Philippine National Bank vs.

Court of Appeals
G.R. No. 88880, 196 SCRA 536
April 30, 1991

PNB, over the objection of the private respondent, and without authority from the Monetary Board,
within a period of only four (4) months, increased the 18% interest rate on the private respondents loan
obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in
November 1984.
Private respondent-debtor expressed its agreement in the Deed of Real Estate Mortgage that the
interest rate may be increased during the life of the contract to such increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE may prescribe or within the limits allowed by
law.
No law was passed in July to November 1984 increasing the interest rates on loans or renewals thereof
to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to
effectuate the increases.
At the outset, CB Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest rates.
ISSUE:
Whether a bank, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased?
RULING:
No. In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary
Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change
such rate or rates whenever warranted by prevailing economic and social conditions, it expressly
provides that such changes shall not be made oftener than once every twelve months.
In this case, PNB, over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private
respondents loan obligation three (3) times. xxx Those increases were null and void, for if the Monetary
Board itself was not authorized to make such changes oftener than once a year, even less so may a bank
which is subordinate to the Board.
Secondly, xxx while the private respondent-debtor did agree in the Deed of Real Estate Mortgage that
the interest rate may be increased during the life of the contract to such increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe xxx or within the limits
allowed by law xxx no law was ever passed in July to November 1984 increasing the interest rates on

loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and
delivered by the debtor to effectuate the increases.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private
respondents loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code. xxx
In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). The debtor herein never agreed
in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound
to pay a higher rate than that. That an increase in the interest rate from 18% to 48% within a period of
four (4) months is excessive, xxx is indisputable.

DEPOSIT
BANK OF THE PHILIPPINE ISLANDS
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM
G.R. No. 104612, May 10, 1994, 232 SCRA 302

Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and
stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial
Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI).
In March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was
opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various
amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money
therein was placed in the money market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at
P662, 522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as
President and General Manager of Eastern, one-half of this amount was provisionally released and
transferred to one of the bank accounts of Eastern with CBTC.
In the meantime, a case for the settlement (Sp. Proc. No. 8959) of Velasco's estate was filed with the
RTC of Pasig. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco
and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted
the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and
Velasco and authorized the heirs to divide among themselves the amount withdrawn.

As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the
joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the
heirs of Velasco.
Sometime in 1980, CBTC was merged with BPI. On 2 December 1987, BPI filed with the RTC of Manila a
complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00.
Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the
disputed account subject of a Holdout Agreement and the interests thereon after deducting the amount
due on the promissory note.
After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the
complaint and ruled among others that the promissory note in question is subject to the 'hold-out'
agreement, and that based on this agreement, it was the duty of BPI to debit the account of the
defendants under the promissory note to set off the loan even though the same has no fixed maturity.
As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in
question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court, denied it
because the said claim cannot be awarded without disturbing the resolution" of the intestate court.
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CAG.R. CV No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court.
Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended
Decision wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the
defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that
case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI
should have protected the defendants' interest in the probate proceedings when the said account was
claimed by Velasco's estate. It then ordered BPI to pay defendants the amount of P331,261.44
representing the outstanding balance in the bank account of defendants.
ISSUE:
Whether a banks obligation to pay its depositor such amount accruing to the depositors account is
extinguished by the banks action of allowing, in good faith, such deposit to be withdrawn by a wrong
person?
NO. The counterclaim of Eastern and Lim for the return of the P331,261.44 was equivalent to a demand
that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly
provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, we
held that bank deposits are in the nature of irregular deposits; they are really loans because they earn
interest. The relationship then between a depositor and a bank is one of creditor and debtor. The

deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand
of the depositor.
The account was proved and established to belong to Eastern even if it was deposited in the names of
Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand
payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the
heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed
such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the
money deposited in the account.
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to
withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it
was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be
construed as a final determination or adjudication that the account belonged to Velasco. We have ruled
that when the ownership of a particular property is disputed, the determination by a probate court of
whether that property is included in the estate of a deceased is merely provisional in character and
cannot be the subject of execution.
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto,
had no right to pay to persons other than those in whose favor the obligation was constituted or whose
right or authority to receive payment is indisputable. The payment of the money deposited with BPI that
will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one
authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does
not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor
acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by
fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did
not extinguish its obligation to the true depositor, Eastern.

