CREDIT TRANSACTIONS
Second Exam TSN
SY 2016-2017
December 13, 2016
PART VII: GUARANTY & SURETYSHIP
(Article 2047-2084)
I. NATURE AND EXTENT
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. (1822a)
Classifications of a Guaranty
A) In a Broad Sense (Article 2047, par. 1)
1. Personal Guaranty or Security
- There is no object involved. You just have this
person who acts a guaranty or surety and the
creditor takes into consideration the reputation,
credit and standing of the guarantor without
preference to any other object.
- Essentially unsecured because you only rely on
the promise to pay or the personal commitment
of the guarantor or the surety.
2. Real Securities
- Contracts of pledge, mortgage and antichresis
- There is a real contract of security because you
have a property which acts a security or a
collateral, not just a mere promise for the
obligation.
B) As to its origin (Art. 2051, par. 1.)
1. Conventional. — One constituted by agreement of the
parties
2. Legal. — One imposed by virtue of a provision of law;
or
3. Judicial. — One required by a court to guarantee the
eventual right of one of the parties in a case.
C) As to consideration (Art.2048.)
1. Gratuitous. — One where the guarantor does not
receive any price or remuneration for acting as such or
2. Onerous. — One where the guarantor receives
valuable consideration for his guaranty.
D) As to the person guaranteed (Art. 2051, par. 2.)
1. Single. — One constituted solely to guarantee or
secure performance by the debtor of the principal
obligation; or
2. Double or sub-guaranty. — One constituted to secure
the fulfillment by the guarantor of a prior guaranty.
E) As to its scope and extent (Art. 2055, par. 2.)
1. Definite. — One where the guaranty is limited to the
principal obligation only, or to a specific portion
thereof; or
2. Indefinite or simple. — One where the guaranty
includes not only the principal obligation but also all its
accessories (e.g., interests) including judicial costs.
Note: Guaranty may also be continuing or not. (see Art. 2053.)
Contract of Guaranty and Suretyship
 In both of these contracts, you have two (2) parties –
the principal debtor or principal creditor and the
guarantor or surety.
Characteristics of a Guaranty
1. Consensual – perfected by mere consent.
2. Nominate – because the law provide as a name for it.
3. Accessory – cannot stand on its own; there must be a
principal obligation
4. Subsidiary – takes effect only when the principal
cannot pay his obligation
5. Not a primary obligation – the obligation is subject to a
condition; when the principal debtor fails to pay or
fulfill his condition; only when his condition is fulfilled
that the obligation of the guarantor arises;
6. Unilateral – because the obligation is only upon the
guarantor; no obligation is imposed upon the creditor
as he only has to wait if the principal debtor cannot
pay; thereafter, you can now proceed to the guarantor.
7. Guarantor must be distinct from the personal debtor –
a person cannot be a personal guarantor of himself
Suretyship (Article 2047, par. 2)
Suretyship may be defined as a relation which exists where
one person (principal or obligor) has undertaken an obligation
and another person (surety) is also under a direct and primary
obligation or other duty to a third person (obligee), who is entitled
to but one performance, and as between the two who are bound,
the one rather than the other should perform.
The surety, engages to be answerable to a third person for
the debt, default, or miscarriage of another known as the
principal.
If a person binds himself solidarily with the principal debtor,
the contract is called suretyship and the guarantor is called a
surety.
Surety vs. Solidary Co-debtor (Escano vs. Ortigas)
Surety (Fiador in solidum) Solidary Co-debtor
Outside of the liability he Has no other rights than those
assumes to pay the debt bestowed upon him in Section 4,
before the property of the Chapter 3, Title I, Book IV of the
principal debtor has been Civil Code.
exhausted, retains all the
other rights, actions and
benefits which pertain to
him by reason of the fiansa.
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.
What happened in the case of Escano vs. Ortigas?
ESCAÑO vs. ORTIGAS
(June 29, 2007)
FACTS:
In 1980, PDCP entered into a loan agreement with Falcon
whereby the Ortigas group executed an Assumption of Solidary
Liability binding their selves solidary liable with Falcon for the
due and punctual payment of the said loan.
In the meantime, two separate guaranties were executed to
guarantee the payment of the same loan one of which was
executed by petitioners Escaño, Silos et al (Escaño group).
Two years later (1982), the Ortigas group assigned their
shares to the Escano group in consideration that the Escaño
group will assume all liabilities of the Ortigas group arising from
their previous joint and several undertakings with Falcon,
including those related to the loan with PDCP. Thus, a 1982
Undertaking was executed between the Escano group as
"SURETIES," on one hand, and Ortigas group as "OBLIGORS,"
on the other.
Nevertheless, Falcon defaulted in its payment causing
PDCP to file a complaint for sum of money against Ortigas and
the Escaño group. In his answer, Ortigas filed a cross-claim
against his co-defendants Falcon and the Escaño group on the
basis of the 1982 Undertaking.
Later on, Ortigas entered into a compromise agreement with
PDCP whereby he agreed to pay PDCP P1.3M as full
satisfaction of the PDCP’s claim against him, in exchange that
PDCP will release him from any liability or claim arising from the
Falcon loan agreement. Nevertheless, he maintained his cross-
claim against the Escaño group.
Petitioners dispute that they are liable to Ortigas on the
basis of the 1982 Undertaking. However, assuming that they are
indeed liable, petitioners argue that they are only jointly liable
and not solidarily since the Undertaking did not provide for
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express solidarity pursuant to Article 1207 of the NCC.
Ortigas countered that petitioners are solidarily liable for the
Undertaking as the language used in the agreement clearly
shows that it is a surety agreement between the obligors
(Ortigas group) and the sureties (Escaño group). Ortigas points
out that the Undertaking uses the word "SURETIES", which was
repeated 13 times, 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 since the Undertaking expressly seeks to relieve
obligors of any and all liability arising from their said joint and
several undertaking with Falcon," and for the "sureties" to
"irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP."
ISSUES:
1. W/N a contract of suretyship exists between the
Escaño group and the Ortigas group. NO
2. W/N petitioners were solidarily liable on the basis of
the 1982 undertaking. NO but they are jointly liable
RULING:
First issue
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.
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. In the case at
bar, the mere utilization of the term "SURETIES" could not work
to effect the Undertaking as a contract of surety, especially as it
does not appear who exactly is the principal debtor whose
obligation is "assured" or "guaranteed" by the surety. The use of
the term "sureties" cannot be deemed as a conclusive indication
of the existence of a surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas. Otherwise, it would lay down
corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
Presumption of joint obligation
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 but he
failed to discharge such burden.
Distinction between surety and solidary co-debtor
Surety Solidary co-debtor
Outside of his liability, he The creditor can compel any
assumes to pay the debt one of the joint and several
before the property of the debtors or the surety alone
principal debtor has been to answer for the entirety of
exhausted, retains all the the principal debt
other rights, actions and
benefits which pertain to him
by reason of the fiansa
Even as the surety is The solidary debtor who
solidarily bound with the effected the payment to the
principal debtor to the creditor may claim from his
creditor, the surety who does co-debtors only the share
pay the creditor has the right which corresponds to each,
to recover the full amount with the interest for the
paid, and not just any payment already made.
proportional share, from the
principal debtor or debtors.
The guarantor who pays is
subrogated by virtue thereof
to all the rights which the
creditor had against the
debtor
Such right to full Such solidary debtor will not
reimbursement falls within be able to recover from the
the other rights, actions and co-debtors the full amount
benefits which pertain to the already paid to the creditor,
surety by reason of the because the right to
subsidiary obligation recovery extends only to the
assumed by the surety. proportional share of the
other co-debtors, and not as
to the particular proportional
share of the solidary debtor
who already paid
Second issue
It is not impossible that as between Escaño, 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.
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.
Q: Is Ortigas deemed as a surety?
A: No. No surety in this case.
Q: Can the Ortigas group and the Escano group be considered as
solidary co-debtors?
A: No. They are only jointly liable.
Discussion:
When you discussed in your Obligations and Contracts, joint
and solidary obligation, that is with regard to the creditor. When
you say solidary obligation, anyone can be demanded to fulfill the
performance or pay the full obligation in which thereafter the one
who paid the obligation can seek reimbursement form his co-
debtors.
In this instance, Ortigas stressed that he was the one who
paid the obligation. But again there is no contract of surety
Before alleging that suretyship exists, you to first identify what
is the principal obligation, who is the principal debtor, who is the
principal creditor. There is no allegation in this case as to what is
the principal obligation and who is the principal debtor thereto.
The action filed by Ortigas against the Escano group was
essentially to seek for reimbursement.
Reimbursement in what sense? Can we seek reimbursement
for the total amount that he has paid? No because they are
considered as joint. With regard to the Escano group, can they be
held solidarily liable? No because they are also considered as
joint debtors.
The Undertaking does not contain any express stipulation
that the petitioners agreed "to bind themselves jointly and
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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.
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.
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.
Solidary Co-Debtor vs. Surety
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.
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.
Nature of Surety’s Undertaking
1. Liability is contractual and accessory but direct.
2. Liability is limited by terms of contract.
3. Liability arises only if principal debtor is held liable.
4. Surety is not entitled to exhaustion.
5. Undertaking is to creditor, not to debtor.
6. Surety is not entitled to notice of principal’s default.
7. Prior demand by the creditor upon principal not
required.
8. Surety is not exonerated by neglect of creditor to sue
principal.
What happened in the case of Asset Builders vs. Stronghold?
ASSET BUILDERS vs. STRONGHOLD
(October 18, 2010)
FACTS:
Petitioner ABC entered into a construction agreement with
Lucky Star for the drilling of a production well. To guarantee
faithful compliance, Lucky Star engaged respondent Stronghold,
which issued two surety bonds in favor of petitioner.
However, Lucky Star failed to complete the drilling work with
the period agreed upon and despite demands for completion.
This caused petitioner to rescind the contract and to demand for
payment from Stronghold under the two bonds.
The RTC ordered Lucky Star to pay petitioner but absolved
respondent from liability. It ruled that the surety bond and
performance bond executed by are in the nature of accessory
contracts which depend for its existence upon another contract.
Thus, when the agreement between Lucky Star and petitioner
was rescinded, the surety and performance bond were
automatically cancelled.
ISSUE: W/N Stronghold can be held liable as surety on the
basis of the two bonds it executed in favor of petitioner.
RULING: YES
Respondent, along with its principal, Lucky Star, bound itself
to 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 NCC.
Pursuant thereto, the surety undertakes to be bound
solidarily with the principal obligor which 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. Notwithstanding the fact
that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the
undertaking.
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.
Suretyship, in essence, contains two types of relationship:
1. The principal relationship between the obligee
(petitioner) and the obligor (Lucky Star), and
2. The accessory surety relationship between the
principal (Lucky Star) and the surety (respondent).
In this arrangement, the obligee accepts the surety’s
solidary undertaking to pay if the obligor does not pay. Such
acceptance, however, does not change in any material way the
obligee’s 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 surety’s role
arises only upon the obligor’s default, at which time, it can be
directly held liable by the obligee for payment as a solidary
obligor.
In this case, when Lucky Star failed to finish the drilling work
within the agreed time frame despite petitioner’s demand for
completion, it was already in delay. Due to this default, Lucky
Star’s liability attached and, as a necessary consequence,
respondent’s liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking
with the petitioner and further failed to return the P575k
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 respondent’s
primary and direct responsibility to the petitioner.1avvphil
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 based on
Article 1216. Contrary to the trial court’s 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 obligor’s 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 Star’s
unsatisfactory progress in the drilling work and its failure to
complete it in due time amount to non-performance of its
obligation.
Q: What is the nature of his alleged liability?
A: As a surety.
Q: Who are the parties to the contract of suretyship?
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A: The principal debtor is Lucky Star. The principal creditor is
Asset Builders. The surety is Stronghold.
Q: Is Stronghold liable as a surety?
A: Yes.
Discussion:
Remember that a surety’s undertaking is contractual and
accessory but direct.
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. 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.
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.
The surety’s role arises only upon the obligor’s default, at
which time, it can be directly held liable by the obligee for
payment as a solidary obligor.
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 obligor’s
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 Star’s
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 Star’s non-performance of its obligation as
guaranteed by the performance bond.
Finally, Article 1217 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.
Now how do we distinguish a contract of guaranty from a
contract of suretyship?
CASTELLVI DE HIGGINS vs. SELLNER
FACTS:
Respondent Sellner wrote a letter to petitioner Mrs.
Higgins if the promissory note executed by Keystone is not
paid at maturity, then, within 15 days after notice of such
default and upon surrender to him of the 3k shares of
Keystone Mining Company stock, he will assume joint and
several liability with Keystone.
Petitioner Mrs. Higgins argues that Sellner is a surety while
Sellner argues that he is merely a guarantor.
ISSUE: W/N Sellner is a surety.
RULING: NO but he is a mere guarantor
Distinction between a surety and a guarantor
Surety Guarantor
Each promises to answer for the debt or default of another
Assumes liability as a The liability as a regular
regular party to the party to upon an
undertaking independent agreement to
pay the obligation if the
primary pay or fails to do so
Charged as an original Collateral undertaking
promissory
Obligation is primary Obligation is secondary
It is perfectly clear that the obligation assumed by
defendant was simply that of a guarantor. 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.
When the note became due, it is admitted that the shares
of stock used as collateral security were selling at par. Notice
that the note had not been paid was not given to and when the
Keystone 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.
Q: Who is the principal debtor?
A: Keystone Mining.
Q: Who is the principal creditor?
A: Macleod and Higgins.
Q: Who is the alleged surety?
A: Sellner.
Discussion:
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 as a regular
party to upon an independent agreement to pay the obligation if
the primary payor fails to do so. A surety is charged as an original
promissory; the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary; the obligation
of the guarantor is secondary.
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 of 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.
JANUARY 05, 2017
Under Article 2047, the first contract refers to a contract of
Guarantee and the second deals with a contract of suretyship
emphasizing that the surety find himself solidarily liable with the
principal debtor.
But do recall that in the case of Espana vs. Ortigas, it was
emphasized that the distinction of the liability of a solidary debtor
from that of a surety. While the contract of suretyship is an
accessory contract, the obligation of a solidary debtor generally
arises from a principal obligation. Moreover, in surety, if you pay
the obligation to the principal creditor can seek full reimbursement
from the principal debtor. But a solidary debtor, if he pays the full
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amount to the creditors, cannot pay the whole amount from the
solidary debtor as he has his own proportionate share on the
obligation. So a solidary debtor cannot be considered as a
guarantor of his co-debtors.
Nature sureties undertaking
In the case of Asset vs. Stronghold, recall that the liability of
the surety is contractual accessory but his liability to the creditor
is direct, immediate, primary, and absolute. Further, his liability is
limited by the terms of the contract and his liability will only arise if
the principal debtor is liable. Moreover, a surety is not entitled to
exhaustion which is granted to a guarantor.
Also do remember that the undertaking of the surety is to the
creditor and not the debtor. The surety is not even entitled to a
notice of the principal’s default and to which prior demand of
the creditor to the principal is not required. And lastly, the
surety is not exonerated by the neglect of creditor to sue
principal.
In the case of Castellvi vs. Sellner, we have some
distinctions between a contract of guarantee and suretyship.
What are these distinctions? This was also emphasized in the
case of Machetti vs. Hospicio de San Jose.
MACHETTI vs. HOSPICIO DE SAN JOSE
FACTS:
Machetti entered into a contract with respondent Hospicio de
San Jose for the construction of a building. As a condition of the
contract, Machetti obtained the guarantee of Fidelity. However,
Hospicio alleged that the work had not been carried out in
accordance with the terms of the contract and that the
workmanship was not of the standard required. Hence, Hospicio
filed for damages against Machetti. Pending the resolution of the
case, Machetti was declared insolvent thus suspending the
proceedings. Hospicio now filed instead a claim against Fidelity
alleging that he is a surety.
ISSUE: W/N Fidelity is a surety.
RULING: NO but a mere guarantor
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. However, 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 it 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.
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.
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.
Discussion:
Remember, what does insolvency mean? Insolvency means
that that the debtor does not have sufficient assets to pay off its
obligations as they become due. So what does it mean? It is still
possible that the principal debtor still has assets. So remember
that a guarantor can be held liable after the exhaustion of the
assets of the principal debtor.
What happens if the debtor is insolvent? Even if the court has
already declared that the debtor is insolvent, you cannot
immediately go after the guarantor.
Why? Kasi meron pa syang (the debtor) assets. And its
possible that the creditior is among those that may be preferred in
the liquidation of the assets of the debtor. Or kung hindi man sya
preferred, he is one who may share pro rata in the remaining
assets. Kung after iliquidate, wala talagang mapunta sa creditor,
that is the time that you can go after the guarantor to which the
benefit of expulsion has already been resorted to.
Now in this case of Machetti, Fidelity is deemed as a
guarantor. While is it true that the mere use of the word
guarantee does not necessarily make the contract a contract of
guarantee, circumstances maybe shown to consider such as a
suretyship even if the word used is guarantee. However, in this
contracts, there were no other circumstances which would
indicate maybe liable as a surety. It appears that the contract is
the guarantor’s separate undertaking in which the principal does
not join. It rests on a separate consideration from the principal.
And it is a collateral undertaking separate and distinct from the
latter. These are distinguishing features of a contract of
guarantee.
As mentioned earlier, while the surety undertakes to pay if the
principal does not pay, the guarantor only bind himself to pay if
the principal cannot pay. So ang surety is the insurer of the debt.
Guarantor is the insurer of the solvency of the debtor. Fidelity
bound itself only to pay in the event that Machete cannot pay. So
it cannot be compelled to pay unless it is shown that Machete is
not able to pay. It may be proven by the return of the writ of
execution. It is not sufficiently established by the mere fact that it
has been declared insolvent in which the extent of the inability to
pay is not determined until the final liquidation of the remaining
properties of the principal debtor.
GILAT SATELLITE vs. UCPB
FACTS:
One Virtual placed with GILAT a purchase order for various
telecommunications equipment. To ensure the prompt payment of
this amount, it obtained a surety bond from respondent UCPB.
However, One Virtual failed to pay GILAT prompting the
latter to write a demand letter for payment to UCPB. When UCPB
failed to pay, GILAT filed a complaint against it to recover the
amounts supposedly covered by the surety bond, plus interests
and expenses.
The CA ruled that the Purchase Agreement entered into
between petitioner and One Virtual as the principal contract
provides for an arbitration clause. Pursuant to the policy of the
courts to encourage alternative dispute resolution methods,
petitioner and One Virtual were ordered to proceed to arbitration.
When the case was appealed, respondent argued 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. UCPB
further argued that a surety contract is merely an accessory
contract, which cannot exist without a valid obligation. Thus, the
surety may avail itself of all the defenses available to the principal
debtor and inherent in the debt at is, the right to invoke the
arbitration clause in the Purchase Agreement.
ISSUE: W/N UCPB can invoke the arbitration clause as a surety.
RULING: NO
The acceptance of a surety agreement, 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. The respondent cannot invoke in its favor
the arbitration clause in the Purchase Agreement, because it is
not a party to that contract. An arbitration agreement being
contractual in nature, it is binding only on the parties thereto, as
well as their assigns and heirs. Arbitration laws mandate that no
court can compel arbitration, unless a party entitled to it applies
for this relief. Further, it can only be demanded by one who is a
party to the arbitration agreement. Considering that neither
petitioner nor One Virtual has asked for a referral, there is no
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basis for the CA’s order to arbitrate.

Furthermore, 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.
Lastly, sureties do not insure the solvency of the debtor, but
rather the debt itself. 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. 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. To
require the creditor to proceed to arbitration would render the very
essence of suretyship nugatory and diminish its value in
commerce.
Additional notes
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.
Respondent MB Lending extended a loan credit to spouses
Azarraga. The loan was secured by a promissory note where
petitioner Palmares bound herself solidarily liable. When the
balance of the loan remained unpaid, respondent filed a
complaint against petitioner to the exclusion of spouses Azarraga
by reason of their insolvency. Palmares alleged that she offered
to pay the balance of the loan, but it was respondent who refused
to receive the same.
The RTC ruled that the promissory note was a contract of
adhesion and petitioner is only secondarily liable thereto. The CA
reversed the decision and ruled that petitioner was a surety and
even assuming that the promissory note was a contraction of
adhesion, it is not void per se.
Palmares appealed the decision arguing that he is only a
guarantor for the following reasons:
1. The words "jointly and severally or solidarily liable" are
technical and legal terms which are not fully
appreciated by an ordinary layman like her;
2. The rule on reasonable construction applies to him;
3. The promissory note is a contract of adhesion since
respondent alone prepared it;
4. Upon the grant of an extension for her to pay, her
obligation was extinguished.
ISSUE: W/N Palmares is a surety.

