growing out of or connected
therewith for counsel or attorney’s fees, but in no case less
than P25. It is hereby further agreed that in case of
extension or renewal of this ________ we equally bind
ourselves for the payment thereof under the same terms
and conditions as above mentioned 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 this ________ which may be
granted under this indemnity agreement.
Interest on amount paid by the Company. — Any and all
sums of money so paid by the company shall bear interest
at the rate of 12% per annum which interest, if not paid,
will be accummulated and added to the capital quarterly
order to earn the same interests as the capital and the total
sum thereof, the capital and interest, shall be paid to the
COMPANY as soon as the COMPANY shall have become
liable therefore, whether it shall have paid out such sums
of money or any part thereof or not.
xxx xxx xxx
Waiver. — It is hereby agreed upon by and between the
undersigned that any question which may arise between
them by reason of this document and which has to be
submitted for decision to Courts of Justice shall be brought
before the Court of competent jurisdiction in the City of
Manila, waiving for this purpose any other venue. Our right
to be notified of the acceptance and approval of this
indemnity agreement is hereby likewise waived.
xxx xxx xxx
Our Liability Hereunder. — It shall not be necessary for the
COMPANY to bring suit against the principal upon his
default, or to exhaust the property of the principal, but the
liability hereunder of the undersigned indemnitor shall be
jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the
occurrence of such default.” (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in
consideration of the counterbonds, and further asked for
judgment for the unpaid premiums and documentary
stamps affixed to the bonds, with 12 per cent interest
thereon.
Before answer was filed, and upon motion of the
administratrix of Hemady’s estate, the lower court, by
order of September 23, 1953, dismissed the claims of
Luzon Surety Co., on two
grounds:chanroblesvirtuallawlibrary (1) that the premiums
due and cost of documentary stamps were not
contemplated under the indemnity agreements to be a
part of the undertaking of the guarantor (Hemady), since
they were not liabilities incurred after the execution of the
counterbonds; chan roblesvirtualawlibraryand (2) that
“whatever losses may occur after Hemady’s death, are not
chargeable to his estate, because upon his death he ceased
to be guarantor.”
Taking up the latter point first, since it is the one more far
reaching in effects, the reasoning of the court below ran as
follows:chanroblesvirtuallawlibrary
“The administratrix further contends that upon the death
of Hemady, his liability as a guarantor terminated, and
therefore, in the absence of a showing that a loss or
damage was suffered, the claim cannot be considered
contingent. This Court believes that there is merit in this
contention and finds support in Article 2046 of the new
Civil Code. It should be noted that a new requirement has
been added for a person to qualify as a guarantor, that
is:chanroblesvirtuallawlibrary integrity. As correctly
pointed out by the Administratrix, integrity is something
purely personal and is not transmissible. Upon the death of
Hemady, his integrity was not transmitted to his estate or
successors. Whatever loss therefore, may occur after
Hemady’s death, are not chargeable to his estate because
upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety
company has exclusively relied on the personality,
character, honesty and integrity of the now deceased K. H.
Hemady, was the fact that in the printed form of the
indemnity agreement there is a paragraph entitled
‘Security by way of first mortgage, which was expressly
waived and renounced by the security company. The
security company has not demanded from K. H. Hemady to
comply with this requirement of giving security by way of
first mortgage. In the supporting papers of the claim
presented by Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged which
appears at the back of the indemnity agreement.” (Rec.
App., pp. 407-408).
We find this reasoning untenable. Under the present Civil
Code (Article 1311), as well as under the Civil Code of 1889
(Article 1257), the rule is that —
“Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law.”
While in our successional system the responsibility of the
heirs for the debts of their decedent cannot exceed the
value of the inheritance they receive from him, the
principle remains intact that these heirs succeed not only
to the rights of the deceased but also to his obligations.
Articles 774 and 776 of the New Civil Code (and Articles 659
and 661 of the preceding one) expressly so provide,
thereby confirming Article 1311 already quoted.
