Credit 5.3 Conchingyan Security G.R. No. L-47369 June 30, 1987 JOSEPH COCHINGYAN, JR.

R. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent. FELICIANO, J.: This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided: (b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its

Page 1 of 22 renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not. We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. xxx xxx xxx (e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. xxx xxx xxx When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered: b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up

Credit 5.3 Conchingyan Security to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; xxx xxx xxx On P8,000.00 from June 24, 1967; Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence. In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows; Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 On P4,000.00 from November 28, 1966; On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967;

Page 2 of 22

until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law. The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; 2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and 3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond.

Credit 5.3 Conchingyan Security We address these issues seriatim. 1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; xxx xxx xxx

Page 3 of 22 6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; xxx xxx xxx 9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5 If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8

Credit 5.3 Conchingyan Security Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that: [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been onlytwo, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ." This part of the Agreement suggests that the

Page 4 of 22 indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties. There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied) The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 12 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall

Credit 5.3 Conchingyan Security have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violatie of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. SO ORDERED G.R. No. L-43862 January 13, 1989 MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs. FELIPE YSMAEL, JR., & CO., INC., defendants-appellants. BIDIN, J.: This is an appeal from the decision** dated October 30, 1971 of the Court of First Instance of Manila (now Regional Trial Court) in Civil Case No. 82168 entitled "Mercantile Insurance Co., Inc. (herein referred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co., Inc., et al (hereinafter referred to as the defendant-appellant) ordering defendants-appellants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr., to pay jointly and severally to the plaintiff the sum of P100,000.00 plus

Page 5 of 22 15% thereof as attorney's fees, and costs. On appeal to the Court of Appeals, this case which involves only a question of law, was certified to this Court. The factual milieu of this case as found by the trial court is as follows: Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application for an overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine National Bank. The latter was willing to grant credit accommodation of P2,000,000.00 applied for provided that the applicant shall have filed a bond in the sum of P140,000.00 to guarantee the payment of the said amount. Accordingly, on March 6, 1967, Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond No. G(16) 007 of Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh. A). On December 4, 1967, Felipe Ysmael Jr. & Co., Inc. as principal and the Mercantile Insurance Co., Inc. executed another surety bond MERICO Bond No. G (16) 0030 in the sum of P40,000.00. It is the condition in both bonds that if the principal Felipe Ysmael, Jr. & Co., Inc. shall perform and fulfill its undertakings with the Philippine National Bank, then these surety bonds shall be null and void (Exh. B). As security and in consideration of the execution of the surety bonds, exhibits A and B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by Felipe Ysmael, Jr. as president and in his personal capacity executed with the plaintiff Mercantile Insurance Co., Inc. an indemnity agreement (Exh. D) wherein the defendants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound themselves jointly and severally to indemnify the plaintiff, hold save it harmless from and against any and all payments, damages, costs, losses, penalties, charges and expenses which said company as surety (relative to MERICO Bond No. 0007) shall incur or become liable to pay plus an additional amount as attorney's fees equal to 20% of the amount due to the company, Paragraph 3 of the indemnity agreement expressly provides: 3) ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding paragraph, where the obligation involves a liquidated amount for the payment of which the company has become legally liable under the terms of the obligation and its suretyship undertaking or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY a term or extension for payment of the latter's demand the full amount necessary to discharge the COMPANY's aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either of them by court action or otherwise to enforce payment even prior to making payment to the obligee which may hereafter be done by the COMPANY. On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta Torres in their official capacities and the defendants executed another indemnity agreement (Exh. E) with the plaintiff in consideration of the surety bond (referring to MERICO Bond No. G (16) 0030. In the indemnity agreement (Exh. E) the same provisions of paragraph 3 found in exhibit D is provided for.