SILVESTRA BARON
vs.
PABLO DAVID
G.R. Nos. L-26948 and L-26949, October 8, 1927, 51 Phil. 2

Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the
municipality of Magalang, Pampanga, a mill. Plaintiffs placed in the defendant's mill such deposits of
palay with the understanding that the defendant was at liberty to convert it into rice and dispose of it at
his pleasure.
In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the
defendant's mill; and this, in connection with some that she took over from Guillermo Baron, amounted

to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865
cavans and 43 kilos of palay in the mill. No compensation has ever been received by Silvestra Baron
upon account of the palay delivered by Guillermo Baron, he has received from the defendant
advancements amounting to P2,800; but apart from this he has not been compensated.
The mill was actively running during the entire season, and as palay was daily coming in from many
customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it
was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs'
palay was mixed with that of others.
On January 17, 1921, a fire occurred that destroyed the mill and its contents.
Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the
defendant; while the defendant, on the other hand, claims that the palay was deposited subject to
future withdrawal by the depositors or subject to some future sale which was never effected. He
therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921.
Opposing attorneys assume that in order for the plaintiffs to recover, it is necessary that they should be
able to establish that the plaintiffs' palay was delivered in the character of a sale, and that if, on the
contrary, the defendant should prove that the delivery was made in the character of deposit, the
defendant should be absolved.
ISSUE:
Whether a depository may be is liable to the depositor for the loss of the thing deposited due to
fortuitous event?
Yes. xxx [E]ven supposing that the palay may have been delivered in the character of deposit, subject to
future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant
might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account
for its value.
Under Article 1768 of the Civil Code, when the depository has permission to make use of the thing
deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and
of course by appropriating the thing, the bailee becomes responsible for its value.

CONSOLIDATED TERMINALS, INC., (CTI)

vs.
ARTEX DEVELOPMENT CO., INC. (ARTEX)
G.R. No. L-25748, March 10, 1975, 63 SCRA 46

CTI was the operator of a customs bonded warehouse located at Port Area, Manila. It received on
deposit one hundred ninety-three (193) bales of high density compressed raw cotton valued at
P99,609.76. It was understood that CTI would keep the cotton in behalf of Luzon Brokerage Corporation
until the consignee thereof, Paramount Textile Mills, Inc., had opened the corresponding letter of credit
in favor of shipper, Adolph Hanslik Cotton of Corpus Christi, Texas.
Allegedly by virtue of a forged permit to deliver imported goods, purportedly issued by the Bureau of
Customs, Artex was able to obtain delivery of the bales of cotton on November 5 and 6, 1964 after
paying CTI P15,000 as storage and handling charges. At the time the merchandise was released to Artex,
the letter of credit had not yet been opened and the customs duties and taxes due on the shipment had
not been paid.
CTI, in its original complaint, sought to recover possession of the cotton by means of a writ of replevin.
The writ could not be executed. CTI then filed an amended complaint by transforming its original
complaint into an action for the recovery from Artex of P99,609.76 as compensatory damages, P10,000
as nominal and exemplary damages and P20,000 as attorney's fees.
CTI alleged that Artex acquired the cotton from Paramount Textile Mills, Inc., the consignee. Artex
alleged in its motion to dismiss that it was not shown in the delivery permit that Artex was the entity
that presented that document to the CTI. Artex further averred that it returned the cotton to Paramount
Textile Mills, Inc. when the contract of sale between them was rescinded because the cotton did not
conform to the stipulated specifications as to quality.
Since CTI is only a warehouseman and according to the amended complaint, plaintiff was already paid
the warehousing and handling charges of the 193 bales of high density compressed raw cotton
mentioned in the complaint, the plaintiff can no longer recover for its services as warehouseman.
On appeal CTI contends that, as warehouseman, it was entitled to the possession of the bales of cotton;
that Artex acted wrongfully in depriving CTI of the possession of the merchandise because Artex
presented a falsified delivery permit, and that Artex should pay damages to CTI.
CTI relies on Section 10 of the Warehouse Receipts Law which provides that "where a warehouseman
delivers the goods to one who is not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all having a right of property or possession in the
goods ..."