“ART. 774. — Succession is a mode of acquisition by virtue
of which the property, rights and obligations to the extent
of the value of the inheritance, of a person are transmitted
through his death to another or others either by his will or
by operation of law.”
“ART. 776. — The inheritance includes all the property,
rights and obligations of a person which are not
extinguished by his death.”
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:chanroblesvirtuallawlibrary
“Under the Civil Code the heirs, by virtue of the rights of
succession are subrogated to all the rights and obligations
of the deceased (Article 661) and cannot be regarded as
third parties with respect to a contract to which the
deceased was a party, touching the estate of the deceased
(Barrios vs. Dolor, 2 Phil. 44).
xxx xxx xxx
“The principle on which these decisions rest is not affected
by the provisions of the new Code of Civil Procedure, and,
in accordance with that principle, the heirs of a deceased
person cannot be held to be “third persons” in relation to
any contracts touching the real estate of their decedent
which comes in to their hands by right of inheritance; chan
roblesvirtualawlibrarythey take such property subject to all
the obligations resting thereon in the hands of him from
whom they derive their rights.”
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874
and de Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the
deceased party is not altered by the provision in our Rules
of Court that money debts of a deceased must be
liquidated and paid from his estate before the residue is
distributed among said heirs (Rule 89). The reason is that
whatever payment is thus made from the estate is
ultimately a payment by the heirs and distributees, since
the amount of the paid claim in fact diminishes or reduces
the shares that the heirs would have been entitled to
receive.
Under our law, therefore, the general rule is that a party’s
contractual rights and obligations are transmissible to the
successors. The rule is a consequence of the progressive
“depersonalization” of patrimonial rights and duties that,
as observed by Victorio Polacco, has characterized the
history of these institutions. From the Roman concept of a
relation from person to person, the obligation has evolved
into a relation from patrimony to patrimony, with the
persons occupying only a representative position, barring
those rare cases where the obligation is strictly personal,
i.e., is contracted intuitu personae, in consideration of its
performance by a specific person and by no other. The
transition is marked by the disappearance of the
imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of
the obligation of the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract.
What did the creditor Luzon Surety Co. expect of K. H.
Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse
on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give; chan roblesvirtualawlibraryand
to the Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or by
some one else in his behalf, so long as the money was paid
to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of
the agreements sued upon nowhere indicate that they are
non-transferable.
“(b) Intransmisibilidad por pacto. — Lo general es la
transmisibilidad de darechos y obligaciones; chan
roblesvirtualawlibraryle excepcion, la intransmisibilidad.
Mientras nada se diga en contrario impera el principio de
la transmision, como elemento natural a toda relacion
juridica, salvo las personalisimas. Asi, para la no
transmision, es menester el pacto expreso, porque si no, lo
convenido entre partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del
causante, sobre ellos recaen los efectos de los vinculos
juridicos creados por sus antecesores, y para evitarlo, si asi
se quiere, es indespensable convension terminante en tal
sentido.
Por su esencia, el derecho y la obligacion tienden a ir más
allá de las personas que les dieron vida, y a ejercer presion
sobre los sucesores de esa persona; chan
roblesvirtualawlibrarycuando no se quiera esto, se impone
una estipulacion limitativa expresamente de la
transmisibilidad o de cuyos tirminos claramente se
deduzca la concresion del concreto a las mismas personas
que lo otorgon.” (Scaevola, Codigo Civil, Tomo XX, p. 541-
542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters
into a contract is deemed to have contracted for himself
and his heirs and assigns, it is unnecessary for him to
expressly stipulate to that effect; chan
roblesvirtualawlibraryhence, his failure to do so is no sign
that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require
bondsman Hemady to execute a mortgage indicates
nothing more than the company’s faith and confidence in
the financial stability of the surety, but not that his
obligation was strictly personal.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are “not transmissible
by operation of law”. The provision makes reference to
those cases where the law expresses that the rights or
obligations are extinguished by death, as is the case in legal
support (Article 300), parental authority (Article 327),
usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919).