Credit 5.3 Conchingyan Security By agreement dated September 5, 1967 (Exh. C), the amount of the Bond was reduced by P40,000.00 so that the total liability of the plaintiff to the Philippine National Bank in view of the aforesaid reduction is P100,000.00 (Exh. C), P60,000.00 on Surety Bond No. 0007 plus P40,000.00 on Surety Bond No. 0030. In view of the failure of the defendants to pay the overdraft and credit line with the Philippine National Bank demanded from the Mercantile Insurance Co., Inc. settlement of its obligation under surety bonds No. (G-16)-0007 for P 60,000.00 which expired on March 6, 1970 and No. G (-16)- 0030 for P 40,000.00 which expired since September 4, 1968 (Exh. P) otherwise drastic measures for collection to protect the interest of the bank would be taken. Attached to the demand letter is a statement of account. By letter of December 17, 1970, the Legal Department of plaintiff company wrote a letter of demand to the defendants (Exhs. G and H) inviting their attention to the letter of demand of the Philippine National Bank sent to the plaintiff and demanding from the defendants the settlement of said account. These letters were received as shown by the registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to settle their obligation with the Philippine National Bank, on February 10, 1971, plaintiff brought the present action. Instead of filing their answer, the defendants (appellants herein) filed a motion to DISMISS, which motion was subsequently denied. Thereafter, the defendants filed their answer and the case was set for pre-trial. On the date scheduled for pre-trial, the defendants and their counsel failed to appear, thus on motion of the plaintiff, they were declared in default and plaintiff was allowed to present its evidence ex-parte. Upon motion for reconsideration filed by the defendants, the case was ordered re-opened and the case was scheduled for reception of defendant's evidence. Thereafter, the parties were required to submit their respective memoranda and the case was submitted for decision. On October 30, 1971, the trial court rendered its decision, the dispositive part of which reads: WHEREFORE, in view of the foregoing considerations, judgment is rendered for the plaintiff and the defendants are ordered to pay jointly and severally the plaintiff the sum of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable attorney's fees and the costs. Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the Philippine National Bank in partial satisfaction of the obligation of the defendants to said Bank. SO ORDERED. (Record on Appeal, p. 96) Said decision was appealed to the Court of Appeals on questions of facts and law. Acting on the appeal and finding that the only question raised therein involves a question of law, the Court of Appeals by resolution *** dated April 29, 1976, certified the same to this Court, for proper disposition (Rollo, pp. 62-63).

Page 6 of 22 This Court, thru its First Division by Resolution dated May 31, 1978, resolved to have the case docketed and declared the same submitted for decision (Rollo, p. 65). The defendants-appellants raised the following assignments of errors in the Court of Appeals: I THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF CAUSE OF ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE PLAINTIFF HAS PAID NOTHING ON THE SURETY BONDS AND HAS SUFFERED NO ACTUAL DAMAGE. II THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE INDEMNITY AGREEMENTS IS VOID. III CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE DEFENDANTSAPPELLANT'S TO PAY JOINTLY AND SEVERALLY TO THE PLAINTIFF THE SUM OF P100,000.00 PLUS THE FURTHER SUM OF 15% THEREOF IN THE CONCEPT OF REASONABLE ATTORNEY'S FEES AND THE COSTS. (Brief for DefendantsAppellants, CA, pp. 1-2). The crux of the controversy is whether or not the surety can be allowed indemnification from the defendants-appellants, upon the latter's default even before the former has paid to the creditor. There is no dispute that the overdraft line of P1,000,000.00 and the credit line of Pl,000,000.00 applied for by the defendant was granted by the Philippine National Bank on the strength of the two surety bonds denominated as MERICO Bond No. G(16) 0007 for one hundred thousand pesos (Exh. A) and MERICO Bond No. G(16) 0030 for forty thousand pesos (Exh. B), later reduced as above stated on September 5, 1967 (Exh. C) by P40,000.00 or a total amount of P100,000.00. As security and in consideration of the execution of the surety bonds, the defendants executed with the plaintiff identical indemnity agreements (Exhs. D and E) which provide, among others that payment of indemnity or compensation may be claimed irrespective of whether or not plaintiff company has actually paid the same. Defendants-appellants maintain that the complaint is premature and that paragraph 3 of the indemnity agreements is void for being contrary to law, public policy and good morals. They argued that to allow plaintiff surety (appellee herein) to receive indemnity or compensation for something it has not paid in its capacity as surety would constitute unjust enrichment at the expense of another. (Brief for Defendants-Appellants, CA, p.6). To bolster their contention, defendants-appellants argue that it is an indispensable requisite for an action to prosper, that the party bringing the action must have a cause of action against the other

Credit 5.3 Conchingyan Security party; and that for a cause of action to be ripe for litigation, there must be both wrongful violation and damages; all of which are not present in the case at bar because plaintiff-appellee has not suffered any injury whatsoever, notwithstanding the demand sent to it by the Philippine National Bank, nor has plaintiff-appellee made a single actual payment to said bank. Hence, to allow plaintiff-appellee to recover from them something which it has not paid in its capacity as surety would violate the fundamental principle which states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI POTEST (No person should unjustly enrich himself at the expense of another). [Defendants-Appellants' Brief, pp. 7-8; 49]. The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand indemnification from the principal, upon the latter's default, even before the former has paid to the creditor, has long been settled by this Court in the affirmative. It has been held that: II The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954). Hence, appellants contention that the action of the appellee (surety company) is premature or that the complaint fails to state a cause of action because the surety has not paid anything to the bank, cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact, such contention is belied not only by the allegations in the complaint but also by the agreement entered into between the appellants and the appellee in favor of the bank. The records show that the cause of action is distinctly set forth in the complaint, the pertinent portion of which states: 6. That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B") were extended by the Philippine National Bank, a credit accommodation in the sum of TWO MILLION (P2,000,000.00) PESOS; 7. That the Philippine National Bank is demanding and collecting from the plaintiff the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which is the defendants' account with the said bank that is secured and covered by the above-mentioned bonds (Annexes "A" and "B"); 8. That under the terms of the Indemnity Agreements (Annexes "D" and "E") more particularly paragraph 3, plaintiff may forthwith proceed against the defendants to impose payment, even prior to making payment to the Philippine National Bank; 9. That notwithstanding series of demands made by plaintiff, the defendants failed and refused to pay the Philippine National Bank the sum of ONE HUNDRED THOUSAND (P l00,000.00) PESOS;