ISSUE:
Whether a warehouseman, independently from the depositor, has right or cause of action for
damages against any party who illegally caused the delivery of and obtained custody the subject
matter of the bailment/deposit?
No. CTIs amended complaint does not clearly show that, as warehouseman, it has a cause of action for
damages against Artex. The real parties interested in the bales of cotton were Luzon Brokerage
Corporation as depositor, Paramount Textile Mills, Inc. as consignee, Adolph Hanslik Cotton as shipper
and the Commissioners of Customs and Internal Revenue with respect to the duties and taxes. These
parties have not sued CTI for damages or for recovery of the bales of cotton or the corresponding
taxes and duties.
The case might have been different if it was alleged in the amended complaint that the depositor,
consignee and shipper had required CTI to pay damages, or that the Commissioners of Customs and
Internal Revenue had held CTI liable for the duties and taxes. In such a case, CTI might logically and
sensibly go after Artex for having wrongfully obtained custody of the merchandise.
But that eventuality has not arisen in this case. So, CTI's basic action to recover the value of the
merchandise seems to be untenable. It was not the owner of the cotton. How could it be entitled to
claim the value of the shipment?
In other words, on the basis of the allegations of the amended complaint, the lower court could not
render a valid judgment in accordance with the prayer thereof. It could not render such valid judgment
because the amended complaint did not unequivocally allege what right of CTI was violated by Artex, or,
to use the familiar language of adjective law, what delict or wrong was committed by Artex against CTI
which would justify the latter in recovering the value of bales of cotton even if it was not the owner
thereof.

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS

vs.
GEORGE C. SELLNER
G.R. No. L-158025, November 5, 1920, 41 Phil 142
Defendant George C. Sellner wrote to John T. Macleod, agent for Mrs. Horace L. Higgins, on letter
written by May 31, 1915, obligating and binding himself, his heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John
Maye, jointly and severally, in favor of plaintiff and due six months after date for Pesos 10,000 is not
fully paid at maturity with interest, defendant will, within fifteen days after notice of such default, pay

the plaintiff in cash the sum of P10,000 and interest upon plaintiffs to defendant the three thousand
shares of stock of the Keystone Mining Co. held by defendant as security for the payment of said note.
Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit
that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.

ISSUE:
Whether the plaintiff is a surety or guarantor?
Guarantor.
A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A
surety and a guarantor are unlike in that the surety assumes liability as a regular party to the
undertaking, while the liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the
engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919], 40 Phil., 48;
Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on
Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)
xxx [A]ccording to Article 1822 "By fianza (security or suretyship) one person binds himself to pay or
perform for a third person in case the latter should fail to do so." xxx
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be
more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites
that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default
and upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will
assume responsibility. Sellner is not bound with the principals by the same instrument executed at the
same time and on the same consideration, but his responsibility is a secondary one found in an
independent collateral agreement, Neither is Sellner jointly and severally liable with the principal
debtors.
xxx
There is also an equitable aspect to the case which reenforces this conclusion. The note executed by
the Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by
the makers until September 30, 1916. When the note became due, it is admitted that the shares of stock
used as collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note
had not been paid was not given to and when the Keyston Mining Company stock was worthless.
Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup, through the
sale of the stock, any amount which he might be compelled to pay as a surety or guarantor. The

"indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as evidenced by
the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to
discharge the guarantor.

RIZAL COMMERCIAL BANKING CORPORATION

vs.
HON. JOSE P. ARRO and RESIDORO CHUA
G.R. No. L-49401, July 30, 1982, 115 SCRA 777
October 19, 1976, a comprehensive surety agreement was jointly executed by Residoro Chua and
Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover
existing as well as future obligations which Daicor may incur with the petitioner bank, subject only to the
proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note in the amount of P100,000.00 was issued in favor of petitioner
payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf
of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30, 1978,
petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A
motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the ground that
the complaint states no cause of action as against him. It was alleged in the motion that he cannot be
held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf
of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 petitioner alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is liable because said agreement covers not
merely the promissory note subject of the complaint, but is continuing; and it encompasses every other
indebtedness the Borrower may, from time to time incur with petitioner bank.
ISSUE:
Whether a person, who is a party to a prior comprehensive surety agreement, but who did not
actually signed a promissory note, is liable to pay the obligation evidence by the promissory note?
YES. xxx [E]ven if he did not sign the promisory note, [private respondent] is liable by virtue of the
surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or
may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on
the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by

Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was
the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual
payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus xxx [a] guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured (Article 2053, NCC).