By contract, the articles of the Civil Code that regulate
guaranty or suretyship (Articles 2047 to 2084) contain no
provision that the guaranty is extinguished upon the death
of the guarantor or the surety.
The lower court sought to infer such a limitation from Art.
2056, to the effect that “one who is obliged to furnish a
guarantor must present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer
for the obligation which he guarantees”. It will be noted,
however, that the law requires these qualities to be
present only at the time of the perfection of the contract
of guaranty. It is self-evident that once the contract has
become perfected and binding, the supervening incapacity
of the guarantor would not operate to exonerate him of
the eventual liability he has contracted; chan
roblesvirtualawlibraryand if that be true of his capacity to
bind himself, it should also be true of his integrity, which is
a quality mentioned in the article alongside the capacity.
The foregoing concept is confirmed by the next Article
2057, that runs as follows:chanroblesvirtuallawlibrary
“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 guarantor.”
From this article it should be immediately apparent that
the supervening dishonesty of the guarantor (that is to say,
the disappearance of his integrity after he has become
bound) does not terminate the contract but merely entitles
the creditor to demand a replacement of the guarantor.
But the step remains optional in the
creditor:chanroblesvirtuallawlibrary it is his right, not his
duty; chan roblesvirtualawlibraryhe may waive it if he
chooses, and hold the guarantor to his bargain. Hence
Article 2057 of the present Civil Code is incompatible with
the trial court’s stand that the requirement of integrity in
the guarantor or surety makes the latter’s undertaking
strictly personal, so linked to his individuality that the
guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady
in favor of Luzon Surety Co. not being rendered
intransmissible due to the nature of the undertaking, nor
by the stipulations of the contracts themselves, nor by
provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The
contracts, therefore, give rise to contingent claims
provable against his estate under section 5, Rule 87 (2
Moran, 1952 ed., p. 437; chan
roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810,
814).
debtors under Articles 2071 and 2067 of the New Civil
Code.
Our conclusion is that the solidary guarantor’s liability is
not extinguished by his death, and that in such event, the
Luzon Surety Co., had the right to file against the estate a
contingent claim for reimbursement. It becomes
unnecessary now to discuss the estate’s liability for
premiums and stamp taxes, because irrespective of the
solution to this question, the Luzon Surety’s claim did state
a cause of action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the
records are ordered remanded to the court of origin, with
instructions to proceed in accordance with law. Costs
against the Administratrix- Appellee. SO ORDERED.

“The most common example of the contigent claim is that

which arises when a person is bound as surety or guarantor
for a principal who is insolvent or dead. Under the ordinary
contract of suretyship the surety has no claim whatever
against his principal until he himself pays something by way
of satisfaction upon the obligation which is secured. When
he does this, there instantly arises in favor of the surety the
right to compel the principal to exonerate the surety. But
until the surety has contributed something to the payment
of the debt, or has performed the secured obligation in
whole or in part, he has no right of action against anybody
— no claim that could be reduced to judgment. (May vs.
Vann, 15 Pla., 553; chan roblesvirtualawlibraryGibson vs.
Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs.
Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt.
[Tenn.], 119; chan roblesvirtualawlibraryErnst vs. Nou, 63
Wis., 134.)”
For Defendant administratrix it is averred that the above
doctrine refers to a case where the surety files claims
against the estate of the principal debtor; chan
roblesvirtualawlibraryand it is urged that the rule does not
apply to the case before us, where the late Hemady was a
surety, not a principal debtor. The argument evinces a
superficial view of the relations between parties. If under
the Gaskell ruling, the Luzon Surety Co., as guarantor, could
file a contingent claim against the estate of the principal
debtors if the latter should die, there is absolutely no
reason why it could not file such a claim against the estate
of Hemady, since Hemady is a solidary co-debtor of his
principals. What the Luzon Surety Co. may claim from the
estate of a principal debtor it may equally claim from the
estate of Hemady, since, in view of the existing solidarity,
the latter does not even enjoy the benefit of exhaustion of
the assets of the principal debtor.
The foregoing ruling is of course without prejudice to the
remedies of the administratrix against the principal