Page 7 of 22 10. That on account of defendants' default, plaintiff becomes liable to the Philippine National Bank in the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;' (Record on Appeal, p. 2.) Correspondingly, it is readily apparent that said cause of action was derived from the terms of the Indemnity Agreement, paragraph 3 thereof, as above quoted. By virtue of the provisions of the Indemnity Agreement, defendants-appellants have undertaken to hold plaintiff-appellee free and harmless from any suit, damage or liability which may be incurred by reason of non-performance by the defendants-appellants of their obligation with the Philippine National Bank. The Indemnity Agreement is principally entered into as security of plaintiff-appellee in case of default of defendants-appellants; and the liability of the parties under the surety bonds is joint and several, so that the obligee PNB may proceed against either of them for the satisfaction of the obligation. (Brief for Plaintiff-Appellee, p. 7).

Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiff-appellee the prerogative of filing an action even prior to the latter's making any payment to the Philippine National Bank. Contracts are respected as the law between the contracting parties (Henson v. IAC, 148 SCRA 11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is settled that the parties may establish such stipulations, clauses, terms and conditions as they may want to include, and as long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them (Herrera v. Petrophil Corp., 146 SCRA [1986]. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in the interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of the stipulation shall control. In the case at bar, there is no dispute as to meaning of the terms of the Indemnity Agreement. The only bone of contention is whether or not such terms are null and void as defendants-appellants would have this Court declare. A careful analysis of the contract in question will show that the provisions therein do not contravene any law or public policy much less do they militate against the public good. In fact, as shown above, they are fully sanctioned by well-established jurisprudence. Having voluntarily entered into such contract, the appellants cannot now be heard to complain. Their indemnity agreement have the force and effect of law. Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled: ...The indemnity agreement was not executed for the benefit of the creditors; it was rather for the benefit of the surety and if the latter thought it necessary in its own interest

Credit 5.3 Conchingyan Security to impose this stipulation, and the indemnitors voluntarily agreed to the same, the court should respect the agreement of the parties and require them to abide by their contract. (Security Bank v. Globe Assurance, 107 Phil. 733 [1960]. III Finally, the trial court did not err in ordering defendants-appellants to pay jointly and severally the plaintiff the sum of P100,000.00 plus 15% as attorney's fees. It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are simultaneously the same persons who executed the Indemnity Agreement. Thus, the position occupied by them is that of a principal debtor and indemnitor at the same time, and their liability being joint and several with the plaintiff-appellee's, the Philippine National Bank may proceed against either for fulfillment of the obligation as covered by the surety bonds. There is, therefore, no principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not apply. Otherwise stated, there is no more need for the plaintiff-appellee to exhaust all the properties of the principal debtor before it may proceed against defendants-appellants. As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen (15) per cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, supra). WHEREFORE, the decision appealed from is hereby AFFIRMED. SO ORDERED G.R. No. L-62082 February 26, 1992 PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. TEODORO N. FLORENDO, Judge of the Court of Agrarian Relations, 12th Regional Disctrict, Branch IV, Dumaguete City, VIVIENNE B. VILORIA, SOCORRO MISA, GERMELIN ESTORCO, PABLO BENDOLO, REWEL CABUAL, BONIFACIO VALEROSO, ET. AL., respondents. BIDIN, J.: This is a petition for certiorari with preliminary injunction seeking to annul and set aside the: (a) order of the respondent judge dated May 21, 1982 admitting private respondents' "First Amended Complaint" in CAR Case No. 532 entitled "Vivienne B. Viloria, et al. vs. Philippine National Bank, et al." for declaration of nullity of the foreclosure proceedings in violation of P.D. Nos. 27 and 946; (b) order dated June 3, 1982 denying PNB's opposition to the first amended complaint; and (c) order dated June 28, 1982 denying PNB's motion for reconsideration. The undisputed facts are as follows:

Page 8 of 22 Plaintiffs are tenants of four (4) parcels of land located in the municipality of Mabinay, Negros Oriental, whose previous owner Ricardo Valeroso, mortgaged the same to the Philippine National Bank (PNB, for short). In 1971, said parcels of land were bought by spouses Agripino and Soledad Viloria who assumed the mortgage with PNB (Rollo, Comment, p. 90). In 1974, defendant PNB requested defendant Provincial Sheriff of Negros Oriental to foreclose the mortgage on the aforesaid parcels of land after the failure of the owners thereof to pay certain amortization and the same was sold at public auction to the defendant bank as the highest bidder (Rollo, Brief for Private Respondents, p. 147; Annex "2", p. 3). Notwithstanding the fact that said lands were already brought under the Land Reform Program of the government, the PNB caused the titles to said parcels of land transferred in its name to the prejudice of plaintiffs (Rollo, Ibid.). On September 8, 1981, plaintiffs Vivienne B. Viloria, et al. filed a complaint for "Declaration of Nullity of the Foreclosure Proceedings in Violation of P.D. Nos. 27 and 946" against the defendants PNB, et al. in the Court of Agrarian Relations, 12th Judicial District, Branch IV, Dumaguete City. On October 7, 1981, defendant PNB answered the complaint with counterclaim for damages. Plaintiffs, in turn, filed their reply to the counterclaim dated October 10, 1981. Defendant PNB then moved for leave of court to file third party complaint dated October 20, 1981 against the registered owners-mortgagors of the subject parcels of land. Plaintiffs Vivienne Viloria, et al. moved for the amendment of their complaint to implead the heirs of the deceased plaintiff-Agripino Viloria which respondent Judge admitted in an order dated February 26, 1982. On May 28, 1982, private respondents Vivienne Viloria, et al. moved to further amend their amended complaint. Notable amendment introduced in the First Amended Complaint is the inclusion of another parcel of land as subject matter thereof, described as follows: E Transfer Certificate of Title No. 42836, a parcel of land (Lot 787-B-2-A of the subdivision plan, Psd-54375, being a portion of Lot 7887-B-2 described on plan Psd956, L.R.C. Record No. 9465), with all improvements thereon situated at Cebu City. Bounded on NE., along line 1-2 by lot 785, Cebu Cadastre; on the SE., along line 2-3, by lot 787-A, Cebu Cadastre; on the SW., along line 3-4, by Lot 787-B-2-B of the subdivision plan; and on the NW., along line 4-1 by lots 788-A-1 and 788-A-2 of plan Psd-17436. Containing an area of TWO HUNDRED NINETY-FOUR square meters (294) more or less. Said property belongs to the spouses Agripino and Soledad Viloria and mortgaged also with PNB. It is further alleged that: While letter "E" is the property located in Cebu City and mortgaged with defendant Bank should be considered as one and indivisible with the mortgage executed upon the four (4) parcels of land situated at Mabinay (Negros Oriental) and were put under Land Reform by virtue of the real estate mortgage executed and signed by the spouses land

Credit 5.3 Conchingyan Security owner Agripino and Soledad Viloria which portion of the Real Estate Mortgage document specifically paragraph No. 2 which states "That for and in consideration of certain loans, overdrafts and other credit accommodations obtained from the mortgage, which is hereby fixed at P115,449.61 Philippine Currency, and to secure the payment of the same and those others that the mortgage may extend to the mortgagor including interest and expenses and other obligations owing by the mortgagor to the mortgagee whether direct or indirect or secondary. . . (Rollo, Petition, p. 5). PNB opposed the admission of the aforesaid private respondent's First Amended Complaint on the grounds that there was no proper notice of hearing as required by the Uniform CAR Rules of procedure, the impropriety of including TCT No. 42836 a residential land situated in Cebu City as subject matter of the complaint, and the failure of private respondents to attach a copy of the real estate mortgage contract upon which the action was based (Rollo, Annex "I", pp. 37-38). In an order dated May 31, 1982, respondent Judge Florendo granted private respondents' Viloria, et al. motion and thus, admitted the First Amended Complaint. Said order states among others: Acting on the "Motion to Amend Amended Complaint" dated May 28, 1982, filed by Ma. Corazon C. Locsin, counsel for plaintiffs, wherein the First Amended Complaint (pp. 285 to 290 inclusive) of the records, was attached thereto, and it appearing that Atty. Norberto Denura, counsel for the defendant PNB, has received a copy of aforestated motion and also a copy of the First Amended Complaint thereto attached, the "Motion To Amend Amended Complaint" is hereby GRANTED and the First Amended Complaint is likewise hereby ADMITTED. Petitioner PNB's motion for reconsideration of the above order was denied by respondent Judge Florendo in an order dated June 28, 1981. Hence, the petition. As prayed for in the petition, a temporary restraining order was issued by this Court pursuant to its resolution dated October 25, 1982 enjoining the respondent Judge from proceeding with the hearing of the case. The First Division of this Court resolved to give due course to the petition in the resolution of March 16, 1983. The principal issue in the instant case is whether or not the respondent Judge exceeded his jurisdiction in admitting the First Amended Complaint which adds another parcel of land not within the coverage of Operation Land Transfer pursuant to P.D. 27. The petition is impressed with merit. Upon the abolition of the Court of Agrarian Relations by BP 129 enacted on August 10, 1981 and fully implemented on February 14, 1983, jurisdiction over agrarian disputes is now vested in the appropriate Regional Trial Court pursuant to the provisions of Sec. 19(7) of the said law (Locsin v.