MANILA SURETY & FIDELITY CO., INC.,

vs.
NOEMI ALMEDA, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION
G.R. No. L-27249, July 31, 1970

Noemi Almeda, married to Generoso Esquillo, and doing business under the name and style of Almeda
Trading, entered into a contract with the National Marketing Corporation (NAMARCO) for the purchase
of goods on credit, payable in 30 days from the dates of deliveries thereof. As required by' the
NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc., was posted by
the purchaser to secure the latter's faithful compliance with the terms of the contract. The agreement
was later supplemented on 17 October 1962 and a new bond for the same amount of P5,000.00, also
undertaken by the Manila Surety & Fidelity Co., Inc., was given in favor of the NAMARCO
On 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading the settlement of its
back accounts. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter
also wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO.
On 26 March 1965, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First
Instance of Laguna, and by order of said court of 6 April 1965, he was declared insolvent. In the meeting
of the named creditors of the insolvent held on 14 May 1965 for the purpose of electing the assignee of
his properties, the NAMARCO was represented and its contingent claim duly registered.
On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance
of Manila Civil Case No. 62518 against the spouses Noemi Almeda and Generoso Esquillo, and the
NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The
action was based on the allegation that the defendant spouses had become insolvent and that
defendant NAMARCO had rescinded its agreement with them and had already demanded payment of
the outstanding accounts of the couple.
On 16 December 1966, the court rendered judgment sustaining NAMARCO's contention that the
insolvency of the debtor-principal did not discharge the surety's liability under the bond. Thus, the
complaint was dismissed and plaintiff surety company was ordered to pay off the indebtedness of the

defendant spouses to the NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees
and costs. From this decision, plaintiff surety interposed the present appeal.
Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071 of the
Civil Code, which provides the surety with certain protective remedies that may be resorted to before
he has paid, but after he has become liable to do so.
Upon the other hand, the lower court's ruling, now on appeal, is anchored on an equally explicit
provision of the Insolvency law (SEC. 68, Act 1956, as amended) which provides that No discharge (of
the insolvent from his obligations) shall release, discharge or affect any person liable for the same debt,
for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise.
ISSUE
Whether insolvency of the debtor-principal discharges the surety's liability under the bond?
NO. There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety
company assumed to make immediate payment to said firm of any due and unsettled accounts of the
debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact,
agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's
properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. In short,
appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the
payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant
becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself.
Nevertheless, the guarantor's action for release can only be exercised against the principal debtor and
not against the creditor, as is apparent from the precise terms of the legal provision.
"The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid, may
proceed against the principal debtor ------------------ to obtain a release from the guaranty ---------------."
The juridical rule grants no cause of action against the creditor for a release of the guaranty, before
payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which
is a property right) against his will.
For, the release of the guarantor imports an extinction of his obligation to the creditor; it connotes,
therefore, either a remission or a novation by subrogation, and either operation requires the creditor's
assent for its validity (See Article 1270 and Article 1301). Especially should this be the case where the
principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor
against such a contingency.
In what manner, then, can the article operate? Where the debtor can not make full payment, the
release of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to

accept an equally safe security, either another suitable guaranty or else a pledge or mortgage. Absent
the creditor's consent, the principal debtor may only proceed to protect the demanding guarantor by a
counterbond or counter guaranty, as is authorized by the codal precept (Article 2071 in fine).
xxx In the circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would be
to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to
be barred by the subsequent discharge of the insolvent debtor from all his liabilities.
xxx For one thing, it is almost a certainty that creditor NAMARCO can not secure full satisfaction of its
credit out of the debtor's properties brought into the insolvency proceeding. Considering that under the
contract of suretyship, which remains valid and subsisting, the entire obligation may even be demanded
directly against the surety itself, the creditor's act in resorting first to the properties of the insolvent
debtor is to the surety's advantage At least, the latter would be answerable only for whatever amount
may remain not covered or unsatisfied by the disposition of the insolvent's properties, with the right to
go against debtor-principal after it has made the necessary payment to the creditor. For another, the
fact that the debtor- principal may be discharged from all his outstanding obligations in the insolvency
case would not benefit the surety, as to relieve it of its liability under the surety agreement. That is so
provided in Section 68 of the Insolvency Act which shall be controlling in the case.
Finally, even supposing that the present action is not blocked by the insolvency proceedings because it
does not aim at reducing the insolvent's assets, but only at having the suretyship substituted by other
equivalent security, still it is difficult to see how the principal debtor, with his business, property and
assets impounded by the insolvency court, can obtain other securities with which to replace the
guaranty given by the plaintiff-appellant. The action at bar would seem, under the circumstances,
destined to end in futility.
WHEREFORE, with the modification that appellant's liability shall be limited to the payment of whatever
amount may remain due to the appellee NAMARCO and is unsatisfied in the insolvency proceeding, but
not to exceed the amount of the surety's undertaking under the bonds, the decision appealed from is
affirmed in all other respects. Costs against appellant surety company.