Having held that a surety upon demand fails to pay, it can be held RULING: YES
liable for interest, even if in thus paying, its liability becomes more
than the principal obligation. The increased liability is not because Surety distinguished from guarantor
of the contract, but because of the default and the necessity of
judicial collection. In the absence of an agreement as to interests, Surety Guarantor
the Court ordered UCPB to pay legal interest at the rate of 6% A surety is an insurer of the A guarantor is an insurer of
per annum from 5 June 2000 until the satisfaction of its obligation debt the solvency of the debtor
under the Suretyship Contract. A suretyship is an A guaranty, an undertaking
undertaking that the debt that the debtor shall pay
Discussion: shall be paid
A surety promises to pay the A guarantor agrees that the
So here, we have UCPB acting as a surety of the obligation principal's debt if the principal creditor, after proceeding
of One Virtual in favour of Gilat Satelite. Now remember that will not pay against the principal, may
here, UCPB becomes liable upon mere failure of the principal proceed against the
debtor, One Virtual, to make prompt payment. And Gilat Satelite guarantor if the principal is
would not be ordered to a separate claim against One Virtual unable to pay
before proceeding against the surety, UCPB. Remember the A surety binds himself to A guarantor, on the other
obligation of the surety is joint an solidary with the principal perform if the principal does hand, does not contract that
debtor. Its liability to the creditor or promise of the principal is said not, without regard to his the principal will pay, but
to be direct, primary, and absolute. So a surety is directly and ability to do so simply that he is able to do so
equally bound with the principal. Therefore, a surety is NOT A surety undertakes directly A guarantor contracts to pay
entitled to a separate notice of default or to the benefit of for the payment and is so if, by the use of due
excussion. In fact, it can be sued separately or together with the responsible at once if the diligence, the debt cannot be
principal debtor. principal debtor makes made out of the principal
With regard to the Arbitration clause, UCPB remains a default debtor
stranger to the purchase agreement which involves the arbitration
clause. Therefore, UCPB cannot invoke the said provision in its She did understand "jointly and severally or solidarily liable"
favor. Why? Because UCPB is not a party to the said contract. If there is no doubt upon the intention of the contracting
Further, the Supreme Court emphasized that the sureties do not parties, the literal meaning of its stipulation shall control.
ensure the solvencies of the debtors but the debt itself. So, the Petitioner expressly bound herself to be jointly and severally or
creditor has the right to directly proceed against either the solidarily liable with the principal maker of the note. The terms of
principal debtor or the sureties. That’s why the benefit of the contract are clear, explicit and unequivocal that petitioner's
excussion cannot be invoked. In practice, what usually happens liability is that of a surety. Her contention is opposed to her
is that the creditors sue both the principal debtor and the surety manifestation in the contract that she "fully understood the
para isang kaso nalang. contents" of the promissory note and that she is "fully aware" of
What about the interest? Respondents alleged that its failure her solidary liability with the principal maker. Petitioner admits
to demand was due to the advise of One Virtual that petitioner that she voluntarily affixed her signature thereto; ergo, she cannot
allegedly breached its undertaking. However, record was bereft of now be heard to claim otherwise.
proof to show that UCPB’s delay was justified by these Having entered into the contract with full knowledge of its
circumstances. Having been held that the surety, upon demand, terms and conditions, petitioner is estopped to assert that she did
fails to pay, it can be held liable for interest even if the whole so under a misapprehension or in ignorance of their legal effect,
liability becomes more than the principal obligation because the or as to the legal effect of the undertaking. The rule that
increase in the liability is not because of the contract but rather ignorance of the contents of an instrument does not ordinarily
the default or failure of the surety to pay upon demand and the affect the liability of one who signs it also applies to contracts of
necessity of judicial collection. So here the interest accrued from suretyship. And the mistake of a surety as to the legal effect of
the time of extra-judicial demand. Notice that the interest rate her obligation is ordinarily no reason for relieving her of liability.
here is 6% because the obligation arose NOT from a loan or
forbearance of money. Reasonable construction
Petitioner erroneously invokes the rule on strictissimi juris,
PALMARES vs. CA which holds that when the meaning of a contract of indemnity or
FACTS: guaranty has once been judicially determined under the rule of
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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.
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.
To judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally
considered.
1. 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.
2. 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. 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.
3. 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.
Contract of adhesion
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 grant of extension
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.
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 herein 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, herein respondent
corporation, failing in which we cannot grant the relief prayed for.
Discussion:
So what do we have here. One of the defenses of Palmares
is that the contract here was a contract of adhesion. We all know
what is a contract of adehesion. It is a contract or a document
prepared by one party and the other party merely affixes his
signature signifying his adherence to the provisions therein. So
take it or leave it. But remember that in several rulings of the SC
the mere fact that the contaract is a contract of adhesion does not
make it invalid per se. In numerous occasions, such contracts
have binding effect and upheld. What is important is that the
parties signing the contract clearly understood the provisions
therein. In this instance, we have there that the co-maker is fully
aware. It is clear and unequivocal that Palmares’ liability is that of
a surety. This is also affirmed by the subsequent acts of
Palmares. She admitted that she voluntarily signed it.
The SC again emphasized that the surety is the insurer of the
debt. On the other hand, the guarantor is the insurer of the
solvency of the debtor. A suretyship is an undertaking that the
debt shall be paid while a guarantee is an undertaking that the
debtor shall pay. A surety binds himself to perform if the principal
debtor 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. A surety undertakes directly for
the payment and so response le at once if the principal debtor
defaults. A guarantor agrees to pay if by the use of due diligence,
the debt cannot be made out of the principal debtor.
Another defenses on the part of Palmares is that a contract if
suretyship must be strictly construed. However the SC
emphasized that such rule may only apply if it has been definitely
ascertained that the contract is that of a suretyship and not a
guarantee. Also, a surety is not entitled, as a matter of right, to be
given notice of the principal’s default.
Also take note, the fact that the creditor was lenient in
demanding for the payment or performance of the obligation does
not constitute an extension of time of payment to release a
surety. When you talk about extension of time, there must be an
agreement between the creditor and the principal debtor wherein
the debtor is given additional time to pay within a definite period
given. A mere delay on the part of the creditor is not the
extension of time contemplated under the law. The mere fact that
the corporation gave the principal debtors an extended period to
comply with their obligation did not effectively absolve the surety,
Palmares, from the consequences of her undertaking.
So again, in these cases we have discussed the distinction
between these two contracts.
In a contract of guarantee, is not solidary with that of the
principal debtor. Only if the principal debtor cannot pay and the
creditor has exhausted the properties of the principal debtor and
where there is no more property to answer the obligation, only
then can the creditor go after the guarantor. Sa suretyship
naman, the obligation of the surety is solidary to that of the
principal debtor. So the creditor can proceed against the surety
without the benefit of excussion. A surety is primarily liable. A
guarantor is secondarily liable.
Another distinction that you should take note of is in relation
to the Statutes of Fraud. The Statute of Fraud does not apply to
contracts of suretyship to which the surety is primarily liable. It is
not a collateral undertaking or promise to pay the obligation of
another person. It may be proven by mere oral evidence. While a
guarantee must be in writing in order to be enforceable.
Another distinction is with that of an endorser, contract of
guarantee is a contract of security but an endorsement is not for
security. It is a mode of transferring. In a contact of guarantee,
the liability is more extensive than that of an endorser. The
guarantor cannot be sued a promisor but an endorsement can be
sued as such.
Also distinguish warranty from guarantee. In warranty, there
is an undertaking that the title, quality, and quantity of the subject
matter is what has been represented in the deed. is what has
been represented Sa guarantee naman, you do not refer to the
quality or character of the subject matter. But rather we have a
person who is bound to another for the fulfilment or payment of
the obligation. What is only similar under these two is that both
contain undertakings by one party to another to indemnify against
some possible default or defence.
JANUARY 10, 2017
Recap: We started with 2047 already, and last meeting we have
emphasized the distinctions bet. A contract of guaranty and a
contract of suretyship again take note of this distinctions. We also
mentioned Alaxai(?) with regard to the Statute of Frauds, the
same is applicable to the contract of guaranty which means that
the contract of guaranty must be in writing in order for it to be
enforceable. That the promise of a surety or an original promisor
may be proved by parol evidence. We already discussed the
cases, Palmares and Gilat Satellite.
Now let’s proceed to the next article.
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
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The general rule obviously is that guaranty is gratuitous unless
stipulation by the parties that is considered onerous.
Now we have also emphasized before, a contract of guaranty is
an accessory contract. And being a contract, it must have all the
essential elements for its validity. So you must have consent,
object and consideration.
Q: What’s the consideration in a contract of guaranty? Is it
necessary for the guarantor to receive something in return for the
contract of guaranty?
WILLEX PLASTIC, INC. V. CA, INTERNATIONAL
CORPORATE
Facts: Inter Resin opened a letter of credit with Manila Banking.
To secure payment, Inter Resin and IUCP executed two
Continuing Surety Agreement in 1978 binding themselves
solidarily liable to pay Manila Bank.
Then in 1979, Inter Resin and Willex executed a Continuing
Guaranty in favor of IUCP binding themselves solidarily liable to
IUCP for the payment it made to Manila Bank. However, neither
of them paid causing IUCP to file a claim against them.
Willex argues that under the "Continuing Guaranty,"
1. Its liability is for sums obtained by Inter-Resin from
Interbank, not for sums paid by the latter to Manila
bank for the account of Inter-Resin.
2. Being an accessory contract, cannot legally exist
because of the absence of a valid principal obligation.
3. It cannot be retroactively applied so as to secure
payments made by Interbank under the two Continuing
Surety Agreements since it must be applied
prospectively.
4. It cannot it cannot be proceeded against without first
exhausting all property of Inter-Resin claiming the
benefit of excussion.
Issue: W/N Willex may be held solidarily liable with Inter Resin
for the amount paid by Interbank to Manila Bank.
Held: YES
As to the consideration
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.
As to the contention of prospective application
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. Furthermore, by no
means was it meant in the case of Diño vs. CA that in all
instances a contrast of guaranty or suretyship should be
prospective in application. Lastly, 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.
As to the right of excussion
There was an express renunciation of the right of excussion
when the Continuing Guaranty provides that if default be made in
the payment of the guaranteed, the principal may directly proceed
against Willex in the same manner as if all such liabilities
constituted are direct and primary. Not only this, Willex also
expressly bound itself solidarily liable with Inter-Resin under the
agreement as expressed in the following terms, “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.”
Q: So by saying that there is a continuing guaranty, are we saying
that Willex here now is a continuing guarantor?
A: No maam, the intention of the parties is that of the suretyship.
Q: What makes it a suretyship and not a contract of guaranty?
It is very clear on the agreement: “Willex together with the Inter
Resin agree jointly and severally guaranteed the prompt and
punctual payment to the notes issued by the debtors...”
Q: So here, when was the continuing guaranty is executed?
A: It was executed in 1979.
Q: When was the principal obligation demanded from Willex
perfected?
A: Perfected on the year 1981.
Q: Can we just say, that it can refuse to pay on the account that it
executed the continuing guaranty, it did not receive anything
arising from the principal obligation, the loan from inter-resin?
What’s the consideration of the accessory contract of guaranty or
suretyship?
A: The consideration of the principal contract ma’am is the same
as that of the guaranty or suretyship.
The consideration necessary to support a surety obligation need
not pass directly to the surety, so it cannot be a defense on the
part of the surety that it did not receive anything in exchange for
agreeing as a guarantor or 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."
So take note of that in relation to Article 2048. Parties may agree
to some consideration that the guarantor or surety may agree to
be such in exchange for a consideration but even if the parties did
not make such arrangement. Again, a contract of guaranty being
an accessory contact is existence dependent upon the principal
obligation.
In the absence of its specific consideration agreed upon by the
parties then the cause or consideration of the guaranty or
suretyship is the same cause of the principal obligation. But of
course if the principal contract has no cause or consideration
principal contract is void, accessory contract of guaranty or
suretyship is likewise void. Because again you already learn,
accessory follows the principal.
Article 2049. A married woman may guarantee an obligation
without the husband's consent, but shall not thereby bind
the conjugal partnership, except in cases provided by law.
Remember the Civil Code was enacted 1950s, it emphasized
that, patriarchal in nature, the right of the married woman to enter
into a contract of guaranty. Remember with regard to the
properties, the general rule applying the Family Code, to the
absence of any stipulation it will be the absolute community of
property. What would happen here? A married woman agree to
be a guarantor of an obligation. If the principal debtor fails to pay
then the married woman who acted as the guarantor and she has
separate property then the contract of guaranty may refer to her
separate and personal property of the married woman. But what if
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the married woman has no separate property of her own, can the
creditor go after the absolute community property of the spouses?
Take note, it has to be taken in consideration whether the act
being a guarantor of the married woman redounded to the benefit
of the family. Then the principal obligation, the right to demand
against the married woman is enforceable to the absolute
community property. So it’s the same thing with regard to the
husband. Husband also has a prohibition under the Civil Code to
act as a guarantor or surety.
Article 2050. If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of articles 1236 and 1237 shall apply.
Now do remember that in a contract of guaranty or suretyship,
you do not need the consent of the principal debtor for its validity.
Essentially, it is only between the guarantor and the principal
creditor. Consent of the principal debtor is not necessary to the
validity of the guaranty and suretyship but again we take in to
consideration what we have already learned in obligations and
contracts under Articles 1236 and 1237.
Article 1236. The creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to
the contrary. Whoever pays for another may demand from
the debtor what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to
the debtor. (1158a)
So let us say Ysmael borrowed money from Emilio, si Ronald
maraming pera “ako na magbayad sa utang ni Ysmael”.
Kelangan pa ba nya magpaalam kay Ysmael na siya mag bayad?
Hndi na. Pero ano ang effect nito? 1236 and 1237. First, Ronald
cannot force Emilio to accept the payment, because again the 1 st
paragraph is clear, not bound to accept payment by a third
person who has no interest in the fulfillment of the obligation. But
if Emilio accepts the payment, no problem, what are the rights
available on the part of this third person Ronald paying the
obligation of Ysmael? We take into consideration whether the
payment is made with the knowledge or consent of the principal
debtor. Here, you recall, beneficial reimbursement and
subrogation.
Article 1237. Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty. (1159a)
If Ronald pay against the will or without the knowledge of Ysmael,
Ronald can seek a reimbursement to the extent Ysmael has
benefited. Let us say 10,000 php pero naan a diay partial
payment na 2,000 php pero gibayaran lahat yun ni Ronald.
Siyempre si Emilio tinanggap nya ung whole 10,000 php. But can
Ronald demand the whole 10,000 for reimbursement from
Ysmael? On the part of Ysmael, he can raise a defense, na may
partial payment na 2,000 php. Kung meron man ako obligation
sayo only upto 8,000 php lang. To differentiate it, if Ronald paid
with the consent of Ysmael, Ronald will be entitled to the rights
available as the same as that of the creditor Emilio. For example,
Ysmael executed a mortgage, pwede din yun mahabol ni Ronald.
Or let us say, Carra who acted as surety or guarantor of Ysmael,
ano mangyari yan? C Ronald who paid with the consent of
Ysmael pede rin habulin ni Ronald si Carra as a guarantor or
surety of the principal debtor. Again that’s the effect of
subrogation to be distinguished from beneficial reimbursement if
the third person who paid the obligation did so without consent or
against the will of the principal debtor. So that is what is
emphasized it there in 2050.
Article 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title. It may also be
constituted, not only in favor of the principal debtor, but also
in favor of the other guarantor, with the latter's consent, or
without his knowledge, or even over his objection. (1823)
Okay, so the first paragraph mentions what we have discussed
before in relation to the classifications of a contract of guaranty.
Second paragraph refers to what we call “double guaranty or sub-
guaranty”. So you have a guarantor, who guarantees the
performance of the principal obligation and the obligation of the
guarantor is guaranteed by another person who is considered as
a sub-guarantor.
Article 2052. A guaranty cannot exist without a valid
obligation. Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation. (1824a)
This article, emphasized again that the contract of guaranty is an
accessory contract. It cannot exist without a valid obligation. So
valid contracts may include defective contracts which are
nevertheless valid. The voidable contracts valid it can be
annulled. Unenforceable contracts, valid but unenforceable. You
also have rescsissible contracts valid but can be rescinded.
These type of defective contracts can be the principal contracts
subject of contract of surety and guaranty. Of course, the time of
guaranty and suretyship was entered into, those defective
contracts were still considered as valid. For example, it’s a
voidable contract it has not yet annulled. Because otherwise, it
has been annulled at the the time they entered into a contract of
guaranty, wala ng valid contract to speak of. But of course if the
prinicipal obligation is a void contract then you could not have a
valid accessory contract of guaranty or suretyship. Now Article
2052, also tells us that the natural obligation maybe guaranteed.
As you have already learned in natural obligation is an obligation
not based on law but on equity and natural law. It does not grant
the right of action to enforce their performance but after a
voluntary fulfillment by the obligor, the authorized the retention of
what has been delivered or by reason thereof. It cannot be
enforce, but it may still be the object of a guaranty. Once there is
performance, the debtor cannot demand to take back what he
has given or paid.
Now another important provision here in guaranty and suretyship
is Article 2053:
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.
(1825a)
Article 2053 is in relation to contracts of continuing guaranty and
suretyship.
Q: What is contracts of continuing guaranty and suretyship?
A: The surety or guarantor guarantees the liabilities that are
already existing and all the future liabilities that are obtained.
DINO vs. CA
FACTS: In 1977 Uy Tiam Enterprises obtained a letter of credit
from Metrobank. To secure the payment thereof, Norberto Uy
and Jacinto Diño executed Continuing Suretyship in favor of
Metrobank. Under the agreement, Norberto Uy agreed to pay
Metrobank any indebtedness up to the aggregate sum of P300k
while Diño agreed to be bound up to the aggregate sum of
P800k. It was further stipulated that the Continuing Suretyship
shall remain in full force and effect until written notice have
been received by Metrobank that it has been revoked by the
sureties.
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In 1979, when the same was paid, Uy Tiam obtained
another letter of credit from Metrobank but without the
participation of Norberto Uy and Jacinto Diño as they did not
sign the document. Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did Metrobank or
Uy Tiam inform them that the 1979 Letter of Credit has been
opened and the Continuing Suretyships separately executed in
1977 shall guarantee its payment.
When Uy Tiam failed to pay, Metrobank demanded
payment from Norberto Uy and Diño. However, they denied any
liability alleging 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
cannot be held liable for the obligation contracted in 1979
because they are not privies thereto as it was contracted
without their participation. Even assuming that the agreements
were in full force and effect at the time the 1979 credit was
obtained, they cannot be held liable for an amount over and
above what they guaranteed upon since the obligations of a
surety cannot extend beyond what is stipulated in the
agreement.
Metrobank argued that Uy and Diño, as sureties, bound
themselves as solidary obligors of Uy Tiam of both existing
obligations and future ones. Furthermore, the agreement was in
full force and effect at the time the letter of credit was obtained
in 1979 since they, as sureties, did not exercise their right to
revoke it by giving notice to the bank.
ISSUE: W/N the Uy and Diño can be held liable as sureties for
the 1979 credit by virtue of the Continuing Suretyship
Agreement signed in 1977.
RULING: YES but only for the amount they agreed to
guarantee
Continuing guaranty
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.
Expression used
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.
Paragraph I of the Continuing Suretyship Agreement
executed by Diño contains identical provisions except with
respect to the guaranteed aggregate principal amount which is
P800k. Also, the requirement of written notice for the revocation
unequivocally reveal that the suretyship agreements 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. Undoubtedly, the purpose of the
execution of the Continuing Suretyships was to induce
Metrobank to grant any application for credit accommodation
Uy Tiam may desire to obtain. 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.
Non-existence of obligation at the time agreement was
executed
It is true that a guaranty cannot exist without a valid
obligation under Article 2052. However, the succeeding article
provides that a guaranty may also be given as security for
future debts, the amount of which is not yet known. Also, Article
2052 speaks about a valid obligation, as distinguished from a
void obligation, and not an existing or current obligation.
As to the amount of liability
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. The Continuing Suretyship Agreements
signed by Uy and Diño fix the aggregate amount of their
liability. 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.
Payment of interest
Nevertheless, they are liable for payment of interest and
judicial cost under Article 2055 of the CC. 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. The payment
thereof shall begin to run from the date when the complaint was
filed in court.
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.
Conclusion
Since the complaint was filed on 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 Diño
which stipulates an aggregate principal sum of not exceeding
P800k, and partly covered by that of Uy which pegs his
maximum liability at P300k.
Uy and Diño are liable only up to the maximum limit of their
respective Continuing Suretyship Agreement of the remaining
unpaid balance Uy Tiam under the 1979 letter of credit together
with the interest due thereon from the date of the filing of the
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complaint as well as the adjudged attorney's fees and costs.
Q: Here the principal obligation is perfected again on what date?
A: 1979 mam.
Q: When was the contract of continuing suretyship executed by
Uy and Dino?
A: 1977 ma’am.
Q: Can Uy and Dino still be held liable? Under the same
continuing suretyship agreement?
A: The SC held that YES, the Supreme Court define what is a
continuing guaranty, it 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. Hence, where the contract of guaranty states
that the same is to secure the advances made from time to time.
The Guaranty will be construed to be a continuing ma’am. So in
this case, it was not revoked, hence ma’am the continuing
guaranty exists ma’am.
Q: What provision or statement or terms in the continuing
suretyship agreement executed by Uy and Dino made them liable
to the 1979 obligation?
A: It was also held by the SC, 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.
Q: In this case, what where the specific terms used?
A: In this case ma’am, the terms used, I will read nlang ma’am.
“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”.
Q: Is there any limitation on the said continuing suretyship
agreement on the part of the liability of Uy and Dino? You have to
take it to consideration because of the amount demanded from
them?
A: 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.
So here the total is 815,000 so it is still within the limitation to the
amount that they agreed to be guaranteed.
Article 2053 emphasizes the validity of continuing suretyship or
continuing guaranty even if at the time of its execution there is as
yet, no principal obligation. In the case of Dino vs. CA, the SC
discuss that the guarantee maybe given to secure even future
debts, the amount of which may yet be known at the continuing
guaranty is executed. The continuing guaranty or suretyship is
one which is not limited to single transaction but 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.
The liability to be demanded from the guarantor or surety should
be within the description or contemplation of the contract, of
guaranty, until the expiration or termination thereof. 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. Other terms: "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.
So here: 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, any and all such instruments in full force and effect until
written notice shall have been received by the bank that it has
been revoked by the Surety.
So, while it is true that the guaranty cannot exist without a valid
obligation under 2052, again if what was entered into is a
continuing suretyship or guaranty that is expressly covered and
considered valid under Article 2053.
Q: What’s the purpose? Why do parties enter into these types of
contracts of continuing guaranty or suretyship? What happen in
the case of Atok?
ATOK vs. CA
FACTS:
In 1979, Sanyu Trading, spouses Halili and Bermudo
(sureties) executed a Continuing Suretyship which provides that:
They jointly and severally unconditionally guarantee to
Atok Finance (creditor) the full, faithful and prompt payment
and discharge of any and all indebtedness of Sanyu
Chemical (principal). The word "indebtedness" includes any
and all advances, debts, obligations and liabilities of
Principal now or hereafter made, incurred or created,
whether due or not due, absolute or contingent, liquidated
or unliquidated, or whether recovery upon such
indebtedness may be or hereafter become barred by any
statute of limitations, or whether such indebtedness may be
or otherwise become unenforceable.
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.
In 1981, Sanyu Chemical assigned its trade receivables to
Atok Finance thru a Deed of Assignment. However, on the same
year, Atok Finance filed an action against Sanyu Chemical and
the sureties alleging that Sanyu Chemical failed to collect and
remit the amount due under the trade receivables.
Sanyu Chemical and the sureties alleged 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 CA ruled that the Agreement cannot be enforced
because (1) the contract, just like guaranty, cannot exist without a
valid obligation; (2) although it may be given as security for future
debt the obligation contemplated cannot be considered "future
debt"; and (3) 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.
ISSUE: W/N the sureties can be held liable under the Continuing
Suretyship Agreement.
RULING: YES
It is true that a 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 the principal obligation. It
is also true that Article 2052 of CC states that "a guarantee
cannot exist without a valid obligation." However, a guaranty may
also be given as security for future debts the amount of which is
not yet known under Article 2053.
Of course, a surety is not bound under any particular principal
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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.
Comprehensive or Continuing Surety Agreement
Comprehensive or continuing surety agreements are in fact
quite common 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. This is
precisely what happened in the case at bar.
The obligations of the sureties 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.
Q: What is the ruling of the court with regard to the contention of
the private respondent that continuing suretyship agreement is
null and void because there was no existing obligation to Atok
Finance?
A: The SC held that still such is misguided because it is covered
under Article 2053. Here it is not necessary that a principal
obligation exists at the time of the execution of the continuing
suretyship agreement.
Q: Again, what is the purpose of the parties in executing such
kind of agreement?
A: To secure future debts without executing further contracts.
Unless revoked provided in their agreement.
Here, Comprehensive or continuing surety agreements are in fact
quite common place in present day financial and commercial
practice. 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 loan
or financing or credit accommodation extended to the principal
debtor. Less time, Less effort and much easier on both parties for
the release of the loan or for the execution of the subsequent
principal obligation.
In this case, we also have a continuing suretyship agreement,
considered valid. Even if at the time of its execution, no pre-
existing obligation was yet due. It is clear on the said agreement
that it relates 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. It’s very clear what we have here is a continuing
suretyship agreement which is valid under Article 2053.
We also have the case of RCBC vs. Judge Arro.
RCBC vs. JUDGE ARRO
FACTS: Chua and Enrique Go, Sr. executed Comprehensive
Surety Agreements to guaranty any existing indebtedness of
DAICOR 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
(DAICOR) upon which they held themselves liable provided that
the liability shall not exceed the aggregate principal sum of
P100k.
When the promissory note was not paid, petitioner RCBC
filed a complaint of sum of money against DAICOR, Enrique Go
Sr. and Chua. Chua alleged that he cannot 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.
On the other hand, RCBC argued that by virtue of the
execution of the comprehensive surety agreement, Chua 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. In other words petitioner argues that when
Go and Chua signed the Comprehensive Continuing Agreement,
they bound themselves as solidary debtors of DAICOR not only to
existing obligations but to future ones.
ISSUE: W/N Chua may be held liable to pay the promissory note,
which he did not sign, pursuant to the Comprehensive Continuing
Agreement.
RULING: YES
The comprehensive surety agreement was jointly executed
by Enrique Go and Chua 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 P100k.
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.
At the time the promissory note was executed, the
comprehensive surety agreement was admittedly in full force and
effect. The loan was, therefore, covered by the said agreement,
and Chua, 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.
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.
Q: What is the specific provision in the continuing suretyship
agreement in refer to future obligations?
A: “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”
Q: In this case, there was another condition, aside from the
limitation up to 100,000 php. When will the sureties, Go and Chua
be liable for the obligation of Daicor?
A: In this case, the condition that the borrower is liable as maker,
drawer, indorser, acceptor or otherwise. The SC, Daicor is liable
on the promissory note as maker of the promissory note.
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Here, the guaranty is a continuing one which shall remain in full
force and effect until the bank is notified of its termination. It’s
very clear again on the comprehensive surety agreement.
To guaranty among others, any existing indebtedness, which
already exists at the time of the constitution of the agreement,
and/or induce the bank at any time or from time to time
thereafter, so including future obligations, to make loans or
advances or to extend credit in other manner to, or at the request,
or for the account of the Borrower,
So, another thing that you would notice here in the cases, the
suretyship agreement can be limited by the parties. There is an
aggregate sum or principal to what extent they can act as a
surety. In this case, 100,000 php.
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. Issuing the promissory note as the maker.
Even if it is just an accessory obligation, again it is considered
valid as it covers future debts as contemplated under Article
2053.
Another case is Fortune Motors.
FORTUNE MOTORS vs. CA
In 1981, Chua and Rodrigueza each executed a Surety
Undertaking where they absolutely, unconditionally and solidarily
guaranteed to Filinvest the full, faithful and prompt performance,
payment and discharge of any and all obligations and
agreements of Fortune Motors under or with respect to any and
all such contracts and any and all other agreements (whether by
way of guaranty or otherwise) to Filinvest.
In 1982, Fortune Motors and CARCO entered unto a
Financing Agreement whereby CARCO delivered to Fortune
Motors motor vehicles for resale. In turn, Fortune Motors
executed 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 Filinvest,
which will pay the motor vehicles for Fortune. Under the same
agreement, Fortune Motors will report and remit the proceeds of
any sale for cash or on terms to Filinvest immediately without
necessity of demand.
However, Fortune Motors failed to remit the proceeds or to
return those unsold motor vehicles to Filinvest causing the latter
to demand payment from Chua and Rodrigueza.
Chua and Rodrigueza refused to pay alleging that the future
debts which can be guaranteed under Article 2053 of the CC 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. Hence, the Surety Undertakings were null and void
because, at the time they were executed, there was no principal
obligation existing.
ISSUE: W/N a suretyship agreement may secure future
obligations.
RULING: YES
Comprehensive or continuing surety agreements
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.
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.
The surety undertakings executed by Chua and Rodrigueza
were continuing guaranties or suretyships covering all future
obligations of Fortune Motors with Filinvest. This is evident from
the written contract itself.
Petitioners were aware of the purpose of the contract
Moreover, Rodrigueza and Chua knew exactly where they
stood at the time they executed their respective surety
undertakings in favor of Fortune. 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 preexisting 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 Fortune's 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.
Q: Chua and Rodriqueza are liable in what capacity surety or
guarantor?
A: as a surety ma’am.
Q: What makes them a surety? What provision in the agreement
makes them sureties?
A: In the surety agreement ma’am there was a part: executed an
undated Surety Undertaking whereunder they absolutely,
unconditionally and solidarily guarantee(d) to Respondent
Filinvest Credit Corporation (Respondent Filinvest)
Q: What about their defense?
A: They contended that the surety undertakings were null and
void because at the time they were executed, there was no
principal obligation yet existing. RTC denied the motion. CA
affirmed ruling.
Q: What was the ruling of the SC in relation to that defense?
A: SC ruled, a surety may secure future obligations. Since this
case is similar to Atok finance and National Rice and Corn
Corporation (NARIC) vs. Court of Appeals. What the petitioners
undertook ma’am was a continuing guaranty or suretyship
covering all future obligations of Fortune Motors with Filinvest
Credit Corp.
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So here, they are considered as suretyship, they entered into a
continuing suretyship agreement. The written contract stated: 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. 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.
So with Article 2053, the sureties and guaranties are not
(inaudible) because at the time they signed they already knew
they would answer for future debts as well. 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.
SOUTH CITY HOMES vs. BA FINANCE
In 1983, Fortune Motors, Palawan Lumber and South City
Homes, represented by Chua, Tan, Rodrigueza, Baltazar, and
Tablante (sureties) executed three Continuing Suretyship
Agreements whereby they jointly and severally unconditionally
guaranteed the full, faithful and prompt payment and discharge of
any and all indebtedness of Fortune Motors in favor of BA
Finance.
Six moths thereafter, CARCO drew 6 Drafts in its own favor,
payable 30 days after sight, charged to the account of Fortune
Motors. Thereafter, Fortune Motors executed trust receipts
covering the motor vehicles delivered to it by CARCO under
which it agreed to remit to CARCO the proceeds of any sale and
immediately surrender the remaining unsold vehicles. The drafts
and trust receipts were assigned to BA Finance under Deeds of
Assignment executed by CARCO.
When Fortune Motors failed to pay and remit the proceeds or
return the motor vehicles unsold, BA Finance demanded payment
from the sureties.
Petitioners contend 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. They stressed that their obligations to the
creditor (CARCO) was extinguished by the assignment of the
drafts and trust receipts to BA Finance without their knowledge
and consent, and pursuant to legal provision on conventional
subrogation a novation was effected, thereby extinguishing the
liability of the sureties.
ISSUES: W/N there was a novation of the obligation as to
extinguish the liabilities of the sureties.
RULING: NO
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. As a consequence, the third party steps into
the shoes of the original creditor as subrogee of the latter.
Petitioners' obligations were not extinguished.
In assignment, the debtor's consent is not essential for the
validity of the assignment, his knowledge thereof affecting only
the validity of the payment he might make.
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.
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 debtor's 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
debtor's consent. 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. Therefore, the
sureties are liable for the 6 drafts and the trust receipts.
Note: They are held liable under the Continuing Surety
Agreement. The ruling in Fortune Motors was reiterated. Please
check the case.
The SC emphasized Article 2053 of the Civil Code which allows
the suretyship agreement to secure future loan even if the
amount is not yet known. A surety is not bound under any
particular principal obligation until that principal obligation is born.
As mentioned, 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.
The SC also pointed out here the effect of an assignment of
credit. So what happens in an assignment of credit? There is an
agreement y 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 principal debtor. So,
the third party, the assignee, steps into the shoes of the original
creditor or the assignor. So with that, the obligations of the
sureties were not extinguished by any assignment of credit.
Consent is not necessary in order that assignment may fully
produce legal effects and does not depend on the consent of the
debtor.
What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. Notice here would
be relevant as to effect of payment. Because if the principal
debtor were not informed of the assignment of credit, and they
paid to the original creditor, would that extinguish the obligation?
YES, because they were not notified of the assignment. It would
have been different if the assignment of credit has already taken
place, the principal debtor were informed thereof but still they
paid to the original creditor. In that instance, the original creditor
is not entitled anymore to payment, and payment made to him
does not extinguish the obligation. Remember, under Obligations
and Contract, payment must be made to the creditor at the time
of payment and not at the time of the constitution of the
obligation. A creditor may, therefore, validly assign his credit and
its accessories without the debtors consent.
Again, take note of the nature of a continuing guarantee or
suretyship. It may be constituted upon a specific obligation but
also future obligation, even those obligations which are not
liquidated, not yet determined at the time of the execution of such
continuing suretyship or guarantee.
However, at the time that it is demanded, the principal debtor and
the sureties or guarantors, the amount is already fixed or
ascertained, or demandable.
What happens if the amount is not yet liquidated? You wait, noh?
The parties liable will wait until the amount is liquidated. After
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that, the creditor can now enforce against the guarantor the
payment of the amount that has been determined.
Also pointed out in Article 2053 last sentence, a conditional
obligation can also be a subject of a guarantee. So the contract
of guarantee could not be enforced unless the condition has
already happened. Once it has been fulfilled, the obligation of the
guarantor can now be enforced. If a condition is attached to the
principal obligation, (?) as to be observed to the accessory
contract of guarantee or suretyship.
Article 2054. A guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall
be reduced to the limits of that of the debtor.
So this a consequence of the suretyship or guarantee as to the
excess of the contract.
As such accessory contracts may constitute an amount that is
less than the principal obligation but not more than the principal
obligation. The principal obligation may be P1M, but in the
contract of continuing suretyship, it may indicated that it is only up
to the aggregate amount of P500,000. Pwede ‘yun.
If the debt of the principal is only P10,000, the guarantor can
guarantee up to P10,000 and even below. But you cannot
guarantee more than P10,000 because, again, that would be an
absurd situation wherein the accessory contract is more onerous
than the principal obligation.
But what happens if it is not a continuing guarantee and the
principal obligation is P10,000 and it is simply a contract of
suretyship or guarantee where you agree to be bound up to
P20,000. Of course, the guarantor or surety cannot be
demanded to pay the whole P20,000 kay P10,000 lang man
‘yung utang. But that does not make the guaranty or suretyship
void. The obligation that can be enforced against the guarantor
or surety will only be up to the principal obligation of P10,000.
What if the obligation, let us say, is P150,000? And then we have
a contract of guaranty or suretyship up to the amount of
P100,000. What if nagbayad na si principal debtor ng P100,000?
So out of the principal obligation, P50,000 nalang. Now, what if
the creditor will now demand from the guarantor or surety na “uy
di makabayad si principal debtor, magbayad ka na ng P50,000.”
Can the surety or guarantor say na “ay di na ako magbayad kasi
‘yung P100,000 na limitation ko kay ‘yun na ang gibayaran ni
principal debtor.” Is that an excuse available to the guarantor or
surety?
Of course not! Kasi mawala ‘yung essence sa accessory contract
of guaranty or suretyship. So that argument is not valid. In fact,
we can relate it to application of payment. In application of
payment, saan muna i-apply ‘yung obligation? Choice ni debtor.
Kung wala nag choose ang debtor, si creditor. Kung wala gi-
choose ang debtor and creditor, sa most onerous. So pwede mo
siya i-relate doon. In relation to that, the payment shall be
applied first to those which are more onerous. So in that
P150,000, P100,000 is guaranteed and the P50,000 is not
guaranteed. Then what will be the effect? So i-una mo siya
apply sa walang security. Para ang P50,000 pwede mo pa ma
collect sa guarantor or surety.
PACIFIC BANKING v. IAC
Robert Regala executed a Guarantor’s Undertaking in favor
of Pacific Bank whereby he bound himself jointly and severally
liable to pay any and all indebtedness, obligations, charges or
liabilities due and incurred by his wife Celia with the use of the
Pacificard issued to her by Pacific Bank.
It was also agreed that any changes of or novation in the
terms and conditions in connection with the issuance or use of
the Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release him from
responsibility, it being understood that he fully agree to such
charges, novation or extension, and that the agreement is a
continuing one and shall subsist and bind him until the liabilities of
his wife Celia have been fully satisfied or paid.
When Celia failed to pay, Pacific Bank demanded payment
from Robert. Robert admitted that he executed the Guarantor’s
Undertaking but alleged that his liability is only limited to P2k per
month.
ISSUE: W/N Robert is liable under the Guarantor’s Undertaking.
RULING: YES
The undertaking signed by Roberto 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.
As a surety he bound himself jointly and severally with the
debtor Celia to pay the Pacific Bank upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred
by Celia with the use of Pacificard or renewals thereof issued in
her favor by Pacific Bank. This undertaking was also provided as
a condition in the issuance of the Pacificard to Celia.
As to the extent of liability
It is true that under Article 2054 of the CC, 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. It is likewise not disputed by the parties that the credit
limit granted to Celia was P2k per month and that Celia
succeeded in using the card beyond the original period of its
effectivity. However, Robert’s liability should not be limited to that
extent since as surety of his wife, he 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. Robert, in fact, made his commitment
as a surety a continuing one.
Robert 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.
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.
A guarantor’s undertaking which is actually a surety’s undertaking
where the husband acted as a surety agreed to be jontly ans
severally liable together with the wife with Pacific Bank in relation
to the use of a Pacific credit card or renewals thereof. Even if the
limit that was indicated is P2,000 per month, in the same
undertaking it was provided that “any changes of or novation in
the terms and conditions or any extension shall not in any manner
release me/us (so that refer to the husband as well) it being
understood that I fully agree to such charges, novation or
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extension, and that this understanding is a continuing one until
the liabilities of Celia has been fully satisfied or paid.”
So here the husband was deemed to be a surety of the said
obligation. While it is true that Art 2054 provides that the
guarantor may bind himself for less, but not for more than the
principal debtor, it is also clear that the credit limit granted to
Celia was P2,000 per month, but nevertheless, Celia succeeded
in using the same beyond the its effectivity. With that, it cannot
be limited to P2,000 per month as the husband expressly bound
himself to the extent of the debtor’s indebtedness expressly
waiving any discharge in case of any change or novation of the
terms and conditions in connection of the issuance of the credit
card.
So the obligation on the part of Roberto here was a continuing
surety binding upon himself until all the liabilities of Celia had
been fully paid.
MOLINO VS. SECURITY DINERS INTERNATIONAL
The Security Diners issues two types of credit cards, the
Regular (Local) Card and the Diamond (Edition) Card. One of the
requirements for the issuance of either of these cards is that an
applicant should have a surety. Hence, when Danilo applied for a
Regular card, he got his sister-in-law Molino as his surety.
Under the Surety Undertaking, Molino bound herself jointly
and severally with Danilo to pay Security Diners all the obligations
and charges including but not limited to fees, interest, attorney's
fees and all other costs incurred by Danilo in connection with the
use of the card. Further, 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 her from the
Surety Undertakings, it being understood that the undertaking is a
continuing one and shall subsist and bind her until all such
obligations, charges and fees have been fully paid and satisfied.
Later on, Danilo’s card was upgraded Diamond card with the
approval of Molino. However, he defaulted in payment causing
Security Diners to demand payment from Molino.
Molino contended that her liability under the Surety
Undertaking is limited to P10k and that she did not expressly give
her consent to be bound as surety under the upgraded card. The
note she signed registering her approval to the same 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. Further, since the principal
debtor, Danilo, was not held liable, having been dropped as a
defendant, she could not be said to have incurred liability as
surety. Being merely a surety, a pronouncement should first be
made declaring the principal debtor liable before she herself can
be proceeded against.
ISSUE: W/N Molino is liable for the upgrade of the card pursuant
to the Surety Undertaking.
RULING: YES
Novation, as a mode of extinguishing obligations. There is no
doubt that the upgrading was a novation of the original agreement
covering the first credit card issued to Danilo, basically since it
was committed with the intent of canceling and replacing the said
card. However, the novation did not serve to release Molino 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.
It must be noted that the extent of the credit cardholder's
indebtedness, under the clear terms of the Guarantor's
Undertaking that the surety signed with the credit card company.
The Surety Undertaking expressly provides that petitioner's
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. 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.
There being no question that Danilo incurred debts in credit
card advances, an obligation shared solidarily by petitioner,
Security Diners 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, until the obligation is
fully satisfied.
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.
Here, there was an allegation that novation made the obligation of
the surety more onerous. In fact, it was alleged that upgrading of
the card should not be covered by the surety.
While it is concluded that the upgrade was a novation, it did not
release the petitioner from her surety obligations because in the
same surety undertaking, she expressly waived discharge in case
of change or novation in the agreement.
The SC emphasized several provisions in the surety’s
undertaking emphasizing the extent of the liability of the sister-in-
law. She is a surety as she found herself jointly and severally
with Danilo to pay SDIC. She declared that any change or
novation in the Agreement or any extension to pay such
obligation shall not release her from this Surety Undertaking.
Even if there was novation, she’s not released because of the
waiver.
Moreover, the undertaking is a continuous one and shall subsist
and bind her until all obligations have been fully paid. The
indication of a credit limit, the P10,000, shall not relieve her of
liability for all other amounts voluntarily incurred by the cardholder
in excess of said credit limit.
With these cases, so far, what is the lesson to be learned? When
you sign a document acting as a co-maker and guarantor, the first
thing that you should do is read it first.
Who are usually the sureties or guarantors especially in a
continuing agreement? You have officers of corporations.
Usually what will happen is that they sign the contract as
authorized representative of the corporation and in their personal
capacity. With that, they can be held solidarily liable and it
depends when we say continuing agreement.
GATEWAY vs. ASIANBANK
Gateway obtained an Domestic export packing loan from
Asianbank. To secure payment thereof, Geronimo and Andrew
executed separate but almost identical deeds of suretyship in
favor of Asianbank. The undertaking provides that:
1. They warrant the due and faithful performance by the
debtors of all obligations to be performed under any
contracts evidencing indebtedness/obligations and any
supplements, amendments, changes or modifications
made thereto;
2. Their liability shall be solidary, direct and immediate
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and not contingent upon the pursuit by the Asianbank
(creditor) of whatever remedies it may have against
Gateway or the securities or liens it or they may
possess;
3. They agree to be and remain bound upon the
suretyship, notwithstanding that all obligations of
Gateway to Asianbank outstanding and unpaid at any
time may exceed the aggregate principal sum of P10M.
Asianbank repeatedly extended the maturity of the loan
granted to Gateway until it was consolidated with the Dollar
Promissory Note under the Omnibus Credit Line. Nevertheless,
Gateway still defaulted causing Asianbank to finally demand
payment from Gateway and its sureties.
Later on, Gateway was declared insolvent. As a result
thereof, Geronimo prays that the claim against him be also
extinguished.
Asianbank argues that the stay of the collection suit against
Gateway is without bearing on the liability of Geronimo as a
surety since claims against a surety may proceed independently
from that against the principal debtor. Being such, Geronimo may
not invoke the insolvency of Gateway as a defense to evade
liability.
Geronimo counters that his liability as a surety cannot be
separated from Gateway’s liability. As surety, 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
pursuant to Article 2054 of the CC. Otherwise, his liability
becomes more onerous and burdensome since he is precluded
as from seeking recourse against the insolvent corporation.
Lastly, he argues that the deed of suretyship covers only the
P10M export packing loan but not the additional loans
consolidated under the Dollar Promissory Notes which maturity
date was repeatedly extended by Asianbank without his
knowledge and consent.
ISSUE: W/N Geronimo is held liable under the Surety
Undertaking despite the insolvency of Gateway.
RULING: YES
As to the insolvency proceeding
A creditor’s right to proceed against the surety exists
independently of his right to proceed against the principal.
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. 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. Hence, 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 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.
As to the extinguishment of his liability
Article 2054 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 where one
person, the surety, engages to be answerable for the debt,
default, or miscarriage of another known as the principal.
As to the coverage of the suretyship agreement
By its nature, a continuing suretyship covers current and
future loans, provided that, with respect to future loan
transactions, they are, 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 P10M credit loan and the loan under
the Dollar PN.
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. 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 contracted/incurred
by Gateway in favor of Asianbank. 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.
As to the grant of extensions
Such contention is unacceptable as it glosses over the fact
that the waiver to be notified of extensions is embedded in surety
document itself. 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.
No discussion.
SECURITY BANK vs. CUENCA
In 1980, Roldolfo Cuenca executed an Indemnity Agreement
in favor of Security Bank binding himself solidarily liable with
SMIC for the payment of an P8M credit loan facility and whatever
amount including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the
aforesaid credit accommodations upon demand and without the
benefit of excussion. The loan shall effective until 30 November
1981 and that the bank reserves the right to amend any of the
terms and conditions of the loan upon written notice to the
Borrower.
In 1985, Cuenca resigned as President and Chairman of
SMIC. Subsequently, his shareholdings were sold in public
auction and was bought by Angala.
Meanwhile, SIMC repeatedly availed of its credit line and
obtained 6 other loans with Security Bank evidenced by
Promissory Notes. Later on, Security Bank and SMIC agreed to
restructure the past due obligations of SMIC. This was done
without notice to or the prior consent of Cuenca. The restructured
loan provides that the P6M loan which was the only loan incurred
prior to the expiration of the P8M-Credit Loan and the only one
covered by the Indemnity Agreement was not segregated from
but was instead lumped together with, the other loans which were
not secured by said Indemnity Agreement. Pursuant thereto,
SMIC executed promissory notes in 1989 covering the total
principal amount of P12.2M.
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However, SMIC defaulted in its payment causing Security
Bank to demand payment from Cuenca who refused to pay.
Security Bank argues that there was no novation which
resulted to the extinguishment of Cuenca’s obligation since the
1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. Further, the terms
thereof were not more onerous. Not only this, 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 as provided under the Indemnity Agreement. Hence,
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.
ISSUE: W/N Cuenca may be held liable for the 1989 Agreement.
RULING: NO
As to novation
The 1989 Loan Agreement extinguished the obligation
obtained under the 1980 credit accommodation. While the 1980
credit accommodation had stipulated that the amount of loan was
not to exceed P8M, the 1989 Agreement provided that the loan
was P12.2M. The periods for payment were also different. 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.
As to the contention that 1989 Agreement was a mere
renewal
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 P8M credit facility. Hence, his obligation as
a surety should be deemed extinguished, pursuant to Article 2079
of the CC.
The theory behind Article 2079 is that an extension of time
given to the principal debtor by the creditor without the surety’s
consent would deprive the surety of his right to pay the creditor
and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon the 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.
As to the alleged waiver of consent
An essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter’s
obligation. While respondent held himself liable for the credit
accommodation or any modification thereof, such clause should
be understood in the context of the P8M limit and the November
30, 1981 term. It did not give the bank or SMIC 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.
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.
Construction of suretyship agreements
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. 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. Ambiguous contracts are
construed against the party who caused the ambiguity. 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 petitioner’s view that
there was such a waiver. Otherwise, his liability would thus be
more burdensome than that of the SMIC. Such untenable theory
is contrary to the principle that a surety cannot assume an
obligation more onerous than that of the principal.
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.
Lastly, that the Indemnity Agreement is a continuing surety
does not authorize the bank to extend the scope of the principal
obligation inordinately.
Q: Now what was the limitation of the obligation here of Cuenca
as a surety?
A: the loan agreement in 1981 and beyond the limitation in the
agreement
Q: How about the ruling of the court that Cuenca here was no
longer an employee. Can he use such defense wherein the surety
at the time he acted as such executed the agreement was still the
president, officer, or major stock holder of the corporation. But
subsequently he was no longer a stockholder, will there be a
release of the liability as a surety?
A: No, maam. The obligation of the surety while he was an officer
subsists even if he is no longer an officer.
Q: So in this case, why did the SC rule that Cuenca was no
longer liable as he was not an officer anymore? SC held “there
was no logic for the bank to assume that he would still agree to
act as a surety in the 1989 indebtedness because at that time, he
was no longer an officer or stockholder of the debtor-corporation.”
A: Because again you go back to the stipulations in the indemnity
agreement. Least likely his obligations last up until 1981. In the
execution of the 1989 agreement, it was said that the 1981
agreement was extinguished. In other words, hindi porke’t hindi
na sya stockholder sa corporation, he would be immediately
released of his obligation. We have to take that in the light of the
circumstances in this case. When you sign a document, you sign
as a surety, not because you are a stockholder or officer of the
corporation.
So here unlike in other agreements that there was an expressed
waiver in the obligation, nothing indicated that there was any
waiver to any change or any modification of said principal
obligation. It was emphasized in this case that the surety
agreement is strictly construed
or any doubt would be 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 application in the loan
agreement or notify him thereof. The Bank here cannot hold
Cuenca liable for loans obtained in excess of the amount or
beyond the period stipulated in the agreement absent of any
stipulation that Cuenca will be notified or gave consent thereto.
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This is especially true here wherein respondent was no longer an
officer or major stock holder. Parang additional fact or
circumstance considered so that Cuenca was not held liable
anymore. The 1989 loan agreement extinguished the 1981 credit
accommodation. This is clear from the explicit provision of to
liquidate the principal and the interest the earlier indebtedness.
The 1989 loan agreement expressedly stated that is purpose was
to liquidate not to renew or extend the outstanding indebtedness.
Respondent did not sign the 1989 document which prejudice
extended to the original 10million credit. It’s not really any
extension but merely a posting was merely to the old obligation
na naextinguish.
It is fundamental in the law of suretyship that any agreement
between the debtor and principal creditor, which essentially varies
from the terms used in the first contract without the consent the
surety will release the surety from liability. While respondent
made himself liable to the credit accommodation. Such clause
would be understood to be in the context of the 8 million limit and
the 1981 term. It did not give respondent any license to modify
the nature and scope of the original credit accommodation
without informing or getting the consent of Cuenca.
A contract of surety can not extend to more than what was
stipulated. It is strictly construed against the creditor, every doubt
resolved against enlarging the obligation of the surety.
Here, the surety agreement contained an equivocal stipulation, no
express stipulation compare this to another case which was the
case of PhilAmGen. In that case, there was a clear stipulation
that there was no stipulation as to the waiver.
But in the present case, there was an expressed stipulation. At
most, the alleged basis of the respondent is deemed uncertain
and confers no clear obligation to Sta. Ines to notify the Bank of
its indebtedness in the original obligation.
A continuing guaranty is one which covers all transaction,
including those arising in the future, as long as it is within the
description or contemplation of the contract of guaranty until the
expiration or termination thereof but still subject to the stipulations
of the loan agreement as held in this case. Further, just because
you are not a stockholder, it does not exonerate you from any
liabilities because if you sign as a surety, you do so in your own
personal capacity not because you are the officer or major stock
holder. In this case, hindi siya liable dahil beyond the limitation
yung obligation that is being demanded.
Art. 2054. A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount
and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall
be reduced to the limits of that of the debtor. (1826)
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
So in the cases of Pacific Banking and Molino that we already
discussed, again, if there is an express waiver for any novation or
change in the principal contract and to which the surety agreed to
such novation, then you cannot subsequently question any
change. For example in those cases, nag exceed sa limit noh,
credit limit in the credit cards that were issued. Nevertheless, the
securities in those cases were still held to be liable. Also, take
note that with regard to contracts of securities, it must be strictly
interpreted against the creditor and to which we have also
discussed the case of Cuenca wherein in that case, it was
stipulated that the 1989 loan agreement extinguished the
previous obligation to which the surety secured and also we have
taken into consideration the limits for each contracts of security,
for example its only up to 8 million or its only for a limited period,
then that should also be taken into consideration.
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 compromise 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. (1827a)
Alright, 2055 is very clear that the contract of guaranty is not
presumed. In other words, it must be expressed and cannot
extend to more than what is stipulated. So, we have here the
case of Piczon vs Piczon.
PICZON vs. PICZON
Sosing-Lobos Co. obtained a loan from Consuelo Piczon.
Estaban Piczon, as the President of the company, bound himself
as guarantor of the loan. When Sosing Lobos defaulted,
Consuelo demanded payment from Esteban as surety including
the payment of interest.
ISSUE: W/N Esteban is a surety.
RULING: NO but only a guarantor
Piczon expressly bound himself only as guarantor, and there
are no circumstances in the record from which it can be deduced
that his liability could be that of a surety. A guaranty must be
express pursuant to Article 2055 and it would be violative of the
law to consider a party to be bound as a surety when the very
word used in the agreement is "guarantor”.
He accepted the express assumption of liability by Sosing-
Lobos for the payment of the obligation in question, thereby
modifying their original posture that inasmuch as that corporation
did not exist yet at the time of the agreement, Piczon necessarily
must have bound himself as insurer.
As to the interest
Piczon is also liable for 12% interest from the date of
execution of the guaranty. In the case at bar, the "interest agreed
upon" by the parties was to commence from the execution of said
document. f the contract stipulates from what time interest will be
counted, said stipulated time controls, and, therefore interest is
payable from such time, and not from the date of the filing of the
complaint.
Q: So who is the principal debtor here?
A: Sosing-Lobos and Co., Inc.
Q: Why could he (Esteban Piczon) be considered as a surety?
A: He is not considered as a surety here because under the terms
of the contract, he expressly bound himself only as a guarantor.
Q: So, when would it happen that a person is liable as a surety
even if he is referred as a guarantor in an agreement?
A: If he binds himself jointly and severally liable.
Q:Alright, together with the principal debtor. But in this case, that
circumstance is not present.
Here Piczon expressly bound himself only as guarantor and there
are no circumstances in the record from which it can deduce that
his liability could be that of a surety. Under 2055, a guaranty must
be expressed and it would be violative of the law to consider a
party to be bound as a surety when the (??? noisy) used in the
agreement is the guarantor. But again, the mere use of the word
guarantor or guaranty does not necessarily mean that the person
only bound himself only as a guarantor and not as a surety, if
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there are circumstances that would point out that he bound
himself solidarily liable with the principal debtor.
So here, with regard to a contract of guaranty, there is no
presumption as to its existence. The terms of the contract must
be stipulated in such a way that there's no doubt that there exist a
contract of a guaranty and that he promised or undertakes to
answer for the obligation of another. In addition, with regards to
the existence of a surety, if a person bound himself only to be a
guarantor then he could not expressly bound himself to be a
guarantor, it could not be interpreted that he bound himself
solidarily liable with the principal debtor.
Now with respect to the guarantor, he shall be obliged to pay for
the costs only from the time when the guaranty was made and
cannot be faulted for the delay of the debtor. As we have
mentioned last time, if upon demand to the guarantor and he did
not pay then he will be liable for all costs from the time the
demand was made upon the guarantor. The guarantor could not
be held liable for other costs incurred or interests incurred from
the time the principal debtor was in delay, otherwise, that would
be unfair to the said guarantor.
So again, the guarantor shall answer only for such judicial costs
as have been incurred after he has been judicially required to pay
otherwise here, you would have a harsh necessity wherein the
guarantor would be paying another's debt without any benefit
whatsoever for himself.
We also have the case of BA Finance.
BA FINANCE vs. CA
Renato Gaytano, doing business under the name Gebbs Int’l.
obtained a P60k loan from Traders Royal Bank. 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. Wong as credit administrator of
BA Finance, undertook to guarantee the loan of the Gaytano
spouses.
However, the Gaytanos refused to pay the balance of the
loan causing TRB to file complaint for sum of money against the
Gaytano spouses and petitioner BA Finance.
BA Finance contends that the letter guaranty is ultra vires,
and therefore unenforceable; that said letter-guaranty was issued
by its employee 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 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.
ISSUE: W/N BA Finance may be held liable as a guarantor.
RULING: NO
Although Wong was clearly authorized to approve loans even
up to P350k without any security requirement, which is far above
the amount subject of the guaranty in the amount of P60k,
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.
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.
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 rule is clear that an
agent who exceeds his authority is personally liable for damages.
As to estoppel
TRB 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.
Q: What was the principal obligation here?
A: Payment of the loan ma'am.
Q: Who entered into that contract of loan? What was the
document entered into by the Gaytano spouses?
A: A deed of suretyship.
Q: So, it's an accessory contract. What would be the principal
obligation? Who entered into that contract of loan?
A: Gebbs International ma'am.
Q: Alright, Gaytano doing business under Gebbs International to
which the Gaytano spouses executed a deed of suretyship. now
under the facts of this case, can we say that there was a double
guaranty or a double suretyship?
A: No ma'am.
Q: Why not? Supposedly, what was the transaction or document
executed here by Philip Wong?
A: A contract of guaranty ma'am.
Q: Specifically, it was alleged that Philip Wong, as credit
administrator of BA Finance, guaranteed the loan, in this
instance, the obligation of Gaytano spouses when they executed
that deed of suretyship. But again here, was BA Finance liable?
A: No, BA Finance was not liable ma'am because the letter of
guaranty was invalid because it was beyond the authority of Philip
Wong to issue guaranties.
Alright, so here, although Wong was authorized to approve loans
even up to P350,000 without any security requirement, nothing in
the said memorandum expressly vests upon him as credit
administrator the power to issue guaranties. The contention that
there was this phrase contingent commitment does not mean that
he had the authority to enter as a guarantor for and in behalf of
BA Finance.
Remember here, again applying 2055, guaranty is not presumed,
it must be expressed and cannot be extended beyond its
specified limits. Okay, is there a requirement that the acceptance
here be made express or in writing?
Now recall in your Obligations and Contracts that as to the
creditor, the acceptance of a payment need not be express or in
writing. But what about in the existence of a contract of guaranty?
Is it required that the creditor accepts the contract of guaranty or
the promise of guaranty by the guarantor?
AGLIBOT vs. SANTIA
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Santia granted a P2.5M loan to Pacific Lending thru petitioner
Aglibot. As a guaranty or security for the payment of the note,
Aglibot issued and delivered to Santia 11 post-dated personal
checks drawn from her own. However, the checks were
dishonored upon presentment to the bank causing Santia to
demand payment from Pacific and Aglibot and to file a criminal
charge against Aglibot under BP 22.
Aglibot admitted that she obtained a loan from Santia but
claimed that she did so in behalf of Pacific, the true borrower.
According to her, 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. Maintaining that she was a mere guarantor of the
said debt of Pacific when she agreed to issue her own checks,
Aglibot insists that Santia failed to exhaust all means to collect
the debt from Pacific, the principal debtor, and therefore he
cannot now be permitted to go after her subsidiary liability. In
other words, she claims the benefit of excussion.
ISSUE: W/N Aglibot is entitled to the benefit of excussion.
RULING: NO
Benefit of excussion
It is settled that the liability of the guarantor is only subsidiary,
and all the properties of the principal debtor, PACIFIC, must first
be exhausted before the guarantor may be held answerable for
the debt. 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.
This rule is contained in Article 2062 of the CC, which
provides that the action brought by the creditor must be filed
against the principal debtor alone, except in some instances
mentioned in Article 2059, then the action may be brought against
both the guarantor and the principal debtor.
Application of Statute of Frauds
The Court must, however, reject Aglibot’s claim for want of
proof, in view of Article 1403(2) of the CC, embodying the Statute
of Frauds. Under its provisions concerning a guaranty agreement,
which is a promise to answer for the debt or default of another the
law clearly requires that it, or some note or memorandum thereof,
be in writing. Otherwise, it would be unenforceable unless ratified
although under Article 1358 a contract of guaranty does not have
to appear in a public document
On the other hand, Article 2055 of the CC 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 PACIFIC resembling
her guaranteeing its debt to Santia. And neither is there a
showing that PACIFIC thereafter ratified her act of "guaranteeing"
its indebtedness by issuing her own checks to Santia.
Accommodation party
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.
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. t 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.
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.
Conclusions
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 PACIFIC for the
payment of its loan. 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 NIL must take primacy in application.
TEXAS COMPANY vs. ALONSO
Facts: Leonor Bantug was an agent of Texas Company. On the
other hand, Tomas Alonso bound himself joint-severally liable for
the liability of Leonor in connection with the agency contract with
the Texas Company. 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.
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were
sued by the Texas Company (P.I.), Inc. for the recovery of money
for the unpaid balance of the Leonora S. Bantug’s account.
The CFI of Cebu sentenced Bantug and Alonso to pay jointly and
severally to the Texas Company. The CA modified the judgment;
Bantug was held solely liable for the payment of the aforesaid
sum of money.
Meanwhile, Tomas argues that the CA erred in holding that there
was merely an offer of guaranty on the part of the respondent,
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Tomas Alonso, and that the latter cannot be held liable
thereunder because he was never notified by the Texas
Company of its acceptance.
Issue: WON there was merely an offer of guaranty on the part of
Alonso.
Held: YES. The Court of Appeals has placed reliance upon our
decision in National Bank vs. Garcia, while the petitioner invokes
the case of National Bank vs. Escueta. 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 CA 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.
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. The acceptance need not necessarily be
express or in writing, but may be indicated by acts amounting to
acceptance. 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, the reason being that the
contract of guaranty is unilateral.
Q: Does it mean that for the perfection of the validity of a contract
of a guaranty, there must be acceptance or notice of acceptance
by the creditor?
A: Yes ma'am.
Q: Now, take note there must be a distinction from a offer of
guaranty and from a - ?
A: Acceptance?
Q: No, because if it is an offer, notice of acceptance is required,.
However, if what we have is an unconditional promise of
guaranty, notice of acceptance is not required anymore. In this
instance, why is it considered merely an offer of guaranty, and not
an unconditional promise of guaranty?
A: Because it required a further action ma'am from the creditor
before the obligation becomes fixed.
Q: What is your basis?
A: The bond in question was executed at the request of the
petitioner, and -
Q: So would that be sufficient that it is merely an offer and not an
unconditional promise of guaranty? What is the clause that you're
referring to as the basis that this is merely an offer. Please read.
A: 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.
Alright, so in other words, by virtue of that provision it is clear
here that what you have is merely an offer which requires
acceptance for the guarantor to be liable as well on the obligation.
Otherwise, if this was an unconditional promise of guaranty such
notice of acceptance would not have been necessary.
So here, the bond was subject to the petitioner's approval and
this is clear in the additional security clause.
Nakalagay diyan, 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.
So, the bond will be still be subject to the approval of the
petitioner here. If the petitioner is satisfied of such bond, notice of
its acceptance or approval should necessarily given to the proper
party in interest, namely the surety or the guarantor. So what we
have here is merely an offer of proposition for a guaranty. Where
there is a merely an offer 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, until 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 condition and intends to act upon
the guaranty. The acceptance need not necessarily be express or
in writing but be may be indicated by acts amounting to
acceptance.
On the other hand, if the transaction is not merely an offer of
guaranty but amounts to a direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of a
guaranty, all that is necessary to make the promise binding is that
the promisor should act upon it and notice of acceptance is not
necessary., The reason being that a contract of guaranty is
unilateral in nature. So take note, if it is merely an offer and there
is no waiver, there must be notice of acceptance. Otherwise, if it
is an unconditional promise, notice of acceptance is not
necessary because a contract of guaranty is unilateral.
What happened in the case of Visayan?
VISAYAN SURETY vs. CA
Facts: The spouses Danilo Ibajan and Mila Ambe Ibajan filed
with the RTC a complaint against spouses Jun and Susan
Bartolome, for replevin to recover from them the possession of an
Isuzu jeepney, with damages. Ibajan alleged that they were the
owners of an Isuzu jeepney which was forcibly and unlawfully
taken by defendants Jun and Susan Bartolome while parked at
their residence. In line with this, filed a replevin bond through
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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.
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 which the court granted. Later,
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. The trial
court issued a writ of replevin in favor of intervenor Dominador
Ibajan but it was returned unsatisfied.
Intervenor Dominador Ibajan filed with the trial court a
motion/application for judgment against plaintiffs bond. The RTC
granted the motion.
Issue: WON the surety is liable to an intervenor on a replevin
bond posted by petitioner in favor of respondents.
Held: NO.
Intervenor. 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.
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 oblige. 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.
The obligation of a surety cannot be extended by
implication beyond its specified limits. 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. A contract of surety is not presumed; it
cannot extend to more than what is stipulated.
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.
Q: What do you mean by intervenor?
A: 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.
Q: What is the basis that the RTC ordered the delivery of said
jeepneys?
A: The basis is that Dominador Ibajan was the registered owner
of said jeepneys.
Q: So with the surety, to whom can Visayan Surety be made
liable?
A: To the defendant since the surety was filed by the plaintiff in
this case. So if the plaintiff would lose in this case, then the
defendant can invoke as to the bond filed by the plaintiff.
Alright, so what we have here, you have complainants who filed
an action for replevin to recover the possession of a jeepney and
the plaintiffs here, the Spouses Ibajan, filed a replevin bond, so
that they can acquire possession of the property. Now the
replevin bond will answer for damages in case it is found that the
spouses are not really entitled to the possession of this property
but rather it would still be spouses Bartolome that would be
entitled thereto.
However, it turns out that the registered owner is Dominador
Ibajan, the father of the plaintiff Danilo, and therefore he has
superior right to possess the property. He intervened in the said
case and he is considered an intervenor because he is a person
not originally impleaded as a party in the proceeding and
nevertheless he has legal interest in the matter in litigation or in
the success of either 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.
Remember that with regard to the construction or interpretation of
a contract of guaranty or suretyship, it is strictly interpreted
against the creditor and in favor of the guarantor or surety and it
is not to be extended beyond its terms or specified limits. So
here, the surety agreement is an agreement where a party called
the "surety" guaranties the performance with another party called
the "principal or obligor" of an obligation undertaking in favor of a
third person called the "obligee". The obligation here of Visayan
surety cannot be extended by implication beyond its specified
limits. The extent of a surety's liabilities is determined only by the
clause of the contract of suretyship.
In this case, it did not include to be answerable to Dominador
Ibajan or to any other third person. A contract of surety, just like
that of a guaranty, is not presumed and it cannot extend to more
than what is stipulated. The surety cannot be held liable to the
intervenor in this case when the relationship and obligation of the
surety is limited to the defendants spouses Bartolome as
specified in the contract of surety.
January 17, 2017
By Angel Deparine and Julian Sabrido
Art. 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is
to be complied with.
These are the qualifications mentioned in 2056.
When we talk about integrity, we are talking about the good
reputation of the person.
Capacity to bind himself --- that he is of legal age, that he has not
been convicted with a crime that carries with it the penalty of civil
interdiction.
Sufficient property--- that these properties are equivalent to the
amount of the debt involved.
However, take note, that these requirements may be waived by
the creditor. Even if not all these are present, the creditor can,
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nevertheless, accept a person to act as a guarantor to a principal
obligation.
Absent one qualification does not make the contract of guarantee
VOID, as long as accepted by the creditor.
It is a contract between a creditor and guarantor.
The second sentence of 2056 refers to jurisdiction.
 The place of performance- that is the court which
has jurisdiction over the case in case litigation will
commence. Of course when it comes to
jurisdiction and venue with the regard to the case
to be filed, then we have the Rules of Court.
Art. 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that
a specified person should be the guarantor.
This emphasizes that if the qualifications in 2056 are present, this
is at the time of inception of the contract of guarantee (???
Confusing ang sentence ni ma’am)
If subsequently one of the requisites in 2056 is not present
anymore, then it will not affect the validity of the contract of
guarantee.
ESTATE OF HEMADY vs. LUZON SURETY CO., INC.
[G.R. No. L-8437. November 28, 1956.]
Facts: The Luzon Surety Co. had filed a claim against the Estate
based on 20 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 lower court dismissed the claims of Luzon Surety Co., on
stating that “whatever losses may occur after Hemady’s death,
are not chargeable to his estate, because upon his death he
ceased to be guarantor.”
The administratrix 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. 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.
Issue: WON the liability of Hemday as a surety terminated upon
his death.
Held: NO. Under our law, therefore, the general rule is that a
party’s contractual rights and obligations are transmissible to the
successors.
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. Luzon Surety merely
expects a reimbursement of the moneys that it might have to
disburse on account of the obligations of the principal debtors.
Luzon Surety Co. was indifferent that the reimbursement should
be made by Hemady himself.
The third exception to the transmissibility of obligations under
Article 1311 exists when they are “not transmissible by operation
of law”. By contract, the articles of the Civil Code that regulate
guaranty or suretyship 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; and 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.
Based on article 2057, 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 it is his right, not his duty be 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.
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.
Discussion:
Recall Oblicon Art 1311 regarding the Principle of Relativity.
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
Applying that provision, even if the surety Hemady already died,
his estate could still be held liable. His death did not extinguish
the obligation from the contract of surety.
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; and 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 2056.
This apparent that the supervening dishonesty of the guarantor,
disappearance of his integrity, does not terminate the contract but
merely entitles the creditor to demand a replacement of the
guarantor. But this is optional as to the creditor, it is his right, not
his duty, he may waive it if he chooses, and hold the guarantor to
his bargain.
The contracts of suretyship entered into by Hemady is 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 there under necessarily passed upon
his death to his heirs.
But again the heirs will only be liable to the extent of the share or
the inheritance that they will received from the Estate of Hemady,
beyond that they cannot be held personally liable to the creditor
of Hemady.
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So, again, the requirements under 2056 are required only at the
inception and perfection of the contract; and not required to
continue to subsist afterwards.
Even if the surety or guarantor becomes subsequently
insolvent…or has been convicted involving dishonesty, it will not
necessarily make the contract void. It will not operate to
exonerate the guarantor of the eventual liability he has contracted
the contract of guaranty continues. The creditor can choose to
demand for another guarantor.
YULIM INTL COMPANY LTD., JAMES YU, JONATHAN YU,
AND ALMERICK TIENG LIM vs. INTL EXCHANGE BANK
(NOW UNION BANK OF THE PHILIPPINES)
G.R. No. 203133, February 18, 2015
Facts: iBank, a commercial bank, granted Yulim, a domestic
partnership, an Omnibus Loan, as evidenced by a Credit
Agreement which was secured by a Chattel Mortgage over
Yulim’s inventories. As further guarantee, the partners, namely,
James, Jonathan and Almerick, executed a Continuing Surety
Agreement in favor of iBank.
Yulim availed of its aforesaid credit facility with iBank and
executed a PN to mature. Yulim defaulted on the said note. iBank
sent demand letters to Yulim, through its President, James, and
through Almerick, but without success. iBank then filed a
Complaint for Sum of Money with Replevin against Yulim and its
sureties.
The RTC ordered Yulim alone to pay iBank and dismissed the
complaint. The CA found the records bereft of any evidence to
show that Yulim had fully settled its obligation to iBank,
Accordingly, the appealed decision is 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 o the monetary awards.
The petitioners insist that they have paid their loan to iBank. They
maintain that the letter of iBank to them, which “expressly
stipulated that the petitioners shall execute a Deed of Assignment
over one condominium unit xxx” 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.
Issue: WON James Yu et.al are liable as sureties.
Held: Yes. 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. Under Article 2047 of the Civil Code, these words are
said to describe a contract of 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. 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.” 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, as in this case. Article I of the
Continuing Surety Agreement executed by the individual
petitioners clearly provides that they bound themselves as
sureties.
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 to the Deed of Assignment. 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.
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.
To stress, the assignment being in its essence a mortgage, it was
but a security and not a satisfaction of the petitioners’
indebtedness.34 Article 125535 of the Civil Code invoked by the
petitioners contemplates the existence of two or more creditors
and involves the assignment of the entire debtor’s property, not
a dacion en pago.36 Under Article 1245 of the Civil Code,
“[d]ation in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law
on sales.” Nowhere in the Deed of Assignment can it be remotely
said that a sale of the condominium unit was contemplated by the
parties, the consideration for which would consist of the amount
of outstanding loan due to iBank from the petitioners.
Discussion:
It’s clear here that the petitioners are sureties jointly and severally
liable due to the continuing surety agreement.
Now they alleged that the obligation has already been
extinguished since they executed a deed of assignment involving
a condominium unit.
However, while the contract was denominated as a deed of
assignment, a careful examination of the contract would show
that it was solely to act as a security.
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Nowhere can it be remotely construed that the letter intimidates
an understanding by iBank, that the deed of assignment would
serve to extinguish the loan. Otherwise, there would be no need
for ibank to mention therein in the deed the three collaterals or
supports provided by the petitioners: the deed of assignment,
mortgage and continuing surety agreement.
So the deed of assignment was only an interim security for the
repayment of any loan granted or those that may be granted in
the future for compliance of the terms and conditions of the
relevant credit and/or loan documents.
So the condominium unit was not assigned as Dacion en Pago to
the bank. It was a mere temporary security, not a payment to
settle their promissory notes. This could also be further evidenced
by the subsequent section of the Deed of Assignment that as
soon as the title to the condo has been issued, they would
execute a deed of real estate mortgage. So if there was really an
intention to use that condo as a special form of payment to
extinguish the obligation, there would have been no need for that
section for the execution of the mortgage.
The parties really intended to constitute that condo as a REM.
Considering that the assignment, in its essence, is a mortgage
and not a security and not a satisfaction of the petitioner’s
indebtedness. Nowhere in the deed can it be remotely said that
the sale of the condo was contemplated by the parties. The
consideration for which consists of the amount outstanding loan
due to the bank of the petitioners. So no dacion en pago.
II. EFFECTS OF GUARANTY
BENEFIT OF EXCUSSION OR EXHAUSTION
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.
The Benefit of Excussion or the Benefit of Exhaustion.
-The creditor shall first exhaust the available remedies before
claiming from the guarantor.
WISE & CO., INC. vs. DIONISIO P. TANGLAO
Facts: Cornelio David was an agent of Wise & Co. David failed to
liquidate to Wise & Co. Thereafter, Wise & Co. instituted civil
case against Cornelio C. David for the recovery of a certain sum
of money in the CFI.
Wise & Co. obtained a preliminary attachment of David's
property. To avoid the execution of said attachment, David
succeeded in having his Attorney Tanglao execute, a power of
attorney (Exhibit A) in his favor, with the following clause:
To sign for me as guarantor for himself in his indebtedness to
Wise & Company of Manila, which indebtedness appears xxx and
to mortgage my lot, to guarantee the said obligations to the Wise
& Company, Inc., of Manila.
Subsequently, David made a compromise agreement with the
Wise&Co. to pay for the sum of P640, payable at the rate of P80
per month and he pledged the lot owned by the Atty. Dionisio
Tanglao as a guaranty for the balance.
David paid the sum of P343.47 to Wise & Co., on account of the
P640 which he bound himself to pay under the compromise
agreement, leaving an unpaid balance of P296.53.
Wise & Co. now institutes this case against Tanglao for the
recovery of said balance of P296.53.
Issue: WON Tanglao is liable for the remaining balance.
Held: NO.
Tanglao merely mortgaged his property and did not bind
himself as a surety. David used said power of attorney only to
mortgage the property and did not enter into contract of
suretyship. Nothing is stated in the compormse agreement that
Tanglao became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses thereof,
and even if this inference might be made, it would be insufficient
to create an obligation of suretyship which, under the law, must
be express and cannot be presumed.
The only obligation which the compromise agreement has
created to Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said P640.
However, a foreclosure suit is not instituted in this case against
Tanglao, but a purely personal action for the recovery of the
amount still owed by David.
The Benefit of Excussion. At any rate, even granting that
defendant Tanglao may be considered as a surety under the
compromise agreement, the action does not yet lie against him
on the ground that all the legal remedies against the debtor have
not previously been. The plaintiff has in its favor a judgment
against debtor David for the payment of debt. It does not appear
that the execution of this judgment has been asked for and it
shows that David has two pieces of property the value of which is
in excess of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.
DISCUSSION
The power of attorney was only to mortgage the property and
they did not enter into a contract of suretyship.
Do take note that this is a 1936 case, there is no clear distinction
yet as between a surety and guarantor. So the usage of the
surety here referred to that of a guarantor.
So here the contract of surety or guaranty must be EXPRESS
and cannot be presumed.
Here, Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640.
At any rate, even granting that defendant Tanglao may be
considered as a surety or a guarantor, with this case a guarantor,
he action does not yet lie against him since he is entitled to the
benefit or excussion; legal remedies against the debtor have not
previously been exhausted.
When we say ‘resorted to available legal remedies’, it’s not
sufficient to just make a demand. You have to resort to all legal
remedies against the debtor.
As a general rule, you proceed first against the debtor,
exhausting all the properties of the debtor and resorting to all the
legal remedies against the said debtor.
PBCOM VS. CA, JOSEPH L.G. CHUA AND JALECO DEV’T,
INC.
Facts: On April 14, 1976, Fortune Motors (Phils.), Inc. executed
a Surety Agreement in favor of Philippine Bank of
Communications (PBCOM) with Joseph L.G. Chua, as one of the
sureties. Meanwhile, on March 6, 1981, Forte Merchant Finance,
Inc., executed a Surety Agreement in favor of PBCOM with
Joseph L.G. Chua again as one of the sureties.
On October 24, 1983 Chua executed a Deed of Exchange
transferring a parcel of land with improvements to JALECO Dev.,
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Inc. As a result, the title over the land was issued in the name of
JALECO. Thereafter, on November 2, 1983, Chua sold 6,000
shares of JALECO to Mr. Chua Tiong King and another 6,000
shares of JALECO to Guillermo Jose, Jr. and Caw Le Ja Chua,
wife of Chua sold the 6,000 share of JALECO to Chua Tiong
King.
In the meanwhile, for failure of both Fortune Motors and Forte
Merchant Finance, Inc. to meet their respective financial
obligations with PBCOM, the latter filed Civil Case against
Fortune Motors, Joseph L. G. Chua et. al. and Civil Case against
Forte Merchant Finance, Inc., Joseph L. G. Chua et. al. with the
RTC, both for Sum of Money with Writ of Preliminary Attachment
where PBCOM was able to obtain a notice of levy on the
properties of Fortune Motors.
When PBCOM was able to locate Chua's former property which
was already transferred to JALECO by virtue of the Deed of
Exchange dated October 24, 1983, PBCOM filed Civil Case for
annulment of Deed of Exchange with the RTC.
The CA said that the annulment case is premature since the main
case against Fortune and Forte are still pending.
Chua admitted the Deed of Exchange in favor of JALECO and
contended that it was done in good faith and in accordance with
law.
Issue: WON the annulment case is premature because if the
pendency of the case against Fortune and Forte.
Held: NO. For failure of both Fortune Motors and Forte
Merchant. to pay their obligations with the petitioner, the latter
filed the two civil cases against Fortune Motors. and Forte
Merchant and respondent Chua. The petitioner was granted a writ
of attachment as a result of which properties belonging to Fortune
Motorswere attached. It turned out, however, that the attached
properties of Fortune Motors were already previously
attached/mortgaged to prior lien holders. As regards Forte
Merchant, it appears that it has no property to satisfy the debts it
incurred with PBCOM. The record further shows that as regards
Chua, the property subject of the Deed of Exchange between him
and JALECO was his only property. Under these circumstances,
the petitioner's petition for annulment of the deed of exchange on
the ground that the deed was executed in fraud of creditors,
despite the pendency of the two other civil cases is well-taken.
As surety for the financial obligations of Fortune Motors and the
Forte Merchant with the petitioner, respondent Chua bound
himself solidarily liable with the two principal debtors. (Article
2047, Civil Code) The petitioner may therefore demand payment
of the whole financial obligations of Fortune Motors and Forte
Finance from Chua, if the petitioner chooses to go directly after
him. Hence, since the only property of Chua was sold to JALECO
after the debts became due, the petitioner has the right to file an
annulment of the deed of exchange between Chua and JALECO
wherein Chua sold his only property to JALECO to protect his
interests and so as not to make the judgments in the two cases
illusory.
While it is necessary that the credit of the plaintiff in the accion
pauliana must be prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted.
Parenthetically, the appellate court's observation that the
petitioner's interests are sufficiently protected by a writ of
attachment on the properties of Fortune Finance has neither legal
nor factual basis.Discussion:
DISCUSSION
It is not sufficient to say that as long as the debtor is insolvent you
can now go after the guarantor. You must resort to all remedies
against the debtor.
In this case, while it is true that Chua is a surety to which the
benefit of excussion is not available, I included this case to
emphasize a remedy that is available to the creditor in relation to
the benefit of excussion---which is accion pauliana.
In this case, the only property of Chua was sold to JALECO, after
the debts became due, and then the petitioner here had the right
to file an annulment of the deed of exchange between Chua and
JALECO, wherein Chua sold his only property to JALECO, to
protect his interest, so as not to make the judgments in the two
cases illusory.
Another instance here is that Chua continued to stay in the
property and evidence contains that Chua and his immediate
family controlled JALECO.
So the deed of exchange executed had for its subject the sale of
the only property of Chua at the time when his financial
obligations became due and demandable. Despite the sale, Chua
continued to stay in the same property.
Xxx
An accion pauliana can be resorted to, to rescind or impugn the
contract or alienation made by debtor in fraud of the creditor. Xxx
The creditor can file his action before proceeding against the
creditor.
In application of the Benefit of Excussion, an accion pauliana
must be first made before we proceed against the guarantor.
PRUDENTIAL BANK vs.IAC, PHILIPPINE RAYON MILLS, INC.
and ANACLETO R. CHI
G.R. No. 74886 December 8, 1992
Facts: Philippine Rayon Mills Inc. entered into a contract with
Nissho Co., Ltd. of Japan for the importation of textile
machineries. Philippine Rayon applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor of
Nissho. Nissho withdrew twelve drafts against the letter of credit
which Prudential Bank paid to the Bank of Tokyo but only two of
these drafts were accepted by Anacleto Chi, the president of
Philippine Rayon.
Upon the arrival of the machineries, the Prudential Bank indorsed
the shipping documents to the defendant- appellant which
accepted delivery of the same. They executed, a trust receipt
which was signed by Anacleto Chi to enable Philippine Rayon
Mills to take delivery of the machines.
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.
The obligation of the defendant-appellant arising from the letter of
credit and the trust receipt remained unpaid and unliquidated.
Repeated formal demands for the payment of the said trust
receipt yielded no result. Hence, the present action for the
collection of money against Phil. Rayon and Anacleto R. Chi. In
their respective answers, the defendants interposed that the
complaint states no cause of action; if there is, the same has
prescribed; and the plaintiff is guilty of laches.
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Issues: WON Chi is jointly and severally liable with Philippine
Rayon.
Held. NO. Chi is merely a guarantor. 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 xxxx
PHILIPPINE RAYON MILLS, INC.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI
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
asolidary 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 guarantors had
signed it. The clause "we jointly and severally agree and
undertake" refers to the undertaking of the two 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.
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 persons
and acknowledged before a notary public. While indeed, the
clause ought to have been signed by two 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. With respect to a guaranty, 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. While the
acknowledgement of a surety before a notary public is required to
make the same a public document, a contract of guaranty does
not have to appear in a public document.
Issue: WON Chi is liable.
Held: NO. The remaining issue to be resolved concerns the
propriety of the dismissal of the case against Chi. Chi he cannot
be bound as a simple guarantor pursuant to Article 2058 of the
Civil Code. He cannot 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. Simply stated, there is as yet no cause of
action against Chi.
Excussion is not a condition sine qua non for the institution of an
action against a guarantor. However, Chi's liability is limited to the
principal obligation in the trust receipt plus all the accessories
xxx; with respect to the latter, he shall only be liable for those
costs incurred after being judicially required to pay xxx
DISCUSSION
So, we have here Phil Rayon as the principal debtor, and we also
have Chi who affixed his signature in tax receipt. However in
affixing his signature, it did not make her a solidary liable with Phil
Rayon.
While it is true that they have that phrase ‘jointly and severally
undertake’, who are the signatories in said document? It was only
Chi. The intention of that is to have Solidary Guarantee Clause.
Under the Solidary Guarantee Clause, the one who signs the
contract is not necessarily solidary bound to the principal debtor.
xxx
The intention is that you have guarantors, and among
themselves, they are solidarily bound. This is different from the
obligation of a surety, because a surety is still solidarily bound
together with the principal debtor.
So, when you have a guarantor, you have benefit of excussion.
You can have several guarantors, and you have the benefit of
excussion to each and every one of them.
It is also possible that between and among these guarantors, they
are solidarily bound, wherein they (creditor?) would still be
entitled to the benefit of excussion. But as long as 2058 is
resorted to, na exhaust na lahat wala pa rin masingil, so pwede
na masingil ang guarantors. Any one of them pwede na masingil
ang whole amount because of the Solidary Guarantee Clause.
But in this case, it is only Chi who signed.
There is a provision on waiver of exhaustion. But the SC held this
is ineffective because the space therein where the property may
not be exhausted was not filled up.
So the defense of exhaustion may be raised by the guarantor
before he may be held for the obligation, which Chi did.
Also here what we have is a contract of adhesion that was
prepared by the bank, so with regard to the interpretation, any
doubt will be strictly construed against the one who prepared the
said contract. Here, even if it was only Chi who signed the clause
it did not make his act and idle ceremony or render the clause
totally meaningless. By his signing he became the sole guarantor
to which he is entitled the benefit of excussion.
Now also take note here excussion is not a condition sine qua
non for the institution of an action against a guarantor. so in other
words, the guarantor, can be impleaded as a party, in the claim
for the collection of sum of money by the creditor. 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.
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
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(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation.
GR: Guarantor shall be entitled the benefit of excussion.
EXCEPTION: Artcle 2059.
1. Waiver (expressly renounces)
This benefit of excussion is a privilege granted to a
guarantor. Like any other right, this can be waived. It is
solely the guarantor can waive this right as this is a
personal right. So this cannot be waived by the creditor.
No specific form for this waiver as long as it is express.
2. If he has bound himself solidarily
He is now considered as a surety primarily liable with
the debtor.
3. Insolvency
Here, there is no need for a judicial decree or
declaration of bankruptcy. However, the insolvency
here must be actual. Recall the case of Machetti.
wherein the mere declaration of insolvency is not
sufficient to go after the guarantor. There must be first
a final liquidation. Why? Because when we say that the
debtor is insolvent it does not necessarily mean that he
has no assets remaining at all. It is just that he may still
have assets but are not sufficient to pay of all his
obligations. So in the liquidation proceedings there will
be concurrence and preference of credits. Restitution
or liquidation of the remaining assets to pay off his
obligations. Puwede preferred yung creditors,
pabayarin siya. Puwede pro-rata ang creditor so may
portion mabayaran si creditor. So therefore if that
liquidation has still to take place then the creditor has
no right yet to go after the guarantor just because the
debtor has already been declared insolvent.
3. Absconded or cannot be sued within the
Philippines
It is not expected to the creditor should first proceed
against his principal debtor because in this case it
would not become impossible for him to enforce the
court decision against the principal debtor since the
principal debtor has left the country. Remember that
court processes are jurisdictional. It cannot be enforced
outside the Philippine territory unless what we have is
subject matter involving res—property here in the
Philippines. You have to consider the Rules of Court.
But what if the debtor has no properties in the
Philippines? Then it may be useless to go after him in
another country and he cannot fulfill his obligation.
Remember you cannot acquire jurisdiction under civil
procedure, you cannot acquire jurisdiction against the
debtor unless he has properties here in PH wherein
you can acquire jurisdiction over the res or the thing.
But, if there is no property then your action against him
will be useless. Unless he has a manager or a
representative then you can sue the manager or
representative.
4. The principal debtor has not more property
So you need not wait for the excussion of the
properties of the principal debtor because it is already
clear that you cannot pay. You can now proceed
against the guarantor. It would be useless to proceed
against the principal debtor.
Now aside from the exceptions under 2059 we also have to take
into consideration other provisions of the law.
 Pledge or mortgage- because you have to resort
first to the foreclosure of the property mortgaged.
 When we go to 2084, on judicial bondsmen and
subsurety.
Art 2084. A judicial bondsmen cannot demand the exhaustion of
the property of the principal debtor.
A sub surety in the same case, cannot demand the exhaustion of
the property of the debtor or of the surety.
1. There must be compliance with the requirements in
article 2060.
Art. 2060. In order that the guarantor may make use of the
benefit of excussion he must set it up against the creditor upon
the latter’s demand for payment for him, and point out to the
creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.
Under 2059 we have therein the circumstances wherein the
benefit of the excussion is not available to the guarantor. In those
circumstances the principal creditor is not required to pursue all
remedies against the principal debtor.
Under 2060, as a pre requisite before the guarantor can avail of
the benefit of excussion, the guarantor must set this up as a
defense against the creditor. You allege it or interpose it as a
defense kung maningil ang creditor sayo. Sabihin mo, oops, di pa
ako magbayad kay meron pa ako benefit of excussion.
Failure to interpose is essentially a waiver on your part.
So if you are a guarantor and demand is made upon you, you
must set this defense. If the guarantor did not set up his defense
of the benefit of excussion then he is deemed to have waived it.
The other one is if he fails to to point out specific properties of the
principal debtor that are available in the Philippines to cover the
amount of the debts.
Requisites in 2060:
(Before you can avail of the benefit of excussion of the guarantor:
)
1. He must allege this benefit.
2. If a demand is made against him he must set this as a
defense, that there is no cause of action against him
because he has the benefit of the excussion.
3. The guarantor must able to point out specific properties
of the principal debtor available in the Philippines.
So it does not cover properties that are located outside the
Philippines. Why? Because it would be legally impossible for the
creditor to proceed against this property. Chances are, the cost of
going after this properties would be more than the amount of the
obligation therefore rendering the action nugatory. It must be
sufficient to cover the amount of debt, the properties must also be
sufficient to cover the amount of debt.
Even if the guarantor is able to set up the defense and points out
the properties available in the Philippines, but the properties are
not sufficient then it is not within the contemplation of 2060.
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Also take note of the term “available”. The properties that we will
point out must also be available. Meaning it is not subject of
litigation or is not encumbered.
BITANGA VS. PYRAMID
G.R. No. 173526 August 28, 2008
Facts: On March 26, 1997, Pyramid Construction Engineering
Corporation entered into an agreement with Macrogen Realty of
which Benjamin Bitanga is the president. Pyramid is to construct
in favor of Macrogen a commercial building. Pyramid commenced
the construction project on May 1997. However, Macrogen Realty
failed to settle Pyramid's progress billings, which resulted to the
suspension of the work. Pyramid then instituted a case against
Macrogen Realty seeking payment from the latter for the unpaid
billings and project costs.
Before the arbitration case could be set for trial, both parties
entered into a compromise agreement whereby Macrogen Realty
agreed to pay the total amount of P6,000,000 in six equal monthly
installments. Bitanga guaranteed the obligations of Macrogen
Realty under the compromise agreement by executing a Contract
of Guaranty in favor of Pyramid, by virtue of which he irrevocably
and unconditionally guaranteed the full and complete payment of
the principal liability of Macrogen Realty.
However, contrary to petitioner’s assurances, Macrogen Realty
failed and refused to pay all the monthly installments agreed upon
in the Compromise Agreement. Hence, on 7 September 2000,
respondent moved for the issuance of a writ of execution against
Macrogen Realty, which was granted.
On 29 November 2000, the sheriff filed a return stating that he
was unable to locate any property of Macrogen Realty, except its
bank deposit of P20,242.33, with the Planters Bank, Buendia
Branch.
Respondent then made, on 3 January 2001, a written demand on
petitioner, as guarantor of Macrogen Realty, to pay the
P6,000,000.00, or to point out available properties of the
Macrogen Realty within the Philippines sufficient to cover the
obligation guaranteed. It also made verbal demands on petitioner.
Yet, respondent’s demands were left unheeded.
Bitanga argued that the benefit of excussion was still available to
him as a guarantor since he had set it up prior to any judgment
against him. According to him, respondent failed to exhaust all
legal remedies to collect from Macrogen Realty the amount due
under the Compromise Agreement, considering that Macrogen
Realty still had uncollected credits which were more than enough
to pay for the same.
Issue: WON Benjamin Bitanga can avail himself of the benefit of
excussion
Held: NO. Under a contract of guarantee, 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 guarantor who pays for
a debtor, in turn, must be indemnified by the latter. However, the
guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor. This is what is otherwise
known as the benefit of excussion.
Article 2060 of the Civil Code imposes a condition for the
invocation of the defense of excussion. Article 2060 of the Civil
Code clearly requires that in order for the guarantor to make use
of the benefit of excussion, he must set it up against the creditor
upon the latter’s demand for payment and point out to the creditor
available property of the debtor within the Philippines suffiecent to
cover the amount of the debt.
It must be stressed that despite having been served a demand
letter at his office, petitioner still failed to point out to the
respondent’s properties sufficient to cover its debt as required
under Article 2060 of the Civil Code. Such failure on petitioner’s
part forecloses his right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only
property of Macrogen Realty which he found was its deposit of
P20,242.23 with the Planters Bank. Article 2059(5) of the Civil
Code thus finds application and precludes petitioner from
interposing the defense of excussion.
Bitanga had not genuinely controverted the return made by
Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent
efforts, he was not able to locate any property belonging to the
Macrogen Realty, except for a bank deposit with the Planters
Bank at Buendia, in the amount of P20,242.23. It is axiomatic that
the liability of the guarantor arises when the insolvency or inability
of the debtor to pay the amount of debt is proven by the return of
the writ of execution that had not been unsatisfied.
DISCUSSION
So here, we have Bitanga who acted as a guarantor. However,
he cannot avail of the benefit of excussion. The guarantor cannot
be compelled to pay the creditor unless the latter has exhausted
the property of the debtor and resoted to all the legal remedies
against the debtor. As provided under Article 2060, the guarantor
must set up the benefit of excussion against the creditor upon the
latter’s demands for payment. Despite having been served a
demand letter the petitioner still failed to point out properties of
Macrogen Properties which shall cover its debt. With that, such
failure on the petitioner’s part forecloses its right to set up the
defence of exculsion. In addition, the last paragraph of 2059 is
also applicable. Sheriff submitted that the only property of
Macrogen Property is only P20,422 with the bank. So it may be
presumed that the execution on the property of the principal
debtor did not result to the satisfaction of the obligation kasi yun
nalang yung property. And you have to take note na when it
comes to corporation, it has a separate personality so you can
not go after the personal assets of the corporators.
JN DEVELOPMENT CORP., and SPS. RODRIGO and
LEONOR STA. ANA vs. PHIL EXPORT AND FOREIGN LOAN
GUARANTEE CORP G.R. No. 151060, August 31, 2005
Facts: JN Development Corporation and Traders Royal Bank
entered into an agreement whereby TRB would extend to JN
Credit Line for P2M. The loan was covered by several securities,
including an REM from PhilGuarantee. With PhilGuarantee
issuing a guarantee in favor of TRB, JN, petitioner spouses Sta.
Ana and petitioner Narciso Cruz executed a Deed of Undertaking
to assure repayment to PhilGuarantee.
JN failed to pay the loan to TRB upon maturity; thus, on Oct. 7,
1980, TRB requested PhilGuarantee to make good its guarantee.
PhilGuarantee paid TRB. Subsequently, PhilGuarantee made
several demands on JN, but the latter failed to pay. Thereafter,
PhilGuarantee filed a Complaint for collection of money and
damages against herein petitioners.
Issue: WON petitioners are liable to reimburse PhilGuarantee.
Held: YES. Under a contract of guarantee, 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 guarantor who pays for
a debtor, in turn, must be indemnified by the latter. However, the
guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor. This is what is otherwise
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known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies
against the principal debtor have been expanded. Thus, it was
held that the creditor, as a condition precedent, must first obtain a
judgment against the principal debtor before assuming to run
after the alleged guarantor. The guarantor must set it up against
the creditor upon the latters demand for payment and point out to
the creditor available property of the debtor within the Philippines
sufficient to cover the amount of the debt.
While a guarantor enjoys the benefit of excussion, nothing
prevents him from paying the obligation once demand is made on
him. Excussion, after all, is a right granted to him by law and as
such he may opt to make use of it or waive it. PhilGuarantees
waiver of the right of excussion cannot prevent it from demanding
reimbursement from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the latter has paid.
The guarantee was only up to 17 December 1980. JNs obligation
with TRB fell due on 30 June 1980, and demand on
PhilGuarantee was made by TRB on 08 October 1980. That
payment was actually made only on 10 March 1981 does not
take it out of the terms of the guarantee. What is controlling is that
default and demand on PhilGuarantee had taken place while the
guarantee was still in force.
As to the extension of time. The requirement that the guarantor
should consent to any extension granted by the creditor to the
debtor under Art. 2079 is for the benefit of the guarantor. As such,
it is likewise waivable by the guarantor. Thus, even assuming that
extensions were indeed granted by TRB to JN, PhilGuarantee
could have opted to waive the need for consent to such
extensions. Indeed, a guarantor is not precluded from waiving his
right to be notified of or to give his consent to extensions obtained
by the debtor.
DISCUSSION
Excussion may only be invoked where the legal remedies against
the creditor has been expanded. He creditor must first obtain a
judgement against the principal debtor before assuming to run
after the guarantor. Obviously, exhaustion cannot even take place
before judgment have been obtained. To which, in relation to
2016, we have stated that the guarantor must set up the defence
of this benefit upon demand from guarantor. Again, excussion is a
right granted to the guarantor by law and as such he may opt to
make use of it or waive it. Phil Guarantee’s waiver of the benefit
of excussion cannot prevent the petitioner from demanding
reimbursement from the principal debtor. A guarantor is not
precluded from waiving his right to be notified.
Phil Guarantee did not invoke the benefit of excussion. There was
only express renunciation of such benefit. And remember, it is
only the guarantor who can invoke this benefit at his discretion.
Phil Guarantee did not avail of the defenses. So naghanap lang
talaga ng palusot ditto ang principal debtor. He could still be held
liable.
Article 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor resulting
from such negligence.
So here, the creditor failed to proceed against the properties of
the principal debtor and went after the guarantor. However,
despite being informed of the available properties by the
guarantor, the creditor negligently refuses to proceed against this
properties. Subsequently, the that debtor becomes insolvent, or
naunahan ng ibang creditor. What will be the effect of the
negligence of the creditor? The creditor shall suffer the loss to the
extent of such properties. So hindi nya na pwedeng balikan si
guarantor because the guarantor complied with the requirements
under Article 2060. Creditor will suffer the loss.
Article 2062. In every action by the creditor, which must be
against the principal debtor alone, except in the cases mentioned
in article 2059, the former shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he
may, if he so desire, set up such defenses as are granted him by
law. The benefit of excussion mentioned in article 2058 shall
always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.
So the creditor files an action for collection of sum of money. It
must be against the principal debtor. But there is no legal
impediment that would join or implead the guarantor in the action.
Ofcourse during the case, the guarantor must set up this defense
of excussion. But as to the fact of filing, walang problema. What is
required here is that the court must notify the guarantor of the
action. Meaning, there is an obligation to notify the guarantor. He
may also appear in the case. Notify lang yun. With that
notification, the guarantor has two choices: to appear in the case
or not to appear. If he appears, he may set up the defense of
excussion. He can also set up defenses available for the principal
debtor. In fact, even if he voluntarily appears in the case, the
defense of excussion is NOT deemed waived.
Do take note, however, that the guarantor CANNOT be sued
alone before the principal debtor has been held liable. Pwede,
pero principal debtor muna. Pero hindi pwede na hindi ka pa
nagfile against the principal debtor, sa guarantor ka na agad.
Article 2063. A compromise between the creditor and the
principal debtor benefits the guarantor but does not prejudice him.
That which is entered into between the guarantor and the creditor
benefits but does not prejudice the principal debtor.
Compromise is the more preferred mode. It is possible that a
compromise can happen between the creditor and the principal
debtor. And the rule is that it should benefit the guarantor. Kung
ang 100K nagging 50K nalang, that should also benefit the
guarantor. If despite the compromise agreement, then the
guarantor shall be liable for the reduced amount. So the
compromise may benefit but NOT prejudice the guarantor.
Article 2064. The guarantor of a guarantor shall enjoy the benefit
of excussion, both with respect to the guarantor and to the
principal debtor.
This another article that deals with double guarantee. The
obligations of a guarantor can alsobe guaranteed by a sub-
guarantor to which the sub-guarantor may not be held liable
without the benefit of excussion not only as against the creditor
but also the guarantor. Articles applicable to the guarantor shall
also be available to the sub-guarantor.
Article 2065. Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer for the
same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively bound
to pay, unless solidarity has been expressly stipulated.
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The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion
against the principal debtor.
JANUARY 19, 2017
Article 2065. Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer for the
same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively bound
to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion
against the principal debtor.
What we have here is the benefit of division.
What is the scenario here?
You have several guarantors for only one debtor involving only
one debt.
Illustration:
(90,000)
Debtor Creditor
G1 G2 G3
30K 30K 30K
Let’s us say the money borrowed by the debtor from the creditor
is 90,000 pesos. There are 3 guarantors. Now as guarantors we
know that their liability is subsidiary, the guarantor can go only
after them as long as the assets of the debtor has already been
exhausted, unless there is an exemption.
Let us say “na exhaust na” “pwede na maningil si creditor” how
much can the creditor collect from one guarantor? Can he force
one of the creditors to pay for the entire 90,000 pesos? Because
of the rule in 2065 for benefit of division, extend of liability of each
guarantor is only 30,000 pesos.
Notice here that what you have are guarantors but the nature of
liability among them is joint. Of course the exemption here is if
they have an agreement that they are solidarily bound to the
obligation of the debtor.
What do you mean that “solidary sila? Pwede ba yon guarantor
pero solidary?” “Pwede, guarantor sila with regards sa debt ni
debtor, so ang obligation nila when it comes to him is hindi
solidary but subsidiary lang and accessory. But as to among
themselves they are considered solidary debtors by their
agreement wherein if the creditor after exhaustion of the
properties of the debtor, if creditor demands from any of
them(guarantors) they can compel them to pay for the entire
90,000 obligation, again that is if the have agreed to be solidary
guarantors; but if in the absence of any agreement or stipulation
that they are solidary guarantors, they would only be considered
as joint guarantors of the principal debtor in which they cannot be
compelled to pay more than their proportionate shares in the
obligation of the principal debtor.
Please take note of the benefit of division, “iba sya from
excussion; both of them exist in a contract of guaranty pero the
benefit of division exist when 1. You have several guarantors (at
least 2); 2. Involving one debtor; 3. For one debt or obligation
MIRA HERMANOS V. MANILA
Petitioner Mira Hermanos delivered merchandise on consignment
to respondent Manila Tobacconists to be sold by the latter. To
secure the obligation, petitioner required respondent a bond of
P3k which was executed by Provident Insurance.
However, the business of respondent increased so that the
merchandise it received from petitioner exceeded the P3k bond.
Hence, an additional bond of P2k was executed by Manila
Compañia with the same terms and conditions (except as to the
amount) as the bond of the Provident.
Upon final and complete liquidation, respondent has an unpaid
balance of P2,272.79 to petitioner. When it failed to pay,
petitioner demanded payment from the two surety companies.
Provident paid only P1,363.67, which is 60% of the amount owed
by respondent alleging that the remaining 40% should be paid by
Manila Compañia. However, Manila Compañia refused to pay the
balance contending that so long as the liability of the respondent
did not exceed P3k, it was not bound to pay anything because its
bond referred only to the obligation of the respondent in excess of
P3k and up to P5k.
ISSUE: W/N Provident Insurance is entitled to the benefit of
division.
RULING: NO
The benefit of division refers to several sureties of only one
debtor for the same debt. In the instant case, although the two
bonds on their face appear to guarantee the same debt co-
extensively up to P2k — that of the Provident alone extending
beyond that sum up to P3k — it was pleaded and conclusively
proven that in reality said bonds, or the two sureties, do not
guarantee the same debt because the Provident guarantees only
the first P3k while the Manila Compañia, only the excess over
and above said amount up to P5k. Hence, the benefit of division
does not apply in this case. Otherwise, there would have been no
need for the additional bond of P2k if its purpose were to cover
the first P2k already covered by the P3k bond of the Provident.
If the purpose of the additional bond of P2k were to cover not the
excess over and above P3k but the first P2k of the obligation of
the principal debtor like the bond of P3k which covered only the
first P3k of said obligation, then it would result that had the
obligation of the respondent exceeded P3k, neither of the two
bonds would have responded for the excess, which was precisely
the event against which petitioner Mira Hermanos wanted to
protect itself by demanding the additional bond of P2k.
For instance, suppose that the obligation of the principal debtor
Tobacconists amounted to P5k. If both bonds were co-extensive
up to P2k, like what Provident is contending, the result would be
that the first P2k of the obligation would have to be divided
between and paid equally by the two surety companies, which
should pay P1k each, and of the balance of P3k the Provident
would have to pay only P1k more because its liability is limited to
the first P3k, thus leaving the plaintiff in the lurch as to the excess
of P2k.
That was manifestly not the intention of the parties. As a matter of
fact, when the Provident gave its bond and fixed the premiums
thereon it assumed an obligation of P3k in solidum with the
Tobacconists without any expectation of any benefit of division
with any other surety. The additional bond of P2k was, more than
a year later, required by the creditor of the principal debtor for the
protection of said creditor and certainly not for the benefit of the
original surety, which was not entitled to expect any such benefit.
Take note of the facts in Mira, in this case you cannot apply
benefit of division as provided in 2065. While you have here 2
sureties (2065 can be applicable for both guarantors and
sureties) and one debtor which Manila Tobacconists, however the
obligation guaranteed by Provident and Manila Compania de
Seguros are different. For provident the first 3,000 and for Manila
Compania “ang sobra sa 3,00” up to 5,000 pesos. In other words,
you cannot apply here ‘yung rue of division. Do remember yung 3
requisites.
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3 requisites of the benefits of division:
(1) There must be one debtor;
(2) Several guarantors; and
(3) One obligation.
Do you remember that case we discussed last time? Prudential,
yung isa lang yung nag perma. Yung intention nun is guarantor
sila and they will be solidary an exemption to the benefit of
division, since by agreement they gave their consent to be
solidariliy be bound as guarantors.
Requisites for 2065 to apply:
(1) There must be one debtor with several guarantors of
the same obligation;
(2) It must be claimed by guarantor should the co-
guarantors __ in the manner;
(3) Solidarity must not have been expressly stipulated.
Take note that unlike the benefit of excussion, the benefit of
division cannot be expressly renounced. In other words it Is either
joint or solidary talaga ang obligation ng several guarantors or
sureties, only solidary by agreement. If there is no agreement
joint, as provided in 2065.
Take note also that in regards to the guarantors themselves, they
are co-guarantors hindi sila sub guarantors. With regard to these
co-guarantors hindi required yung application ng 2060. What is
2060? Yun allege the right to the benefit of excussion, point out
specific properties of the debtor available in the Philippines.
Guarantor 1 cannot refuse to pay on the ground na mag point out
sya ng properties ni guarantor 2 and 3. 2060 is not applicable to
co-guarantors but you can apply it to sub-guarantors and of
course the guarantor himself.
SECTION 2
Effects of Guaranty Between the Debtor and the Guarantor
Article 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the
payment was made known to the debtor, even though it did not
earn interest for the creditor
(3) The expenses incurred by the guarantor after
having notified the debtor that payment had been demanded
of him;
(4) Damages, if they are due.
2066, we have here the rights of a guarantor. Take note that we
have here the term indemnify, in other words here the right to
collect what is covered of this indemnity is available only to a
guarantor who pay.
Remember a contract of guaranty is a contract of indemnity, in
which the guarantor can recover only what he has paid, he
cannot be indemnified by something he did not pay. Indemnity
mean reimbursement. Now what can the guarantor recover or
collect from the principal debtor. Obviously he can collect the total
amount of the obligation because this is the amount the guarantor
guaranteed to pay the creditor.
No. 2 you are talking about legal interest, take note from the time
the payment was made known to the debtor even though it did
not earn interest to the creditor. In other words, here liable si
debtor ng interest kay guarantor even if si guarantor hindi liable
ng interest kay creditor. The interest covered here is of course not
the interest in contemplation of a contract of loan which must be
in writing, yung interest by stipulation. Legal interest in the sense
of damages or in case of default or delay on the part of the
payment. So what would happen here? The creditor was paid by
the guarantor upon due date or wala nag collect si creditor ng
interest for any delay. But the guarantor himself can collect for
legal interest against the principal debtor from the time the
guarantor made known to the debtor such payment. So even if
the guarantor did not pay interest to the creditor, he (guarantor)
nevertheless notified the debtor of the payment, but despite
notification wala nag bayad si debtor and therefore there is delay
on his part. And delay will be liable for interest from the time of
notice, legal interest shall now accrue in favor of the guarantor
What’s the premise here?
This is because kung hindi binayaran ni guarantor si creditor, the
guarantor could have use the money for some other purpose
(pinahiram sa and could have earned interest, could have bought
something and enjoyed it) so that is the basis for the recovery of
interest
Also the right to be indemnified for expenses incurred, in this
case despite notice to the debtor for the obligation, wala, because
of that si guarantor nag barrow sya ng pera, liable xa ng interest
dun sa hiniraman nya ng pera that would be considered interest
expense on the part of the guarantor. Pwede rin nya rin yan ipa
reimburse sa principal debtor. If he incuse expenses in collecting
and demanding payment (travel expenses) those expenses can
be part of the action for reimbursement, also for damages, dahil
nag bayad si guarantor kay creditor tapos hindi sya agad
binayaran ni debtor, what happened, the guarantor parang law
student sleepless nights, mental anguish so he can be entitled for
damages.
Article 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
What is involved in 2067 is that the guarantor paid with the
knowledge of the principal debtor. If the guarantor guaranteed the
obligation without the knowledge or the consent of the principal
debtor, remember in our previous discussion he is entitled only to
beneficial reimbursement kung wala syang consent from the
principal debtor na e guaranty yon. But if the debtor gave his
consent for that guarantor to guaranty his obligation such
guarantor is entitled not just for beneficial reimbursement but he
has the right to be subrogated to the rights that were previously
available to the creditor. So all rights which the creditor had
against the debtor, the guarantor is subrogated thereto
(mortgage, pledge or penalty imposed by reason of agreement)
the guarantor is entitled to such rights as held because of the
benefit of subrogation.
This rights use 2067, however are available to a paying
guarantor because a contract of guaranty is a contract of
indemnity. So the guarantor who pays is subrogated by virtue to
all the right which the creditor had against the debtor and if he
had compromise with the creditor he cannot demand
reimbursement to the debtor more than what he has actually paid,
now that provision is to prevent collusion between the creditor
and the guarantor, in the sense na maka ginansya pa si
guarantor kay he paid for a lesser amount doon sa creditor but he
demanded for the original obligation from the principal debtor.
Now, with regard to knowledge of principal debtor dito sa 2067,
may knowledge and consent si debtor kay guarantor.
Article 2068. If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the defenses which
he could have set up against the creditor at the time the payment
was made.
When it comes to payment we have 2068;
So what happens? The guarantor paid the obligation but did not
tell the debtor that he will pay the obligation. What is the right
available for the debtor? He may set up defenses which he could
have enforced against the creditor at the time the obligation
became due. Dahil hindi sinabihan ni guarantor si debtor na mag
bayad na sya. Guarantor paid for the obligation in full, now he
seeks reimbursement from the debtor, debtor refuses to pay on
the ground that there was already payment or there was for
example dation en pago or the obligation had already prescribed,
this are defenses that can be used by the principal debtor as
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against the guarantor. So that the guarantor cannot compel the
principal debtor to pay. The guarantor has to suffer here. Why?
Kasi nagpa hawod hawod nagpa hero hero. Again here what is
involved in 2068 is that he (guarantor) did not notify the debtor of
the payment; this is different from getting the consent of the
debtor for you to guaranty the obligation, ditto sa 2068 it is still
possible that you are entitled to subrogation because at the time
you agreed to be a guarantor the principal debtor gave his
consent thereto he has knowledge ang problema lang is that at
the time of payment mag bayad kana hindi mo sya (debtor)
sinabihan, ngayon si debtor nag bayad na or did not pay it
because the obligation has already prescribed. Nevertheless, the
guarantor cannot seek reimbursement from the debtor because of
such defenses even if at the time he agreed to be a guarantor he
has the consent of the principal debtor. So again it is possible that
the guarantor acted as such with the knowledge and consent of
the debtor but he did not inform the debtor at the time of payment,
therefore debtor may set up as against the guarantor those he
could have set up as against the principal creditor if the guarantor
pay without notifying the debtor. It just shows here that the
guarantor has the obligation to notify the debtor that he is going to
pay kasi kungna notify nya then he will know if there is
prescription or previous payment and therefore hindi na sya
magbayad now if part of the obligation has already prescribe then
yung part lang na yun ang hindi liable for reimbursement si
principal debtor. The flaw that is covered in 2168 is that the
debtor in not notified before the guarantor paid.
But what if, gave consent, notified before payment, debtor did not
say anything, upon reimbursement the principal debtor raises
prescription so as not to incur liability. Can the guarantor compel
him to pay considering na may consent and there was notification
of payment?
Not anymore. Its not there but you can apply principle of estoppel.
So by his silence or by his acts he is deemed to have waived to
raise these defenses.
Article 2069. If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor.
Alright! So what do we have here? we have an exited guarantor.
The obligation is not yet due, the principal creditor cannot
obviously enforce the obligation or demand for the payment
thereof. But the guarantor paid before the debt was due because
as mentioned he is excited, of course even if the guarantor paid
before the debt became due he cannot yet ask reimbursement
from the debtor. Why? Because his payment was premature, so
wala pa syang right to reimbursement. The guarantor simply has
to wait until the obligation become due and demandable only
exception is he can demand it from debtor if debtor ratifies such
premature payment or such payment is made with the consent of
the debtor, if it has been ratified by the debtor then this means
that the debtor waived the benefit of the period and in other words
pwede na maka seek ng reimbursement si guarantor sa kanya
even if the obligation has not yet mature.
Article 2070. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the debtor,
but only against the creditor. Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous event
from advising the debtor of the payment, and the creditor
becomes insolvent, the debtor shall reimburse the guarantor for
the amount paid.
In relation to 2070 we go back to 2068, why notice to debtor is
important one of the effects is that of 2010, as we had discussed
in 2068, the guarantor must 1st notify the debtor so that the debtor
may properly notify the guarantor of payment or his defences
available , but in 2070 we have a guarantor who paid without
notice of the debtor, so again the debtor does not know of such
payment then anong nanyari? Nagbayad din si debtor kay
creditor, si creditor naman tanggap lang din nang tanggap. In this
scenario, you will see that it is necessary that if you are the
guarantor you notify the debtor of your intent to pay for the
obligation. Such payment is for the benefit of the guarantor as
well of the debtor, so that the debtor will not repeat payment. Now
what happens if si guarantor nagbayad without notice to debtor
and si debtor nagbayad din. Can the guarantor seek
reimbursement from the debtor considering na he did not give
notice to the debtor of his intended payment. Article 2070 tells us
that the guarantor cannot seek reimbursement from debtor. Why?
Because he did not advise debtor. Malay ba naman sa debtor na
magbayad talaga si guarantor, debtor in good faith bayad din sya
ng kanyang utang. What is the remedy here of the guarantor?
The guarantor should go not against the principal debtor but
rather sa creditor Solutio Indebiti payment by mistake , but article
2070 tells us that na its possible for guarantor to seek
reimbursement from the debtor himself in case there is double
payment as long as the following requisites are present
(1) It must be a gratuitous guaranty –the guarantor acted
as such without receiving any consideration, he agreed
to be a guarantor just out of his liberality
(2) The guarantor was prevented by a fortuitous event in
notifying the debtor – so here there was urgency to pay
the obligation and he cannot notify the debtor because
there is a fortuitous event or he cannot contact
(calamity, off communication system) but he wants to
pay already because the obligation is due and
demandable, nevertheless hindi nya na notify si
principal debtor.
(3) The creditor becomes insolvent – remember the 1st
remedy here of the guarantor in case of double
payment is to go after the principal creditor, seek for
the return of the payment base on Solutio Indebiti. Now
if it turns out na wala na palang property si creditor at
the time the guarantor seeks return of the payment –
the creditor becomes insolvent, as long as the guaranty
is gratuitous and the guarantor was prevented by a
fortuitous event from notifying the debtor and the
creditor becomes insolvent – if all this are present then
the guarantor can seek reimbursement from the
principal debtor. Kulang ng isa the guarantor cannot
seek reimbursement from the principal debtor.
Notice if you look at 2070 it does not matter kung sino ang unang
nagbayad it is possible nauna nagbayad si guarantor and the
subsequently si debtor.
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him
from the guaranty within a specified period, and
this period has expired;
(4) When the debt has become demandable, by reason
of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be
extinguished except within a period longer than ten
years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
In all these cases, the action of the guarantor is to obtain release
from the guaranty, or to demand a security that shall protect him
from any proceedings by the creditor and from the danger of
insolvency of the debtor. (1843a)
Alright, remember the general rule that a contract of guaranty is a
contract of indemnity. Therefore it is only when the guarantor
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proceed and collect against the principal debtor. For
reimbursement to whatever he has made the expenses he has
incurred and damages he has suffered kung meron.
But under 2071. What we have here is a guarantor, who have not
been paid. But the law clearly provides him the right to proceed
against the principal debtor.
Take note in 2071. While the guarantor is allowed to proceed
against the principal debtor, it is not for reimbursement. Still
cannot seek reimbursement, because he can only seek
reimbursement if there has been payment. Wala pa naman
sigurong tao na nag hingi ng reimbursement na hindi naman siya
mismo ang nag labas ng pera.
The proceeding here may be instituted by the guarantor after he
has made liable. But again not before payment.
What was the purpose in 2071?
This enables the guarantor, by allowing him to proceed against
the principal debtor despite wala pang nabayaran, enables the
guarantor to take measures for the protection of his own interest
in view of the probability that he would be called upon to pay.
(1) Probably, he would be called upon to pay. He would be liable
if he is sued for payment.
In case of insolvency of the principal debtor, we know under
2059, that as to the guarantor, the benefit of excussion is not
available anymore. Therefore, 2071 it is for protecting own
interest
(3) There is already breach of obligation with respect to the
guarantor. There was an agreement that the guaranty was for a
specific period. So it presupposes that within that agreed period
that the principal debtor will pay. However, the period has
lapsed/expired but the principal debtor did not pay. So 2071 gives
the right to the guarantor to proceed against the principal debtor.
(4) The obligation has become due and demandable because the
period has already expired, again the guarantor is allowed to
proceed against the debtor.
(5) Gen. rule: after 10 yrs. if the obligation has no fixed period.
Supposed to be, or rather, the obligations subject to a period, if it
expires, it is covered under number 4. Pero kung walang period
stipulated by the parties, the rule to be applied is 10 years. If the
obligation cannot be performed until after 10 yrs. then what would
happen is that after 10 yrs. it cannot be enforced. For example if
they entered into a contract and the contract should be performed
in the 11 yr. or after 10 yrs., so w/in the 10 yr. period the
obligation cannot be enforced.
(6) Here mag abscond or the reasonable grounds that the debtor
intends to abscond. Intention is sufficient. Of course, if there is
reasonable grounds that the debtor will abscond. To protect its
own interest, he need not wait na maka layas c principal debtor,
so 2071 is given as a remedy.
(7) Take note imminent danger of insolvency on the part of the
principal debtor. So under number 7, the fact of insolvency is not
required, imminent danger of becoming insolvent. Probability that
the debtor will become insolvent, 2071 is an available remedy.
So what happens, what is the action here of the guarantor? What
is his prayer? in other words in this complaint. The guarantor
obviously cannot demand reimbursement. What he seeks under
2071 is either to
 release him from the guaranty or
 demand another security to protect him from the proceedings
Remember however that the contract of guaranty is between the
guarantor & the creditor.
In case there is release, take note that release is not effective
unless there is consent from the creditor. Without consent of the
creditor, isang remedy lang ang maiwan: demand security to
protect the guarantor from the said proceedings.
MANILA SURETY VS. BATU
May 21, 1957
FACTS:
Defendant Batu Construction, as principal, and the plaintiff
Manila Surety, as surety, executed a surety bond for the sum of
P8,812.00 to insure faithful performance of the former's obligation
as contractor for the construction of the Bacarra Bridge.
On the same date, Batu Constrction and the defendants
Carlos Baquiran and Gonzales Amboy executed an indemnity
agreement in favor of plaintiff Manila Surety which provides that:
The defendants would "indemnify the COMPANY for any
damage, loss, costs, or charges, or expenses of whatever kind
and nature, including counsel or attorney's fees, which the
COMPANY may, at any time, sustain or incur, as a consequence
of having become surety upon the above mentioned bond; said
attorney's fees shall not be less than fifteen (15%) per cent of the
total amount claimed in any action which the COMPANY may
institute against the undersigned (the defendants except Andres
Tunac) in Court," and that "Said indemnity shall be paid to the
COMPANY as soon as it has become liable for the payment of
any amount, under the above-mentioned bond, whether or not it
shall have paid such sum or sums of money, or any part thereof,"
Later on, however, plaintiff received a notice from the Director
of Public Works the annulment of the construction contract
because of its failure to make satisfactory progress in the
execution of the works with the warning that any amount spent by
the Government in the continuation of the work, in excess of the
contract price, will be charged against the surety bond furnished
by the plaintiff. Also, the laborers of the said construction project
filed a complaint against Batu Construction and Manila Surety for
unpaid wages amounting to P5,960.10.
By reason thereof, plaintiff brought an action against the
defendants alleging that defendants are in imminent danger of
becoming insolvent and that they be ordered to deliver to the
plaintiff such sufficient security as shall protect plaintiff from the
any proceedings by the creditors on the Surety Bond.
The defendants denied any liability alleging that they were not
in imminent danger of insolvency, neither did they remove or
dispose of their properties with intent to defraud their creditors.
They further argued that there has been no liquidation yet of the
expenses incurred in the construction of the Bacarra Bridge and
not until after such liquidation shall have been made could their
liability be determined and fixed. Lastly, they argued that the
remedy provided for in the last paragraph of article 2071 of the
NCC may be availed of by the guarantor only and not by a surety.
ISSUES:
1.W/N a surety may avail of the remedy under the last paragraph
of article 2071 of the NCC. YES
2.W/N plaintiff’s cause of action falls under Article 2071. YES
RULING: BOTH YES
First issue
The reason which could be invoked for the non-availability to
a surety of the provisions of the last paragraph of Article 2071
would be the fact that guaranty, like commodatum, is gratuitous.
But guaranty could also be for a price or consideration as
provided for in Article 2048. So, even if there should be a
consideration or price paid to a guarantor for him to insure the
performance of an obligation by the principal debtor, the
provisions of article 2071 would still be available to the guarantor.
In suretyship the surety becomes liable to the creditor without
the benefit of the principal debtor's exclusion of his properties, for
the surety maybe sued independently. Hence, he is an insurer of
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the debt and as such he has assumed or undertaken a
responsibility or obligation greater or more onerous than that of
guarantor. Such being the case, the provisions of Article 2071,
under guaranty, are applicable and available to a surety. The
reference in Article 2047 to, the provisions of Section 4, Chapter
3, Title 1, Book IV of the NCC, on solidary or several obligations,
does not mean that suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing guaranty.
Second issue
The plaintiff's cause of action does not fall under:
1.Article 2071(2) because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of
lack of progress in the construction of the bridge is no proof of
such insolvency.
2.Article 2071(3) because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a
specified period which already has expired, because the surety
bond does not fix any period of time and the indemnity agreement
stipulates one year extendible or renewable until the bond be
completely cancelled by the person or entity in whose behalf the
bond was executed or by a Court of competent jurisdiction.
3.Article 2071(4), because the debt has not become demandable
by reason of the expiration of the period for payment.
4.Article 2071(5) because of the lapse of 10 years, when the
principal obligation has no period for its maturity, etc., for 10
years have not yet elapsed.
5,Article 2071(6), because there is no proof that there are
reasonable grounds to fear that the principal debtor intends to
abscond.
6.Article 2071(7), because the defendants, as principal debtors,
are not in imminent danger of becoming insolvent, there being no
proof to that effect.
Nevertheless, the plaintiff's cause of action comes under
Article 2071(1), because the action brought by the laborers for the
collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge
undertaken by the Batu Construction, and one of the defendants
therein is the herein plaintiff Manila Surety.
Article 2071(1) provides that the guarantor, even before
having paid, may proceed against the principal debtor "to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor or from the
danger of insolvency of the debtor, when he (the guarantor) is
sued for payment. It does not provide that the guarantor be sued
by the creditor for the payment of the debt. It simply provides that
the guarantor of surety be sued for the payment of an amount for
which the surety bond was put up to secure the fulfillment of the
obligation undertaken by the principal debtor.
Hence, the suit filed by the laboeres in the Justice of the
Peace Court of Laoag, province of Ilocos Norte, for the collection
of unpaid wages earned in connection with the work done by
them in the construction of the Bacarra Bridge, Project PR-72(3),
is a suit for the payment of an amount for which the surety bond
was put up or posted to secure the faithful performance of the
obligation undertaken by the principal debtors (the defendants) in
favor of the creditor, the Government of the Philippines.
SC emphasized that the provisions of 2071 under guaranty are
applicable and available to a surety. Even if the surety here has
not yet paid the principal creditor, he can avail of the remedies
under 2071—either to obtain release or ask for another security
from the principal debtor.
Among the instances in 2071, plaintiff’s cause of action comes
under par. 1 of 2071 because the action he brought for the
collection of unpaid wages is in connection of the construction
and one of the defendants is Manila Surety.
Again, under par. 1, “when he is sued for payment.”
Take note of the case of Special Steel v. Villareal (GR No.
143304, July 8, 2004). In this case, SC expressly stated that
since there is no guaranty in the circumstances in this case, 2071
does not apply to a surety. It also held that the surety in this case
could not just unilaterally withheld the respondents’ wages as a
preliminary remedy under 2071. However, further readings of the
decision of the court, it tackled on the remedy for a surety, which
is by instituting an action to demand for security. The court here
did not outrightly or expressly overturn the Manila Surety case.
Although this case expressly stated that “2071 does not apply to
a surety,” the 2 cases could still be reconciled.
There is no conflict and 2071 should still be applicable because of
that ruling in Special Steel wherein the remedy given to the surety
is to file a separate civil action—which is the intention of 2071. I
think the emphasis here is that the surety could not, in the same
action, exercise the remedy that may have been available under
2071.
They could only demand a security since there still no actual
payment.
What is the intention in 2071? To require a security from the
principal debtor. So, I think that 2071 can still be applicable even
in contracts of suretyship, not just in contracts of guaranty.
Thus, although not expressly stated in this 2004 case, that can
still be reconciled with the Manila Surety case.
Recap: Benefit of division available to several guarantors of
only one debtor of the same obligation. It must be claim on a
timely manner. It is only available unless solidarity is expressly
stipulated. 2066 the rights of the guarantor to what extent can he
asked for indemnification. 2067 with regard to a guarantor who is
entitled to subrogation. 2068 you relate that to 2070 with regard
to the effect of absence of notice by the guarantor to the debtor
for paying the creditor. 2069 the effect of the guarantor who paid
before the obligation was due.
And we have Article 2071, we have emphasized the
proceeding here is not reimbursement, as the guarantor did not
yet paid, do remember that the contract of guaranty is a contract
of indemnity. Such indemnity takes place if the guarantor paid the
principal creditor. But in 2071, the guarantor can file an action
against the debtor even if he has not yet paid the creditor. The
guarantor of course cannot demand reimbursement.
So what does he entitled under 2071? To seek for release or
for him to be release from the guaranty. Although we have
emphasized that for this to take place it must be made to the
consent of the creditor. Because again the debtor has no power
to release the guarantor from the guaranty in the absence of the
creditor’s consent. Because essentially, the contract of guaranty
is between the creditor and the guarantor.
Under 2071, aside from release with the consent of the
creditor, if such cannot be sought he can nevertheless demand
another security from the debtor to protect him from the
proceedings. Now last meeting, we have discussed the case of
Manila Surety, wherein Article 2071 is applicable to a contract of
suretyship as well.
Although we pointed out that in the Special Steel Case in
2004, there is statement there by the SC that it does not apply to
the surety. Nevertheless, if you look at the decision, the remedy
that was suggested there was to file an action instituting an action
to demand security. So again, if you look at 2071 that is one of
the things that the guarantor can demand from the debtor.
So if we try to reconcile these two cases of Manila Surety and
Special Steel case, essentially it just points out that for you to
avail of Article 2071 you have to file a separate action. You
cannot just withheld any property of the debtor in order to secure
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the eventual payment of the guarantor to the creditor. So, again place. Is 2071 here applicable? Which is 1843 of the Old Civil
please try to read the case of Specialty Steel. Code. What is the remedy being sought? Release from guaranty
or demand a security. But if you look at the action filed. It is not.
TUASON vs. MACHUCA What is the basis of the action? The agreement that the
FACTS: defendant bound himself to pay the plaintiff as soon as the latter
may have become bound and liable whether or not he should
Manila Compaña executed a bond of P9,663 in favor of have actually paid. So that must be the basis of the claim here.
Universal Trading Company (UTC) for the payment of its There was already a final judgement wherein the plaintiff is bound
imported sundry goods. However, before paying the said sum, to pay the note executed in favor of Manila Compania de
Manila Compaña obtained from UTC and Tuason Co. a solidary Seguros. So even if there no actual payment. Pwede na siya mag
note for the same amount. As a consequence thereof, UTC and file ng action because of there express stipulation. Plaintiff
its president Machuca bound themselves solidarily to pay, became bound and liable by a final judgment to pay the value of
reimburse, and refund to the company all such sums or amounts the note to "Manila Compañia de Seguros."
of money as it, or its representative, may pay or become bound to
pay, upon its obligation with Manila Compaña whether or not it Also do take note here the issue of expenses where being claim.
shall have actually paid such sum or sums or any part thereof. However in the regards the SC held that, that litigation was
Manila Compaña paid the value of the sundry goods. Later originated by the plaintiff having failed to fulfill its obligation with
on, however, UTC was declared insolvent causing Manila "Manila Compañia de Seguros," and it cannot charge the
Compaña to file a complaint against Tuason recover the value of defendant with expenses which it was compelled to make by
the note with interest in the total sum of P12,197.27. By final reason of its own fault. So only the principal obligation. Not the
judgment, Tuason was ordered to pay Manila Compaña the said litigation expenses.
sum.
On the other hand, Tuason sought recovery of the said sum Q: Now what are the distinctions of 2066 and 2071?
to defendant Machuca plus attorney’s fees, court’s costs and
sheriff fees plus interest in the total sum of P15,353.19. It must be Article 2066 Article 2071
noted, however, that plaintiff Tuason was not yet able to pay contract of indemnity, a Not reimbursement but for
Manila Compaña the said sum. demand for reimbursement the release from the guaranty
or security of the
ISSUE: W/N Tuason may also recover the litigation expenses it performance to protect the
incurred with Manila Compaña by virtue of the note executed by surety from obligations
Machuca. available as a remedy after before the guarantor has paid
the guarantor has paid but after he has become
RULING: NO liable
a right of action after payment Preventive remedy before
The action cannot be held to come under Article 1843 of the payment
CC since the payment was not yet made by plaintiff Tuason. It is substantive right preliminary
true that, under Article 1843, an action lies against the principal remedy
debtor even before the surety pays the debt, but it clearly appears a right of action, which seeks to obtain for the
in the complaint that this is not the action brought by plaintiff. At without the provisions of the guarantor release from the
any rate this article does not provide for the reimbursement of any other, might be worthless guarantee or the security to
amount, as is sought by the plaintiff.la protect him from any
Nevertheless, proceedings by the creditor
Nevertheless, plaintiff Tuason is entitled to the relief sought. and from the danger of
According to the document executed solidarily by Machuca and insolvency by the debtor
the UTC, defendant Machuca bound himself to pay the plaintiff as
soon as the latter may have become bound and liable, whether or
not it shall have actually paid. It is indisputable that the plaintiff KUENZLE vs. SUNCO
became bound and liable by a final judgment to pay the value of
the note it executed in favor of Manila Compañia. FACTS:
Hence, the plaintiff has the right to recover from the
defendant the sum of P9,663, or the value of the note executed Plaintiff Kuenzle instituted an action against Chung Chu Sing
by the plaintiff in favor of Manila Compañia which the plaintiff is for payment of debt. However, before the plaintiff could secure a
under obligation to pay by virtue of final judgment. However, the judgment, defendant Tan Sunco instituted four separate actions
defendant cannot be obliged to pay the plaintiff the expenses against Chung Chu Sing alleging that he was a surety for Chung
incurred by it in the litigation between it and Manila Compañia. Chu Sing for the payment of certain merchandise purchased by
That litigation was originated by the plaintiff having failed to fulfill the latter evidenced by four invoices in varying amounts. Chung
its obligation with Manila Compañia, and it cannot charge the Chu Sing confessed judgment in favor of Tan Sunco.
defendant with expenses which it was compelled to make by Tan Sunco then caused to be levied upon under execution all
reason of its own fault. It is entitled, however, to the expenses of the property of Chung Chu Sing. Kuenzle moved to set aside
incurred by it in this action brought against the defendant, which the judgment on the ground that the four judgments were
are fixed at P1,653.65 as attorney's fees. obtained by collusion and fraud, because the debtor did not owe
anything to Tan Sunco at the time the four judgments were
Q: What is the relief that they are seeking from the court? secured and that Tan Sunco had not yet paid the said sums for
which he had become surety.
A: That he will be reimbursed or refunded by the Universal Credit
Company. But since the company became insolvent He is going ISSUE: W/N Article 1843 (now 2071) is applicable in this case.
against Antonio Machuca.
RULING: YES
Q: When you say reimbursement, has actual payment already
taken place? Article 1838 (now 2066) distinguished from Article 1843 (now
2071)
A: None.
Article 1838 (now 2066) Article 1843 (now 2071)
Q: Is article 2071 be resorted? Is the remedy sort for covered in Provides for the enforcement Provides for the surety’s
such article? What is the basis of his action? of the right of the surety protection before he has paid
against the debtor after he but after he has become
So here, you cannot have 2066, this is not an action for has paid the debt liable to do so
reimbursement. Why? Because actual payment has not yet taken

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Gives a right of action after
payment
In the nature of substantive
right
Gives a right of action which,
without the provisions of the
of the other, might be
worthless.
The surety is past the point
where a preliminary
protective remedy is of any
value to him.
Gives a protective remedy
before payment
In the nature of preliminary
remedy
Purposes of obtaining for the
surety relief from the burden
of his suretyship or a
guaranty to defend him
against any proceedings of
the creditor and from the
danger of insolvency of the
debtor.
To give to the surety a
remedy in anticipation of the
payment of the debt, which
debt, being due, he could be
called upon to pay at any
time, it remains only to say, in
this connection, that the only
procedure known under our
present practice to enforce
that right is by action
ARTICLE 2072. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.
Here, we have a third person who is not a party to the contract,
not the debtor, not the creditor, not the guarantor. But, he’s the
person who request the guarantor to become as such. What
would happen here? So let’s say Julian would borrow money from
JC. So Julian debtor and JC creditor. Let us say, you have here,
Vanessa concerned citizen, sabi nya “Uy hanap ako ng guarantor
si Julian”. So she approaches Celeste as the guarantor sa utang
ni Julian kay JC. So what do we have here, we have third person
Vanessa who is not a party to the contract of guaranty not a party
to the principal obligation. But 2072 gives a cause of action
against her. To which she can be held liable. Again, because she
made that request to another person to act as a guarantor. So if,
Celeste makabayad siya kasi di nagbayad c Julian, meron course
of action c Celeste against Vanessa. The third person cannot
raise the defense that she cannot be sued because she is not a
privy to the contract. 2072 is the basis, the law provides such a
third person can be made liable.

Defendant Sunco availed himself of that right against the
debtor. The methods he employed were unusual but the evidence
adduced is entirely insufficient to establish such fraud and
collusion that would justify the setting aside of judgment assailed.
Nevertheless, while the surety has the right to obtain as he
did the judgments against the principal debtor, he ought not to be
allowed to realize the said judgments to the point of actual
collection of the same until he has satisfied or caused to be
satisfied the obligation which he assures. Otherwise, a great
opportunity for collusion and improper practices between the
surety and his principal would be offered which might result to the
injury and prejudice of the creditor who holds the claim against
them. In other words, Sunco shall not execute said judgments
against the property of the judgment debtor until he has paid the
debt for which he stands as surety.
Q: Which provision is applicable here? 2066 or 2071?
A: The article applicable here ma’am is 2071.
So take note of the distinctions between Article 2066 previously
1838 and Article 2071 previously 1843. 2066, again, provides for
the enforcement for the rights of the surety or guarantor against
the debtor after he has paid the debt and Article 2071 provides for
the protection after he has paid but after he has become liable to
do so. Now on the other hand, 2066 is a right of action after
payment. 2071 is a protective remedy before payment. 2066 is a
substantive right while 2071 is a preliminary remedy. 2066 right of
action which without the provisions of 2071 might be worthless.
The remedy given by 2071 is to obtain relief from the burder of
his suretyship or guaranty to defend him against any proceedings
of the creditor from the danger of insolvency. 2066 has no such
purpose, when the surety’s right under this article become
available, he is past the point where a preliminary protective
remedy is of any value to him.
So the purpose of 2071, is to give surety a remedy in anticipation
of the payment of the debt which if it becomes due he may called
upon to pay at any time. The only procedure is to enforce that
right despite action. As soon as he availed himself of that right
under 2071 against the debtor. The methods employed are that
unusual but not of themselves fraudulent. So, the action filed by
Sunco is actually under 2071. However the SC emphasized, that
while surety has the But while the surety has the right to obtain as
he did the judgments against the principal debtor, he ought not to
be allowed to realize the said judgments to the point of actual
collection of the same until he has satisfied or caused to be
satisfied the obligation the payment of which he assures.
Otherwise, a great opportunity for collusion and improper
practices between the surety and his principal would be offered
which might result to the injury and prejudice of the creditor who
holds the claim against them. So, Sunco shall not execute said
judgments against the property of the judgment debtor until he
has paid the debt for which he stands surety.
TIDCORP vs. ASIA PACES CORP
Respondents Asia Paces Corporation (ASPAC) and Paces
Industrial Corporation (PICO) entered into a sub-contracting
agreement with the Electrical Projects Company of Libya
(ELPCO)
To finance its working capital requirements, ASPAC obtained
loans from foreign banks Banque Indosuez and PCI Capital.
The loans were secured by several Letters of Guarantee
issued by petitioner TIDCORP whereby it irrevocably and
unconditionally guaranteed full payment of ASPAC’s loan
obligations to the foreign banks in the event of ASPAC’s default.
However, as a condition precedent to the issuance by
TIDCORP of the Letters of Guarantee, ASPAC, PICO, and
ASPAC’s President, respondent Balderrama had to execute
several Deeds of Undertaking, binding themselves to jointly and
severally pay TIDCORP for whatever damages or liabilities it may
incur under the Letters of Guarantee.
In the same light, ASPAC, as principal debtor, entered into
surety agreements (Surety Bonds) with Paramount, Phoenix,
Mega Pacific and Fortune (bonding companies), as sureties, also
holding themselves solidarily liable to TIDCORP, as creditor, for
whatever damages or liabilities the latter may incur under the
Letters of Guarantee.
ASPAC eventually defaulted on its loan obligations.
TIDCORP and its various creditor banks Banque Indosuez and
PCI Capital, forged a Restructuring Agreement extending the
maturity dates of the Letters of Guarantee. However, the bonding
companies were not privy to the Restructuring Agreement and,
hence, did not give their consent to the payment extensions
granted by Banque Indosuez and PCI Capitalin favor of
TIDCORP.
Following new payment schedules, TIDCORP fully settled its
obligations under the Letters of Guarantee to both Banque
Indosuez and PCI Capital. TIDCOPR, in turn, filed a collection
case against:
(a) ASPAC, PICO, and Balderrama on account of their
obligations under the deeds of undertaking; and
(b) The bonding companies on account of their
obligations under the Surety Bonds seeking payment
for the damages and liabilities it had incurred under
the Letters of Guarantee.
The RTC partially granted TIDCORP’s complaint and thereby
found ASPAC, PICO, and Balderrama jointly and severally liable

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to TIDCORP pursuant to the terms of the Deeds of Undertaking,
but absolved the bonding companies from liability on the ground
that the moratorium request and the consequent payment
extensions granted by Banque Indosuez and PCI Capital in
TIDCORP’s favor without their consent extinguished their
obligations under the Surety Bonds pursuant to Article 2079.
The CA upheld the decision but modified it to the extent of
holding ASPAC, PICO, and Balderrama liable to TIDCORP for
attorney’s fees since the payment of thereof was stipulated by the
parties in the Deed of Undertaking.
ISSUE: W/N the bonding companies’ liabilities to TIDCORP
under the Surety Bonds were extinguished by virtue of the
Restructuring Agreement.
RULING: NO
The theory behind Article 2079 is that an extension of time
given to the principal debtor by the creditor without the surety’s
consent would deprive the surety of his right to pay the creditor
and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon the 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.
In the case at bar, the payment extensions granted by the
foreign banks to TIDCORP under the Restructuring Agreement
did not have the effect of extinguishing the bonding companies’
obligations to TIDCORP under the Surety Bonds, notwithstanding
the fact that said extensions were made without their consent.
This is because Article 2079 refers to a payment extension
granted by the creditor to the principal debtor without the consent
of the guarantor or surety. In this case, the Surety Bonds are
suretyship contracts which secure the debt of ASPAC, the
principal debtor, under the Deeds of Undertaking to pay
TIDCORP, the creditor, the damages and liabilities it may incur
under the Letters of Guarantee, within the bounds of the bonds’
respective coverage periods and amounts. No payment extension
was, however, granted by TIDCORP in favor of ASPAC in this
regard. Hence, Article 2079 should not be applied with respect to
the bonding companies’ liabilities to TIDCORP under the Surety
Bonds.
The payment extensions granted by the foreign banks pertain
to TIDCORP’s own debt under the Letters of Guarantee wherein
it (TIDCORP) irrevocably and unconditionally guaranteed full
payment of ASPAC’s loan obligations to the banks in the event of
its (ASPAC) default. In other words, the Letters of Guarantee
secured ASPAC’s loan agreements to the banks. Under this
arrangement, TIDCORP therefore acted as a guarantor, with
ASPAC as the principal debtor, and the banks as creditors.
There are two sets of transactions that should be treated
separately and distinctly from one another following the civil law
principle of relativity of contracts "which provides that contracts
can only bind the parties who entered into it, and it cannot favor
or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof."
Verily, as the Surety Bonds concern ASPAC’s debt to
TIDCORP and not TIDCORP’s debt to the banks, the payments
extensions (which conversely concern TIDCORP’s debt to the
banks and not ASPAC’s debt to TIDCORP) would not deprive the
bonding companies of their right to pay their creditor (TIDCORP)
and to be immediately subrogated to the latter’s remedies against
the principal debtor (ASPAC) upon the maturity date. It must be
stressed that these payment extensions did not modify the terms
of the Letters of Guarantee but only provided for a new payment
scheme covering TIDCORP’s liability to the banks.
In fine, considering the inoperability of Article 2079 in this
case, the bonding companies’ liabilities to TIDCORP under the
Surety Bonds – except those issued by Paramount and covered
by its Compromise Agreement with TIDCORP – have not been
extinguished. Since these obligations arose and have been duly
demanded within the coverage periods of all the Surety Bonds,
TIDCORP’s claim is hereby granted.
SECTION 3
EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS
ARTICLE 2073. When there are two or more guarantors of the
same debtor and for the same debt, the one among them who
has paid may demand of each of the others the share which is
proportionately owing from him.
If any of the guarantors should be insolvent, his share shall
be borne by the others, including the payer, in the same
proportion.
The provisions of this article shall not be applicable, unless
the payment has been made in virtue of a judicial demand or
unless the principal debtor is insolvent.
Remember the benefit of division, we have at least 2 guarantors
who are co-guarantors for the same debtor for one and the same
obligation. Now as a guarantor for the benefit of division, you
cannot compelled to pay the entire obligation. As you will only be
held liable to pay your own share.
So, as we have discussed before, if you have a creditor, lend
money to the debtor the amount of 120,000 and you have 4
guarantors. Applying the benefit of division, each will only be held
liable for 30,000. Now, 2073 tell us that if a guarantor made to
pay for the whole obligation, then he can seek reimbursement for
the other parties.
Please take not when to apply 2073, payment has been made in
virtue of judicial demand or the principal debtor is insolvent. In
this instance if guarantor 1 is to pay the whole 120,000, he can
seek reimbursement for the respective proportionate of his co-
guarantors which is 30,000 each. Remember he still has to
shoulder his share. Now assuming, one of them is insolvent, si
guarantor 4.
Look at the second paragraph of 2073, his share shall be borne
by the others including the payer of the same proportion.
So notice this is different form your joint obligation general rules
on obligations and contracts. Kasi the general rule on joint
obligations, if one of the debtors is insolvent the others will not
shoulder his share dba? But here 2073 is specific, so this is
applicable, one of them pays and one of them turns out to be
insolvent, his proportionate share would be shoulder by the rest.
To which 30,000 share of the insolvent guarantor will be divided
amongst the rest of the co-guarantors so tag 40,000 cla. Kung c
guarantor 1 ang nagbayad sa whole 120,000 and c guarantor 4
ang insolvent, he can seek reimbursement from guarantor 2 and
3 for the 40,000 share. Again, take note, this is only applicable if
payment has been made by virtue of a judicial demand or unless
the principal debtor has already become insolvent.
ARTICLE 2074. In case of the preceding article, the co-
guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal debtor
against the creditor, and which are not purely personal to the
debtor.
So here, co-guarantors can raise a defense that may have been
available to the principal debtor. For example, guarantor 1 may
hold liable for 120,000 and then he will proceed reimbursement to
guarantor 2 can raise the defenses of prescription, payment or
other modes of distinguishing the principal obligation. Of course,
these guarantors cannot set up defenses which are purely
personal to the principal debtor. If the debtor was insane or minor
at that time the obligation was entered into, then these co-
guarantors cannot raise those defenses when reimbursement has
been sought from them under 2073. They can only raise
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defenses which pertain to the obligation and not to the person of
the principal debtor.
ARTICLE 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.
So it’s possible here even if we have several guarantors, that one
of them or all of them have sub-guarantors. Now, the guarantor
should first be made to pay before the sub-guarantor should be
held liable. So if, however, as an example here, G4 become
insolvent. The sub guarantor will be the one, who becomes is
hold into the place of the guarantor who is insolvent. To which he
will be liable for the proportionate share.
EXTINGUISHMENT OF GUARANTY
ARTICLE 2076. The obligation of the guarantor is extinguished at
the same time as that of the debtor, and for the same causes as
all other obligations.
Modes of extinguishment of obligations:
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of the debt;
4. Confusion or merger of the rights of creditor and
debtor;
5. Compensation; and
6. Novation.
So those modes along with the other modes of extinguishment of
obligation such as happening of a resolutory condition,
prescription, those are also applicable here to a contract of
guaranty.
Q: Death of the debtor? Would that extinguish the obligation?
Why?
A: No ma’am. Because generally ma’am, obligations arising from
contracts are transmissible. Second, by stipulation of the parties
or nature of the obligation making it transmissible or the law
provides it so.
STRONGHOLD vs. REPUBLIC
FACTS:
Respondent Republic-Asahi entered into a contract of
construction with Santos, the proprietor of JDS. To guarantee the
faithful and satisfactory performance of its undertakings, JDS
posted a performance bond of P795k executed, jointly and
severally with petitioner Stronghold.
However, respondent rescinded the contract upon being
dissatisfied with the progress of the work undertaken by JDS.
Nevertheless, pursuant to Article XV of the contract, such
rescission shall not be construed as a waiver of respondent’s
right to recover damages from JDS and its sureties. As a result
thereof, respondent sought payment of the bond from petitioner.
Petitioner countered that it was automatically released from
any liability under the bond upon the death of Santos as the bond
principal. Even assuming that it was not the case, petitioner was
released from liability under the performance bond because there
was no liquidation, with the active participation and/or
involvement of the surety and Santos hence, there was no
ascertainment of their corresponding liabilities under the
performance bond. In other words, respondent can no longer
prove its claim for damages in view of the death of Santos.
ISSUE: W/N petitioner’s liability under the performance bond was
automatically extinguished by the death of Santos, the principal.
RULING: NO
As a general rule, the death of either the creditor or the
debtor does not extinguish the obligation. Obligations are
transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the nature
of the obligation. Only obligations that are personal or are
identified with the persons themselves are extinguished by death.
In the present case, the liability of petitioner is contractual in
nature, because it executed a performance bond. Whatever
monetary liabilities or obligations Santos had under his contracts
with respondent were not intransmissible by their nature, by
stipulation, or by provision of law. Hence, his death did not result
in the extinguishment of those obligations or liabilities, which
merely passed on to his estate. Death is not a defense that he or
his estate can set up to wipe out the obligations under the
performance bond. Consequently, petitioner as surety cannot use
his death to escape its monetary obligation under its performance
bond. As a surety, petitioner is solidarily liable with Santos.
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.
Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the petitioner, in
view of the solidary nature of their liability. The death of the
principal debtor will not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently, despite the
death of the principal debtor, respondent may still sue petitioner
alone, in accordance with the solidary nature of the latter’s liability
under the performance bond.
A: Can seek to the heirs of Santos.
Q: To what extent?
A: To the extent of the estate of Santos ma’am.
Do take note, general rule obligations are transmissible. Unless
otherwise stipulated by parties, or by law, or nature of the
obligations. Or the obligations are personal in nature. None of the
exceptions are present on this case. Santos has liabilities that are
not intransmissible. So his death could not be the cause of the
extinguishment of his obligation. Which maybe pass through his
estate. As such, Stronghold cannot use Santos’ Death and
escape their obligation under the performance bond. Now also
take note, as we have pointed out earlier, novation is a mode of
extinguishing an obligation. Would it necessary extinguish as well
the accessory contract of guaranty or suretyship? Now we have
to take into consideration whether the novation constitutes a
material alteration which varies the term of the principal contract
without the consent of the guarantor or surety. If such is a
material alteration, the surety or guarantor will be released from
the liability as if it would constitute novation or change of the
principal contract which is already extinguished.
ARTICLE 2077. If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
released.
So what happen here? We have dacion en pago – Article 1245.
As you have known, dacion en pago is a special form of payment
and is also considered as a form of novation. Wherein the old
obligation which is monetary in nature is extinguished by delivery
of the property for extinguishing the obligation of course with the
consent of creditor. Now, with that dacion en pago the delivery of
the property, the principal obligation is extinguished, and being an
accessory contract, the surety or guaranty is likewise extinguish.
But what happens if the creditor is evicted from the property
subject of that dacion en pago. Now the debt of course, is already
extinguish, so wala na ung relationship under the new loan. With
the eviction it will not revived the contract of guaranty or
suretyship. In other words, the creditor, despite eviction cannot go
after anymore the guarantor or surety.
This has to be taken into consideration by the creditor when he
accepts property as a form of payment from the debtor. Because
again, once he accepts this arrangement, dacion en pago, even if
subsequently he would be evicted, he cannot go after the surety
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or guarantor anymore. But of course, he still has recourse against
the principal debtor.
ARTICLE 2078. A release made by the creditor in favor of one of
the guarantors, without the consent of the others, benefits all to
the extent of the share of the guarantor to whom it has been
granted.
The creditor release one of the guarantors without the consent of
the others, we have here the debtor and several guarantors. Then
let us say, sabihan ni creditor kay Guarantor 1, wag muna
bayaran ang share mo. What is the effect, will be the remaining
co-guarantors be burden with the proportionate share of the first
guarantor when he was realeased? Of course not. Because these
co guarantors did not gave their consent to the release. They
should not be prejudiced.
In other words, if they would eventually be held liable, applying
the benefit of division, they would only be liable for their
proportionate share. Otherwise, if we allow it, it will be prejudicial.
Again the scenario here, the release was made by the creditor in
favor of one of the guarantors without the consent of the co-
guarantors. But of course, all of them give consent, then they will
shoulder the proportionate share of the guarantor was released. If
not all of them gave their convent, who will shoulder is those
guarantors who gave their consent to such release.
But it’s a different scenario of course, if what was release by the
creditor is the principal debtor. Because if such will be so, the
principal obligation is extinguished, accessory obligation of
guaranty or suretyship is likewise extinguished.
ARTICLE 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself
constitute any extension of time referred to herein.
SPOUSES TOH vs. SOLID BANK
FACTS:
Respondent Solid Bank extended an omnibus credit line in
favor of FBPC embodied in a letter-advise. One of the documents
essential for the credit facility was a Continuing Guaranty, which
covers any and all existing indebtedness of, and such other loans
and credit facilities which may be granted to FBPC. Petitioner-
spouses Toh and respondent-spouses Li signed the Continuing
Guaranty, binding their selves solidarily liable to petitioner. It
provides:
The Continuing Guaranty set forth no
maximum limit on the indebtedness that
respondent FBPC may incur and for which the
sureties may be liable. It also contained a de facto
acceleration clause if "default be made in the
payment of any of the instruments, indebtedness,
or other obligation" guaranteed by petitioners and
respondents. And to strengthen said security, the
Continuing Guaranty waived rights of the sureties
against delay or absence of notice or demand on
the part of respondent Bank, and gave future
consent to the Bank's action to "extend or change
the time payment, and/or the manner, place or
terms of payment," including renewal, of the credit
facility or any part thereof in such manner and
upon such terms as the Bank may deem proper
without notice to or further assent from the
sureties.
The effectivity of the Continuing Guaranty was
not contingent upon any event or cause other than
the written revocation thereof with notice to the
Bank that may be executed by the sureties.
Later on, respondent Bank received information that
respondent-spouses Li had fraudulently departed from their
conjugal home. Hence it demanded payment from petitioners
invoking the acceleration clause and the Continuing Guaranty.
Petitioners argued that the Continuing Guaranty was void by
virtue of the extension of the due dates of the letters of credit
without the required 25% partial payment per extension; the
approval of another letter of credit, L/C 93-0042, even after
respondent-spouses Li had defaulted on their previous
obligations; and, the unmistakable pattern of fraud.
ISSUES:
1. W/N the Continuing Guaranty was valid. YES
2. W/N the unilateral extensions made by petitioner bank
extinguished the liability of petitioner spouses Toh. YES
RULING: BOTH YES
First issue
The Continuing Guaranty is a valid and binding contract of
petitioner-spouses as it is a public document that enjoys the
presumption of authenticity and due execution. Petitioner-
spouses Toh voluntarily affixed their signatures on the surety
agreement and were thus at some given point in time willing to be
liable under those forms.
Nothing in the Continuing Guaranty restricts their contractual
undertaking so long as they were corporate officers and
stockholders of FBPC. In fact the obligations assumed by them
therein subsist "upon the undersigned, the heirs, executors,
administrators, successors and assigns of the undersigned, and
shall inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their commitment
"shall remain in full force and effect until written notice shall have
been received by the Bank that it has been revoked by the
undersigned." Verily, if petitioners intended not to be charged as
sureties after their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required notice of
revocation upon the Bank as expressly allowed therein.
Second issue
However, even if the petitioner spouses Toh were bound to
the surety agreement they signed, respondent bank is also bound
to its representations in the "letter-advise" particularly as to the
extension of the due dates of the letters of credit, which was
subject to conditions as stipulated in the Continuing Guaranty.
Although it was stipulated that respondent Bank "may at any
time, or from time to time, in its discretion change the time
payment," such waiver is confined per se to the grant of an
extension and does not surrender the prerequisites therefor as
mandated in the "letter-advise." In other words, the authority of
the Bank to defer collection contemplates only authorized
extensions, that is, those that meet the terms of the "letter-
advise."
Certainly, while the Bank may extend the due date at its
discretion pursuant to the Continuing Guaranty, it should
nonetheless comply with the requirements that domestic letters of
credit be supported by 15% marginal deposit extendible three
times for a period of 30 days for each extension, subject to 25%
partial payment per extension. any doubt on the terms and
conditions of the surety agreement should be resolved in favor of
the surety. It must be noted that petitioner spouses Toh are only
accommodation sureties for they received nothing out of the
security contract they signed.
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver stipulated
in the Continuing Guaranty. Evidently, they constitute illicit
extensions prohibited under Article 2079 of the CC. This act of
the Bank is not mere failure or delay on its part to demand
payment after the debt has become due, as was the case in
unpaid 5 letters of credit which the Bank did not extend, defer or
put off, but comprises conscious, separate and binding
agreements to extend the due date, as was admitted by the Bank
itself. As a result of these illicit extensions, petitioner-spouses Toh
are relieved of their obligations as sureties of respondent FBPC
under Article 2079 of the CC.
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Article 2079 is clear. Even the extensions granted by the creditor
to the debtor, without the consent of the guarantor or surety, will
release the guarantor or surety. But here, the surety bonds or
suretyship contracts which secured the debts under the deeds of
undertaking to pay.. So ano yung covered sa surety bonds?
Obligation ng ASPAC as debtor to TIDCORP as the creditor, and
then the surety companies are the sureties. No payment,
however, or no extension granted by TIDCORP in favor of
ASPAC in this regard. What are the extensions given here? The
extensions given were, by virtue of which.. sino ang debtor?
ASPAC. Sino ang creditor? PCI. and then you have TIDCORP as
guarantor. And the obligation of TIDCORP in that transaction
wherein the banks are the creditor. The coverage or the scope of
their surety obligation (solidary obligation) is to which wherein
TIDCORP is the creditor. What are covered in this extensions are
those to which the creditor are the banks. It is said here that there
are two sets of transactions, dated separately. The extension
given in one, should not be given to the other.
We have to emphasize what is the principal obligation involved in
the extension. Is it the same one covered in the suretyship
agreement. These payments in the extensions did not modify the
terms. It provides only new payments covering TIDCORP's
liability.. but again, it's not covered by the surety bond. (Maam:
pls read the full text, don't rely on the digest)
Under Article 2079, the extension is given to the debtor without
the consent of the guarantor or the surety. The guaranty is
extinguished because such extension is given without the
consent of the guarantor or surety. It may be beyond the
contemplation of the guarantor or surety, because later on the
guarantor might become insolvent. When the debtor becomes
insolvent, to whom will the guarantor proceed? So again, such
extension without the consent shall be prejudicial to the
guarantor. In effect, such kind of extension will release the
guarantor and the surety from the obligation. So again, the
extension must be without consent for the guarantor to be
released.
If the guarantor gave consent, or for example, as what was stated
earlier, there was a waiver to any extension given in favor of the
guarantor, it is implied that the guarantor or surety agreed to the
extension, to which he will shoulder the risk until the grant of such
extension. However, do take note that this extension is not
applicable if there is a mere failure of the creditor to demand
payment after the obligation has become due.
So the extension contemplated here is not mere failure to collect.
If there is mere failure to make demand, any extension of time will
not release a guarantor from his obligation. The requirement here
is there must be an agreement between the debtor and the
creditor that the debtor is given a specific period of time to be
able to pay his obligation. So it must be based on an agreement.
So if the obligation is payable in installments, and an extension is
given to one or two installments, it will not affect the liability of the
surety or the guarantors. But, if for example, there is an
acceleration clause, wherein default, failure to pay two
installments, the obligation shall become due, and then the
creditor extends or renews the period of payment for the debtor
without the guarantor's consent, then you apply the first sentence
in 2079. The guarantor is released from his obligation, no matter
how short the extension is. In fact, you don't even take into
consideration whether there is actual prejudice to the guarantor or
surety by virtue of such extension.
Extension by virtue of a new agreement without consent of the
guarantor extinguishes the guaranty.
ARTICLE 2080. The guarantors, even though they be solidary,
are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter.
Two or more guarantors are entitled to the benefit of division,
unless it is expressly stipulated that they will be solidarily liable.
However, 2080 provides, whether they be joint or solidary, the
guarantors may be released when the creditor, through his act,
cannot subrogate the guarantor to the rights, mortgages, and
preferences of the said creditor. This presupposed that the
guarantor acted with the knowledge and consent of the principal
debtor.
Why? Becau se we are talking about subrogation here. So kung
hindi ma subrogate ang guarantors sa rights ng creditors, then
you apply 2080, to which guarantors will be released.
If in the first place, the guarantors are not entitled to subrogation,
then 2080 is not applicable. So here, what would be an example?
Let's say a mortgage was executed in favor of a creditor, and the
creditor was negligent because he turned out that it was not in a
public instrument, hindi yan ma foreclose, hindi yan basta basta
mahabol ni creditor. So failure to comply with that requirement,
debtor did not pay, creditor proceeded against the guarantors.
But considering that the guarantors cannot be subrogated with
the rights of the creditor, they can be released under 2080.
What's the reason behind this provision? It should not prejudice
the guarantors, and this would also avoid opportunity for collusion
between the creditor and the debtor to prejudice the guarantors.
PNB vs. MANILA SURETY
FACTS:
Petitioner PNB opened a letter of credit in favor of Edgington
Oil for 8k tons of hot asphalt. Of this amount, 2k tons worth P279k
were released and delivered to ATACO under a trust receipt
guaranteed by respondent Manila Surety up to the amount of
P75k.
Later on, ATACO executed a deed of assignment authorizing
petitioner bank to receive and collect from the Bureau of Public
Works the amount to be applied as payment for the asphalt it
owed.
ATACO delivered to the Bureau asphalt amounting to
P431,466.52. Of this amount petitioner collected P106,382.01 for
8 months until for unexplained reasons, petitioner ceased to
collect. It was later found that that more moneys were payable to
ATACO from the Public Works office, because the latter had
allowed mother creditor to collect funds due to ATACO under the
same purchase order to a total of P311,230.41.
This caused petitioner to file a claim against the principal
debtor (ATACO) and the surety (respondent) to recover the
balance of P158,563.18.
The CA found petitioner bank negligent in having stopped
collecting from the Bureau the moneys falling due in favor of the
principal debtor, ATACO before the debt was fully collected,
thereby allowing such funds to be taken and exhausted by other
creditors to the prejudice of the surety. Such negligence of
petitioner bank resulted in the exoneration of respondent Manila
Surety.
Petitioner bank countered that the power of attorney it
obtained from ATACO was merely in additional security in its
favor, and that it was the duty of the surety, and not that of the
creditor, owed see to it that the obligor fulfills his obligation, and
that the creditor owed the surety no duty of active diligence to
collect any, sum from the principal debtor.
ISSUE: W/N petitioner’s negligence in collecting the debt
exonerated respondent Manila Surety.
RULING: YES
The CA did not hold the Bank answerable for negligence in
failing to collect from the principal debtor but for its neglect in
collecting the sums due to the debtor from the Bureau of Public
Works, contrary to its duty as holder of an exclusive and
irrevocable power of attorney to make such collections, since an
agent is required to act with the care of a good father of a family
and becomes liable for the damages which the principal may
suffer through his non-performance.
Certainly, the Bank could not expect that the Bank would
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diligently perform its duty under its power of attorney, but
because they could not have collected from the Bureau even if
they had attempted to do so. It must not be forgotten that the
Bank's power to collect was expressly made irrevocable, so that
the Bureau of Public Works could very well refuse to make
payments to the principal debtor itself, and a fortiori reject any
demands by the surety.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional security still,
by allowing the assigned funds to be exhausted without notifying
the surety, the Bank deprived the former of any possibility of
recoursing against that security. The Bank thereby exonerated
the surety, pursuant to Article 2080 of the Civil Code.
The demand letter informing the debtor its outstanding
balance was P156,374.83 has no bearing on the issue whether
the Bank has exercised due diligence in collecting from the
Bureau of Public Works, since the letter was addressed to
ATACO, and the funds were to come from elsewhere. As to the
letter of demand on the Public Works office, it does not appear
that any reply thereto was made; nor that the demand was
pressed, nor that the debtor or the surety were ever apprised that
payment was not being made. The fact remains that because of
the Bank's inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to appellant Bank was only
P158,563.18. The finding of negligence made by the Court of
Appeals is thus not only conclusive on us but fully supported by
the evidence.
Maam: How was PNB negligent here?
Ans: PNB was negligent because it did not collect from the
Bureau.
Maam: Why did it result to negligence? Why and how is 2080
applicable? What happened to the Bureau? PNB was allowed to
collect from the Bureau.
So here there was already an assignment with power of attorney
from the principal debtor, ATACO, in favor of PNB. But here, to
apply 2080, you have to consider how is it that the creditor is
considered negligent? It already had the authority to collect from
the bureau. But it was negligent in actually collecting from the
bureau. In fact, at the time the assignment was executed, meron
pang funds ang bureau, but PNB did not act upon it. And what
happened? Other creditors were able to collect. So binigyan na
sila ng power, wala silang ginawa. That is the precise situation
covered in 2080. It allowed the assigned funds to be exhausted
without notifying the surety, which the bank deprived the surety of
any possibility of recoursing against the security. to which the
bank exonerated the surety pursuant to Art. 2080.
There was a letter that was sent by PNB to the debtor ATACO..
but it does not appear that any reply was made or that the
demand was pressed. The fact remains that because ofthe
bank's inactivity, other creditors were able to collect. So in effect,
Manila Surety is released from its obligation applying Art. 2080.
ARTICLE 2081. The guarantor may set up against the creditor all
the defenses which pertain to the principal debtor and are
inherent in the debt; but not those that are personal to the debtor.
Okay, this is similar to the previous articles, whatever defenses
available to the principal debtor are also available to the
guarantor. Prescription.. among others, you have 2068, 2074,
and 2081.
LEGAL AND JUDICIAL BONDS
ARTICLE 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications
prescribed in article 2056 and in special laws.
Okay, so we have here a bond. It is an undertaking that is
sufficiently secured wherein the bondsman acts as a surety,
maybe a corporation or a juridical person.
All the bonds, including judicial bonds are contractual in nature.
They are merely as special class of contracts of guaranty,
characterized by the fact that they are given in virtue of a judicial
order.
ARTICLE 2083. If the person bound to give a bond in the cases
of the preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof.
So we already know that guaranties and suretyships are
contracts of personal security. And then we have pledges and
mortgages which are contracts of real security. Now pledges and
mortgages are sufficient to cover obligations with legal or judicial
bonds as may be allowed.
ARTICLE 2084. A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the
exhaustion of the property of the debtor or of the surety.
Ok, so a judicial bondsman is solidarily liable with the principal
debtor. Sub-surety, is likewise solidarily liable. That means that
these judicial bondsmen and sub-surety are not entitled to the
benefit of exhaustion.
CONTRACT OF PLEDGE
As we have discussed before, contracts of guaranty and
suretyship are contracts of personal security. No property is
involved to actually secure the payment or performance of the
principal obligation. Although, we have mentioned that as a
qualification for guaranty or surety, as well in bondsmen, you
must have sufficient property.
The security itself is not the properties, but the undertaking, or the
promise of the guarantor to pay when the debtor cannot pay.
Now, what about pledge? When it comes to pledge, or even
mortgages, the property itself is the security, and not the promise
of the owner of the property. So when we talk about pledge and
mortgages, these are contracts of security.
What is a contract of pledge?
It is a contract of security but it is specifically a real security in the
sense that what acts as a security is the property itself. So a
contract of pledge, mortgage, antichresis, these are accessory
contracts of real security for the property and not the promise of
the owner acts as a security for the obligation.
So a pledge is a contract by virtue of which the debtor delivers to
the creditor or any third person a movable or document
evidencing incorporeal rights for the purpose of securing the
fulfillment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be
returned along with all its goods and accessories.
So in this type of contract it may be a personal or movable
property, or a document evidencing real or incorporeal rights
acting as a security for the principal or for the fulfillment of the
principal obligation. In case the obligation is not fulfilled, the
creditor may proceed against the movable or incorporeal right.
But if the obligation is paid, then the creditor is responsible for
returning the property subject of the pledge, as well as its
accessions and accessories must be returned to its owner.
TYPES OF PLEDGE:
1. Voluntary or conventional pledge – a pledge is
created by agreement of the parties.
2. Legal pledge – contracts of pledge created by
operation of law. An example of which is in a contract
of deposit, where the depositary retains the thing
deposited. It is an example of a pledge by operation of
law.
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PARTIES IN A CONTRACT OF PLEDGE:
1. Pledgor
2. Pledgee
CHARACTERISTICS OF A CONTRACT OF PLEDGE:
1. Real contract
- it is a contract perfected by delivery of the subject
matter and therefore it is a real contract
2. Accessory contract
- it is also an accessory contract, being a security
arrangement, and it has no independent existence on
its own as its validity depends on the validity of the
principal obligation. Keep in mind that when an
accessory contract is void, it does not automatically
mean that the principal contract is also void. However
when the principal contract is void, the principal is also
void by virtue of the principle “the accessory follows the
principal”
3. Unilateral contract
– for it creates an obligation solely on the part of the
creditor to return the thing subject thereof upon the
fulfillment of the principal obligation
4. Subsidiary contract
– for the obligation does not arise until the fulfillment of
the principal obligation that is secured
Now, in the absence of a separate consideration, we have the
same consideration as that of the principal obligation. But the
pledger may also be a third person, not necessarily the principal
debtor. In that instance, what would be the cause or
consideration? The principal obligation.
What are the objects of the pledge? It may be movables- car,
jewelry, even cellphones, or laptops (Corporeal). You can also
have documents evidencing incorporeal rights- securities or
shares (incorporeal).
2 KINDS OF MOVABLES/SUBJECT MATTER IN PLEDGE:
1. Corporeal/tangible properties
2. Incorporeal/intangible properties – while it cannot be
seen, it nevertheless exists by fiction of law. So for it to
be a subject matter in a contract of pledge, what you
deliver is the evidence of such security.
So here, we are talking about real securities. There are 4. The
pledge, mortgage, chattel mortgage, and antichresis. In these
contracts, the intention is to secure the performance of the
principal obligation by subjecting these properties.
You also have real estate mortgage. It is the same concept as
pledge, as a security in a principal obligation, but the subject here
is different. You have a real or immovable property, securing the
fulfilment of the obligation. If the debtor cannot pay, then the
creditor may proceed against the property, have it foreclosed, and
apply the proceeds to the principal obligation.
Now these Articles. 2085, and onwards.. pls take note, there are
provisions that are common to both pledge and mortgage, and
there are also provisions that are specifically applicable to pledge.
So you have to take note the distinction between pledge and
mortgage.
Real Estate Mortgage Pledge
The subject is a matter is an Movable property or
immovable incorporeal rights
Delivery is not required Delivery to the creditor is
required.
Take note in a contract of
pledge, when we say that
delivery is necessary for the
perfection of the contract, we
are talking about ACTUAL
DELIVERY, not construct
delivery.
For it to be valid against 3rd Not valid as to 3rd persons if it
persons, it must be registered. is not in a public instrument
which contains a description of
the thing pledged and the date
of the pledge
ARTICLE 2085. The following requisites are essential to the
contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of
the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property.
Essential requisites of a contract of pledge and mortgage
This is in addition to the essential requisites of consent,
object and consideration.
1. Contract is constitutes to secure the fulfillment of a
principal obligation.
Remember, both pledge and mortgage are accessory
contracts, they cannot exist independently of the
principal obligation, they derive their existence from the
principal obligation. So if the principal obligation is void,
you cannot have a valid pledge or mortgage.
2. That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged.
Only the absolute owner of the thing can be the pledgor
or mortgagor. If you are just a lessee, you cannot
mortgage the property. What is the effect if you are not
the owner? Ofcourse, you will have a void pledge or
mortgage.
Why is it that ownership is required in this accessory
contracts? Because in pledge or mortgage, these
involves acts of disposition. Why? Because what will
happen if there is failure to pay the principal obligation?
These properties covered by the pledge or mortgage
can be sold and the proceeds will be applied to the
principal obligation.
3. That the persons constituting the pledge or
mortgage have the free disposal of their property,
and in the absence thereof, that they be legally
authorized for the purpose.
CALIBO vs. CA
FACTS:
Respondent Pablo was the owner of a tractor, which he left in
the safekeeping of his son Mike. Mike kept the tractor in the
garage of the house he was leasing from petitioner. However,
Mike defaulted in the payment of his rent and electric and water
bills. Mike promised to settle his obligation to petitioner and
offered the tractor as security.
Later on, respondent Pablo sought claim and possession of
the tractor. When petitioner refused to give the tractor,
respondent instituted an action for replevin against petitioner.
petitioner claims that the tractor in question was validly
pledged to him by private respondent's son Mike Abella to answer
for the latter's monetary obligations to petitioner. In the
alternative, petitioner asserts that the tractor was left with him, in
the concept of an innkeeper, on deposit and that he may validly
hold on thereto until Mike Abella pays his obligations. Even if
Mike was not the owner of the tractor, a principal-agent
relationship may be implied between Mike and his father
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respondent Pablo. Hence, Pablo was bound by the pledge, even
if it were beyond the authority of his son to pledge the tractor,
since he allowed his son to act as though he had full powers to do
so.
ISSUES: W/N there was a valid pledge of the tractor to petitioner.
RULING: NO
In a contract of pledge, the creditor is given the right to retain
his debtor's movable property in his possession, or in that of a
third person to whom it has been delivered, until the debt is paid.
For the contract to be valid, it is necessary that:
1. The pledge is constituted to secure the fulfillment of a
principal obligation;
2. The pledgor be the absolute owner of the thing
pledged; and
3. The person constituting the pledge has the free
disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
The pledgor Mike was not the absolute owner of the tractor
that was allegedly pledged to petitioner. The tractor was owned
by his father who left the equipment with him for safekeeping.
Clearly, the second requisite for a valid pledge, that the pledgor
be the absolute owner of the property, is absent in this case.
Hence, there is no valid pledge.
As to petitioner’s argument of agency, Article 1869 of CC
provides that for an agency relationship to be deemed as implied,
the principal must know that another person is acting on his
behalf without authority. Here, respondent categorically stated
that the only purpose for his leaving the subject tractor in the care
and custody of Mike was for safekeeping, and definitely not for
him to pledge or alienate the same. If it were true that Mike
pledged respondent’s tractor to petitioner, then Mike was acting
not only without respondent’s authority but without the latter's
knowledge as well.
Article 1911, on the other hand, mandates that the principal is
solidarily liable with the agent if the former allowed the latter to
act as though he had full powers. Again, in view of respondent’s
lack of knowledge of Mike's pledging the tractor without any
authority from him, it stands to reason that the former could not
have allowed the latter to pledge the tractor as if he had full
powers to do so.
There is likewise no valid deposit in this case. In a contract of
deposit, a person receives an object belonging to another with the
obligation of safely keeping it and of returning the same.
Petitioner himself states that he received the tractor not to safely
keep it but as a form of security for the payment of Mike’s
obligations. There is no deposit where the principal purpose for
receiving the object is not safekeeping.
Q: Can we say that there is a contract of agency here?
A: No maam. The court also said that there was no contract of
agency.
Q: can you see that there is a deposit here wherein the lessor will
be allowed to retain the property?
A: there was no contract of deposit here. Calibo did not receive
the property for safekeeping, but as a form of security.
So here, take note, there was no valid contract of pledge. There
was a subject, the tractor, however, one of the requisites that the
pledgor must be the absolute owner of the thing pledged is not
present in this case. Mike, the son, was not the absolute owner of
the tractor for it was owned by his father. So there was no valid
contract of pledge.
There can also be no contract of agency because the SC
emphasized that there was no evidence that there was a contract
of agency that was executed in favor of Mike by the father. Again,
agency requires the consent of the principal. Obviously, there
was also no valid deposit. The purpose of deposit is for
safekeeping, and it is clear from the facts of the case that the
tractor was delivered to Calibo not for safekeeping, but as a
security for Mike’s obligation.
What is the remedy here of Calibo? He can still go after the
obligation of Mike, but Ofcourse, he cannot retain the tractor.
So again, take note of this 2nd requisite- the pledgor or
mortgagor must be the absolute owner of the thing pledged. A
pledge or motgage executed by one who is not an owner thereof
is without legal existence.
Now, also under 2085, under the 3rd paragraph, that it is not
necessary that the pledgor or mortgagor is the principal debtor.
What is important is that the pledgor or mortgagor is the absolute
owner of the property. For this 3rd paragraph to apply, valid
consent from the pledgor or mortgagor, who is the absolute
owner of the thing pledged, must be present. The fact that the
loan was solely for the benefit of the debtor would not invalidate
the pledge or mortgage. Ofcourse, the creditor would be required
to exercise due care and prudence in making proper inquiry as to
whether the person is the absolute owner of the property.
In this case, the pledgor or mortgagor shall not be liable, as will
be discussed later on.. he cannot be further liable for any
deficiency.. because the extent of this obligation is only to the
value of the property pledged or mortgaged.
THIRD REQUISITE: That the persons constituting the pledge or
mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose.
As we have mentioned, in this contract of pledge and mortgage,
are acts of ownership.. so they must have the capacity or
authority to dispose of the thing. Free disposal means that the
property must not be subject of any lien or encumbrance. Also
relate this in a provision in the Revised Penal Code, estafa or
other forms of deceit. Also there must be any pending case
involving the property. It must not be a subject of any litigation.
Now remember these are additional, essential requisites for a
valid contract because we still of course have to have Consent,
Object and Consideration. Plus these three absence of any of
which will result into a void pledge or mortgage.
Already I discussed the case of Calibo, How about the case of
development? Development bank?
DEVELOPMENT BANK V PRUDENTIAL BANK
Litex executed trust receipts in favor of respondent Prudential
Bank involving 5k spindles to be used for its textile mill. Later on,
Litex obtained a foreign currency loan with petitioner DBP. As
security thereof, Litex executed real estate and chattel mortgages
in favor of DBP including the articles covered by the trust
receipts.
Upon learning of Litex’s rehabilitation, Prudential informed
DBP that it was the absolute and juridical owner of the various
items covered by the trust receipts and they were thus not part of
the mortgaged assets that could be legally ceded to DBP.
However, DBP extra-judicially foreclosed the mortgages
including the articles claimed by Prudential and subsequently
acquired ownership thereof.
Nevertheless, DBP requested documents from Prudential to
enable it to evaluate Prudential’s claim. However, without the
knowledge of Prudential, DBP sold the Litex textile mill, as well as
the machineries and equipment therein, to Lyon. As a result,
Prudential filed a complaint for a sum of money with damages
against DBP. Prudential argued that even if Litex mortgaged the
items to DBP and the latter foreclosed on such mortgage, DBP
was duty-bound to turn over the proceeds to Prudential, being the
party that advanced the payment for them.
DPB argued that the transactions between Litex and
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Prudential were not trust receipt transactions because the
spindles were procured by Litex not to sell them but or the
exclusive use of its textile mills.
The RTC ordered DBP, as a trustee ex maleficio, to pay
Prudential. The CA further found that DBP was not a mortgagee
in good faith.
ISSUE: W/N the chattel mortgage executed by Litex in favor of
DBP validly included the goods covered by the trust receipts.
RULING: NO
In a trust receipt transaction, the release of the goods to the
entrustee, on his execution of a trust receipt, is essentially for the
purpose of their sale or is necessarily connected with their
ultimate or subsequent sale.
Here, Litex was not engaged in the business of selling
spinning machinery, its accessories and spare parts but in
manufacturing and producing textile and various kinds of fabric.
The articles were not released to Litex to be sold. Nor was the
transfer of possession intended to be a preliminary step for the
said goods to be ultimately or subsequently sold. Instead, the
contemporaneous and subsequent acts of both Litex and
Prudential showed that the imported articles were released to
Litex to be installed in its textile mill and used in its business. DBP
itself was aware of this.
The articles were owned by Prudential and were only held by
Litex in trust. While it was allowed to sell the items, Litex had no
authority to dispose of them or any part thereof or their proceeds
through conditional sale, pledge or any other means.
Article 2085(2) of the CC requires that, in a contract of pledge
or mortgage, it is essential that the pledgor or mortgagor should
be the absolute owner of the thing pledged or mortgaged.
Further, Article 2085(3) mandates that the person constituting the
pledge or mortgage must have the free disposal of his property,
and in the absence thereof, that he be legally authorized for the
purpose.
Here, Litex had neither absolute ownership, nor free disposal,
nor the authority to freely dispose of the articles. Hence, it could
not have subjected them to a chattel mortgage. Their inclusion in
the mortgage was void and had no legal effect. Since there can
be no valid mortgage, there could also be no valid foreclosure or
valid auction sale. Thus, DBP could not be considered either as a
mortgagee or as a purchaser in good faith.
It must be noted that no one can transfer a right to another
greater than what he himself has. Nemo dat quod non habet.
Hence, Litex could not transfer a right that it did not have over the
disputed items. Corollarily, DBP could not acquire a right greater
than what its predecessor-in-interest had. The spring cannot rise
higher than its source. DBP merely stepped into the shoes of
Litex as trustee of the imported articles with an obligation to pay
their value or to return them on Prudential’s demand. By its failure
to pay or return them despite Prudential’s repeated demands and
by selling them to Lyon without Prudential’s knowledge and
conformity, DBP became a trustee ex maleficio.
You have a mortgage, what would be the principal
obligation? In relation to the mortgage
The Principal Obligation was the payment of the 498. . . in favor
of Prudential bank.
M: You have a valid mortage? The Said Machineries
The Supreme Court held that there was no valid mortgage
applying Article 2085 of the Civil Code: Emphasizing on the
second requisite and that the pledgor should be the absolute
owner of the thing which is pledged maam. In this case maam
since there is a valid trust receipt agreement then the ownership
of the spindle was that to prudential bank and not that to litex. So
litex was not the absolute owner of the spindle so there was no
valid mortgage.
M: How about the allegation that the bank here is considered
as a mortgagee or or purchaser in good faith.
In this case maam the court held that actually the bank was not in
good faith because at the time that it required. Yes ma’am
because they know of the fact that those goods. . . “Cough
Cough” “Cough”
M: Why is it that DBP cannot be considered a mortgagee in
good faith
Because DBP had a knowledge that the goods had been under a
trust receipt before the foreclosure of the sale.
M: Okay Thank you.
So here, again now emphasis on the second requisite under 2085
the pledgor or mortgagor must be the absolute owner of the thing
pledged or mortgaged, in this instance we have a trust receipt
transaction and we have emphasized what happens in this kind of
transaction we have goods which are released by the entruster.
who owns or holds absolute title or security interest for the said
goods. The entruster here is prudential and the goods are
released to the entrustee and the latter execution and delivery to
the entruster of the trust receipt. So here the trust receipt
evidences absolute title or a security interest for the goods. The
execution of the trust receipt transaction of the goods or
machineries covered therein are actually owned by prudential
bank, which is only in the physical possession of litex textiles.
And therefore even with the execution of the chattel mortgage
involving the said equipment’s there can be no valid mortgage
because those machineries were still owned by prudential bank.
No valid mortgage, no valid foreclosure to which DBP cannot be
considered in a purchaser in good faith because they were made
aware of the trust receipts.
M: What is a doctrine of a mortgagee in good faith?
CAVITE DEV’T BANK vs. SPS LIM
Rodolfo Guansing obtained a loan from petitioner CDC. As
security thereof, Rodolfo mortgaged a parcel of land in favor of
CDC. When Rodolfo defaulted in its payment, CDC foreclosed
the mortgage and subsequently acquired title thereto.
Later on, Lim offered to purchase the property from CDC.
However, Lim discovered that Rodolfo fraudulently secured title
over the subject property from his father Perfecto who
successfully restored his previous title thereto. By virtue of the
alleged misrepresentation of CDC, Lim filed an action for specific
performance and damages against CDC.
Petitioner alleged that it is a mortgagee in good faith as a
mortgagee bank, it is not required to make a detailed
investigation of the history of the title of the property given as
security before accepting a mortgage.
ISSUE: W/N CDC was a mortgagee in good faith.
RULING: NO
CDB's acceptance of Lim's offer to purchase, a contract of
sale was perfected and, indeed, partially executed because of the
partial payment of the purchase price. There is, however, a
serious legal obstacle to such sale, rendering it impossible for
CDB to perform its obligation as seller to deliver and transfer
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ownership of the property.
Pursuant to Article 2085 of the CC, in a contract of mortgage
or pledge, it is required that the mortgagor or pledgor be the
absolute owner of the thing pledged or mortgaged in anticipation
of a possible foreclosure sale should the mortgagor default in the
payment of the loan. Here, Rodolfo was not the owner of the
mortgage land. Nemo dat quod non habet. One cannot give what
one does not have. Hence, CDC did not validly acquire ownership
thereof.
Nevertheless, there could a situation where, despite the fact
that the mortgagor is not the owner of the mortgaged property, his
title being fraudulent, the mortgage contract and any foreclosure
sale arising therefrom are given effect by reason of public policy.
This is the doctrine of "the mortgagee in good faith" based on the
rule that all persons dealing with property covered by a Torrens
Certificate of Title, as buyers or mortgagees, are not required to
go beyond what appears on the face of the title. The public
interest in upholding the indefeasibility of a certificate of title, as
evidence of the lawful ownership of the land or of any
encumbrance thereon, protects a buyer or mortgagee who, in
good faith, relied upon what appears on the face of the certificate
of title.
However, CDC cannot be considered as a mortgagee in good
faith. While it is not expected to conduct an exhaustive
investigation on the history of the mortgagor's title, it cannot be
excused from the duty of exercising the due diligence required of
banking institutions especially so if there might be circumstances
apparent on the face of the certificate of title which could excite
suspicion as to prompt inquiry.
It is standard practice for banks, before approving a loan, to
send representatives to the premises of the land offered as
collateral and to investigate who are real owners thereof, noting
that banks are expected to exercise more care and prudence
than private individuals in their dealings, even those involving
registered lands, for their business is affected with public interest.
There is no evidence that CDB observed its duty of diligence
in ascertaining the validity of Rodolfo’s title. It appears that
Rodolfo Guansing obtained his fraudulent title by executing an
Extra-Judicial Settlement of the Estate With Waiver where he
made it appear that he and Perfecto Guansing were the only
surviving heirs entitled to the property, and that Perfecto had
waived all his rights thereto. This self-executed deed should have
placed CDB on guard against any possible defect in or question
as to the mortgagor's title. Moreover, the alleged ocular
inspection report by CDB's representative was never formally
offered in evidence. Indeed, petitioners admit that they are aware
that persons were occupying the subject land other than Rodolfo
and that said persons, who are the heirs of Perfecto, contest the
title of Rodolfo.
Therefore, the sale by CDB to Lim of the property mortgaged
in 1983 by Rodolfo must be deemed a nullity for CDB did not
have a valid title to the said property. To be sure, CDB never
acquired a valid title to the property because the foreclosure sale,
by virtue of which, the property had been awarded to CDB as
highest bidder, is likewise void since the mortgagor was not the
owner of the property foreclosed.
Maam: Is there a Valid Mortgage?
D: None maam because the bank is not the real owner.
Maam: The bank is not the real owner of the property?
D: No the mortgagor is not the real owner of the property.
Maam: Who is the Mortgagor here
D: Rodolfo Maam, and Perfecto is the true owner.
Maam: Now what about the issue, Is Cavite Development
bank considered a mortgagor in good faith?
D: No maam, as a banking institution it should exert not ordinary
diligence but extra ordinary diligence in order to secure the title
that the owner of the mortgaged property is the real owner of the
property and in this case the court said that it appears not that
Rodolfo guansing obtained his fraudulent title by executing a
extrajudicial settlement of the estate where he made it appear
that he and Perfecto Guansing were the only surviving heirs
entitled to the Property. This self-executed deed should have
alerted the Bank against any possible defect in the mortgage.
D: The Bank also did not have an ocular inspection over the
property.
M:Again a requirement here is that the mortgagor must be the
owner of the property is required for a valid mortgage. Even if
there was a title registered in the name of Rodolfo, it turned out
he was not the true owner thereof because it was a fraudulently
secured by Rodolfo. The title is merely an evidence of ownership
but the mere fact you are in possession of the title does not mean
you own the property mismo.
Cavite alleged the defense that it is considered a mortgagee in
good faith.
The Doctrine of Mortgagee in Good Faith is based on the rule that
all persons dealing with property covered by Torrens Certificate of
Title are not required to go beyond what appears on the face of
the title. Mortgagee has the right to rely on the face of the title.
An innocent purchaser for value therefore, who relies on the title
is protected. However the mortgagee bank cannot claim to be a
mortgagee in good faith because he cannot be excused from
exercising the due diligence required from Banking Institutions. It
is a standard practice of Banking Institutions to send
representatives to the premises of the land and investigate who
the real owners are thereof.
Also take note as we have discussed last time the third paragraph
in 2085 wherein you can have 3rd persons who are not parties to
the principal obligation who may secure the principal obligation by
mortgaging or pledging their own property. It is not necessary that
the pledgor or mortgagor is the principal debtor at the same time.
What is required is that such pledgor or mortgagor is the absolute
owner thereof.
VDA DE JAYME vs. CA
Spouses Jayme and Neri, the president of Asiancars, entered
into a contract of lease covering one-half of the lot owned by
spouses Jayme. It was stipulated that Asiancars may use the
leased premises as a collateral to secure payment of a loan
which Asiancars may obtain from any bank, provided that the
proceeds of the loan shall be used solely for the construction of a
building which, upon the termination of the lease or the voluntary
surrender of the leased premises before the expiration of the
contract, shall automatically become the property of the spouses
Jayme.
Later on, Asiancars obtained a loan from Metrobank.
However, the entire lot was offered as collateral in a Deed of Real
Estate Mortgage signed by spouses Jayme. Asiancar failed to
settle the unpaid balance of its loan obligation causing Metrobank
to foreclose the property.
Upon learning of such, petitioner sought the annulment
thereof alleging that Asiancars did not tell them that security of
the loan was the entire lot. Hence, petitioner alleged that they
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were deceived into signing the DREM when their intention as well
as consent was only to be bound as guarantors and not
mortgagors.
Respondents deny that any fraud was employed since the
spouses were fully advised and compensated for the use of their
property as collateral.
ISSUE: W/N the third party mortgage undertaken by spouses
Jayme in favor of Neri was valid.
RULING: YES
The DREM entered into by the spouses Jayme partakes of a
Third Party Mortgage under Article 2085(3) of the CC.
Clearly, the law recognizes instances when persons not
directly parties to a loan agreement may give as security their
own properties for the principal transaction. In this case, the
spouses should not be allowed to disclaim the validity of a
transaction they voluntarily and knowingly entered into for the
simple reason that such transaction turned out prejudicial to them
later on.
So long as valid consent was given, the fact that the loans
were solely for the benefit of the debtor would not invalidate the
mortgage with respect to petitioner’s property. In consenting
thereto, even granting that petitioner may not be assuming
personal liability for the debt, her property shall nevertheless
secure and respond for the performance of the principal
obligation.
In this case, no fraud attended the execution of the deed of
mortgage. With the assistance of a lawyer and consultation with
their literate children, the spouses though illiterate could not feign
ignorance of the stipulations in the deed. Patently, theirs was not
a vitiated consent. It could not now be justifiably asserted that the
Jayme spouses only intended to be bound as guarantors and not
as mortgagors.
In this jurisdiction, when the property of a third person which
has been expressly mortgaged to guarantee an obligation to
which the said person is a stranger, said property is directly and
jointly liable for the fulfillment thereof, in the same manner as the
mortgaged property of the debtor himself.
In the case at bar, when Asiancars failed to pay its obligations
with Metrobank, the properties given as security (one of them
being the land owned by the Jaymes) became subject to
foreclosure. When several things are given to secure the same
debt in its entirety, all of them are liable for the debt, and the
creditor does not have to divide his action by distributing the debt
among the various things pledged or mortgaged. Even when only
a part of the debt remains unpaid, all the things are liable for such
balance.
At the time of the foreclosure, Asiancars had a remaining
balance. Thus, Metrobank had every right to effect the
extrajudicial foreclosure of the mortgaged properties to satisfy its
claim.
Metrobank is also a purchaser in good faith. It had no
knowledge of the stipulation in the lease contract. Although the
same lease was registered and duly annotated on the TCT of the
Lot, Metrobank was charged with constructive knowledge only of
the fact of lease of the land and not of the specific provision
stipulating transfer of ownership of the building to the Jaymes
upon termination of the lease. There was no annotation on the
title of any encumbrance. While the alienation was in violation of
the stipulation in the lease contract between the Jaymes and
Asiancars, Metrobank’s own rights could not be prejudiced by
Asiancars’ actions unbeknownst to Metrobank. Thus, the transfer
of the building in favor of Metrobank was p valid and binding.
Petitioners however, are not without recourse for the loss of
their property. Although they cannot go after respondent, they
have in their favor the undertaking executed by Neri and other
members of his family. The undertaking also bound respondent
Asiancars, as well as its officers who were signatories to the
aforesaid Undertaking, to reimburse petitioners for the damages
they suffered by reason of the mortgage.
So here we have the Spouses Jaime who executed a real estate
mortgage in favor of the creditor Metrobank. This partakes the
third party mortgage as mentioned in Last Paragraph 2085. So
long as valid consent was given, the fact that the loans were
solely for the benefit of the debtor would not invalidate the
mortgage with respect to the petitioners property. The Law
recognizes instances where persons not directly parties to a loan
may give as security their own properties to the principal
transaction. No fraud attended the execution of the deed of
mortgage. The properties given as security, one of which was
owned by the Spouses Jaime, became subject to a foreclosure.
The Supreme Court also pointed out that the Metrobank is a
Purchasor in Good Faith because it had no knowledge of the
stipulation in the Contract although the lease was registered and
duly annotated, Metrobank was only charged with the
constructive knowledge of the lease and not of any specific
provisions stipulating the transfer of ownership of the building to
the Jaimes upon termination of the lease. No annotation of
encumbrance was also made.
Art. 2086. The provisions of Article 2052 are applicable to a
pledge or mortgage. (n)
A guarantee cannot exist without a valid obligation nevertheless a
guarantee may be constituted to guarantee the performance of a
voidable or unenforceable contract. It may also guarantee a
natural obligation. Just like guarantee and suretyship, pledge and
mortgage, the principal obligation must also be valid as they are
mere accessory contracts.
Art. 2087. It is also of the essence of these contracts that
when the principal obligation becomes due, the things in
which the pledge or mortgage consists may be alienated for
the payment to the creditor. (1858)
MANILA BANKING vs. TEODORO
In 1964, Teodoro Jr. executed a Deed of Assignment
Receivables from the EEA in favor of petitioner bank. The Deed
of Assignment provided that:
1. It was for and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the sum
of P10k extended to respondents by petitioner bank as
security for the payment of said sum and interest
thereon;
2. Respondents, as assignors, remise, release, and
quitclaim to assignee bank all their rights, title and
interest in and to the accounts receivable assigned;
3. The assignment would also stand as a continuing
guaranty for future loans of respondents to petitioner
bank and correspondingly the assignment shall also
extend to all the accounts receivable, respondent shall
also obtain in the future, until the consideration on the
loans secured by respondents from petitioner bank
shall have been fully paid by them.
In 1966, respondents entered into a contract with Emergency
Employment Administration (EEA), now Philippine Fisheries
Commission (PFC). By virtue thereof, petitioner bank extended
loans to respondents Teodoro Sr. and his son Teodoro Jr.
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evidenced by 3 promissory notes they executed in favor of the
bank in 1966.
Petitioner banks took steps to collect from the PFC but no
collection was effected. Hence, it filed its claim against
respondents.
The respondents argue that petitioner’s claim is already
considered paid by the Deed of Assignment which Teodoro Jr.
executed. They further claim that the deed of assignment is a
quitclaim in consideration of their indebtedness to petitioner bank
and not mere guaranty.
ISSUES:
1. W/N the assignment of receivables extinguish the loan
obligations of respondents to petitioner. NO
2. W/N petitioner must first exhaust all legal remedies
against PFC before it can proceed against respondents
for collections of loan under the promissory notes. NO
RULING: BOTH NO
First issue
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, dation in payment, exchange or donation, and without the
need of the consent of the debtor, transfers his credit and its
accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the
assignor could have enforced it against the debtor.
It may be in the form of a sale, but at times it may constitute a
dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has
against a third person, or it may constitute a donation as when it
is by gratuitous title; or it may even be merely by way of guaranty,
as when the creditor gives as a collateral, to secure his own debt
in favor of the assignee, without transmitting ownership.
The character that it may assume determines its requisites
and effects. Its regulation, and the capacity of the parties to
execute it; and in every case, the obligations between assignor
and assignee will depend upon the judicial relation which is the
basis of the assignment.
In the case at bar, it is evident that the assignment of
receivables executed by respondent in 1964 did not transfer the
ownership of the receivables to petitioner bank and release
respondents from their loans with the bank incurred under
promissory notes. It did not result from a sale transaction nor was
constituted by virtue of a dation in payment since at the time deed
of assignment was executed, said loans were non-existent yet.
The deed of assignment was executed in 1964 while the
promissory notes in 1966.
At most, it was a dation in payment for P10k, the amount of
credit from petitioner bank indicated in the deed of assignment. At
the time the assignment was executed, there was no obligation to
be extinguished except the amount of P10k. Moreover, in order
that an obligation may be extinguished by another which
substitutes 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.
Obviously, the deed of assignment was intended as collateral
security for the bank loans of respondents, as a continuing
guaranty for whatever sums would be owing by them to petitioner,
as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge, the latter
being the lesser transmission of rights and interests.
An assignment to guarantee an obligation is in effect a
mortgage and not an absolute conveyance of title which confers
ownership on the assignee.
Second issue
The obligation of respondents under the promissory notes not
having been released by the assignment of receivables, they
remain as the principal debtors of petitioner bank rather than
mere guarantors. The deed of assignment merely guarantees
said obligations. That the guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor, under Article 2058 of the NCC does not therefore apply to
them. It is of course of the essence of a contract of pledge or
mortgage that when the principal obligation becomes due, the
things in which the pledge or mortgage consists may be alienated
for the payment to the creditor pursuant to Article 2087 of the
NCC. In the instant case, respondents are both the principal
debtors and the pledgors or mortgagors. Resort to one is,
therefore, resort to the other.
Petitioner bank did try to collect on the pledged receivables.
As the EEA which issued the receivables had been abolished, the
collection had to be coursed through the Office of the President
which disapproved the same. The receivable became virtually
worthless leaving respondents’ loans from petitioner bank
unsecured. It is but proper that after their repeated demands
made on respondents for the settlement of their obligations,
petitioner bank should proceed against respondents. It would be
an exercise in futility to proceed against a defunct office for the
collection of the receivables pledged.
What do you mean by assignment, under the law?
What is the effect if this deed of assignment is merely a
pledge?
Since it is only a pledge it is only as a security of an obligation
which is the promissory note
What happens to the Obligation? What is the action here of
Manila Bank?
You’re Correct there is only a deed of assignment where the
intention is merely to constitute the pledge over the receivables
covered therein. So what is the effect if it is a mere pledge?
What is the action here? Filed by the bank against the
debtors? What happens in a pledge? Is the Obligation
extinguished?
Since the obligation is not extinguished, the bank could not
contend that the mere assignment of the receivables will
extinguish the obligation in the said promissory note because it is
acting as a collateral security.
Do take note, what do we mean of assignment of credit? An
agreement by which of which the owner of the credit, known as
the assignor by legal cause such as sale dacion in payment
exchange or donation and without the need of the consent of the
debtor, transfers his credit and his accessory rights to another,
known as the assignee, who acquires the power to enforce it to
the same extent as the assignor could have enforced it against
the debtor it may be in the form of sale or it may constitute a
dacion in payment wherein you could have properties whether
personal or real properties delivered to the creditor in lieu of the
monetary obligation for the purpose of extinguishing the
obligation, the deed of assignment covering the receivables
covering from the emergency employment association did not
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transfer the ownership of these receivables to the bank and
release the appellants from their loans. It is clear that the deed of
assignment was merely a security for the payment of the sum of
interest in the promissory note.
Again how do we interpret the contracts? Not by the language
used by the parties in the document but by their intention. The
supreme court also pointed out in that the interpretation of
contracts that whether the transaction is a pledge or dacion in
payment, the presumption is in favor of pledge and the latter
being the lesser involving the lesser transmission of rights and
interests. Property, personal property is merely used as a
collateral or a security for the principal obligation. Walang transfer
of ownership as compared to dacion in payment. Which has a
greater transmission of rights kasi may transfer of ownership.
So here the deed of assignment was intended as a collateral
security for the bank loans of the appellants and as a continuing
guarantee for whatever sums will be owing by defendants to
plaintiff.
In this case the bank demanded for the payment from the debtors
and the debtors are still held liable because their obligations were
not extinguished by those receivables covered in the deed of
assignment as those merely acted as a security for their
obligation.
In relation to 2087 please take note of 2088 very important
provision in relation to contracts of pledge and mortgage.
2088 states that the creditor cannot appropriate the things given
by way of pledge or mortgage and dispose of them. Any
stipulation to the contrary is null and void. This 2088 refers to
what we have already learned before. Pactum Commissorium.
What happens in Pactum Commissorium?
Automatic appropriation of property to the creditor in case of the
debtors default. Automatic appropriation is prohibited by 2088.
HECHANOVA vs. ADIL
Jose Servando obtained a loan worth P20k from his cousin,
Pio Servando secured by a mortgaged of 3 parcels of land. The
agreement was evidenced by a private document whereby it was
stipulated that if Jose fails to redeem the property within 10 years,
Pio shall become the sole owner thereof.
Later on, Jose sold the 3 parcels of land to Hechanova by
virtue of a deed of sale. Pio now sought the annulment of the sale
or, in the alternative, that Jose be ordered to pay the loan plus
interest and damages.
Petitioner argued that Pio has no cause of action against
them nor was he a real party in interest since as a mere
mortgagee, he had no standing to question the validity of the
sale. Further, the mortgage was embodied in a private document
and not registered with the ROD.
ISSUE: W/N Pio, as mortgagee, may question the validity of the
sale.
RULING: NO
Pio has no cause of action and has no standing to question
the validity of the deed of sale executed by the decease Jose in
favor of Hechanova and Masa. No valid mortgage has been
constituted Pio’s favor, the alleged deed of mortgage being a
mere private document and not registered. Moreover, it contains
a stipulation (pacto comisorio) which is null and void under Article
2088 of the CC. Even assuming that the property was validly
mortgaged to Pio, his recourse was to foreclose the mortgage,
not to seek annulment of the sale.
FEBRUARY 2, 2017
By: Manilyn Pascioles
Article 2088 defines Pactum Commissorium. We have already
learned what a pactum commissorium is.
Q: Again what do you understand about this term?
A: It means ma’am that the thing was pledged or mortgaged by
way of securing an obligation in which it is provided that in case
the debtor fails to pay within a certain period the thing pledged or
mortgaged ma’am will automatically be appropriated to the
creditor.
ALCANTARA VS. ALINEA
Facts:
ALINEA and BELARMINO borrowed from ALCANTARA
P480. It was agreed by them that in case of non-payment, it
would be understood that the house and lot owned by ALINEA
and shall be considered as absolutely sold to ALCANTARA for
the said sum.
Despite non-payment by ALINEA and BELARMINO, the latter
failed to deliver the property.
ALCANTARA filed a complaint praying that judgment be rendered
in his behalf ordering ALINEA and BELARMINO to deliver to him
the house and lot, among others.
Issue: WON THE CONTRACT OF LOAN AND A PROMISE OF
SALE OF A HOUSE AND LOT IS VALID. YES.
Held:
Either one of the contracts are perfectly legal and both are
authorized. No article of the Civil Code prohibits expressly, or by
inference, that an agreement could not be made in the form in
which the same has been executed. Contracts shall be binding,
whatever may be the form in which they may have been
executed, provided the essential conditions required for their
validity exist.
PACTUM COMMISSORIUM INDICATES THE EXISTENCE OF
THE CONTRACTS OF MORTGAGE OR OF PLEDGE OR THAT
OF ANTICHRESIS, none of which have coincided in the loan
indicated herein.
THE HOUSE AND LOT, DOES NOT APPEAR MORTGAGED IN
FAVOR OF ALCANTARA, because in order to constitute a valid
mortgage it is indispensable that the instrument be registered in
the Register of Property and the document of contract does not
constitute a mortgage, nor could it possibly be a mortgage, for the
reason of said document is not vested with the character and
conditions of a public instrument.
There could also be NO PLEDGE, not being personal property,
and notwithstanding the said double contract, ALINEA and
BELARMINO continued in possession thereof and the said
property has never been occupied by ALCANTARA.
There is NO CONTRACT OF ANTICHRESIS, inasmuch as the
ALCANTARA has never been in possession thereof, nor has he
enjoyed the said property, nor for one moment ever received its
rents.
It was agreed between the parties herein that if ALINEA and
BELARMINO should not pay the loan in January, 1905, the
property belonging to the latter should remain sold for the
aforesaid sum, and such agreement must be complied with,
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inasmuch as there is no ground in law to oppose the compliance
with that which has been agreed upon, having been so
acknowledged by the obligated parties.
So here, again the reason of the prohibition against pactum
commissorium arrangement is that it is contrary to law, public
policy, and morals. It is ordinarily the loan is less than the value of
the property that was pledged or mortgaged. On the part of the
debtor, his/her choices are limited and sometimes they are really
in need of money, they have no other option or better option but
to agree to that automatic appropriation.
So in the case of Alcantara vs Alinea, we have to take note that
there is no pactum commissorium in this instance because the
property does not appear to have been mortgaged because we
our talking of real property here. It could not be considered as a
pledge, not being a personal property. Neither was there a
contract of antichresis.
The property belonging to the defendant should remain sold for
the said sum and agreement complied with as there is no ground
to oppose the compliance which was agreed upon having been
acknowledge by the parties.
So what is prohibited is the automatic appropriation. If an act is
still required for the parties to consummate the transfer of the
property from the debtor to the creditor, then that is not a pactum
commissorium. Because that additional act would mean that the
appropriation is not automatic.
Under Article 2088, we emphasize that there must be a pledge or
mortgage. There are 2 requisites emphasized in the case of Uy
Tong vs CA.
SPS. UY TONG VS. CA
Facts:
Uy Tong and Kho Po Giok (SPOUSES) purchased from
Bayanihan Automotive (BAYANIHAN) seven motorcycles for
P47,700. This was evidenced by a written agreement, stating
among others that if for any reason the SPS should fail to pay
their obligation, BAYANIHAN shall become automatically the
owner of the the SPS’ apartment with the only obligation on
BAYANIHAN to pay P3,535, and in such event the SPS shall
execute the corresponding Deed of absolute Sale in favor of the
VENDOR and or the Assignment of Leasehold Rights (The SPS
are owners of the apartment and the lease-hold rights over the
land on which the building stands).
The SPS failed to pay, prompting BAYANIHAN to file an action
for specific performance.
TC: In favor of BAYANIHAN. An order for execution pending
appeal was issued. Thus, a deed of assignment was executed by
the Sps. The latter also acknowledged their receipt of P3,000
paid by BAYANIHAN pursuant to the judgment.
Despite the execution, SPS remained in possession of the
premises, even after the expiration of the period in which they are
allowed to stay. BAYANIHAN filed an ejectment case, which was
dismissed, and subsequently, an action for recover of
possession.
Issue: WON THE DEED OF ASSIGNMENT IS NULL AND VOID
BECAUSE IT IS IN THE NATURE OF A PACTUM
COMMISSORIUM AND/OR WAS BORNE OUTOFTHESAME.
No.
Held: SPS: The agreement is in the nature of a pactum
commissorium which is null and void, hence, the deed of
assignment which was borne out of the same agreement suffers
the same fate.
Article 2088 of the CC furnishes two elements for pactum
commissorium:
1. that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for
the payment of 
the principal obligation 

2. that there should be a stipulation for an automatic

appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal
obligation within the stipulated period. 

There is NO BASIS FOR THE APPLICATION OF THE PACTUM
COMMISSORIUM. First, there is no indication of 'any contract of
mortgage entered into by the parties. It is a fact that the parties
agreed on the sale and purchase of trucks.
Also, there is NO CASE OF AUTOMATIC APPROPRIATION of
the property by BAYANIHAN. When the SPOUSES defaulted in
their payments of the second and third installments of the trucks
they purchased, BAYANIHAN filed an action in court for specific
performance. The trial court rendered favorable judgment for
BAYANIHAN and ordered the SPOUSES to pay the balance of
their obligation and in case of failure to do so, to execute a deed
of assignment over the property involved in this case. The
SPOUSES elected to execute the deed of assignment pursuant
to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN
because it took the intervention of the trial court to exact
fulfillment of the obligation. And even granting that the original
agreement between the parties had the badges of pactum
commissorium, the deed of assignment does not suffer the same
fate as this was executed pursuant to a valid judgment.
SPS: They must be exempted from the ruling of CA that their
failure to deny the genuineness and due execution of the deed of
assignment was deemed an admission thereof since the basis for
this exception is the SPOUSES' insistence that the deed of
assignment having been borne out of pactum commissorio is not
subject to ratification and its invalidity cannot be waived.
The SPOUSES failed to deny under oath and specifically the
genuineness and due execution of the said deed. Perforce, under
Section 8, Rule 8 of the Revised Rules of Court, the SPOUSES
are deemed to have admitted the deed's genuineness and due
execution. Besides, they themselves admit that the contract was
duly executed and that the same is genuine.
SPS: They contend that the deed is unenforceable because the
disposition portion of civil case requires BAYANIHAN to pay the
SPS the sum of P 3,535. To buttress their claim of non-
compliance, they invoke the receipt issued by them to show that
BAYANIHAN was P535 short of the complete payment.
UNMERITORIOUS. Inasmuch as the decision in the case
imposed upon the parties correlative obligations which were
simultaneously demandable so much so that if BAYANIHAN
refused to comply with its obligation under the judgment to pay
the sum of P 3,535 then it could not compel the SPS to comply
with their own obligation to execute the deed of assignment over
the subject premises. The fact that the SPS executed the deed of
assignment with the assistance of their counsel leads to no other
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conclusion that private respondent itself had paid the full amount.
ELEMENTS FOR PACTUM COMMISSORIUM
1. that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for
the payment of the principal obligation; and
2. that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
In this case, there is no indication of any contract of mortgage
entered into by the parties and there is no case of automatic
appropriation of property because what happened here is that the
Sps. Uy Tong elected to execute Deed of Assignment pursuant to
a judgment. No automatic appropriation because it took the
intervention of the Trial Court. The case was filed to exact the
fulfilment of the obligation.
In this connection, especially to those who have Sales, do not
forget Article 1602 which refers to Equitable Mortgage. Even if
what was executed before the court, for example is a Deed of
Absolute Sale, and any of the circumstances is present, that
despite the execution thereof the buyer still remains in
possession of the property and it was sold for unusual amount.
Then that would constitute as an equitable mortgage and there
could be no automatic transfer by such deed of absolute sale,
otherwise that would still be considered a pactum commissorium
which again is prohibited under Article 2088.
Now, why is it that parties or creditors resort to this arrangement
of pactum commissorium or automatic appropriation or the
execution or the execution of deed of sale instead of pledging or
mortgaging the properties? Because it is easier for them as a
form of security. If they would require for the execution of
mortgage or pledge, they would still have to sell the properties
and comply for the requirements for a valid public auction.
Compare it to automatic appropriation or the execution of the
deed of sale, it would be easier on the part of the creditor to effect
payment to extinguish the obligation of the debtor.
Now also do take note, that any waiver of Article 2088, is not valid
and any stipulation to the contrary is null and void. In fact even if
there is no vitiation of consent, even if the debtor himself
voluntarily offer, that would still constitute a pactum
commissorium under Article 2088.
PHILNICO VS. PMO
Facts: Privatization and Management Office (PMO), Philnico
Mining (PHILNICO) and Philnico Processing Corporation (PPC)
executed an Amended and Restated Definitive Agreement
(ARDA), which laid down the terms and conditions of the
purchase and acquisition by PHILNICO from PMO of 22,500,000
shares of stock of PPC, as well as receivables of PMO from PPC.
Under the ARDA, PHILNICO agreed to pay PMO the peso
equivalent of US$333,762,000 as purchase price, payable in
installments and in accordance with the schedule set out.
It was agreed by the parties, PHILNICO shall pledge the shares
to PMO and shall also pledge to PMO the Converted Shares and
the New Shares as security for the payment of the purchase price
upon the issuance of such shares in the name of PHILNICO. It
was also stipulated that, in case of default, the title to the Existing
Shares and the Converted Shares shall ipso facto revert to PMO
without need of demand.
On account of the huge financial cost of building a new nickel
refinery plant, coupled with the economic problems, PMO,
PHILNICO, and PPC executed an Amendment Agreement
providing for the restructuring of the payment terms of the entire
obligation under the ARDA.
Three years later, PHILNICO had defaulted in its payment. Before
the last the deadline of the extended period of payment,
PHILNICO filed a Complaint for Prohibition against Reversion of
Shares with Prayer for Writ of Preliminary Injunction and/or
Temporary Restraining Order, Suspension of Payment and Fixing
of Period of Payment, against PMO, PPC, and the PPC
Corporate Secretary.
Issue: WON THE ARDA ON IPSO FACTOOR AUTOMATIC
REVERSION OF THE PPC SHARES OF STOCK TO PMO IN
CASE OF DEFAULT BY PHILNICO CONSTITUTES PACTUM
COMMISSORIUM. Yes.
Held:
Pactum commissorium is among those contractual
stipulations that are deemed contrary to law. It is defined as "a
stipulation empowering the creditor to appropriate the thing given
as guaranty for the fulfillment of the obligation in the event the
obligor fails to live up to his undertakings, without further
formality, such as foreclosure proceedings, and a public sale
ART. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void.
There are two elements for pactum commissoriumto exist:

1. that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for
the payment of the principal obligation;

2. that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or
mortgaged in the event of nonpayment of the principal
obligation within the stipulated period.
Both elements of pactum commissorium are present in the instant
case:
1. By virtue of the Pledge Agreement, PHILNICO pledged
its PPC shares of stock in favor of PMO as security for
the fulfillment of the former’s obligations under the
ARDA and the Pledge Agreement itself; and
2. There is automatic appropriation as under Section 8.02
of the ARDA, in the event of default by PHILNICO, title
to the PPC shares of stock shall ipso facto revert from
PHILNICO to PMO without need of demand.
CA: The ARDA and the Pledge Agreement are entirely separate
and distinct contracts. Neither contract contains both elements of
pactum commissorium: the ARDA solely has the second element,
while the Pledge Agreement only has the first element. Thus,
there is no pactum commissorium.
UNMERITORIOUS. The agreement of the parties may be
embodied in only one contract or in two or more separate
writings. In case of the latter, the writings of the parties should be
read and interpreted together in such a way as to render their
intention effective.
The agreement between PMO and PHILNICO is the sale of the
PPC shares of stock by the former to the latter, to be secured by
a pledge on the very same shares of stock. The ARDA and the
Pledge Agreement herein, although executed in separate written
instruments, are integral to one another. The Pledge Agreement
secures, for the benefit of PMO, the performance by PHILNICO of
its obligations under both the ARDA and the Pledge Agreement
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itself. It is with the execution of the Pledge Agreement that

PHILNICO turned over possession of its certificates of shares of
stock in PPC to PMO. There had already been a shift in the Property is alienated to
relations of PMO and PHILNICO, from mere seller and buyer, to the creditor for the
payment of the debt.
creditor-pledgee and debtor-pledgor. Having enjoyed the security
and benefits of the Pledge Agreement, PMO cannot now insist on The property upon non- The creditor has other
applying Section 8.02 of the ARDA and conveniently and payment is deemed remedies.
arbitrarily exclude and/or ignore the Pledge Agreement so as to automatically appropriated
evade the prohibition against pactum commissorium. to the creditor if the principal
debtor cannot pay
PMO: There is no valid Pledge Agreement, arguing that There is no automatic
PHILNICO could not have validly pledged the PPC shares of appropriation.
stock because it is not yet the absolute owner of said shares. The
Even if the parties agree to Consent of both parties is
sale of the PPC shares of stock to PHILNICO is subject to the
the Pactum Commissorium required for its validity.
resolutory condition of non-payment by PHILNICO of the
stipulation, or even if they
installments due on the purchase price. mutually consent, still void. The creditor can refuse
(Void WON there is consent) to accept the property
UNMERITORIOUS. Among the requirements of a contract of
offered as payment of the
pledge is that the pledgor is the absolute owner of the thing
debt
pledged. Based on the provisions of the ARDA, ownership of the
PPC shares of stock had passed on to PHILNICO, hence, Do not confer title Law on Sale is applied,
enabling PHILNICO to pledge the very same shares to PMO. there is a need of sale
which confers title
PMO cannot maintain that the ownership of the PPC shares of
stock did not pass on to PHILNICO, but in the same breath claim It will not extinguish the Extinguishes the
that non-payment by PHILNICO of the installments due on the obligation obligation
purchase price is a resolutory condition for the contract of sale –
these two arguments are actually contradictory. So that it could
invoke the resolutory condition of nonpayment of an installment,
PMO must necessarily concede that its contract with PHILNICO
was a one of sale and that ownership of the PPC shares of stock SPS. ONG VS. ROBAN LENDING
had indeed passed on to PHILNICO. And even then, having lost
Facts:
Sps ONG obtained several loans from Roban Lending
ownership of the shares, PMO cannot automatically recover the
(ROBAN) for P4M secured by REM on their parcels of land.
same without taking steps to set aside the contract of sale.
Subsequently, the parties amended the REM by consolidating the
loan inclusive of charges which totaled P 5,916,117.50. On the
Take note that the 2 elements of Pactum Commissorium are same date, they executed a Dacion in Payment Agreement where
again emphasized in this case. As pointed out, remember that Sps ONG assigned the properties covered by the properties
they even executed a Pledge Agreement, in which one of the
requirements is that the pledgor must be the owner thereof. PMO subject to the REM to ROBAN in settlement of their total
is there for estopped to say otherwise that there was no transfer obligation.
of ownership and that Philnico is not the owner thereof. The
ownership of the shares stocks was passed on PIC, enabling PIC Sps ONG filed a complaint for declaration of mortgage contract
to pledge the said shares of stocks to PMO. The ARDA, PMO as abandoned, annulment of deeds, illegal exaction, unjust
had transferred to PIC all rights, title, and interests in and to the enrichment, accounting, and damages, alleging that the
PPC shares of stock, and delivered to PIC the certificates for said Memorandum of Agreement and the Dacion in Payment executed
shares for cancellation and replacement of new certificates are void for being pactum commissorium.
already in the name of PIC. In addition, the ARDA explicitly
declares that PIC as buyer shall exercise all the rights, including ROBAN answered that if the voluntary execution of the
the right to vote, of a shareholder in respect of the PPC shares of
Memorandum of Agreement and Dacion in Payment Agreement
stock. PMO cannot maintain that the ownership of the PPC
shares of stock did not pass on to PIC, but in the same breath novated the REM then the allegation of Pactum Commissorium
claim that non-payment by PIC of the installments due on the has no more legal leg to stand on. It also alleged that the Dacion
purchase price is a resolutory condition for the contract of sale in Payment is lawful and valid and that the accumulated charges
and interest were reasonable and valid.
Take note also the distinction of Pactum Commissorium and
Dation en pago. RTC: No pactum commisorium.

Pactum Commissorium Dacion en Pago CA: Affirmed.

VOID
There is an original contract
of pledge, mortgage or
antichresis
Valid special form of
payment for properties
alienated to the creditor
by debtor in payment of
the debt (Art 1245)
There is just a simple
obligation of a contract of
loan and not necessarily
an accessory contract of
security
Issue: WON THE AGREEMENT CONSTITUTES PACTUM
COMMISSORIUM. YES.
Held:
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are:
1. there should be a property mortgaged by way of
security for the payment of the principal obligation, and


2. there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
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case of non-payment of the principal obligation within
the stipulated period 
 has heirs(W,X,Y and Z), his estate can be held liable
In the case at bar, THE MEMORANDUM OF AGREEMENT AND
THE DACION IN PAYMENT CONTAIN NO PROVISIONS FOR
FORECLOSURE PROCEEDINGS NOR REDEMPTION. Under
the Memorandum of Agreement, the failure by Sps ONG to pay
their debt within the one-year period gives ROBAN the right to
enforce the Dacion in Payment transferring to it ownership of the
properties covered by the same. ROBAN, in effect, automatically
acquires ownership of the properties upon Sps ONG’s failure to
pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt. In the case at bar, the alienation
of the properties was by way of security, and not by way of
satisfying the debt. The Dacion in Payment did not extinguish Sps
ONG’s obligation On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in Payment,
petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year.
So again take note of the distinction of between Pactum
Commissorium and Dacion en Pago
What is the effect if we have a pactum commissorium? What is
considered void is only the stipulation of automatic appropriation.
The pledge and mortgage itself will still be valid, provided all the
elements required for its validity are present. It can still be
enforced, again provided that all the required elements for its
validity are present. What is void is merely the automatic
appropriation or forfeiture of property in favor of the creditor.
Which means the remedy of the creditor is to foreclose the
property and sell it to a public auction.
Article. 2089. A pledge or mortgage is indivisible, even
though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is expected the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment
of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied. (1860)
Article 2089 emphasizes that contracts of pledge and mortgage
are indivisible. What are the effects if these contracts are
indivisible?
1. Let’s say that A borrowed money from B worth 100,
000.00 wherein a property is mortgage. Even if A has
already paid 50,000.00 to the creditor B, A cannot seek
release of that 50,000.00 by saying that pwede ba
irelease ng creditor ang 50% ng property. So hindi
pwede yun. The mortgage can be released upon full
payment of the obligation because again it is indivisible
in nature.
2. Another effect, in case A dies and let us say that he
for his obligation. The liability of the heirs is only to the
extent of what they have received. So kung 4 sila, tag
¼ sila sa share sa properry and sa obligation. What if
W pays B 25,000.00, still he cannot seek release of
that 25% of the property. Dapat bayaran nila ang full
amount.
3. What if B, the creditor, dies and he has heirs(C and D).
What if A paid C 50,000.00. C cannot release the
corresponding 50% of the mortgage property. Again
because of the indivisible nature of mortgage or pledge.
Also emphasized in the same article, if for example the thing was
mortgaged or pledged, for example 100,000.00. What if there was
a pledged ring worth 75,000.00 and a watch worth 25,000.00.
Same rule applies. Even if A has already paid 25,000 to B, A
cannot ask for the return of the watch because again, contracts of
pledge and mortgage are indivisible.
It is a different thing if first, A borrowed from B 75,000 delivering
the ring as security. Subsequently A borrowed another 25,000
from B delivering a watch as security. If A paid the 75,000,
remember that the ring was constituted as security only for this
obligation, so if such amount was paid, then A can seek for the
return of the ring because these are two separate obligation.
Those are the scenarios contemplated under Art. 2089.
Article 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable.
(n)
So you should already know that solidarity is different from
indivisibility. Indivisibility refers to subject or object while solidarity
or joint refers to the juridical tie existing between the parties. So it
does not mean that just because the tie between the parties is
solidary it is divisible or when they are jointly liable it is divisible.
Again these are not the same.
Article 2091. The contract of pledge or mortgage may secure
all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition. (1861)
Remember that a pledge or mortgage is an accessory contract,
so it must secure a principal obligation which must be valid. So
you could have as we mention before a natural obligation,
unenforceable or voidable contracts and as mention in Art 2091,
even those obligation which are subject to condition. What is
important is that the principal obligation is valid. Obviously, illegal,
void and non-existent or fictitious obligations cannot be a principal
obligation of a pledge or mortgage.
Article 2092. A promise to constitute a pledge or mortgage
gives rise only to a personal action between the contracting
parties, without prejudice to the criminal responsibility
incurred by him who defrauds another, by offering in pledge
or mortgage as unencumbered, things which he knew were
subject to some burden, or by misrepresenting himself to be
the owner of the same. (1862)
So for example sa pledge, for its validity the thing must be
delivered to the pledgee/creditor. So what if there is only a
promise to enter into pledge or mortgage? For example there is a
promise to enter into a pledge but the thing was not yet delivered,
that would still be considered a valid contract, a consensual
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contract. But such could not be considered a pledge because of
the absence of delivery. It is only a consensual contract with a
promise to constitute a pledge. That is nevertheless enforceable
but what we have there is only a personal action against the
promisor. Unlike if you have already the essential requisites for a
valid pledge or mortgage then you could have real action against
the property covered by the said contracts of pledge or mortgage.
A promise to constitute a contract of pledge or mortgage if
accepted gives rise only a personal right binding upon the parties
and does not create a real right over the property. Remember
these two: personal right against a specific person and real right
against the whole world. What exist in this instance is only a right
of action to compel the fulfillment of the promise but there could
be as yet no valid pledge or mortgage in the absence of its
essential requisites. It is also referred in 2092 the right to compel
in relation to such promise. Recall your Revised Penal Code
where estafa may be committed by a person who pretends to be
the owner of a real property and pledges or mortgages the same,
and turns out that he is not the owner, or when he is the owner
and represents that it is unencumbered, free from liens and
encumbrances, then pledged or mortgaged the same to
creditor/pledgee, but it turns out that it was already sold to a 3 rd
party. With such instance, he can be liable for estafa under the
RPC.
February 7, 2017
B. Provisions Applicable Only to Pledge
Art. 2093. In Addition to the requisites prescribed in 2085, it
is necessary, in order to constitute the contract of pledge,
that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement.
In pledge and mortgage, aside from the essential element of
consent, object, and consideration, we emphasize also the
essential requisites under 2085—
2085. The following requisites are essential to the contracts
of pledge and mortgage:
1. That they be constituted to secure the fulfilment of
a principal obligation
2. That the pledger or mortgagor be the absolute
owner of the thing pledged or mortgaged;
3. that the persons constituting the pledge or
mortgage have the free disposal of their property,
and in the absence thereof, that they be legally
authorized for the purpose;
In relation to pledge, we have the additional essential requisite
which is DELIVERY. Meaning, pledge is a real contract since
delivery is required for its perfection wherein the property itself
must be placed in the possession of the creditor. In the absence
of such delivery no valid contract of pledge is entered into.
JOSE McMICKING vs. PEDRO MARTINEZ and GO
G.R. No. L-5219 February 15, 1910
Facts: Some time during the year 1908, Pedro Martinez obtained
judgment in the CFI against one Maria Aniversario. Thereafter,
execution was issued upon said judgment and the sheriff levied
upon a pailebot, Tomasa, alleged to be the property of said Maria
Aniversario. Thereupon, Go Juna intervened and claimed a lien
upon said boat by virtue of a pledge of the same to him by the
said Maria Aniversario made on the 27th day of February, 1907,
which said pledge was evidenced by a public instrument bearing
that date.
This present action was brought by the sheriff against Go Juna
and Pedro Martinez to determine the rights of the parties.
Pedro Martinez alleged as a defense that the pledge which said
document was intended to constitute had not been made effective
by delivery of the property pledged, as required by article 1863 of
the CC, and therefore, there existed no preference in favor of Go
Juna.
Court: ruled in favor of Pedro Martinez. An appeal was taken
therefrom.
Issue: WON there was a pledge.
Held: No. The conclusion of the court below that the property was
not delivered in accordance with the provisions of article 1863 of
the CC is sustained by the proofs. It appears, however, that the
document of pledge is a public document which contains an
admission of indebtedness. In other words, while it is intended to
be a pledge, it is also a credit which appears in a public
document. Article 1924 (3)(a), is therefore applicable; and, said
public document antedating the judgment of defendant Martinez,
takes preference thereover.
As the validity of the indebtedness of Aniversario. The validity
of that document in so far as it shows an indebtedness have not,
however, been determined. Anniversario is not a party to this
action. No judgment can be rendered affecting her rights or
liabilities under said instrument. Otherwise, it would be wholly
unjust. That would be to require her to pay a debt which has not
only not been shown to be enforceable against her but which, as
a witness for the defendant Martinez on the trial of this cause, she
expressly and vehemently repudiated as a valid claim against
her.
SC emphasized the requirement of delivery for a valid contract of
pledge.
Notice also that there was this document of credit which was a
public document. Nonetheless, in the absence of delivery there
could be no valid pledge.
A pledge of personal property to secure an indebtedness is
without force or effect UNLESS the property pledged is delivered
to the pledgee or some third person agreed upon by the parties.
In this case, although we have a public document, it may only b
considered as an evidence of indebtedness BUT the pledge
would still eb considered as VOID for failure of delivery.
As an effect of such pledge in a public instrument, such debt is
preferred over a judgment secured against the pledger
subsequent to the date of the said public instrument.
When talking about delivery, as a general rule, we are talking
about actual possession. Thus, there must be ACTUAL
DELIVERY of the personal property to which the creditor will hold
possession of the thing, or to a third person by agreement.
SYMBOLIC/CONSTRUCTIVE DELIVERY
Can you still have a valid contract of pledge even if there was no
actual delivery? YES. When talking of pledge, it does not only
cover personal properties, but it also involves intangible
properties evidenced by a document or incorporeal rights
evidenced by documents.
Example: goods which are covered by Warehouse Receipts. As
evidence of the goods being stored in the warehouse, the
warehouseman issues a warehouse receipt. If said goods will be
pledged to the creditor, instead of delivering the goods to the
creditor, and the creditor storing it back to the sid warehouse,
what is instead delivered to the creditor is the warehouse receipt.
By virtue thereof, the delivery of the warehouse receipt will be
sufficient to give rise to a perfected contract of pledge.
Art. 2094. All movables which are within commerce may be
pledged, provided they are susceptible to possession.
VALID SUBJECT MATTER IN PLEDGE
Personal property. Things which are valid subject of pledge are
those within commerce of men and susceptible of possession.
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You could have incorporeal rights as subject of pledge under
2095—
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds,
warehouse receipts, and similar documents may also be
pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.
Aside from warehouse receipts, you could also have negotiable
instruments, bills of lading, bonds, etc. as valid subject matters of
pledge.
Take note that the subject of a pledge are not the document itself
but the incorporeal rights covered by the said documents.
REQUIREMENTS FOR A PLEDGE TO BIND THIRD PERSONS
Art. 2096. A pledge shall not take effect against third persons
if a description of the thing pledged and the date of the
pledge do not appear in a public instrument.
Requisites for a pledge to bind third persons:
1. There must be a description of the thing pledged;
2. The date of the pledge must appear on a public
instrument.
Why is it that the pledge must describe the thing pledge, as
well as the date?
So that it would not be easy for the pledger to pledge the thing
several times since the contract of pledge actually discloses such
information.
IMPORTANT: It must be in a public instrument. Therefore, it must
be duly notarized. Take note that there must also be delivery to
the creditor of the subject matter. When such details are in a
public instrument, remember that you subscribe and swear to the
truthfulness of what is indicated therein.
What is the effect if this requirement is not complied with?
CALTEX, INC, vs.CA and SEBTC
G.R. No. 97753 August 10, 1992
Facts: Security Bank, a commercial banking institution issued
280 certificates of time deposit (CTDs) in favor of Angel dela Cruz
who deposited with herein defendant the aggregate amount of
P1,120,000.00. Angel dela Cruz delivered the said certificates of
time (CTDs) to Caltex in connection with his purchased of fuel
products from the latter. Subsequently, Angel dela Cruz
negotiated and obtained a loan from defendant bank. On the
same date, said depositor executed a notarized Deed of
Assignment of Time Deposit which surrenders to defendant bank
full control of the CTD and to apply the said time deposits to the
payment of whatever amount due upon the maturity of the loan.
SEBTC received a letter from herein plaintiff formally informing it
of its possession of the CTDs in question and of its decision to
pre-terminate the same. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the value of the
CTDs.
The loan of Angel dela Cruz with SEBTC matured and fell due.
The latter set-off and applied the time deposits in question to the
payment of the matured loan. In view of the foregoing, plaintiff
filed the instant complaint, praying that defendant bank be
ordered to pay it.
Issue: Who has the better right between Caltex and Security
Bank in the CTDs?
Held: Caltex. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered
as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own
authorized and responsible representative himself.
Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder
thereof, 21 and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. 22 In the
present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs
would have sufficed. Here, the delivery thereof only as security
for the purchases of Angel de la Cruz could at the most constitute
petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be
contractually provided for.
Where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his
lien. As such holder of collateral security, he would be a pledgee
but the requirements therefor and the effects thereof, not being
provided for by the NIL, shall be governed by the Art. 2095 and
Art. 2096 of the Civil Code on pledge of incorporeal rights.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule
of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a
pledge contract cannot affect third persons adversely.
What is the objective of this requirement? Essentially, it is to
forestall fraud on the part of the debtor who will attempt to
conceal his properties from creditors by alleging that his
properties are already subject of a pledge.
Art. 2097. With the consent of the pledgee, the thing pledged
may be alienated by the pledger or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession.
In pledge, there is no transfer of ownership. It is merely a lien
over the thing; it is merely an encumbrance. It does not
dispossess the pledger of the ownership over the thing as he still
remains to be the owner.
However, 2097 provides a condition that the pledgee must
consent to the alienation.
Remember, possession is in the hands of the creditor-pledgee. If
there is a sale, there is a valid contract of sale and there is no
need for a consent under 2097. BUT to bind the pledgee with
regard to the sale, you must give such consent.
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In the absence of the consent of the pledgee on the sale and
subsequent transfer of ownership, then he could not assert
ownership over the said property subject of the pledge. Moreover,
this is also relevant in the sense that even if there ahs already
been a sale, the rights of the pledgee would still prevail over the
rights of the buyer, PROVIDED that there is compliance with the
requirement under 2095 (in a public instrument, c the date of the
pledge, as well as the description of the thing pledged.
ESTATE OF GEORGE LITTON vs. CIRIACO B. MENDOZA and
COURT OF APPEALS
G.R. No. L-49120 June 30, 1988
Facts: Mendoza issued two checks in favour of Tan. Tan had the
two checks discounted but were later returned with words ‘stop
payment’. It appears it was ordered by Mendoza for failure of the
spouses to deposit sufficient funds for the check issued by the
spouses in his favour.
Tan sued Mendoza while the spouses brought an action for
interpleader for not knowing whom to pay. Pendente lite, Tan
assigned in favour of Littion, Sr his litigatious credit (in action of
spouses) against Mendoza, duly submitted to the court, with
notice to the parties.
Mendoza entered into Compromise Agreement with Tan wherein
the latter recognized that his claims against Mendoza had been
settled and because of that, both waives any claim against the
other; with a provision that it no way affects Tan’s right to go
against the spouses.
Mendoza filed MFR saying that there was the compromise
agreement which absolved him from liability.
Tan opposed this saying the Compromise agreement was null
and void because of the deed of assignment executed in favour
of Litton, Sr.; he says that with such, he has no more right to
alienate said credit;
Issue: WON there was a valid compromise.
Held: NO. The validity of pledge/guaranty in favour of Liiton has
not been questioned. The deed of assignment fulfils the
requirements of a valid pledge or mortgage.
Although it is true that Tan may validly alienate the litigatious
credit as ruled by the appellate court, citing Article 1634 of the
Civil Code, said provision should not be taken to mean as a grant
of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security.
The Court rules that the said provision should be read in
consonance with Article 2097 of the same code. Although the
pledgee or the assignee, Litton, Sr. did not ipso facto become the
creditor of private respondent Mendoza, the pledge being valid,
the incorporeal right assigned by Tan in favor of the former can
only be alienated by the latter with due notice to and consent of
Litton, Sr. or his duly authorized representative. To allow the
assignor to dispose of or alienate the security without notice and
consent of the assignee will render nugatory the very purpose of
a pledge or an assignment of credit.
Moreover, under Article 1634, the debtor has a corresponding
obligation to reimburse the assignee, Litton, Sr. for the price he
paid or for the value given as consideration for the deed of
assignment. Failing in this, the alienation of the litigated credit
made by Tan in favor of private respondent by way of a
compromise agreement does not bind the assignee, petitioner
herein.
Here, there was a deed of assignment executed by Tan in favor
of Litton, the subject if which is the credit of Mendoza in favor of
Tan. Even if they executed a deed of assignment, it was really for
the purpose of securing or guaranteeing Tan’s obligation in favor
of Litton.
The validity of such pledge is not in question. Such deed fulfills
the requisite for a valid pledge or mortgage.
After the execution of the deed of assignment, Mendoza and Tan
entered into a compromise agreement. Remember, Tan has
already pledged the credits due from Mendoza. With that, we
apply article 2097.
Although the pledgee, Litton, did not ipso facto become the
creditor of Mendoza, the pledge being valid, the incorporeal right
assigned by tan in favor of Litton can only be alienated by tan
with due notice and consent of Litton or his duly authorized
representative, none of which is present in this case.
To allow the assignor, in this case Tan, to dispose or alienate the
security without notice and consent of Litton, the very purpose of
such pledge is rendered nugatory.
It is also very important to note that Mendoza was already aware
of the deed of assignment, which is actually a pledge in favor of
Litton. Private respondent is estopped from entering a
compromise agreement involving the same litigated credit without
notice to and consent of the assignee because of knowledge on
his part.
Considering that this was already subject of the pledge, you could
also relate this with what you have already learned under
Obligations and Contracts that payment must be made to the
creditor at the time of the payment for a valid extinguishment of
the obligation.
RIGHTS AVAILABLE TO THE PLEDGEE
Art. 2098. The contract of pledge gives a right to the creditor
to retain the thing in his possession or in that of a third
person to whom it has been delivered, until the debt is paid.
Alright the right to retain b the pledge of the thing subject to
pledge. Remember sa commudatum , no right to retain even if
meron pang obligation except hidden flaws. But here the pledgee
has the right to retain the thing as long as the debt has not been
paid and once the obligation has been paid the pledge has now
the obligation to return the thing to the pledgor, notwithstanding
that the debtor has already contracted another debt (ex. Jewelries
were delivered to secure the payment of a 100,000 obligation.
Now subsequently nangutang nanaman si debtor ng another
50,000 pesos, nabayaran na ni debtor yung 100,000 pesos
secured by the jewelry. In this case since there is already
payment , the pledge has the obligation to return the jewelry to
pledgor he cannot use as a ground na hindi ko pa esauli kasi may
utang kappa na 50,000 pesos. Pwede ang gawin nila is they will
enter into another contract of pledge wherein the 50,000 will be
secured by that jewelry. But unless it has been stipulated that that
thing pledge is subject to another obligation then upon full
payment of the obligation to which the thing secures then the
pledge should return the thing.
Under 2098, the pledgee has the right to possess the thing. Once
the debt has been paid, he has the obligation to return to the
pledger the thing pledged notwithstanding that the debtor
contracts another debt.
Take note, for a valid pledge, you must secure a principal
obligation. If the principal obligation has already been fully paid,
the pledgee must return the property. Even if she still has another
debt, UNLESS if they enter into another contract stipulating that
the same property will now be used to secure the second
obligation.
The pledgee cannot say that he will continue to retain it once the
principal obligation secured by the thing pledged has already
been fulfilled.
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RIGHT TO RETENTION--
Limited only to the principal obligation for which the pledge was
created.
Art. 2099. The creditor shall take care of the thing pledged
with the diligence of a good father of a family; he has the
right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in
conformity with the provisions of this code.
This refers to the obligation on the part of the creditor to take
good care of the thing with the diligence of a good father of a
family.
Remember, there is no transfer of ownership to the pledgee, so
he cannot just sue it in any manner that he would want to. Not
being the owner thereof, he has to subsequently return it. In the
mean time, he has to take good care of it.
If the thing requires preservation, expenses should be advanced
by the pledgee but he is entitled to reimbursement.
Art. 2100. The pledgee cannot deposit the thing pledged with
a third person, unless there is a stipulation authorizing him
to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.
General Rule: Another obligation on the part of the creditor-
pledgee: he cannot deposit the thing to a third person.
Exception: if there is a stipulation authorizing him to do so.
The pledgee shall be responsible for the acts of his agents or
employees since their acts, in legal effect, are also deemed his
acts.
Art. 2101. The pledger has the same responsibility as a bailor
in commodatum in the case under 1951.
Recall 1951—
Art. 1951. The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be
liable to the latter for the damages which he may suffer by
reason thereof.
The pledgee has the right to retain the thing until the pledgor
reimburses him for the damages that he has suffered.
Art. 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what
he receives with those which are owing him; but if none are
owing him, or insofar as the amount may exceed that which
is due, he shall apply it to the principal. Unless there is a
stipulation to the contrary, the pledge shall extend to the
interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to
the pledgor or owner of the animals pledged, but shall be
subject to the pledge, if there is no stipulation to the
contrary.
Assuming that the thing pledged earns interest, dividends, or
shares of stocks, who shall own these? Still, it is the pledgor
being the owner of the thing. To the owner belongs the __
accession or accessory.
Under 2102, the pledgee is given the right to apply these interests
or dividends in payment of the loan or obligation. In effect, these
interests or dividends would still redound to the benefit of the
owner-pledgor to the extent that his obligation would be reduced,
or extinguished.
How about animals? Again, there is no transfer of ownership so
the pledgor-owner continues to own including the fruits or the
offspring of animals. This would therefore mean that animals are
personal properties which could be the subject of a pledge.
Under 2102 said offspring of the animals can still be subject to
the pledge if there is no stipulation to the contrary.
Art. 2103. Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to recover
it from, or defend it against a third person.
This is till in line with the principle that in pledge there is no
transfer of ownership. In this instance, what if the thing pledged is
expropriated?
It is not that common that a personal property is expropriated, but
there is no prohibition against it. If the same thing is expropriated,
the pledgor would not be considered as the owner thereof.
Under the 2nd paragraph, it emphasizes that the right of the
pledgee is a real right—enforceable against third persons. Of
course, there must be compliance with the requisites under 2096.
The pledgee can file actions before the court to recover it or to
defend it against third persons.
Art. 2104. The creditor cannot use the thing pledged, without
the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be
used by the creditor but only for that purpose.
What is being entrusted to the creditor-pledgee is the possession
of the thing.
General rule: The pledgee cannot use the thing without consent
or permission of the pledgor (similar rule with deposit). The same
rule applies with the fruits, accessions, and accessories of the
thing pledged.
Exception: If the use of the thing is allowed for a certain way,
then the pledgee shall use the thing only in that way.
If, however, it uses the thing in any other manner different
from what they had stipulated, what is the remedy of the
pledgor?
He may ask that it be judicially or extrajudicially deposited, NOT
demand he return of the thing pledged.
When do you avail of the right to have the thing deposited?
(1) If the pledgee uses the thing pledged;
(2) You have the authority of the owner;
(3) If allowed to use it, but uses it in a manner different
from what they agreed upon.
Instances that the owner may ask that the thing pledged be
deposited judicially or extrajudicially:
(1) When creditor uses thing pledged without authority of
the owner; (2104)
(2) When creditor misuses the thing in any other way;
(2104)
(3) When thing pledged is in danger of being lost or
impaired because of the negligence or willful act of the
pledgee (2106)
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Art. 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he
has paid the debt and its interest, with expenses in a proper
case.
This emphasizes the rule that thing will not be returned unless
there has been full payment. The debtor cannot ask for the return
of the thing unless the debt has already been paid.
2104 does not demand the return of the thing but only to have it
deposited. Therefore, the only reason for the return of the thing is
the extinguishment of the obligation.
Art. 2106. If through the negligence or willful act of the
pledgee, the thing pledged is in danger of being lost or
impaired, the pledgor may require that it be deposited with a
third person.
This is the third instance wherein the thing may be deposited.
Art. 2108. If, without the fault of the pledgee, there is danger
of destruction, impairment, or diminution in value of the
thing pledged, he may cause the same to be sold at a public
sale. The proceeds of the auction shall be a security for the
principal obligation in the same manner as the thing
originally pledged.
The ground under 2107 and 2108 are the same. However, in
2108 does not provide that the pledgor demand the return of the
thing in substitute of another thing. Rather, the pledgee is given
the right to cause the thing pledged to be sold at a public sale.
Under 2108, the thing pledges is in danger of destruction,
impairment or diminution in value, still, without the fault of the
pledgee. However, under 2108, the pledgee has the right to sell
thing at the auction
How can we reconcile 2110 and 2108? Which is preferred? 2018,
kasi sabi dun sa 2107, without prejudice of the right of the
pledgee under the provisions of the following article.

Cannot demand for the return of the thing, but the thing will only
be deposited to a third person. This is in relation to the duty of the Art. 2110. If the thing pledged is returned by the pledgee to
pledgee to take care of the thing with the diligence of a good the pledgor or owner, the pledge is extinguished. Any
father of a family. stipulation to the contrary shall be void.
2106 and 2104 provide for the instances wherein the pledgee can If subsequent to the perfection of the pledge, the thing is in
demand that the thing be deposited. the possession of the pledgor or owner, there is a prima
facie presumption that the same has been returned by the
pledgee. This same presumption exists if the thing pledged
is in the possession of a third person who has received it
Art. 2107. If there are reasonable grounds to fear the from the pledgor or owner after the constitution of the
destruction or impairment of the thing pledged, without fault pledge. (n)
of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the The right of the pledgee to have the thing sold at the public
latter is of the same kind as the former and not of inferior auction as provided in 2108 is superior than the right of the
quality, and without prejudice to the right of the pledgee pledgor provided in 2107 to demand the return of the thing in
under the provisions of the following article. substitute of another thing. Therefore, the pledgor can only
exercise his right under 2107 if the pledgee does not exercise his
The pledgee is bound to advise the pledgor, without delay, of
right to sell the thing at the public auction as provided in 2108. To
any danger to the thing pledged.
which he debtor may now demand the return of the thing, subject
that he offers something in substitution.
DISTINGUISH 2106 FROM 2107
Take note that in 2108, if the pledgee decides to sell the property
2106 2107
being sold, it will not yet extinguish the obligation. Why? Because
the proceeds would then be used or acts as a security for the
As to existence With the fault of Without the fault
principal obligation. Kasi di pa man ito due and demandable.
of fault pledgee of pledgee Bakit man ito binenta? Kasi in danger of destruction, impairment
or diminution in value. So ibenta nalang and it will act as a
As to remedy Deposit the thing Pledgor may security, because the obligation is not yet due. The pledgee will
pledged with a demand the hold the proceeds in the meantime.
third person return of the thing
pledged, offering Neither the acceptance by the pledger or owner nor the return of
in place of the the thing pledge is necessary, the pledgee becoming a
thing another depositary.
thing in pledge
This is an instance wherein even if the pledgee continues to be in
which is of the
possession of the thing pledge, but the pledge is already deemed
same kind and
extinguished. Remember a pledge is a personal right on the part
not of inferior of the pledgee which he can waive. Here, the pledge makes a
quality statement in writing that he renounces or abandons the pledge.

Requisites for 2107 to apply: Art. 2109. If the creditor is deceived on the substance or
quality of the thing pledged, he may either claim another
(1) The pledgor has reasonable grounds to fear the
thing in its stead, or demand immediate payment of the
destruction or impairment of the thing pledged;
principal obligation. (n)
(2) No fault on the part of the pledgee;
(3) Pledgor is offering in place of the thing another thing in
pledge which is of the same kind and not of inferior
quality; and
Art. 2111. A statement in writing by the pledgee that he
(4) That the pledgee does not choose to exercise his right
renounces or abandons the pledge is sufficient to extinguish
to cause the thing pledged to be sold at a public
the pledge. For this purpose, neither the acceptance by the
auction (2108).
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary. (n)

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To apply 2111, it must be an abandonment or renunciation in
writing. Verbal is not applicable, although it is not required to be in
a public instrument. In fact, it is not required even that the pledger
be notified of such abandonment or renunciation. The pledge will
be deemed extinguished even if the pledgee remains in
possession of the thing pledged.
Since wala nang pledge, what would be the obligation here of the
pledgee? He would be made as a depositary subject to the
obligations of the depositary. What is deemed abandoned here?
It is only the pledge, to extinguish the pledge, not necessarily the
principal obligation, unless otherwise stipulated.
Art. 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to
the sale of the thing pledged. This sale shall be made at a
public auction, and with notification to the debtor and the
owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first
auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is
no sale either, the creditor may appropriate the thing
pledged. In this case he shall be obliged to give an
acquittance for his entire claim. (1872a)
2112 provides for the procedure to be observed by the creditor
when he decides to sell the thing, when the obligation becomes
due and demandable, and the debtor fails to pay his obligation.
Here, the debtor is given the right to see the thing pledged at the
public auction.
Take of the requirement here that the pledgee must notify the
owner of the thing pledge. It is not sufficient that there is a public
auction. There must be notice as well, to the debtor and the
owner of the thing pledge as provided under 21112.
The sale is conducted by a notary public. It is extrajudicial in
nature. Since it is a public auction, the people may bid, the
highest bidder is given the thing pledge and the proceeds will be
for the payment of the obligation.
However, if at the first public auction the thing is not sold, to
which there is only one bidder, the creditor-pledgee himself, there
must be a second public auction. And if the thing is not yet sold,
or you only have the creditor-pledgee as the only bidder, this time
the said pledgee may appropriate the thing in payment of the
obligation.
There is no pactum commissorium here, because there is no
automatic appropriation.
Formalities under 2112:
1. debt is due and unpaid
2. Sale is made in a public auction
3. There must notice to the owner and the pledgor stating
the amount due
4. The sale must be made in the intervrntion of a notary
public.
If you look at 2112, it only requires notice to the pledger and
owner. It does not require posting of the notice of sale or
publication. It is different when it comes to the extrajudicial
foreclosure of mortgage. Notice to the pledgor and owner is
sufficient.
LIM TAY vs. CA
Facts: Respondent-Appellee Sy Guiok secured a loan from Lim
Tay payable within 6 months. To secure the payment of the
aforesaid loan and interest thereon, Respondent Guiok executed
a Contract of Pledge in favor of Lim Tay whereby he pledged his
300 shares of stock in the Go Fay & Company Inc., Respondent
Corporation, for brevity's sake. On the same date, Alfonso Sy Lim
also secured a loan from Lim Tay payable in 6 months. To secure
the payment of his loan, Sy Lim executed a "Contract of Pledge"
covering his 300 shares of stock in Respondent Corporation.
Under said "Contracts of Pledge," Guiok and Sy Lim
covenanted, inter alia, that:
3. In the event of the failure of the PLEDGOR to pay the
amount within a period of 6 months from the date hereof, the
PLEDGEE is hereby authorized to foreclose the pledge upon
the said shares of stock hereby created by selling the same
at public or private sale with or without notice to the
PLEDGOR, at which sale the PLEDGEE may be the
purchaser at his option; and the PLEDGEE is hereby
authorized and empowered at his option to transfer the said
shares of stock on the books of the corporation to his own
name and to hold the certificate issued in lieu thereof under
the terms of this pledge, and to sell the said shares to issue
to him and to apply the proceeds of the sale to the payment
of the said sum and interest, in the manner hereinabove
provided;
However, Respondent Guiok and Sy Lim failed to pay their
respective loans and the accrued interests. The petitioner filed a
"Petition for Mandamus" against Respondent Corporation, with
the SEC entitled "Lim Tay versus Go Fay & Company. Inc.
Issue: WON Lim Tay is the owner of the shares.
Petitioner's contention that he is the owner of the said shares is
completely without merit.
At the outset, it must be underscored that petitioner did not
acquire ownership of the shares by virtue of the contracts of
pledge. Article 2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the
thing pledged. This sale shall be made at a public auction,
and with notification to the debtor and the owner of the thing
pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held;
and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquittance for his entire claim.
There is no showing that petitioner made any attempt to foreclose
or sell the shares through public or private auction, as stipulated
in the contracts of pledge and as required by Article 2112 of the
Civil Code. Therefore, ownership of the shares could not have
passed to him. The pledgor remains the owner during the
pendency of the pledge and prior to foreclosure and sale, as
explicitly provided by Article 2103 of the same Code:
Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from,
or defend it against a third person.
As to Novation. Neither did petitioner acquire the shares by
virtue of a novation of the contract of pledge. Novation is defined
as "the extinguishment of an obligation by a subsequent one
which terminates it, either by changing its object or principal
conditions, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the
creditor." 26 Novation of a contract must not be presumed. "In the
absence of an express agreement, novation takes place only
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when the old and the new obligations are incompatible on every
point." 27
In the present case, novation cannot be presumed by (a)
respondents' indorsement and delivery of the certificates of stock
covering the 600 shares, (b) petitioner's receipt of dividends from
1980 to 1983, and (c) the fact that respondents have not
instituted any action to recover the shares since 1980.
As to the Delivery of Shares. Respondents' indorsement and
delivery of the certificates of stock were pursuant to paragraph 2
of the contract of pledge which reads:
2. The said certificates had been delivered by the PLEDGOR
endorsed in blank to be held by the PLEDGEE under the
pledge as security for the payment of the aforementioned
sum and interest thereon
accruing.
This stipulation did not effect the transfer of ownership to
petitioner. It was merely in compliance with Article 2093 of the
Civil Code, 29 which requires that the thing pledged be placed in
the possession of the creditor or a third person of common
agreement; and Article 2095, 30 which states that if the thing
pledged are shares of stock, then the "instrument proving the
right pledged" must be delivered to the creditor.
INSULAR LIFE VS. YOUNG
January 16, 2002
Facts: Young obtained a short-term loan of P170,000,000.00
from Interbank for the purchase of shares of stocks. Young's loan
from Interbank became due, causing his serious financial
problem. Consequently, he engaged the services of Asian
Oceanic, a domestic company owned and controlled by another
petitioner, Insular Life, to look for possible sources of capital.
Through the intervention of Asian Oceanic, Young and Insular
Life entered into a Credit Agreement. Under its provisions, Insular
Life extended a loan to Young in the amount
of P200,000,000.00. To secure the loan, Young executed on the
same day a Deed of Pledge over 1,324,864 shares which
represented 99.82% of the outstanding capital stock of the
Bank. The next day, he also executed a PN in favor of
Insular. The Credit Agreement further provides that Insular Life
shall have the prior right to purchase the Schedule I Shares
(owned by Young) and the Schedule II Shares (owned by the
other stockholders of the Bank).
On October 21, 1991, Young signed a letter stating that due to
business reverses, he shall not be able to pay his obligations
under the Credit Agreement between him and Insular Life.
Forthwith, Insular Life instructed its counsel to foreclose the
pledge constituted upon the shares. The latter then sent Young a
notice informing him of the sale of the shares in a public auction
scheduled on October 28, 1991, and in the event that the shares
are not sold, a second auction sale shall be held the next day,
October 29.
On October 28, 1991, only Insular Life submitted a bid, hence,
the shares were not sold on that day. The next day, a second
auction was held. Again, Insular Life was the sole bidder. Since
the shares were not sold at the two public auctions, Insular Life
appropriated to itself, not only the original 1,324,864 shares, but
also the 250,000 shares subsequently issued by the Bank and
delivered to Insular Life by way of pledge. Thus, Insular Life gave
Young an acquittance of his entire claim. Thereafter, title to the
said shares was consolidated in the name of Insular Life.
Young and his associates filed with the RTC a complaint against
the Bank, Insular Life and its counsel, Atty. Jacinto Jimenez,
petitioners, for annulment of notarial sale, specific performance
and damages. The complaint alleges, inter alia, that the notarial
sale conducted by petitioner Atty. Jacinto Jimenez is void as it
does not comply with the requirement of notice of the second
auction sale.
Issue: WON the foreclosure sale is valid.
Held: YES. Notably, the Deed of Pledge which secured the Credit
Agreement between the parties, covered not only 1,324,864
shares which then constituted 99.82% of the total outstanding
shares of petitioner Bank, but also the 250,000 shares
subsequently issued. Consequently, when Young waived in his
letter the period granted him under the said agreement and
manifested his inability to pay his obligation, the loan extended by
petitioner Insular Life became due and demandable. Definitely,
petitioners merely exercised the right granted to them under the
law, which is to foreclose the pledge constituted on the shares, in
satisfaction of respondent Young's loan
The Court of Appeals also erred in declaring that the auction sale
is void since petitioners failed to send a separate notice for the
second auction. Article 2112 of NCC provides for the law
applicable to the auction sale
Clearly, there is no prohibition contained in the law against the
sending of one notice for the first and second public auction as
was done here by petitioner Insular Life. The purpose of the law
in requiring notice is to sufficiently apprise the debtor and the
pledgor that the thing pledged to secure payment of the loan will
be sold in a public auction and the proceeds thereof shall be
applied to satisfy the debt. When petitioner Insular Life sent a
notice to Young informing him of the public auction scheduled on
October 28, 1991, and a second auction on the next day, October
29, in the event that the shares are not sold on the first auction,
the purpose of the law was achieved. We thus reject respondents'
argument that the term "second one" refers to a separate notice
which requires the same formalities as the first notice.
Art. 2113. At the public auction, the pledgor or owner may
bid. He shall, moreover, have a better right if he should offer
the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if
he is the only bidder. (n)
Who can bid? Anybody – the public, the pledgee, even the
pledgor.
The pledgor or owner should have a better right if he should offer
the same terms as the highest bidder. So only for the same
terms.
The pledgee or pledger may be allowed to bid but, not valid if he
is the only bidder and related to article 2112. So if in the first
auction sale, he is the only bidder, then there is no valid auction
sale, a second may be conducted. If he remains to be the only
bidder, then that is the time that he can appropriate the thing for
himself and apply the proceeds to the obligation.
Again, there is no pactum commissorium there because there is
no automatic appropriation.
Art. 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the
pledgee is deemed to have been received the purchase price,
as far as the pledgor or owner is concerned. (n)
If you are the highest bidder, the rule is you at once, you pay in
cash to the pledgee or creditor.
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The pledgee, however, may receive payment not in full or not in
cash. But, as far as the debtor or the owner of the thing pledged
is concerned, the principal obligation is deemed extinguished, as
well as the pledge.
Art. 2115. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the
pledgee is deemed to have been received the purchase price,
as far as the pledgor or owner is concerned. (n)
Very important provision. What is the effect of such sale? It will
extinguish the principal obligation, whether the price of the sale
more or less than the amount due.
What happens if there is an excess, or if there is a deficiency?
MANILA SURETY vs. RODOLFO R. VELAYO
G.R. No. L-21069 October 26, 1967
Facts: Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a
writ of attachment obtained by one Jovita Granados in a suit
against Rodolfo Velayo in the Court of First Instance of Manila.
As "collateral security and by way of pledge" Velayo also
delivered four pieces of jewelry to the Surety Company "for the
latter's further protection", with power to sell the same in case the
surety paid or become obligated to pay any amount of money in
connection with said bond, applying the proceeds to the payment
of any amounts it paid or will be liable to pay, and turning the
balance, if any, to the persons entitled thereto, after deducting
legal expenses and costs.
Since the execution having been returned unsatisfied, the surety
company was forced to pay P2,800.00 that it later sought to
recoup from Velayo; and upon the latter's failure to do so, the
surety caused the pledged jewelry to be sold, realizing therefrom
a net product of P235.00 only. Thereafter and upon Velayo's
failure to pay the balance, the surety company brought suit in the
Municipal Court. Velayo countered with a claim that the sale of
the pledged jewelry extinguished any further liability on his part
under Article 2115 of the Civil Code.
Issue: WON Velayo is liable for the balance.
Held: No.
Article 2115, in its last portion, clearly establishes that the
extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override: If the price of the
sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be
evaded. By electing to sell the articles pledged, instead of suing
on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency
is recoverable
Q: How about the rule with regard to excess? What if the thing
pledge is sold in excess of the principal obligation? what happens
to the excess?
A: If the price of the sale is more than said amount, the debtor
shall not be entitled to the excess, unless it is otherwise agreed.
Pwede may stipulation sa excess, pero sa deficiency, hindi
pwede. Any stipulation will be void to compel the creditor to hold
a honest public sale.
Why is it that the pledgee is not allowed to demand the deficiency
anymore? The foreclosure sale of the thing pledged is only one of
the remedies available to the pledgee. He may also file an action
for collection for sum of money. In other words, he decides not to
foreclose on the thing pledged.
In an action for collection for sum of money, he can have the
thing pledged attached. If he does so, he is not exercising his
right as a pledgee. If the property pledged will be attached and
the court finds that the decbtor is liable , then that property will eb
sold through an execution sale and the proceeds will eb used to
pay off the obligation.
What deos that mean? On the part of the pledgee, he has to
discern. Mas mabilis sa 2112, because it is an extrajudicial
foreclosure. But he has to take into consideration if he can sell it,
at the very least, equivalent to the principal obligation. Kapag
alanganin siya, he may choose to file a collection of sum of
money because he can really collect the amount form the debtor,
to which he will just attach the property. Pag benta niyan sa
execution sale, pwede niya pang mahabol yung interest.
Art. 2116. After the public auction, the pledgee shall
promptly advise the pledgor or owner of the result thereof.
(n)
Dalawang notice – before the sale and after the public auction.
You let the pledger know that the pledge was done according to
law, to which the pledgor must be advised promptly. This is to
enable him to take steps for the protection of his rights if he has
reasonable grounds to believe that the sale was not an honest
one on the part of the pledgor.
Art. 2117. Any third person who has any right in or to the
thing pledged may satisfy the principal obligation as soon as
the latter becomes due and demandable. (n)
Who can discharge the principal obligation? The principal debtor
makes the obligation. Third persons can pay the obligation.
Remember in obligation and contracts, who can compel the
creditor to accept payment? Debtor, his heirs or successors,
assignees, and persons who have an interest in the obligation –
that would include a third person.
If a pledger, who is not the debtor, pays the obligation, he can
compel the creditor to accept such payment, to which he can
demand reimbursement from the debtor.
Third person may be a person, who is not a debtor of the
obligation, who has any right to the thing pledged and pay the
obligation when the same is due and demandable.
Art. 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive
the amount due. He shall apply the same to the payment of
his claim, and deliver the surplus, should there be any, to the
pledgor. (n)
Here, for example, receivables. The debtor can pledge his
receivables, and the pledgee can collect the amount due. To
which the pledgee will now be obligated to apply the amount
collected and received.
However, the creditor-pledgee may receive the amount due. In
other words, it is not obligatory on his part to collect and receive
the amount. He has right, but not the obligation.
Art. 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only
as many of the things as are necessary for the payment of
the debt. (n)
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Let us say there are two things pledged for an amount loaned.
Who has the right to choose which of the two will be sold first? As
soon as the debt becomes due and demandable, and the debtor
fails to pay, the creditor has the right to sell the things, and to
choose which of them will be sold first. But the creditor can only
sell such property as equal to the amount of the obligation.
If for example one of the things pledged was sold for more than
the amount of the obligation, the creditor does not have to sell the
other thing anymore, since it is already sufficient to cover the
obligation. The creditor, then, would have the obligation to return
the other thing pledge not sold to the debtor.
There has to be demand has to the amount for which the thing is
to be obtained.
Demand is required because in pledge by operation of law or
legal pledge, there has to be a demand first to fix the period of
payment. In contrast with conventional pledge, there is already a
period for payment.
After making the demand, and after fixing the period, if the sale is
not made within the period stipulated in the demand, then the
pledgee can sell the thing in a public auction.
Take note of the distinctions between 2122 and 2112.

Art. 2120. If a third party secures an obligation by pledging
his own movable property under the provisions of article
2085 he shall have the same rights as a guarantor under
articles 2066 to 2070, and articles 2077 to 2081. He is not
prejudiced by any waiver of defense by the principal obligor.
(n)
The public auction shall take place within one month after such
demand. If, without just grounds, the creditor does not cause the
public sale to be held within such period, the debtor may require
the return of the thing.
However, although the debtor may demand the return of the
thing, his obligation is not yet extinguished.

If you look at these articles, it does not cover the benefit of

excussion or the benefit of remission. Said third person does not
have the benefit of excussion or the benefit of remission.
The articles cited refer to the right of indemnity available to the
said pledger and whatever remedies the principal debtor can
present against the creditor, as well as the defenses he can
interpose against the creditor.
Art. 2123. With regard to pawnshops and other
establishments, which are engaged in making loans secured
by pledges, the special laws and regulations concerning
them shall be observed, and subsidiarily, the provisions of
this Title. (1873a)
Pawnshop regulation Act is the primarily law with regards to
pawnshops, and is regulated by the Bangko Sentral ng Pilipinas.

Art. 2121. Pledges created by operation of law, such as those

referred to in articles 546, 1731, and 1994, are governed by
the foregoing articles on the possession, care and sale of the
thing as well as on the termination of the pledge. However,
after payment of the debt and expenses, the remainder of the
price of the sale shall be delivered to the obligor. (n)

What we have here is a legal pledge.

LEGAL PLEDGES—

Article 546 – Where a possessor in good faith may retain the

property until he is reimbursed for the necessary and useful
expenses of the owner of the property. Right of the possessor in
good faith is the same as that of a pledgee. He cannot be ordered
to return the thing until there is full payment or reimbursement.
The possessor in good faith may also sell the property if he is not
paid the necessary and useful expenses.

Article 1731 – He who has executed work upon a moveable has

a right to retain it by way of pledge until he is paid. If he is not
paid, he is given the right to sell the thing at a public auction
applying the law on pledge.

Article 1994 – On deposit. The depositary may retain the thing in

pledge until full payment of what may be due him by reason of the
deposit.

Article 612 – Usufruct

Article 1912 -1914 – Right to hold of the agent

Article 1951—Excess will be returned to the debtor.

Art. 2122. A thing under a pledge by operation of law may be

sold only after demand of the amount for which the thing is
retained. The public auction shall take place within one
month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within
such period, the debtor may require the return of the thing.
(n)

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