Page 9 of 22 Valenzuela, 173 SCRA 454 [1989]; Enrique v. Fortuna Mariculture Corporation, 158 SCRA 651 [1988]); In view of such supervening event, it is now the appropriate Branch of the Regional Trial Court of Negros Oriental that has jurisdiction over the case. Be that as it may, the same law provides that whenever a Regional Trial Court takes cognizance of agrarian cases, the special rules of procedures applicable under the present laws to such cases shall continue to be applied, unless amended by law or by rules of court promulgated by the Supreme Court (Sec. 24, BP 129). Coming back to the case at bar, petitioner contends that Lot No. 787-B-2-A (formerly covered by TCT No. 42836, now TCT No. 75805-PNB) being a residential/commercial and non-agricultural land situated at Cebu City is not within the coverage of the Operation Land Transfer, thus not within the jurisdiction of the Court of Agrarian Relations. Jurisdiction, in general, is either one over the nature of the action, over the subject matter, over the person of the defendants or over the issue framed in the pleadings (Balais v. Balais, 159 SCRA 37 [1988]). Jurisdiction over the subject matter, on the other hand, is conferred by law and does not depend on the consent or objection or the acts or omissions of the parties or any one of them (Republic v. Sangalang, 159 SCRA 515 [1988]). The law which conferred jurisdiction on the Court of Agrarian Relations, now transferred to the appropriate Branch of the Regional Trial Court, concerning agricultural lands, is P.D. 946 which provides, among others: Sec. 12. Jurisdiction Over Subject Matter The Court of Agrarian Relations shall have original and exclusive jurisdiction over: a) Cases involving the rights and obligations of persons in the cultivation and use ofagricultural land . . .; b) Questions involving rights granted and obligations imposed by laws, presidential decrees, Orders, Instructions, Rules and Regulations issued and promulgated in relation to the agrarian reform program; xxx xxx xxx e) Cases involving the sale, alienation, mortgage, foreclosure, pre-emption and redemption of tenanted agricultural land; . . . (emphasis supplied) xxx xxx xxx Accordingly, the Court of Agrarian Relations (now RTC sitting as an agrarian court) could only entertain disputes over lands that are the subject of agrarian cases. Corollarily, lands that are not the subject of agrarian disputes should not be brought before it as an agrarian court. It has been the legislative policy to confine to the CAR exclusive jurisdiction over agrarian cases as well as their incidents (Depositario v. Hervias, 121 SCRA 756 [1983]). The following factors indisputably established questioned land is beyond CAR's jurisdiction:

Credit 5.3 Conchingyan Security First, private respondents Viloria, et al. admission in their Comment dated November 19, 1982 (Rollo, pp. 90-97) that Lot No. 787-B-2-A is a residential lot located at Cebu City. Second, the certification by the Agrarian Reform Team No. 215 to the effect that subject lot is not within the coverage of the Operation Land Transfer pursuant to P.D. 27 (Annex Rollo, p. 54). Such ''official certification can be considered as correct, if only because of the presumption of regularity that is stamped on it as an official document" (San Mauricio Mining Co. v. Ancheta, 105 SCRA 371 [1981]). Indeed, amendments to pleadings are generally favored and should be liberally construed (PNB v. CA, 159 SCRA 433 [1988]), however, where the court has no jurisdiction over the subject matter of the case (Lot 387-B-2-A being a residential lot not covered by Operation Land Transfer under PD 27), it is evident that the amendment of the complaint could not be allowed so as to confer jurisdiction upon the court over said property. It being apparent that the Court of Agrarian Relations has no jurisdiction over Lot No. 787-B-2-A aside from the fact that said court has already been abolished by BP 129, the issue as to its territorial jurisdiction has become moot and academic. The propriety of the petition for certiorari is beyond question. The order of the respondent Judge admitting the First Amended Complaint including therein said questioned Lot 787-B-2-A which is a residential lot not falling within the ambit of PD 27, hence, beyond CAR's jurisdiction, was issued in excess of jurisdiction. The term excess of jurisdiction signifies that the court, board or officer has jurisdiction over a case but oversteps such jurisdiction while acting thereon (Alhambra Cigar and Cigarette Manufacturing Co., Inc. v. Caleda., et al., 122 Phil. 355 [1965]). Verily, the writ of certiorari is granted "to keep an inferior court within the bounds of its jurisdiction . . ." (Aguilar v. Tan, 31 SCRA 205.[1970]. It is the proper remedy "where it clearly appears that the trial court is proceeding in excess or outside of its jurisdiction . . ." (Baloria v. Abalos, 32 SCRA 368 [1970]; Time, Inc. v. Reyes, 39 SCRA 303 [1971]; Ablan, Sr. v. Madarang, 41 SCRA 213 [1971]). Since the "office of the writ of certiorari has been reduced to the correction of defects of jurisdiction solely and cannot be legally used for any other purpose" (Albert v. CFI of Manila, Br. VI, 23 SCRA 948 [1968]), said remedy is available in the instant case to keep the trial court from proceeding in the case in excess of its jurisdiction. The private respondents Viloria, et al.'s contention that the petition for certiorari is premature since the order of the respondent judge could have simply been assigned as an error in the appeal by the petitioner in case of adverse judgment is not persuasive. Even when appeal is available and is the proper remedy, this court has allowed a writ ofcertiorari when the orders of the lower court were issued either in excess of or without jurisdiction (Aguilar v. Tan,supra). WHEREFORE, the petition for certiorari is GRANTED and the orders dated May 31, June 3, and June 28, 1982 are hereby ANNULLED and SET ASIDE. The trial of CAR Case No. 532 on the merits is hereby ordered to be conducted in the appropriate Branch of the Regional Trial Court of Negros Oriental in view of the abolition of the Court of Agrarian Relations by BP 129 and the temporary restraining order issued by this Court dated October 25, 1982 enjoining the hearing of

Page 10 of 22 CAR Case No. 532 with respect to Lot No. 787-B-2-A (formerly covered by T.C.T. No. 43836 covering a parcel of land situated in Cebu City ) is made PERMANENT. SO ORDERED. G.R. No. L-29666 October 29, 1971 PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee, vs. JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO D. SANTANA, defendants. FRANCISCO D. SANTANA, defendant-appellant. FERNANDO, J.: Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank & Trust Company, along with the other defendants, Jose Maria Tambunting and Maria Paz Tambunting, his son-in-law and his daughter, for the recovery of the sum of money due in an overdraft agreement, with the Tambunting couple as principal debtors and appellant as surety. The judgment went against him notwithstanding his plea based on Article 2080 of the Civil Code, releasing guarantors, even if they be solidary, if by some act of the creditor subrogation is thereby precluded. 1 The lower court, presided by the then Judge, now Justice of the Court of Appeals, Jose N. Leuterio, in a well-written decision, found such a defense untenable as in what was characterized by the lower courts as the "contract of absolute guaranty", appellant had waived his rights to the benefit conferred by such a provision. In this appeal, would vigorously contend that what was thus agreed to by him was bereft of a binding force. The law in its wisdom does not lend its approval to such an ill-disguised attempt for turn one's back to all obligation arising from a valid contract. We have to affirm. The decision, now on appeal, after stating the nature of the action which as noted is for the recovery of a sum of money due on an overdraft agreement set forth the undisputed facts thus: "On September 9, 1968, plaintiff and defendants executed a contract denominated 'overdraft agreement and pledge' wherein the plaintiff granted to the spouses Jose Maria Tambunting and Maria Paz Tambunting an overdraft from time to time on their current account with the plaintiff bank not to exceed P200,000.00 with interest at the rate of 9% per annum until September 10, 1964, ..., the proceeds of which were to be used by the Tambuntings in their logging operations. Defendant Francisco D. Santana, as guarantor, and the spouses Tambuntings, conveyed to the bank shares of capital stock of the International Sports Development Corporation collateral security for the payment of any and all indebtedness incurred or arising from the overdraft, and all extensions, renewals, amendments or applications thereof. On the same day, defendant Francisco D. Santana executed a document denominated as absolute guaranty in which, in consideration of the 'overdraft agreement and pledge,' he bound himself to the bank, jointly and severally, with the Tambunting spouses for the full and prompt payment of all the indebtedness incurred or to be incurred by said spouses on account of the overdraft line. On July 24, 1964, Jose Maria Tambunting wrote to the plaintiff bank [a] latter, ..., requesting renewal of the overdraft agreement. Plaintiff bank, in a letter dated September 21, 1964, ..., granted the Tambunting spouses an extension of the overdraft line for six (6) months from September 10, 1964, but reducing the

Credit 5.3 Conchingyan Security overdraft line to P185,000.00 with the understanding that other terms and conditions of the overdraft agreement would be in full force and effect. Before the expiration of the six (6) months period, or on March 5, 1965, Jose Maria Tambunting asked for another renewal of the overdraft line for another year, ... . Apparently, this letter was granted by the plaintiff on March 15, 1965, for in another letter of Jose Maria Tambunting to the bank, ... the defendant, on March 29, 1965, assured the bank that he would comply with the requirements of the plaintiff. In a letter dated May 11, 1965, ... of the bank to Tambunting, the Manager of the Credit Department advised Jose Maria Tambunting that the Board of Directors of the plaintiff bank approved his request for an extension of the overdraft line in the amount of P185,000.00 for another year, or until March 10, 1966, but with interest at the rate of 10% per annum; that in the same meeting, the Board also approved the release of the pledge of 135 shares of stocks of the International Sports Development Corporation. The defendants failed to pay the indebtedness on the date due and demand for payment was made upon Francisco Santana and Tambunting as per letters dated December 14, 1965, January 24, 1966 and March 4, 1966, ... . As of December 27, 1966, the total amount due from the defendants, including interests, was P219,165.18, ... ." 2 The decision went on to state: "The Tambunting spouses failed to answer the complaint and were declared in default. The defendant Santana does not dispute the indebtedness. However, it is the contention that he had been released from the guaranty for several reasons. Defendant Santana contends that he was released from his obligation on the overdraft line because the plaintiff had extended the time of payment and released to the Tambuntings without his consent, the 135 shares of stocks of the International Sports Development Corporation which had been pledged to the bank to secure the overdraft line. It is argued that, in accordance with Article 2080 of the New Civil Code, 'The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, andpreferences of the latter.' " 3 Why such a contention was held devoid of merit was explained in such decision thus: "The contract of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time of payment and to release or surrender any security or part thereof held by it without notice to, the consent of, Santana. He had consented in advance the release of the guaranty which the bank might make, Santana cannot now complain that the release of the pledge was without his consent, and that it deprived him of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance and without notice to the release of any security which had been given to assure payment of the obligation. The waiver is not contrary to public policy, because the right is purely personal, and does not affect public interest nor does it violate any public policy. Neither does the return of the shares of stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation, and its release does not vary the terms of the principal obligation." 4 The appealed decision speaks for itself. It cannot, as was made plain in the opening paragraph of this opinion be overturned. 1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana is the measure of rights and duties. As it is with him, so it is with the plaintiff bank. What was therein stipulated had to be complied with by both parties. Nor could appellant have any valid cause for complaint. He had given his word; he must live up to it. Once the validity of its terms is conceded,

Page 11 of 22 he cannot be indulged in his unilateral determination to disregard his commitment. A promise to which the law accords binding force must be fulfilled. It is as simple as that. So the Civil Code explicitly requires: "Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." 5 2. It could have been different if there were no such contract of absolute guaranty to which appellant was a party under the aforesaid Article 2080. He would have been freed from the obligation as a result of plaintiff releasing to the Tambuntings without his consent the 135 shares of the International Sports Development Corporation pledged to plaintiff bank to secure the overdraft line. For thereby subrogation became meaningless. Such a provision is intended for the benefit of a surety. That was a right he could avail of. He is not precluded however from waiving it. That was what appellant did precisely when he agreed to the contract of absolute guaranty. Again the law is clear. A right may be waived unless it would be contrary to law, public order, public policy, morals or good customs. 6 There is no occasion here for the exceptions coming into play. It has been traditional in the Philippine for parents to extend all available aid and assistance to their children. That is a custom of long standing. Nor is there anything offensive to morals by an assumption of contingent liability as thus worded. The law has not been thwarted. Neither is public order nor public policy disregarded. The lower court was right thereto in yielding full assent to the waiver in question.7 The vigor with which counsel for appellant impugned the lower decision cannot therefore be attended with success. It can stand its ground notwithstanding such a sustained and spirited attack. WHEREFORE, the decision of October 30, 1967, as modified on January 8, 1969, is affirmed. With costs against appellant Francisco D. Santana. G.R. No. L-20567 July 30, 1965

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

Credit 5.3 Conchingyan Security and collect from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor under Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that: The conditions of this assignment are as follows: 1. The same shall remain irrevocable until the said credit accomodation is fully liquidated. 2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and in our name, place and stead, to collect and to receive the payments to be made by virtue of the aforesaid Purchase Order, with full power and authority to execute and deliver on our behalf, receipt for all payments made to it; to endorse for deposit or encashment checks, money order and treasury warrants which said Bank may receive, and to apply said payments to the settlement of said credit accommodation. This power of attorney shall also remain irrevocable until our total indebtedness to the said Bank have been fully liquidated. (Exhibit E) ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its investigators found that more moneys were payable to ATACO from the Public Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same purchase order to a total of P311,230.41. Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs. On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered as follows: 1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956, minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956 to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc., on account of this case shall not exceed P75,000.00, and to pay the costs; 2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

Page 12 of 22 3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and 4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc. From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal. The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the judgment of the court of origin as to the surety's liability. Its motions for reconsideration having proved unavailing, the Bank appealed to this Court. The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's negligence resulted in exoneration of respondent Manila Surety & Fidelity Company. This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958. This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power of attorney, but because they could not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal debtor itself, and a fortiori reject any demands by the surety. Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code: ART. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by come act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter. (Emphasis supplied.)

Credit 5.3 Conchingyan Security The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date, October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not being made. The fact remains that because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully supported by the evidence. Even if the Court of Appeals erred on the second reason it advanced in support of the decision now under appeal, because the rules on application of payments, giving preference to secured obligations are only operative in cases where there are several distinct debts, and not where there is only one that is partially secured, the error is of no importance, since the principal reason based on the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the surety was thereby released. WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National Bank. G.R. No. L-34539 July 14, 1986 EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents. GUTIERREZ, JR., J.: This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they signed as accommodation makers. The factual background of this case is stated in the decision of the appellate court: Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by the appellants to the Philippine National Bank,

Page 13 of 22 hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio. Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB. After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company, executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account of the contract for the construction of the Puerto Princesa building in favor of the PNB. This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB, conditioned, however that they should be for labor and materials, made three payments to the Company on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April 28, 1956, the remaining balance of the contract price should be applied to the loan. The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded the construction contract and assumed the work of completing the building. On November 14, 1958, appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract. Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was amended to exclude the Company as defendant, it having been shown that its life as a partnership had already expired and, in

Credit 5.3 Conchingyan Security lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as defendants. After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees. The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the judgment debt. The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners' liability is that of solidary co-makers and that since "the amounts released to the construction company were used therein and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage. In this petition, the petitioners raise the following issues which they present in the form of errors: I. First Assignment of Error. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES: II. Second Assignment of Error. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.

Page 14 of 22 The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship. " They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate mortgage executed by them should have been cancelled. Section 29 of the Negotiable Instrument Law provides: Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co- debtor. Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716): 3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser. There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be

Credit 5.3 Conchingyan Security another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law). In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course? Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee. In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71): We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered. Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it was held: It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the parties between whom there is a privitythe consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration. Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on

Page 15 of 22 behalf of the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned obligation." Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00. This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to the petitioners. We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB. It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the money for themselves. The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and signed the promissory note in the Bank's favor. Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled because the Bank

Credit 5.3 Conchingyan Security violated the deed of assignment and extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's detriment. The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of indebtedness there would have been no basis for the mortgage. True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the samethe Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property. Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to become accommodation makers. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees. SO ORDERED [G.R. No. 138544. October 3, 2000] SECURITY BANK AND TRUST CUENCA, respondent. COMPANY, Inc., petitioner, vs. RODOLFO M. PANGANIBAN, J.:

Page 16 of 22

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations. The Case This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows: WHEREFORE, the judgment appealed from is hereby amended in the sense that defendantappellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment. Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit. In all other respect[s], the decision appealed from is AFFIRMED.[2] Also challenged is the April 14, 1999 CA Resolution, [3] which denied petitioners Motion for Reconsideration. Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows: WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum ofP39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs. SO ORDERED. The Facts The facts are narrated by the Court of Appeals as follows:[5]

DECISION

Credit 5.3 Conchingyan Security The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR). On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations. The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981: JOINT CONDITIONS: 1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca. 2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies; 3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines; 4. Lines shall expire on November 30, 1981; and 5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. (Emphasis supplied.) To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows: xxxxxxxxx Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis supplied). On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8MCredit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover

Page 17 of 22 said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C). Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction. Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line. Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendantappellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans: a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34). It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.

Credit 5.3 Conchingyan Security Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank: PROMISSORY NOTE NO. AMOUNT RL/74/596/88 P8,800,000.00 RL/74/597/88 P3,400,000.00 ------------------TOTAL P12,200,000.00 (Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343). To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides: 1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow. 1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33) From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165) Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively. Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed. Ruling of the Court of Appeals

Page 18 of 22 In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation. The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million. It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety. The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation. Hence, this recourse to this Court.[7] The Issues In its Memorandum, petitioner submits the following for our consideration: [8] A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon; i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981; ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

Credit 5.3 Conchingyan Security iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement; B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC; C. Whether or not petitioners Motion for Reconsideration was pro-forma; Section 11, Rule 13 of the 1997 Rules of Court, provides as follows: D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure. Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will also be addressed. The Courts Ruling The Petition has no merit. Preliminary Matters: Procedural Questions Motion for Reconsideration Not Pro Forma Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review. [9] Consequently, the Petition was filed out of time.[10] We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11] Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma. It held:

Page 19 of 22 We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration. Service by Registered Mail Sufficiently Explained

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed. Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail. We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and that only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with. In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.[14] This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause. First Issue: Original Obligation Extinguished by Novation An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows: ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[15] Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]

Credit 5.3 Conchingyan Security Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were not more onerous. [17]Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement. We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the 1980 credit accomodation. This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows: 1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.[19] (Italics supplied.) The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the original indebtedness serves to strengthen this ruling.[21] Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different. Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23] Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24] Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides: ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. Alleged Extension Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25]

Page 20 of 22 This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the Court explained the rationale of this provision in this wise: The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. Binding Nature of the Credit Approval Memorandum As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use. We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise: 4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980. Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous. Second Issue: Alleged Waiver of Consent Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.[28] Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan

Credit 5.3 Conchingyan Security Agreement is merely its renewal, which connotes cessation of an old contract and birth of another one x x x.[29] At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability. In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the Indemnity Agreement, which isreproduced hereunder: Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference. While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof. Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging

Page 21 of 22 the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver. It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition: 5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[33] We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation. [34] Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The latters liability would thus be more burdensome than that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35] The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified. In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement. In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto. Continuing Surety Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement. This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately. [37] In Dino v. CA,[38] the Court held that a continuing guaranty is one which covers all transactions, including

Credit 5.3 Conchingyan Security those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million. Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling. Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower. No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum. Special Nature of the JSS It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation. Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation. Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan

Page 22 of 22 having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan. In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame. In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation. In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED