G.R. No.

80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA, NENITA
B. ARRIETA, PABLITO BERMUNDO and
LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for
private respondents.

hereafter become barred by any

statute of limitations, or whether
such indebtedness may be or
otherwise
become unenforceable. 1 (Emphasis
supplied)
Other relevant provisions of the
Continuing Suretyship Agreement follow:
(2) This is a continuing
suretyship relating to any
indebtedness, including that
arising under successive
transactions which shall either
continue the indebtedness from
time to time or renew it after it has
been satisfied. This suretyship is
binding upon the heirs, successors,
executors, administrators and
assigns of the surety, and the
benefits hereof shall extend to and
include the successors and assigns
of the Creditor.
(3) The obligations hereunder
are joint and several and
independent of the obligations of
the Principal. A separate action or
actions may be prosecuted against
the Principal and whether or not
the Principal be joined in any such
action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and
rights of set-off against the
moneys, securities or other
property of the Surety given to the
Creditor by law, the Creditor shall
have the lien upon and a right of
self-off against all moneys,
securities, and other property of
the Surety now and hereafter in the
possession of the Creditor; and
every such lien or right of self-off
may be exercised without need of
demands upon or notice to the
Surety. No lien or right of set-off
shall be deemed to have been
waived by any act, omission or
conduct on the part of the Creditor,
or by any neglect to exercise such
right of set-off or to enforce such
lien, or by any delay in so doing,
and every right of set-off or lien
shall continue in full force and
effect until such right of set-off of
lien is specifically waived or
released by an instrument in
writing executed by the Creditor.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us
to review and set aside the Decision of the Court
of Appeals which reversed a decision of the trial
court ordering private respondents to pay jointly
and severally to petitioner Atok Finance certain
sums of money.
On 27 July 1979, private respondents Sanyu
Chemical corporation ("Sanyu Chemical") as
principal and Sanyu Trading Corporation ("Sanyu
Trading") along with individual private
stockholders of Sanyu Chemical, namely, private
respondent spouses Danilo E. Halili and Pablico
Bermundo as sureties, executed in the continuing
Suretyship Agreement in favor of Atok Finance as
creditor. Under this Agreement, Sanyu Trading
and the individual private respondents who were
officers and stockholders of Sanyu Chemical did:
(1) For valuable and/or other
consideration . . ., jointly and
severally unconditionally
guarantee to ATOK FINANCE
CORPORATION (hereinafter called
Creditor), the full, faithful and
prompt payment and discharge of
any and all indebtedness of [Sanyu
Chemical] . . . (hereinafter called
Principal) to the Creditor. The
word "indebtedness" is used
herein in its most comprehensive
sense and includes any and all
advances, debts, obligations and
liabilities of Principal or any one or
more of them,here[to]fore, now or
hereafter made, incurred or
created, whether voluntary or
involuntary andhowever arising,
whether direct or acquired by the
Creditor by assignment or
succession, whether due or not
due, absolute or contingent,
liquidated or unliquidated,
determined or undetermined and
whether the Principal may be may
be liable individually of jointly with
others, or whether recovery upon
such indebtedness may be or

(7) Any indebtedness of the

Principal now or hereafter held by
the Surety is hereby subordinated
to the indebtedness of the Principal
to the Creditor; and if the Creditor
so requests, such indebtedness of
the Principal of the Surety shall be
collected, enforced and shall be
paid over to the Creditor and shall
be paid over to the Creditor and
shall be paid over to the Creditor
on account of the indebtedness of
the Principal to the Creditor but
without reducing or affecting in any
manner the liability of the Surety
under the provisions of this
suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned
its trade receivables outstanding as of 27
November 1981 with a total face value of
P125,871.00, to Atok Finance in consideration of
receipt from Atok Finance of the amount of
P105,000.00. The assigned receivables carried a
standard term of thirty (30) days; it appeared,
however, that the standard commercial practice
was to grant an extension up to one hundred
twenty (120) days without penalties. The relevant
portions of this Deed of Assignment read as
follows:
1. FOR VALUE RECEIVED, the
ASSIGNOR does hereby SELL,
TRANSFER and ASSIGN all his/its
rights, title and interest in the
contracts, receivables, accounts,
notes, leases, deeds of sale with
reservation of title, invoices,
mortgages, checks, negotiable
instruments and evidences of
indebtedness listed in the schedule
forming part hereinafter called
"Contract" or "Contracts."
2. To induce the ASSIGNEE to
purchase the above Contracts, the
ASSIGNOR does hereby
certify,warrant and represent that :
(a). He/It is the sole owner of the assigned
Contracts free and clear of claims of any other
party except the herein ASSIGNEE and has the
right to transfer absolute title thereto the
ASSIGNEE;
(b). Each assigned Contract is bonafide and the
amount owing and to become due on each
contract is correctly stated upon the schedule or
other evidences of the Contract delivered
pursuant thereto;

(c). Each assigned Contract arises out of the sale

of merchandise/s which had been delivered
and/or services which have been rendered and
none of the Contract is now, nor will at any time
become, contingent upon the fulfillment of any
contract or condition whatsoever, or subject to
any defense, offset or counterclaim; x (d). No
assigned Contract is represented by any note or
other evidence of indebtness or other security
document except such as may have been
endorsed, assigned and delivered by the
ASSIGNOR to the ASSIGNEE simultaneously with
the assignment of such Contract;
(e). No agreement has been made, or will be
made, with any debtor for any deduction discount
or return of merchandise, except as may be
specifically noted at the time of the assignment
of the Contract;
(f). None of the terms or provisions of the
assigned Contracts have been amended,
modified or waived;
(g). The debtor/s under the assigned Contract/s
are solvent and his/its/their failure to pay the
assigned Contracts and/or any installment
thereon upon maturity thereof shall
be conclusively considered as a violation of this
warranty; and
(h). Each assigned Contract is a valid obligation of
the buyer of the merchandise and/or service
rendered under the Contract And that no Contract
is overdue.
The foregoing warranties and
representations are in addition to
those provided for in the
Negotiable Instruments Law and
other applicable laws. Any violation
thereof shall render the ASSIGNOR
immediately and unconditionally
liable to pay the ASSIGNEE jointly
and severally with the debtors
under the assigned contracts, the
amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without
compensation or cost, collect and
receive in trust for the ASSIGNEE
all payments made upon the
assigned contracts and shall remit
to the ASSIGNEE all collections on
the said Contracts as follows :
P5,450.00 due on
January 2, 1982 on
every 15th day
(semi-monthly) until
November 1, 1982.
P110,550.00 balloon
payment after 12

months. 3 (Emphasis
supplied)
Later, additional trade receivables were assigned
by Sanyu Chemical to Atok Finance with a total
face value of P100,378.45.
On 13 January 1984, Atok Finance commenced
action against Sanyu Chemical, the Arrieta
spouses, Pablito Bermundo and Leopoldo Halili
before the Regional Trial Court of Manila to collect
the sum of P120,240.00 plus penalty charges
amounting to P0.03 for every peso due and
payable for each month starting from 1
September 1983. Atok Finance alleged that Sanyu
Chemical had failed to collect and remit the
amount due under the trade receivables.
Sanyu Chemical and the individual private
respondents sought dismissal of Atok's claim
upon the ground that such claim had prescribed
under Article 1629 of the Civil Code and for lack
of cause of action. The private respondents
contended that the Continuing Suretyship
Agreement, being an accessory contract, was null
and void since, at the time of its execution, Sanyu
Chemical had no pre-existing obligation due to
Atok Finance.
At the trial, Sanyu Chemical and the individual
private respondents failed to present any
evidence on their behalf, although the individual
private respondents submitted a memorandum in
support of their argument. After trial, on 1 April
1985, the trial court rendered a decision in favor
of Atok Finance. The dispositive portion of this
decision reads as follows:
ACCORDINGLY, judgment is hereby
rendered in favor of the plaintiff
ATOK FINANCE CORPORATION; and
against the defendants SANYU
CHEMICAL CORPORATION, DANILO
E. ARRIETA, NENITA B. ARRIETA,
PABLITO BERMUNDO and
LEOPOLDO HALILI, ordering the
said defendants, jointly and
severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for
each peso for each month from
September 1, 1983 until the whole
amount is fully paid;
(2) P50,000.00 as attorney's fees;
and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the
then Intermediate Appellate Court ("IAC"), and
the appeal was there docketed as AC-G.R. No.
07005-CV. The case was raffled to the Third Civil
Cases Division of the IAC. In a resolution dated 21
March 1986, that Division dismissed the appeal
upon the ground of abandonment, since the

private respondents had failed to file their appeal

brief notwithstanding receipt of the notice to do
so. On 4 June 1986, entry of judgment was made
by the Clerk of Court of the IAC. Accordingly, Atok
Finance went before the trial court and sought a
writ of execution to enforce the decision of the
trial court of 1 April 1985. The trial court issued a
writ of execution on 23 July 1986. 5 Petitioner
alleged that the writ of execution was served on
private respondents. 6
However, on 27 August 1986, private
respondents filed a Petition for Relief from
Judgment before the Court of Appeals. This
Petition was raffled off to the 15th Division of the
Court of Appeals. In that Petition, private
respondents claimed that their failure to file their
appeal brief was due to excusable negligence,
that is, that their previous counsel had entrusted
the preparation and filing of the brief to one of his
associates, which associate, however, had
unexpectedly resigned from the law firm without
returning the records of cases he had been
handling, including the appeal of private
respondents. Atok Finance opposed the Petition
for Relief arguing that no valid ground existed for
setting aside the resolution of the Third Division
of the then IAC.
The 15th Division of the Court of Appeals
nonetheless granted the Petition for Relief from
Judgment "in the paramount interest of
justice," 7 set aside the resolution of the Third
Civil Cases Division of the then IAC, and gave
private respondents a non-extendible period of
fifteen (15) days within which to file their appeal
brief. Private respondents did file their appeal
brief.
The 15th Division, on 18 August 1987, rendered a
Decision on the merits of the appeal, and
reversed and set aside the decision of the trial
court and entered a new judgment dismissing the
complaint of Atok Finance, ordering it to pay
private respondents P3,000.00 as attorney's fees
and to pay the costs.
Atok Finance moved to set aside the decision of
the 15th Division of the Court of Appeals, inviting
attention to the resolution of the IAC's Third Civil
Cases Division of 21 March 1986 originally
dismissing private respondent's appeal for
abandonment thereof. In a resolution dated 18
August 1987, the 15th Division denied Atok
Finance's motion stating that it had granted the
Petition for Relief from Judgment and given
private respondents herein fifteen (15) days
within which to file an appeal brief, while Atok
Finance did not file an appellee's brief, and that
its decision was arrived at "on the basis of
appellant's brief and the original records of the
appeal case."

In the present Petition for Review, Atok Finance

assigns the following as errors on the part of the
Court of Appeals in rendering its decision of 18
August 1987:
(1) that it had erred in ruling that a
continuing suretyship agreement
cannot be effected to secure future
debts;
(2) that it had erred in ruling that
the continuing suretyship
agreement was null and void for
lack of consideration without any
evidence whatsoever [being]
adduced by private respondents;
(3) that it had erred in granting the
Petition for Relief from Judgment
while execution proceedings [were]
on-going on the trial
court. 8 (Emphasis in the original)
As a preliminary matter, we note that a Division
of the Court of Appeals is co-equal with any other
Division of the same court. Accordingly, a Division
of the Court of Appeals has no authority to
consider and grant a petition for relief from a
judgment rendered by another Division of the
same court. In the case at bar, however, we must
note that an intervening event had occurred
between the resolution of 21 March 1986 of the
Third Civil Cases Division of the IAC dismissing
private respondents' appeal and the 30
September 1986 order of the 15th Division of the
Court of Appeals granting the Petition for Relief
from Judgment. On 28 July 1986, the old
Intermediate Appellate Court went out of
existence and a new court, the Court of Appeals,
came into being, was organized and commenced
functioning. 9 This event, and the probability that
some confusion may have accompanied the
period of transition from the IAC to the Court of
Appeals, lead us to believe that the defect here
involved should be disregarded as being of
secondary importance. At the same time, nothing
in this decision should be read as impliedly
holding that a petition from relief judgment is
available in respect of a decision rendered by the
Court of Appeals; this issue is best reserved for
determination in some future cases where it shall
have been adequately argued by the parties.
We turn, therefore, to a consideration of the first
substantive issue addressed by the Court of
Appeals in rendering its Decision on the merits of
the appeal: whether the individual private
respondents may be held solidarily liable with
Sanyu Chemical under the provisions of the
Continuing Suretyship Agreement, or whether
that Agreement must be held null and void as
having been executed without consideration and

without a pre-existing principal obligation to

sustain it.
The Court of Appeals held on this first issue as
follows:
It is the contention of private
appellants that the suretyship
agreement is null and void because
it is not in consonance with the
laws on guaranty and security. The
said agreement was entered into
by the parties two years before the
Deed of Assignment was executed.
Thus, allegedly, it ran counter to
the provision that guaranty cannot
exist independently because by
nature it is merely an accessory
contract. The law on guaranty is
applicable to surety to some
extent Manila Surety and Fidelity
Co. v.Baxter Construction & Co., 53
O.G. 8836; and, Arran v. Manila
Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from
contracts have the force of law
between the contracting parties,
(Article 1159 of the Civil Code) this
does not mean that the law is
inferior to it; the terms of the
contract could not be enforces if
not valid. So, even if, as in this
case, the agreement was for
acontinuing suretyship to include
obligations enumerated in
paragraph 2 of the agreement, the
same could not be enforced. First,
because this contract, just like
guaranty, cannot exist without a
valid obligation (Art. 2052, Civil
Code); and, second, although it
may be given as security for future
debt(Art. 2053, C.C.), the
obligation contemplated in the
case at bar cannot be considered
"future debt" as envisioned by this
law.
There is no proof that when the
suretyship agreement was entered
into, there was a pre-existing
obligation which served the
principal obligation between the
parties. Furthermore, the "future
debts" alluded to in Article 2053
refer to debts already existing at
the time of the constitution of the
agreement but the amount thereof
is unknown, unlike in the case at
bar where the obligation was

acquired two years after the

agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in
serious error. It is true that a serious guaranty or
a suretyship agreement is an accessory contract
in the sense that it is entered into for the purpose
of securing the performance of another obligation
which is denominated as the principal obligation.
It is also true that Article 2052 of the Civil Code
states that "a guarantee cannot exist without a
valid obligation." This legal proposition is not,
however, like most legal principles, to be read in
an absolute and literal manner and carried to the
limit of its logic. This is clear from Article 2052 of
the Civil Code itself:
Art. 2052. A guaranty cannot exist
without a valid obligation.
Nevertheless, a guaranty may be
constituted to guarantee the
performance of a voidable or an
unenforceable contract. It may also
guaranty a natural obligation."
(Emphasis supplied).
Moreover, Article 2053 of the Civil Code
states:
Art. 2053. A guaranty may also be
given as security for future debts,
the amount of which is not yet
known; there can be no claim
against the guarantor until the
debt is liquidated. A conditional
obligation may also be secured.
(Emphasis supplied)
The Court of Appeals apparently overlooked our
caselaw interpreting Articles 2052 and 2053 of
the Civil Code. InNational Rice and Corn
Corporation (NARIC) v. Jose A. Fojas and Alto
Surety Co., Inc., 11 the private respondents
assailed the decision of the trial court holding
them liable under certain surety bonds filed by
private respondent Fojas and issued by private
respondent Alto Surety Co. in favor of petitioner
NARIC, upon the ground that those surety bonds
were null and void "there being no principal
obligation to be secured by said bonds." In
affirming the decision of the trial court, this Court,
speaking through Mr. Justice J.B.L. Reyes, made
short shrift of the private respondents' doctrinaire
argument:
Under his third assignment of error,
appellant Fojas questions the
validity of the additional
bonds(Exhs. D and D-1) on the
theory that when they were
executed, the principal obligation
referred to in said bonds had not
yet been entered into, as no copy
thereof was attached to the deeds

of suretyship. This defense is

untenable, because in its complaint
the NARIC averred, and the
appellant did not deny that these
bonds were posted to secure the
additional credit that Fojas has
applied for, and the credit increase
over his original contract was
sufficient consideration for the
bonds. That the latter were signed
and filed before the additional
credit was extended by the NARIC
is no ground for complaint. Article
1825 of the Civil Code of 1889, in
force in 1948, expressly recognized
that "a guaranty may also be given
as security for future debts the
amount of which is not yet known."
(Emphasis supplied)
In Rizal Commercial Banking Corporation
v. Arro, 12 the Court was confronted again with the
same issue, that is, whether private respondent
was liable to pay a promissory note dated 29
April 1977 executed by the principal debtor in the
light of the provisions of a comprehensive surety
agreement which petitioner bank and the private
respondent had earlier entered into on 19
October 1976. Under the comprehensive surety
agreement, the private respondents had bound
themselves as solidary debtors of the Diacor
Corporation not only in respect of existing
obligations but also in respect of future ones. In
holding private respondent surety (Residoro
Chua) liable under the comprehensive surety
agreement, the Court said:
The surety agreement which was
earlier signed by Enrique Go, Sr.
and private respondent, is an
accessory obligation, it being
dependent upon a principal one,
which, in this case is the loan
obtained by Daicor as evidenced by
a promissory note. What obviously
induced petitioner bank to grant
the loan was the surety agreement
whereby Go and Chua bound
themselves solidarily to guaranty
the punctual payment of the loan
at maturity. By terms that are
unequivocal, it can be clearly seen
thatthe surety agreement was
executed to guarantee future
debts which Daicor may incur with
petitioner, as is legally allowable
under the Civil Code. Thus
Article 2053. A
guarantee may also
be given as security

for future debts, the

amount of which is
not yet known; there
can be no claim
against the
guarantor until the
debt is liquidated. A
conditional obligation
may also be
secured. 13 (Emphasis
supplied)
It is clear to us that the Rizal Commercial Banking
Corporation and the NARIC cases rejected the
distinction which the Court of Appeals in the case
at bar sought to make with respect to Article
2053, that is, that the "future debts" referred to in
that Article relate to "debts already existing at
the time of the constitution of the agreement but
the amount [of which] is unknown," and not to
debts not yet incurred and existing at that time.
Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding
even before the principal obligation intended to
be secured thereby is born, any more that there
would be in saying that obligations which are
subject to a condition precedent are valid and
binding before the occurrence of the condition
precedent.14
Comprehensive or continuing surety agreements
are in fact quite commonm place in present day
financial and commercial practice. A bank or a
financing company which anticipates entering
into a series of credit transactions with a
particular company, commonly requires the
projected principal debtor to execute a continuing
surety agreement along with its sureties. By
executing such an agreement, the principal
places itself in a position to enter into the
projected series of transactions with its creditor;
with such surety agreement, there would be no
need to execute a separate surety contract or
bond for each financing or credit accommodation
extended to the principal debtor. As we
understand it, this is precisely what happened in
the case at bar.
We turn to the second substantive issue, that is,
whether private respondents are liable under the
Deed of Assignment which they, along with the
principal debtor Sanyu Chemical, executed in
favor of petitioner, on the receivables thereby
assigned.
The contention of Sanyu Chemical was that Atok
Finance had no cause of action under the Deed of
Assignment for the reason that Sanyu Chemical's
warranty of the debtors' solvency had ceased. In

submitting this contention, Sanyu Chemical relied

on Article 1629 of the Civil Code which reads as
follows:
Art. 1629. In case the assignor in
good faith should have made
himself responsible for the
solvency of the debtor, and the
contracting parties should not have
agreed upon the duration of the
liability, it shall last for one year
only, from the time of the
assignment if the period had
already expired.
If the credit should be payable
within a term or period which has
not yet expired, the liability shall
cease one year after maturity.
Once more, the Court of Appeals upheld the
contention of private respondents and held that
Sanyu Chemical was free from liability under the
Deed of Assignment. The Court of Appeals said:
. . . Article 1629 provides for the
duration of assignor's warranty of
debtor's solvency depending on
whether there was a period agreed
upon for the existence of such
warranty, analyzing the law thus:
(1) if there is a period (or length of
time) agreed upon, then for such
period;
(2) if no period (or length of time)
was agreed upon, then:
(a) one year from
assignment if debt
was due at the time
of the assignment
(b) one year from
maturity if debt
was not yet due at
the time of the
assignment..
The debt referred to in this law is
the debt under the assigned
contract or the original debts in
favor of the assignor which were
later assigned to the assignee. The
debt alluded to in the law, is not
the debt incurred by the assignor
to the assignee as contended by
the appellant.
Applying the said law to the case at
bar, the records disclose that none
of the assigned receivables had
matured on November 27, 1981
when the Deed of Assignment was
executed. The oldest debt then
existing was that contracted on
November 3, 1981 and the latest

was contracted on December 4,

1981.
Each of the invoices assigned to
the assignee contained a term of
30 days (Exhibits B-3-A to 5 and
extended by the notation which
appeared in the "Schedule of
Assigned Receivables" which states
that the ". . . the terms stated on
our invoices were normally
extended up to a period of 120
days
. . ." (Exhibit B-2). Considering the
terms in the invoices plus the
ordinary practice of the company,
thus, the assigned debts matured
between April 3, 1982 to May 4,
1982. The assignor's warranty for
debtor's warranty, in this case,
would then be from the maturity
period up to April 3, 1983 or May 4,
1983 to cover all of the receivables
in the invoices.
The letter of demand executed by
appellee was dated August 29,
1983 (Exhibit D) and the complaint
was filed on January 13, 1984. Both
dates were beyond the warranty
period.
In effect, therefore, companyappellant was right when it claimed
that appellee had no cause of
action against it or had lost its
cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court
of Appeals was in reversible error in so
concluding. The relevant provision of the Deed of
Assignment may be quoted again in this
connection:
2. To induce the ASSIGNEE [Atok
Finance] to purchase the above
contracts, the ASSIGNOR [Sanyu
Chemical] does hereby certify,
warrant and represent that . . .
(g) the debtor/s
under the assigned
contract/s are
solvent and
his/its/their failure to
pay the assigned
contract/s and/or
any installment
thereon upon
maturity thereof
shall be conclusively
considered as a

violation of this
warranty; and . . .
The foregoing
warranties and
representations are
in addition to those
provided for in the
Negotiable
Instruments Law and
other applicable
laws. Any violation
thereof shall render
the ASSIGNOR
immediately and
unconditionally liable
to pay the ASSIGNEE
jointly and severally
with the debtors
under the assigned
contracts, the
amounts due
thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that
the Deed of Assignment was valid and binding
upon Sanyu Chemical. Assignment of receivables
is a commonplace commercial transaction today.
It is an activity or operation that permits the
assignee to monetize or realize the value of the
receivables before the maturity thereof. In other
words, Sanyu Chemical received from Atok
Finance the value of its trade receivables it had
assigned; Sanyu Chemical obviously benefitted
from the assignment. The payments due in the
first instance from the trade debtors of Sanyu
Chemical would represent the return of the
investment which Atok Finance had made when it
paid Sanyu Chemical the transfer value of such
receivables.
Article 1629 of the Civil Code invoked by private
respondents and accepted by the Court of
Appeals is not, in the case at bar, material. The
liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of
solvency; the liability of Sanyu Chemical was
not ex lege (ex Article 1629) but rather ex
contractu. Under the Deed of Assignment, the
effect of non-payment by the original trade
debtors was breach of warranty of solvency by
Sanyu Chemical, resulting in turn in the
assumption of solidary liability by the assignor
under the receivables assigned. In other
words, the assignor Sanyu Chemical becomes a
solidary debtor under the terms of the
receivables covered and transferred by virtue of
the Deed of Assignment. And because assignor
Sanyu Chemical became, under the terms of the

Deed of Assignment, solidary obligor under each

of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili), became solidarily
liable for that obligation of Sanyu Chemical, by
virtue of the operation of the Continuing
Suretyship Agreement. Put a little differently, the
obligations of individual private respondent
officers and stockholders of Sanyu Chemical
under the Continuing Suretyship Agreement,
were activated by the resulting obligations of
Sanyu Chemical as solidary obligor under each of
the assigned receivables by virtue of the
operation of the Deed of Assignment. That
solidary liability of Sanyu Chemical is not subject
to the limiting period set out in Article 1629 of the
Civil Code.
It follows that at the time the original complaint
was filed by Atok Finance in the trial court, it had
a valid and enforceable cause of action against
Sanyu Chemical and the other private
respondents. We also agree with the Court of
Appeals that the original obligors under the
receivables assigned to Atok Finance remain
liable under the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for
Review is hereby GRANTED DUE COURSE, and the
Decision of the Court of Appeals dated 18 August
1987 and its Resolution dated 30 September
1987 are hereby REVERSED and SET ASIDE. A
new judgment is hereby entered REINSTATING the
Decision of the trial court in Civil Case No. 8422198 dated 1 April 1985, except only that, in the
exercise of this Court's discretionary authority
equitably to mitigate the penalty clause attached
to the Deed of Assignment, that penalty is hereby
reduced to eighteen percent (18%) per
annum (instead of P0.03 for every peso monthly
[or 36% per annum]). As so modified, the
Decision of the trial court is hereby AFFIRMED.
Costs against private respondents.
G.R. No. 185945
December 05,
2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review
on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure seeking to annul and set aside the
Decision1 dated March I 8, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 100021, which
reversed the Decision2 dated April 3, 2007 of the
Regional Trial Court (RTC) of Dagupan City,
Branch 40, in Criminal Case Nos. 2006-0559-D to
2006-0569-D and entered a new judgment.
The fallo reads as follows:

WHEREFORE, the instant petition

is GRANTED and the assailed Joint Decision
dated April 3, 2007 of the RTC of Dagupan City,
Branch 40, and its Order dated June 12, 2007
are REVERSED AND SET ASIDE and a new one
is entered ordering private respondent Fideliza J.
Aglibot to pay petitioner the total amount
of P3,000,000.00 with 12% interest per annum
from the filing of the Informations until the finality
of this Decision, the sum of which, inclusive of
interest, shall be subject thereafter to 12%
annual interest until fully paid.
SO ORDERED.3
On December 23, 2008, the appellate court
denied herein petitioners motion for
reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L.
Santia (Santia) loaned the amount
of P2,500,000.00 to Pacific Lending & Capital
Corporation (PLCC), through its Manager,
petitioner Fideliza J. Aglibot (Aglibot). The loan
was evidenced by a Promissory Note dated July 1,
2003, issued by Aglibot in behalf of PLCC, payable
in one year subject to interest at 24% per annum.
Allegedly as a guaranty or security for the
payment of the note, Aglibot also issued and
delivered to Santia eleven (11) post-dated
personal checks drawn from her own demand
account maintained at Metrobank, Camiling
Branch. Aglibot is a major stockholder of PLCC,
with headquarters at 27 Casimiro Townhouse,
Casimiro Avenue, Zapote, Las Pias, Metro
Manila, where most of the stockholders also
reside.4
Upon presentment of the aforesaid checks for
payment, they were dishonored by the bank for
having been drawn against insufficient funds or
closed account. Santia thus demanded payment
from PLCC and Aglibot of the face value of the
checks, but neither of them heeded his demand.
Consequently, eleven (11) Informations for
violation of Batas Pambansa Bilang 22 (B.P. 22),
corresponding to the number of dishonored
checks, were filed against Aglibot before the
Municipal Trial Court in Cities (MTCC), Dagupan
City, Branch 3, docketed as Criminal Case Nos.
47664 to 47674. Each Information, except as to
the amount, number and date of the checks, and
the reason for the dishonor, uniformly alleged, as
follows:
That sometime in the month of September, 2003
in the City of Dagupan, Philippines and within the
jurisdiction of this Honorable Court, the abovenamed accused, FIDELIZA J. AGLIBOT, did then
and there, willfully, unlawfully and criminally,
draw, issue and deliver to one Engr. Ingersol L.
Santia, a METROBANK Check No. 0006766,

Camiling Tarlac Branch, postdated November 1,

2003, in the amount of P50,000.00, Philippine
Currency, payable to and in payment of an
obligation with the complainant, although the
said accused knew fully well that she did not
have sufficient funds in or credit with the said
bank for the payment of such check in full upon
its presentment, such that when the said check
was presented to the drawee bank for payment
within ninety (90) days from the date thereof, the
same was dishonored for reason "DAIF", and
returned to the complainant, and despite notice
of dishonor, accused failed and/or refused to pay
and/or make good the amount of said check
within five (5) days banking days [sic], to the
damage and prejudice of one Engr. Ingersol L.
Santia in the aforesaid amount ofP50,000.00 and
other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she
did obtain a loan from Santia, but claimed that
she did so in behalf of PLCC; that before granting
the loan, Santia demanded and obtained from her
a security for the repayment thereof in the form
of the aforesaid checks, but with the
understanding that upon remittance in cash of
the face amount of the checks, Santia would
correspondingly return to her each check so paid;
but despite having already paid the said checks,
Santia refused to return them to her, although he
gave her assurance that he would not deposit
them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor;
that she did not receive any notice of dishonor of
the checks; that for want of notice, she could not
be held criminally liable under B.P. 22 over the
said checks; and that the reason Santia filed the
criminal cases against her was because she
refused to agree to his demand for higher
interest.
On August 18, 2006, the MTCC in its Joint
Decision decreed as follows:
WHEREFORE, in view of the foregoing, the
accused, FIDELIZA J. AGLIBOT, is
hereby ACQUITTED of all counts of the crime of
violation of the bouncing checks law on
reasonable doubt. However, the said accused is
ordered to pay the private complainant the sum
of P3,000,000.00 representing the total face
value of the eleven checks plus interest of 12%
per annum from the filing of the cases on
November 2, 2004 until fully paid, attorneys fees
ofP30,000.00 as well as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated
April 3, 2007 in Criminal Case Nos. 2006-0559-D
to 2006-0569-D, which further absolved Aglibot of
any civil liability towards Santia, to wit:

WHEREFORE, premises considered, the Joint

Decision of the court a quo regarding the civil
aspect of these cases is reversed and set aside
and a new one is entered dismissing the said civil
aspect on the ground of failure to fulfill, a
condition precedent of exhausting all means to
collect from the principal debtor.
SO ORDERED.7
Santias motion for reconsideration was denied in
the RTCs Order dated June 12, 2007.8 On petition
for review to the CA docketed as CA-G.R. SP No.
100021, Santia interposed the following
assignment of errors, to wit:
"In brushing aside the law and jurisprudence on
the matter, the Regional Trial Court seriously
erred:
1. In reversing the joint decision of the
trial court by dismissing the civil aspect of
these cases;
2. In concluding that it is the Pacific
Lending and Capital Corporation and not
the private respondent which is principally
responsible for the amount of the checks
being claimed by the petitioner;
3. In finding that the petitioner failed to
exhaust all available legal remedies
against the principal debtor Pacific
Lending and Capital Corporation;
4. In finding that the private respondent is
a mere guarantor and not an
accommodation party, and thus, cannot
be compelled to pay the petitioner unless
all legal remedies against the Pacific
Lending and Capital Corporation have
been exhausted by the petitioner;
5. In denying the motion for
reconsideration filed by the petitioner."9
In its now assailed decision, the appellate court
rejected the RTCs dismissal of the civil aspect of
the aforesaid B.P. 22 cases based on the ground it
cited, which is that the "failure to fulfill a
condition precedent of exhausting all means to
collect from the principal debtor." The appellate
court held that since Aglibots acquittal by the
MTCC in Criminal Case Nos. 47664 to 47674 was
upon a reasonable doubt10 on whether the
prosecution was able to satisfactorily establish
that she did receive a notice of dishonor, a
requisite to hold her criminally liable under B.P.
22, her acquittal did not operate to bar Santias
recovery of civil indemnity.
It is axiomatic that the "extinction of penal action
does not carry with it the eradication of civil
liability, unless the extinction proceeds from a
declaration in the final judgment that the fact
from which the civil liability might arise did not
exist. Acquittal will not bar a civil action in the
following cases: (1) where the acquittal is based

on reasonable doubt as only preponderance of

evidence is required in civil cases; (2) where the
court declared the accuseds liability is not
criminal but only civil in nature[;] and (3) where
the civil liability does not arise from or is not
based upon the criminal act of which the accused
was acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally
pay Santia P3,000,000.00 with interest at
12% per annum, from the filing of the
Informations until the finality of its decision.
Thereafter, the sum due, to be compounded with
the accrued interest, will in turn be subject to
annual interest of 12% from the finality of its
judgment until full payment. It thus modified the
MTCC judgment, which simply imposed a straight
interest of 12% per annum from the filing of the
cases on November 2, 2004 until
the P3,000,000.00 due is fully paid, plus
attorneys fees of P30,000.00 and the costs of the
suit.
Issue
Now before the Court, Aglibot maintains that it
was error for the appellate court to adjudge her
personally liable for issuing her own eleven (11)
post-dated checks to Santia, since she did so in
behalf of her employer, PLCC, the true borrower
and beneficiary of the loan. Still maintaining that
she was a mere guarantor of the said debt of
PLCC when she agreed to issue her own checks,
Aglibot insists that Santia failed to exhaust all
means to collect the debt from PLCC, the
principal debtor, and therefore he cannot now be
permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of
excussion
The RTC in its decision held that, "It is obvious,
from the face of the Promissory Note x x x that
the accused-appellant signed the same on behalf
of PLCC as Manager thereof and nowhere does it
appear therein that she signed as an
accommodation party."12 The RTC further ruled
that what Aglibot agreed to do by issuing her
personal checks was merely to guarantee the
indebtedness of PLCC. So now petitioner Aglibot
reasserts that as a guarantor she must be
accorded the benefit of excussion prior
exhaustion of the property of the debtor as
provided under Article 2058 of the Civil Code, to
wit:
Art. 2058. The guarantor cannot be compelled to
pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to
all the legal remedies against the debtor.
It is settled that the liability of the guarantor is
only subsidiary, and all the properties of the

principal debtor, the PLCC in this case, must first

be exhausted before the guarantor may be held
answerable for the debt.13 Thus, the creditor may
hold the guarantor liable only after judgment has
been obtained against the principal debtor and
the latter is unable to pay, "for obviously the
exhaustion of the principals property the
benefit of which the guarantor claims cannot
even begin to take place before judgment has
been obtained."14 This rule is contained in Article
206215 of the Civil Code, which provides that the
action brought by the creditor must be filed
against the principal debtor alone, except in
some instances mentioned in Article 205916 when
the action may be brought against both the
guarantor and the principal debtor.
The Court must, however, reject Aglibots claim
as a mere guarantor of the indebtedness of PLCC
to Santia for want of proof, in view of Article
1403(2) of the Civil Code, embodying the Statute
of Frauds, which provides:
Art. 1403. The following contracts are
unenforceable, unless they are ratified:
xxxx
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or
some note or memorandum thereof, be in writing,
and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement
cannot be received without the writing, or a
secondary evidence of its contents:
a) An agreement that by its terms is not to
be performed within a year from the
making thereof;
b) A special promise to answer for the
debt, default, or miscarriage of another;
c) An agreement made in consideration of
marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods,
chattels or things in action, at a price not
less than five hundred pesos, unless the
buyer accept and receive part of such
goods and chattels, or the evidences, or
some of them, or such things in action, or
pay at the time some part of the purchase
money; but when a sale is made by
auction and entry is made by the
auctioneer in his sales book, at the time of
the sale, of the amount and kind of
property sold, terms of sale, price, names
of purchasers and person on whose
account the sale is made, it is a sufficient
memorandum;
e) An agreement for the leasing of a
longer period than one year, or for the

10

sale of real property or of an interest

therein;
f) A representation to the credit of a third
person. (Italics ours)
Under the above provision, concerning a guaranty
agreement, which is a promise to answer for the
debt or default of another,17 the law clearly
requires that it, or some note or memorandum
thereof, be in writing. Otherwise, it would be
unenforceable unless ratified,18 although under
Article 135819 of the Civil Code, a contract of
guaranty does not have to appear in a public
document.20 Contracts are generally obligatory in
whatever form they may have been entered into,
provided all the essential requisites for their
validity are present, and the Statute of Frauds
simply provides the method by which the
contracts enumerated in Article 1403(2) may be
proved, but it does not declare them invalid just
because they are not reduced to writing. Thus,
the form required under the Statute is for
convenience or evidentiary purposes only. 21
On the other hand, Article 2055 of the Civil Code
also provides that a guaranty is not presumed,
but must be express, and cannot extend to more
than what is stipulated therein. This is the
obvious rationale why a contract of guarantee is
unenforceable unless made in writing or
evidenced by some writing. For as pointed out by
Santia, Aglibot has not shown any proof, such as
a contract, a secretarys certificate or a board
resolution, nor even a note or memorandum
thereof, whereby it was agreed that she would
issue her personal checks in behalf of the
company to guarantee the payment of its debt to
Santia. Certainly, there is nothing shown in the
Promissory Note signed by Aglibot herself
remotely containing an agreement between her
and PLCC resembling her guaranteeing its debt to
Santia. And neither is there a showing that PLCC
thereafter ratified her act of "guaranteeing" its
indebtedness by issuing her own checks to
Santia.
Thus did the CA reject the RTCs ruling that
Aglibot was a mere guarantor of the indebtedness
of PLCC, and as such could not "be compelled to
pay [Santia], unless the latter has exhausted all
the property of PLCC, and has resorted to all the
legal remedies against PLCC x x x."22
Aglibot is an accommodation party and
therefore liable to Santia
Section 185 of the Negotiable Instruments Law
defines a check as "a bill of exchange drawn on a
bank payable on demand," while Section 126 of
the said law defines a bill of exchange as "an
unconditional order in writing addressed by one
person to another, signed by the person giving it,
requiring the person to whom it is addressed to

pay on demand or at a fixed or determinable

future time a sum certain in money to order or to
bearer."
The appellate court ruled that by issuing her own
post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and
dismissed her claim that she issued her said
checks in her official capacity as PLCCs manager
merely to guarantee the investment of Santia. It
noted that she could have issued PLCCs checks,
but instead she chose to issue her own checks,
drawn against her personal account with
Metrobank. It concluded that Aglibot intended to
personally assume the repayment of the loan,
pointing out that in her Counter-Affidavit, she
even admitted that she was personally indebted
to Santia, and only raised payment as her
defense, a clear admission of her liability for the
said loan.
The appellate court refused to give credence to
Aglibots claim that she had an understanding
with Santia that the checks would not be
presented to the bank for payment, but were to
be returned to her once she had made cash
payments for their face values on maturity. It
noted that Aglibot failed to present any proof that
she had indeed paid cash on the above checks as
she claimed. This is precisely why Santia decided
to deposit the checks in order to obtain payment
of his loan.
The facts below present a clear situation where
Aglibot, as the manager of PLCC, agreed to
accommodate its loan to Santia by issuing her
own post-dated checks in payment thereof. She is
what the Negotiable Instruments Law calls an
accommodation party.23 Concerning the liability of
an accommodation party, Section 29 of the said
law provides:
Sec. 29. Liability of an accommodation party.
An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for
the purpose of lending his name to some other
person. Such a person is liable on the instrument
to a holder for value notwithstanding such holder
at the time of taking the instrument knew him to
be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v.
Aruego:24
An accommodation party is one who has signed
the instrument as maker, drawer, indorser,
without receiving value therefor and for the
purpose of lending his name to some other
person. Such person is liable on the instrument to
a holder for value, notwithstanding such holder,
at the time of the taking of the instrument knew
him to be only an accommodation party. In
lending his name to the accommodated party,

11

Decision2 and Resolution3 of the Court of Appeals

(CA) in CA-G.R. CV No. 89263, which reversed the
Decision4 of the Regional Trial Court (RTC), Branch
141, Makati City in Civil Case No. 02-461,
ordering respondent to pay petitioner a sum of
money.
The antecedent facts, as culled from the CA, are
as follows:
On September 15, 1999, One Virtual placed with
GILAT a purchase order for various
telecommunications equipment (sic), accessories,
spares, services and software, at a total purchase
price of Two Million One Hundred Twenty Eight
Thousand Two Hundred Fifty Dollars
(US$2,128,250.00). Of the said purchase price for
the goods delivered, One Virtual promised to pay
a portion thereof totalling US$1.2 Million in
accordance with the payment schedule dated 22
November 1999. To ensure the prompt payment
of this amount, it obtained defendant UCPB
General Insurance Co., Inc.s surety bond dated 3
December 1999, in favor of GILAT.
During the period between [sic] September 1999
and June 2000, GILAT shipped and delivered to
One Virtual the purchased products and
equipment, as evidenced by airway bills/Bill of
Lading (Exhibits "F", "F-1" to "F-8"). All of the
equipment (including the software components
for which payment was secured by the surety
bond, was shipped by GILAT and duly received by
One Virtual. Under an endorsement dated
December 23, 1999 (Exhibit "E"), the surety
issued, with One Virtuals conformity, an
amendment to the surety bond, Annex "A"
thereof, correcting its expiry date from May 30,
2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of
Four Hundred Thousand Dollars (US$400,000.00)
on the due date of May 30, 2000 in accordance
with the payment schedule attached as Annex
"A" to the surety bond, prompting GILAT to write
the surety defendant UCPB on June 5, 2000, a
demand letter (Exhibit "G") for payment of the
said amount of US$400,000.00. No part of the
amount set forth in this demand has been paid to
date by either One Virtual or defendant UCPB.
One Virtual likewise failed to pay on the
succeeding payment instalment date of 30
November 2000 as set out in Annex "A" of the
surety bond, prompting GILAT to send a second
demand letter dated January 24, 2001, for the
payment of the full amount of US$1,200,000.00
guaranteed under the surety bond, plus interests
and expenses (Exhibits "H") and which letter was
received by the defendant surety on January 25,
2001. However, defendant UCPB failed to settle
the amount of US$1,200,000.00 or a part thereof,

the accommodation party is in effect a surety for

the latter. He lends his name to enable the
accommodated party to obtain credit or to raise
money. He receives no part of the consideration
for the instrument but assumes liability to the
other parties thereto because he wants to
accommodate another. x x x.25 (Citation omitted)
The relation between an accommodation party
and the party accommodated is, in effect, one of
principal and surety the accommodation party
being the surety. It is a settled rule that a surety
is bound equally and absolutely with the principal
and is deemed an original promisor and debtor
from the beginning. The liability is immediate and
direct.26 It is not a valid defense that the
accommodation party did not receive any
valuable consideration when he executed the
instrument; nor is it correct to say that the holder
for value is not a holder in due course merely
because at the time he acquired the instrument,
he knew that the indorser was only an
accommodation party.271wphi1
Moreover, it was held in Aruego that unlike in a
contract of suretyship, the liability of the
accommodation party remains not only primary
but also unconditional to a holder for value, such
that even if the accommodated party receives an
extension of the period for payment without the
consent of the accommodation party, the latter is
still liable for the whole obligation and such
extension does not release him because as far as
a holder for value is concerned, he is a solidary
co-debtor.
The mere fact, then, that Aglibot issued her own
checks to Santia made her personally liable to the
latter on her checks without the need for Santia
to first go after PLCC for the payment of its
loan.28 It would have been otherwise had it been
shown that Aglibot was a mere guarantor, except
that since checks were issued ostensibly in
payment for the loan, the provisions of the
Negotiable Instruments Law must take primacy in
application.
WHEREFORE, premises considered, the Petition
for Review on Certiorari is DENIED and the
Decision dated March 18, 2008 of the Court of
Appeals in CA-G.R. SP No. I 00021 is
hereby AFFIRMED.
G.R. No. 189563
April 7, 2014
GILAT SATELLITE NETWORKS,
LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK
GENERAL INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on
Certiorari1 filed 6 November 2009 assailing the

12

hence, the instant complaint."5 (Emphases in the

original)
On 24 April 2002, petitioner Gilat Satellite
Networks, Ltd., filed a Complaint6 against
respondent UCPB General Insurance Co., Inc., to
recover the amounts supposedly covered by the
surety bond, plus interests and expenses. After
due hearing, the RTC rendered its Decision,7 the
dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court
hereby renders judgment for the plaintiff, and
against the defendant, ordering, to wit:
1. The defendant surety to pay the plaintiff
the amount of One Million Two Hundred
Thousand Dollars (US$1,200,000.00)
representing the principal debt under the
Surety Bond, with legal interest thereon at
the rate of 12% per annum computed
from the time the judgment becomes final
and executory until the obligation is fully
settled; and
2. The defendant surety to pay the plaintiff
the amount of Forty Four Thousand Four
Dollars and Four Cents (US$44,004.04)
representing attorneys fees and litigation
expenses.
Accordingly, defendants counterclaim is hereby
dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no
dispute that plaintiff [petitioner] delivered all the
subject equipments [sic] and the same was
installed. Even with the delivery and installation
made, One Virtual failed to pay any of the
payments agreed upon. Demand
notwithstanding, defendant failed and refused
and continued to fail and refused to settle the
obligation."8
Considering that its liability was indeed that of a
surety, as "spelled out in the Surety Bond
executed by and between One Virtual as
Principal, UCPB as Surety and GILAT as
Creditor/Bond Obligee,"9 respondent agreed and
bound itself to pay in accordance with the
Payment Milestones. This obligation was not
made dependent on any condition outside the
terms and conditions of the Surety Bond and
Payment Milestones.10
Insofar as the interests were concerned, the RTC
denied petitioners claim on the premise that
while a surety can be held liable for interest even
if it becomes more onerous than the principal
obligation, the surety shall only accrue when the
delay or refusal to pay the principal obligation is
without any justifiable cause.11 Here, respondent
failed to pay its surety obligation because of the
advice of its principal (One Virtual) not to
pay.12 The RTC then obligated respondent to pay

petitioner the amount of USD1,200,000.00

representing the principal debt under the Surety
Bond, with legal interest at the rate of 12% per
annum computed from the time the judgment
becomes final and executory, and USD44,004.04
representing attorneys fees and litigation
expenses.
On 18 October 2007, respondent appealed to the
CA.13 The appellate court rendered a Decision14 in
the following manner:
WHEREFORE, this appealed case is DISMISSED for
lack of jurisdiction. The trial courts Decision
dated December 28, 2006 is VACATED. Plaintiffappellant Gilat Satellite Networks Ltd., and One
Virtual are ordered to proceed to arbitration, the
outcome of which shall necessary bind the
parties, including the surety, defendant-appellant
United Coconut Planters Bank General Insurance
Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract,
the complementary-contracts-construedtogether doctrine finds application." According to
this doctrine, the accessory contract must be
construed with the principal agreement.15In this
case, the appellate court considered the Purchase
Agreement entered into between petitioner and
One Virtual as the principal contract,16 whose
stipulations are also binding on the parties to the
suretyship.17 Bearing in mind the arbitration
clause contained in the Purchase
Agreement18 and pursuant to the policy of the
courts to encourage alternative dispute resolution
methods,19 the trial courts Decision was vacated;
petitioner and One Virtual were ordered to
proceed to arbitration.
On 9 September 2008, petitioner filed a Motion
for Reconsideration with Motion for Oral
Argument. The motion was denied for lack of
merit in a Resolution20 issued by the CA on 16
September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a
Comment21 on the Petition for Review. On 24
November 2010, petitioner filed a Reply. 22
ISSUES
From the foregoing, we reduce the issues to the
following:
1. Whether or not the CA erred in
dismissing the case and ordering
petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to
legal interest due to the delay in the
fulfilment by respondent of its obligation
under the Suretyship Agreement.
THE COURTS RULING
The existence of a suretyship agreement does not
give the surety the right to intervene in the

13

principal contract, nor can an arbitration clause

between the buyer and the seller be invoked by a
non-party such as the surety.
Petitioner alleges that arbitration laws mandate
that no court can compel arbitration, unless a
party entitled to it applies for this relief.23 This
referral, however, can only be demanded by one
who is a party to the arbitration
agreement.24 Considering that neither petitioner
nor One Virtual has asked for a referral, there is
no basis for the CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil
Code25 clearly provide that the creditor may
proceed against the surety without having first
sued the principal debtor. 26 Even the Surety
Agreement itself states that respondent becomes
liable upon "mere failure of the Principal to make
such prompt payment."27 Thus, petitioner should
not be ordered to make a separate claim against
One Virtual (via arbitration) before proceeding
against respondent.28
On the other hand, respondent maintains that a
surety contract is merely an accessory contract,
which cannot exist without a valid
obligation.29 Thus, the surety may avail itself of all
the defenses available to the principal debtor and
inherent in the debt30 that is, the right to invoke
the arbitration clause in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a
suretys liability is joint and solidary with that of
the principal debtor. This undertaking makes a
surety agreement an ancillary contract, as it
presupposes the existence of a principal
contract.31 Nevertheless, although the contract of
a surety is in essence secondary only to a valid
principal obligation, its liability to the creditor or
"promise" of the principal is said to be direct,
primary and absolute; in other words, a surety is
directly and equally bound with the principal. 32 He
becomes liable for the debt and duty of the
principal obligor, even without possessing a direct
or personal interest in the obligations constituted
by the latter.33Thus, a surety is not entitled to a
separate notice of default or to the benefit of
excussion.34 It may in fact be sued separately or
together with the principal debtor.35
After a thorough examination of the pieces of
evidence presented by both parties,36 the RTC
found that petitioner had delivered all the goods
to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its
obligation,37 triggering respondents liability to
petitioner as the formers surety.1wphi1 In other
words, the failure of One Virtual, as the principal
debtor, to fulfill its monetary obligation to
petitioner gave the latter an immediate right to
pursue respondent as the surety.

Consequently, we cannot sustain respondents

claim that the Purchase Agreement, being the
principal contract to which the Suretyship
Agreement is accessory, must take precedence
over arbitration as the preferred mode of settling
disputes.
First, we have held in Stronghold Insurance Co.
Inc. v. Tokyu Construction Co. Ltd.,38 that "[the]
acceptance [of a surety agreement], however,
does not change in any material way the
creditors relationship with the principal debtor
nor does it make the surety an active party to the
principal creditor-debtor relationship. In other
words, the acceptance does not give the surety
the right to intervene in the principal contract.
The suretys role arises only upon the debtors
default, at which time, it can be directly held
liable by the creditor for payment as a solidary
obligor." Hence, the surety remains a stranger to
the Purchase Agreement. We agree with
petitioner that respondent cannot invoke in its
favor the arbitration clause in the Purchase
Agreement, because it is not a party to that
contract.39 An arbitration agreement being
contractual in nature,40 it is binding only on the
parties thereto, as well as their assigns and
heirs.41
Second, Section 24 of Republic Act No. 928542 is
clear in stating that a referral to arbitration may
only take place "if at least one party so requests
not later than the pre-trial conference, or upon
the request of both parties thereafter."
Respondent has not presented even an iota of
evidence to show that either petitioner or One
Virtual submitted its contesting claim for
arbitration.
Third, sureties do not insure the solvency of the
debtor, but rather the debt itself.43 They are
contracted precisely to mitigate risks of nonperformance on the part of the obligor. This
responsibility necessarily places a surety on the
same level as that of the principal debtor. 44 The
effect is that the creditor is given the right to
directly proceed against either principal debtor or
surety. This is the reason why excussion cannot
be invoked.45 To require the creditor to proceed to
arbitration would render the very essence of
suretyship nugatory and diminish its value in
commerce. At any rate, as we have held in
Palmares v. Court of Appeals,46 "if the surety is
dissatisfied with the degree of activity displayed
by the creditor in the pursuit of his principal, he
may pay the debt himself and become
subrogated to all the rights and remedies of the
creditor."
Interest, as a form of indemnity, may be awarded
to a creditor for the delay incurred by a debtor in

14

the payment of the latters obligation, provided

that the delay is inexcusable.
Anent the issue of interests, petitioner alleges
that it deserves to be paid legal interest of 12%
per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from the
second demand on 24 January 2001 because of
the latters delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code,
petitioner insists that the delay started to run
from the time it demanded the fulfilment of
respondents obligation under the suretyship
contract. Significantly, respondent does not
contest this point, but instead argues that it is
only liable for legal interest of 6% per annum
from the date of petitioners last demand on 24
January 2001.
In rejecting petitioners position, the RTC stated
that interests may only accrue when the delay or
the refusal of a party to pay is without any
justifiable cause.48 In this case, respondents
failure to heed the demand was due to the advice
of One Virtual that petitioner allegedly breached
its undertakings as stated in the Purchase
Agreement.49The CA, however, made no
pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an
obligation consists in the payment of a sum of
money, and the debtor incurs a delay, the
indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the
interest agreed upon, and in the absence of
stipulation, the legal interest."
Delay arises from the time the obligee judicially
or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails
to comply.50 Delay, as used in Article 1169, is
synonymous with default or mora, which means
delay in the fulfilment of obligations. 51 It is the
nonfulfillment of an obligation with respect to
time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the
following requisites be present: (1) that the
obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3)
that the creditor requires the performance
judicially or extrajudicially.53
Having held that a surety upon demand fails to
pay, it can be held liable for interest, even if in
thus paying, its liability becomes more than the
principal obligation.54 The increased liability is not
because of the contract, but because of the
default and the necessity of judicial collection. 55
However, for delay to merit interest, it must be
inexcusable in nature. In Guanio v. MakatiShangri-la Hotel,56 citing RCPI v. Verchez,57 we
held thus:

In culpa contractual x x x the mere proof of the

existence of the contract and the failure of its
compliance justify, prima facie, a corresponding
right of relief. The law, recognizing the obligatory
force of contracts, will not permit a party to be
set free from liability for any kind of
misperformance of the contractual undertaking or
a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party
a valid cause for recovering that which may have
been lost or suffered. The remedy serves to
preserve the interests of the promissee that may
include his "expectation interest," which is his
interest in having the benefit of his bargain by
being put in as good a position as he would have
been in had the contract been performed, or his
"reliance interest," which is his interest in being
reimbursed for loss caused by reliance on the
contract by being put in as good a position as he
would have been in had the contract not been
made; or his "restitution interest," which is his
interest in having restored to him any benefit that
he has conferred on the other party. Indeed,
agreements can accomplish little, either for their
makers or for society, unless they are made the
basis for action. The effect of every infraction is
to create a new duty, that is, to make
RECOMPENSE to the one who has been injured by
the failure of another to observe his contractual
obligation unless he can show extenuating
circumstances, like proof of his exercise of due
diligence x x x or of the attendance of fortuitous
event, to excuse him from his ensuing liability.
(Emphasis ours)
We agree with petitioner that records are bereft
of proof to show that respondents delay was
indeed justified by the circumstances that is,
One Virtuals advice regarding petitioners
alleged breach of obligations. The lower courts
Decision itself belied this contention when it said
that "plaintiff is not disputing that it did not
complete commissioning work on one of the two
systems because One Virtual at that time is
already in default and has not paid
GILAT."58 Assuming arguendo that the
commissioning work was not completed,
respondent has no one to blame but its principal,
One Virtual; if only it had paid its obligation on
time, petitioner would not have been forced to
stop operations. Moreover, the deposition of Mr.
Erez Antebi, vice president of Gilat, repeatedly
stated that petitioner had delivered all
equipment, including the licensed software; and
that the equipment had been installed and in
fact, gone into operation.59 Notwithstanding these
compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our
Civil Code is explicit in stating that it accrues

15

from the time judicial or extrajudicial demand is

made on the surety. This ruling is in accordance
with the provisions of Article 1169 of the Civil
Code and of the settled rule that where there has
been an extra-judicial demand before an action
for performance was filed, interest on the amount
due begins to run, not from the date of the filing
of the complaint, but from the date of that extrajudicial demand.60 Considering that respondent
failed to pay its obligation on 30 May 2000 in
accordance with the Purchase Agreement, and
that the extrajudicial demand of petitioner was
sent on 5 June 2000,61 we agree with the latter
that interest must start to run from the time
petitioner sent its first demand letter (5 June
2000), because the obligation was already due
and demandable at that time.
With regard to the interest rate to be imposed, we
take cue from Nacar v. Gallery Frames,62 which
modified the guidelines established in Eastern
Shipping Lines v. CA63 in relation to Bangko
Sentral-Monetary Board Circular No. 799 (Series
of 2013), to wit:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due
should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded.1wphi1 In the absence of stipulation,
the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Applying the above-discussed concepts and in the
absence of an agreement as to interests, we are
hereby compelled to award petitioner legal
interest at the rate of 6% per annum from 5 June
2000, its first date of extra judicial demand, until
the satisfaction of the debt in accordance with
the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari
is hereby GRANTED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV
No. 89263 are REVERSED. The Decision of the
Regional Trial Court, Branch 141, Makati City is
REINSTATED, with MODIFICATION insofar as the
award of legal interest is concerned. Respondent
is hereby ordered to pay legal interest at the rate
of 6% per annum from 5 June 2000 until the

satisfaction of its obligation under the Suretyship

Contract and Purchase Agreement.
G.R. No. 199481
December 3, 2012
ILDEFONSO S. CRISOLOGO, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES and CHINA
BANKING CORPORATION, Respondents.
DECISION
PERLAS-BERNABE, J.:
This Petition for Review on Certiorari1 under Rule
45 of the Rules of Court assails the November 23,
2011 Decision2 of the Court of Appeals (CA) in CAG.R. CV No. 80350, which affirmed the December
4, 2002 Decision3of the Regional Trial Courtt
(RTC); Manila, Branch 21. The RTC Decision
acquitted petitioner Ildefonso S. Crisologo
(petitioner) of the charges for violation of
Presidential Decree (P.D.) No. 115 (Trust Receipts
Law) in relation to Article 315 1(b) of the Revised
Penal Code (RPC), but adjudged him civilly liable
under the subject letters of credit.
The Factual Antecedents
Sometime in January and February 1989,
petitioner, as President of Novachemical
Industries, Inc. (Novachem), applied for
commercial letters of credit from private
respondent China Banking Corporation
(Chinabank) to finance the purchase of
1,6004 kgs. of amoxicillin trihydrate micronized
from Hyundai Chemical Company based in Seoul,
South Korea and glass containers from San Miguel
Corporation (SMC). Subsequently, Chinabank
issued Letters of Credit Nos. 89/03015 and DOM330416 in the respective amounts of
US$114,400.007 (originally US$135,850.00)8 with
a peso equivalent of P2,139,119.809 and
P1,712,289.90. After petitioner received the
goods, he executed for and in behalf of
Novachem the corresponding trust receipt
agreements dated May 24, 1989 and August 31,
1989 in favor of Chinabank.
On January 28, 2004, Chinabank, through its Staff
Assistant, Ms. Maria Rosario De Mesa (Ms. De
Mesa), filed before the City Prosecutor's Office of
Manila a Complaint-Affidavit10 charging petitioner
for violation of P.D. No. 115 in relation to Article
315 1(b) of the RPC for his purported failure to
turn-over the goods or the proceeds from the sale
thereof, despite repeated demands. It averred
that the latter, with intent to defraud, and with
unfaithfulness and abuse of confidence,
misapplied, misappropriated and converted the
goods subject of the trust agreements, to its
damage and prejudice.
In his defense, petitioner claimed that as a
regular client of Chinabank, Novachem was
granted a credit line and letters of credit (L/Cs)
secured by trust receipt agreements. The subject

16

L/Cs were included in the special term-payment

arrangement mutually agreed upon by the
parties, and payable in installments. In the
payment of its obligations, Novachem would
normally give instructions to Chinabank as to
what particular L/C or trust receipt obligation its
payments would be applied. However, the latter
deviated from the special arrangement and
misapplied payments intended for the subject
L/Cs and exacted unconscionably high interests
and penalty charges.
The City Prosecutor found probable cause to
indict petitioner as charged and filed the
corresponding informations before the RTC of
Manila, docketed as Criminal Case Nos. 94139613 and 94-139614.
The RTC Ruling
After due proceedings, the RTC rendered a
Decision11 dated December 4, 2002 acquitting
petitioner of the criminal charges for failure of the
prosecution to prove his guilt beyond reasonable
doubt. It, however, adjudged him civilly liable to
Chinabank, without need for a separate civil
action, for the amounts of P1,843,567.90 and
P879,166.81 under L/C Nos. 89/0301 and DOM33041, respectively, less the payment of
P500,000.00 made during the preliminary
investigation, with legal interest from the filing of
the informations on October 27, 1994 until full
payment, and for the costs.
The CA Ruling
On appeal of the civil aspect, the CA
affirmed12 the RTC Decision holding petitioner
civilly liable. It noted that petitioner signed the
"Guarantee Clause" of the trust receipt
agreements in his personal capacity and even
waived the benefit of excussion against
Novachem. As such, he is personally and
solidarily liable with Novachem.
The Petition
In the instant petition, petitioner contends that
the CA erred in declaring him civilly liable under
the subject L/Cs which are corporate obligations
of Novachem, and that the adjudged amounts
were without factual basis because the
obligations had already been settled. He also
questions the unilaterally-imposed interest rates
applied by Chinabank and, accordingly, prays for
the application of the stipulated interest rate of
18% per annum (p.a.) on the corporations
obligations. He further assails the authority of Ms.
De Mesa to prosecute the case against him sans
authority from Chinabank's Board of Directors.
The Court's Ruling
The petition is partly meritorious.
Section 13 of the Trust Receipts Law explicitly
provides that if the violation or offense is
committed by a corporation, as in this case, the

penalty provided for under the law shall be

imposed upon the directors, officers, employees
or other officials or person responsible for the
offense, without prejudice to the civil liabilities
arising from the criminal offense.
In this case, petitioner was acquitted of the
charge for violation of the Trust Receipts Law in
relation to Article 315 1(b)13 of the RPC. As such,
he is relieved of the corporate criminal liability as
well as the corresponding civil liability arising
therefrom. However, as correctly found by the
RTC and the CA, he may still be held liable for the
trust receipts and L/C transactions he had
entered into in behalf of Novachem.
Settled is the rule that debts incurred by
directors, officers, and employees acting as
corporate agents are not their direct liability but
of the corporation they represent, except if they
contractually agree/stipulate or assume to be
personally liable for the corporations debts,14 as
in this case.
The RTC and the CA adjudged petitioner
personally and solidarily liable with Novachem for
the obligations secured by the subject trust
receipts based on the finding that he signed the
guarantee clauses therein in his personal
capacity and even waived the benefit of
excussion. However, a review of the records
shows that petitioner signed only the guarantee
clauses of the Trust Receipt dated May 24,
198915 and the corresponding Application and
Agreement for Commercial Letter of Credit No.
L/C No. 89/0301.16 With respect to the Trust
Receipt17 dated August 31, 1989 and Irrevocable
Letter of Credit18 No. L/C No. DOM-33041 issued
to SMC for the glass containers, the second pages
of these documents that would have reflected the
guarantee clauses were missing and did not form
part of the prosecution's formal offer of evidence.
In relation thereto, Chinabank stipulated19 before
the CA that the second page of the August 31,
1989 Trust Receipt attached to the complaint
before the court a quo would serve as the missing
page. A perusal of the said page, however,
reveals that the same does not bear the
signature of the petitioner in the guarantee
clause. Hence, it was error for the CA to hold
petitioner likewise liable for the obligation
secured by the said trust receipt (L/C No. DOM33041). Neither was sufficient evidence
presented to prove that petitioner acted in bad
faith or with gross negligence as regards the
transaction that would have held him civilly liable
for his actions in his capacity as President of
Novachem.1wphi1
On the matter of interest, while petitioner
assailed the unilateral imposition of interest at
rates above the stipulated 18% p.a., he failed to

17

submit a summary of the pertinent dates when

excessive interests were imposed and the
purported over-payments that should be
refunded. Having failed to prove his affirmative
defense, the Court finds no reason to disturb the
amount awarded to Chinabank. Settled is the rule
that in civil cases, the party who asserts the
affirmative of an issue has the onus to prove his
assertion in order to obtain a favorable judgment.
Thus, the burden rests on the debtor to prove
payment rather than on the creditor to prove nonpayment.20
Lastly, the Court affirms Ms. De Mesa's capacity
to sue on behalf of Chinabank despite the lack of
proof of authority to represent the latter. The
Court noted that as Staff Assistant of Chinabank,
Ms. De Mesa was tasked, among others, to review
applications for L/Cs, verify the documents of title
and possession of goods covered by L/Cs, as well
as pertinent documents under trust receipts
(TRs); prepare/send/cause the preparation of
statements of accounts reflecting the outstanding
balance under the said L/Cs and/or TRs, and
accept the corresponding payments; refer unpaid
obligations to Chinabank's lawyers and follow-up
results thereon. As such, she was in a position to
verify the truthfulness and correctness of the
allegations in the Complaint-Affidavit. Besides,
petitioner voluntarily submitted21 to the
jurisdiction of the court a quo and did not
question Ms. De Mesa's authority to represent
Chinabank in the instant case until an adverse
decision was rendered against him.
WHEREFORE, the assailed November 23, 2011
Decision of the Court of Appeals in CA-G.R. CV No.
80350 is AFFIRMED with the modification
absolving petitioner lldefonso S. Crisologo from
any civil liability to private respondent China
Banking Corporation with respect to the Trust
Receipt dated August 31, 1989 and L/C No. DOM33041. The rest of the Decision stands.
G.R. No. L-48979
September 29, 1943
MIRA HERMANOS, INC., plaintiff-appellee,
vs.
MANILA TOBACCONISTS, INC., ET
AL., defendants.
PROVIDENT INSURANCE CO., defendantappellant.
E. V. Filamor for appellant.
Ramirez and Ortigas for appellee.
Ernesto Zaragoza for defendant, Manila
Compaia de Seguras.
OZAETA, J.:
This appeal has been certified to this court by the
Court of Appeals because it involves only a
question of law arising from the following facts:
By virtue of a written contract (Exhibit A) entered
into between Mira Hermanos, Inc., and Manila

Tobacconists, Inc., the former agreed to deliver to

the latter merchandise for sale on consignment
under certain specified terms and the latter
agreed to pay to the former on or before the 20th
day of each month the invoice value of all the
merchandise sold during the preceding month.
Mira Hermanos, Inc., required of the Manila
Tobacconists, Inc., a bond of P3,000, which was
executed by the Provident Insurance Co., on
September 2, 1939 (Exhibit B), to secure the
fulfillment of the obligation of the Tobacconists
under the contract (Exhibit A) up to the sum of
P3,000.
In the month of October, 1940, the volume of the
business of the Tobacconists having increased so
that the merchandise received by it on
consignment from Mira Hermanos exceeded
P3,000 in value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and in
compliance with that requirement the defendant
Manila Compaia de Seguros, on October 16,
1940, executed a bond of P2,000 (Exhibit C) with
the same terms and conditions (except as to the
amount) as the bond of the Provident Insurance
Co.
On June 1, 1941, a final and complete liquidation
was made of the transactions between Mira
Hermanos and the Tobacconists, as a result of
which there was found a balance due from the
latter to the former of P2,272.79, which
indebtedness the Tobacconists recognized but
was unable to pay. Thereupon Mira Hermanos
made a demand upon the two surety companies
for the payment of said sum.
The Provident Insurance Co., paid only the sum of
P1,363.67, which is 60% of the amount owned by
the Tobacconists to Mira Hermanos, alleging that
the remaining 40% should be paid by the other
surety, Manila Compaia de Seguros, in
accordance with article 8137 of the Civil Code.
The Manila Compaia de Seguros refused to pay
the balance, contending that so long as the
liability of the Tobacconists did not exceed
P3,000, it was not bound to pay anything because
its bond referred only to the obligation of the
Tobacconists in excess of P3,000 and up to
P5,000. Hence Mira Hermanos, Inc., brought this
action against the Manila Tobacconists, Inc.,
Provident Insurance Co., and Manila Compaia de
Seguros to recover from them jointly and
severally the sum of P909.12 with legal interest
thereon from the date of the complaint.
The controversy is mainly between the two surety
companies. In its answer the defendant Manila
Compaia de Seguros alleged as a special
defense:
4. Que la fianza otorgada por esta
demandada 'Manila Compania de

18

Seguros', el Octubre de 1940 fue exigida

por la demandante solo cuando el importe
de las mercancias servidas por esta y
pedidas por la demandada Manila
Tobacconists, Inc., excedio de la suma de
P3,000 garantizada por la otra demandada
Provident Insurance Co.; por lo que quedo
entendido entre la demandante y las tres
demandadas que la fianza de P2,000
prestada el Octubre de 1940 por esta
demandada, 'Manila Compaia de
Seguros', se limitaba y era para responder
solamente del importe de mercancias
servidad a la demandada Manila
Tobacconists, Inc., en tanto en cuanto el
valor de esas mercancias excediese de
P3,000 asegurada por la fianza P3,000 de
la Manila Tobacconists, Inc.
To that the defendant Provident Insurance Co.
replied:
Que no es verdad el hecho alegado por la
demandada 'Manila Compaia de Seguros'
en el parrafo 4 de su contestacion que
dice: 'que quedo entendido entre la
demandante y las tres demandadas que la
fianza de P2,000 prestada el Octubre de
1940 por esta demandada "Manila
Compaia de Seguros" se limitaba y era
para responder solamente del importe de
mercancias servidas a la demandada
Manila Tocacconists, Inc., en tanto en
cuanto el valor de esas mercancias
excediese de P3,000 asegurada por la
fianza de P3,000 de la "Manila
Tobacconists, Inc."
Que la demandada, aqui compareciente,
nunca ha tenido conocimiento ni menos
prestado su consentimiento a esa
supuesta inteligencia.
Que esta demandada no puede ser
privada del beneficio de division a que
tiene derecho como co-fiador, sin que
conste expresamente, por escrito, su
conformidad y consentimiento de
renunciar a su derecho.
Thus there was an issue of fact between the two
surety companies, viz.: whether the
understanding between the plaintiff and the three
defendants was, that the bond of P2,000 given by
the Manila Compaia de Seguros was limited to
and responded for the obligation of the
Tobacconists only insofar as it might exceed the
amount of P3,000 secured by the bond of the
Provident Insurance Co. That issue of fact was
decided by the trial court in favor of the
contention of the Manila Compaia de Seguros;
and judgment was rendered by it against the

Provident Insurance Co. alone for the amount

claimed by the plaintiff.
Appellant's first two assignments of error (the
third being a mere consequence of the first two)
read as follows:
1. El juzgado inferior incurrio en error al
hacer caso omiso del beneficio de division
reclamado por la demandada Provident
Insurance Co. of the Philippines con
arreglo a lo dispuesto en el Art. 1837 del
Codigo Civil.
2. El juzgado erro al aplicar, en lugar de lo
dispuesto en el Art. 1837 del Codigo Civil,
una teoria suya, declarando que la fianza
de P3,000.00 prestada por Provident
Insurance Co. of the Philippines y la fianza
de P2,000 de Manila Compaia de
Seguros, cada una tiene una esfera de
responsabilidad propia e independiente la
una de la otra.
Discussing these two assignments of error jointly,
counsel says:
La unica cuestion que se presenta en esta
causa es puramente de derecho. Si el
saldo deudor de P2,272.79 que
Tobacconists ha dejado de pagar, deben
pagarlo en su lugar, los dos fiadores
proporcionalmente a la cuantia en que se
obligaron o debe pagarlo sola y
exclusivamente la fiadora Provident
Insurance Co., como ordena la sentencia
opelada.
Thus it appears that the issue of fact raised by
and between the two surety companies before
the trial court and decided by the latter in favor
of the appellee Manila Compaia de Seguros is no
longer raised before this Court, appellant
Provident Insurance Co. having limited the issue
in this appeal to whether or not it is entitled to
the "benefit of division" provided in article 1837
of the Civil Code, which reads as follows:
Art. 1837. Should there be several sureties
of only one debtor for the same debt, the
liability therefor shall be divided among
them all. The creditor can claim from each
surety only his proportional part unless
liabilityin solidum has been expressly
stipulated.
The right to the benefit of division against
the co-sureties for their respective shares
ceases in the same cases and for the
same reason as that to an exhaustion of
property against the principal debtor.
With particular reference to the second
assignment of error, we find that the statement of
the trial court to the effect that the bond of
P3,000 responded for the obligation of the
Tobacconists up to the sum of P3,000 and the

19

bond of P2,000 responded for the obligation of

the Tobacconists only insofar as it might exceed
P3,000 and up to P5,000, is not a mere theory but
a finding of fact based upon the undisputed
testimony of the witnesses called by the
defendant Manila Compaia de Seguros in
support of its special defense hereinbefore
quoted. While on its face the bond given by the
Manila Compaia de Seguros contains the same
terms and conditions (except as to the amount)
as those of the bond given by the Provident
Insurance Co., nevertheless it was pleaded by the
Manila Compaia de Seguros and found proven
by the trial court "que la intencion realmente que
se habia perseguido, por lo menos en lo que
respecta a la Manila Tobacconists, Inc., y la Manila
Compaia de Seguros, era la de que esta fianza
de P2,000 habria de responder solamente por
todo aquello que excediera de los P3,000."
The evidence upon which that finding is based is
not only undisputed but perfectly reasonable and
convincing. For, as the trial court observed, there
would have been no need for the additional bond
of P2,000 if its purpose were to cover the first
P2,000 already covered by the P3,000 bond of the
Provident Insurance Co. Indeed, we might add, if
the purpose of the additional bond of P2,000 were
to cover not the excess over and above P3,000
but the first P2,000 of the obligation of the
principal debtor like the bond of P3,000 which
covered only the first P3,000 of said obligation,
then it would result that had the obligation of the
Tobacconists exceeded P3,000, neither of the two
bonds would have responded for the excess, and
that was precisely the event against which Mira
Hermanos wanted to protect itself by demanding
the additional bond of P2,000. For instance,
suppose that the obligation of the principal
debtor, the Tobacconists, amounted to P5,000; if
both bonds were co-extensive up to P2,000 as
would logically follow if appellant's contention
were correct the result would be that the first
P2,000 of the obligation would have to be divided
between and paid equally by the two surety
companies, which should pay P1,000 each, and of
the balance of P3,000 the Provident Insurance Co.
would have to pay only P1,000 more because its
liability is limited to the first P3,000, thus leaving
the plaintiff in the lurch as to the excess of
P2,000. That was manifestly not the intention of
the parties. As a matter of fact, when the
Provident gave its bond and fixed the premiums
thereon it assumed an obligation of P3,000 in
solidum with the Tobacconists without any
expectation of any benefit of division with any
other surety. The additional bond of P2,000 was,
more than a year later, required by the creditor of
the principal debtor for the protection of said

creditor and certainly not for the benefit of the

original surety, which was not entitled to expect
any such benefit.
The foregoing considerations, which fortify the
trial court's conclusion as to the real intent and
agreement of the parties with regard to the bond
of P2,000 given by the Manila Compaia de
Seguros, destroys at the same time the theory of
the appellant regarding the applicability of article
1837 of the Civil Code.
That article refers to several sureties of only one
debtor for the same debt. In the instant case,
altho the two bonds on their face appear to
guarantee the same debt co-extensively up to
P2,000 that of the Provident Insurance Co.
alone extending beyond that sum up to P3,000
it was pleaded and conclusively proven that in
reality said bonds, or the two sureties, do not
guarantee the same debt because the Provident
Insurance Co. guarantees only the first P3,000
and the Manila Compaia de Seguros, only the
excess over and above said amount up to P5,000.
Article 1837 does not apply to this factual
situation.
The judgment of the trial court is affirmed, with
the only modification that it shall be entered
against the defendants Manila Tobacconists, Inc.,
and Provident Insurance Co. jointly and severally.
Appellant shall pay the costs of this instance.
GATEWAY ELECTRONICS
G.R. No.
172041
CORPORATION and
GERONIMO B. DELOS REYES, JR.,
Petitioners,
Pre
sent:
QUISUM
BING, J., Chairperson,
- versus
AUSTRIA-MARTINEZ,*
CARPIO
MORALES,
TINGA,
and
VELASC
O, JR., JJ.
ASIANBANK
CORPORATION,

Promulgated:
Respondent.

Decemb
er 18, 2008
x----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:

20

In case of default by any

and/or all of the DEBTOR(S) to pay
the whole part of said indebtedness
herein secured at maturity, I/WE
jointly and severally agree and
engage to the CREDITOR, its
successors and assigns, the prompt
payment, x x x of such notes,
drafts, overdrafts and other credit
obligations
on
which
the
DEBTOR(S) may now be indebted
or may hereafter become indebted
to the CREDITOR, together with all
interests, penalty and other bank
charges as may accrue thereon x x
x.

This petition for review under Rule 45

seeks
to
nullify
and
set
aside
the
Decision[1] dated October 28, 2005 of the Court of
Appeals (CA) in CA-G.R. CV No. 80734 and its
Resolution[2] of March
17,
2006 denying
petitioners motion for reconsideration.
The Facts
Petitioner Gateway Electronics Corporation
(Gateway) is a domestic corporation that used to
be engaged in the semi-conductor business.
During the period material, petitioner Geronimo
B. delos Reyes, Jr. was its president and one
Andrew delos Reyes its executive vice-president.
On July 23, 1996, Geronimo and Andrew
executed separate but almost identical deeds of
suretyship for Gateway in favor of respondent
Asianbank Corporation (Asianbank), pertinently
providing:

I/WE further warrant the

due and faithful performance by
the DEBTOR(S) of all obligations to
be performed under any contracts
evidencing
indebtedness/obligations and any
supplements,
amendments,
changes or modifications made
thereto, including but not limited
to, the due and punctual payment
by the said DEBTOR(S).

I/We Geronimo B. de los

Reyes, Jr. x x x warrant to the
ASIANBANK CORPORATION, x x x
due and punctual payment by the
following
individuals/companies/firms,
hereinafter called the DEBTOR(S),
of such amounts whether due or
not, as indicated opposite their
respective names, to wit:

MY/OUR liability on this

Deed of Suretyship shall be
solidary, direct and immediate and
not contingent upon the pursuit by
the CREDITOR x x x of whatever
remedies it or they may have
against the DEBTOR(S) or the
securities or liens it or they may
possess; and I/WE hereby agree to
be and remain bound upon this
suretyship,
x
x
x
and
notwithstanding
also
that
all
obligations of the DEBTOR(S) to
you outstanding and unpaid at any
time may exceed the aggregate
principal sum hereinabove stated.[3]

NAME OF
DEBTOR(S)
AMOUNT
OF OBLIGATION
GATEWAY
ELECTRONICS
*P10,000,000.0
0*DOMESTIC BILLS
CORPORATION
[PURCHASED LINE]
*US$3,000,000.00*OMNIBUS
CREDIT LINE
owing to the said ASIANBANK
CORPORATION, hereafter called the
CREDITOR, as evidenced by all
notes, drafts, overdrafts and other
[credit] obligations of every kind
and nature contracted/incurred by
said DEBTOR(S) in favor of said
CREDITOR.

Later
developments
saw
Asianbank
extending to Gateway several export packing
loans in the total aggregate amount of USD
1,700,883.48. This loan package was later
consolidated with Dollar Promissory Note (PN) No.
FCD-0599-2749[4] for
the
amount
of
USD
1,700,883.48 and secured by a chattel mortgage
over Gateways equipment for USD 2 million.

21

Gateway initially made payments on its

loan obligations, but eventually defaulted. Upon
Gateways request, Asianbank extended the
maturity dates of the loan several times. These
extensions bore the conformity of three of
Gateways officers, among them Andrew.

After due hearing, the RTC rendered

judgment dated October 7, 2003[5] in favor of
Gateway, the dispositive portion of which states:
WHEREFORE then, in view
of the foregoing, judgment is
rendered
holding
defendants
Gateway Electronics Corporation,
Geronimo De Los Reyes and
Andrew De Los Reyes jointly and
severally liable to pay the plaintiff
the following:

On July 15 and 30, 1999, Gateway issued

two Philippine Commercial International Bank
checks for the amounts of USD 40,000 and USD
20,000, respectively, as payment for its
arrearages and interests for the periods June 30
and July 30, 1999; but both checks were
dishonored for insufficiency of funds. Asianbanks
demands for payment made upon Gateway and
its sureties went unheeded. As of November 23,
1999, Gateways obligation to Asianbank,
inclusive of principal, interest, and penalties,
totaled USD 2,235,452.17.

a)

The sum of $2,235,452.17

United States Currency with
interest to be added on at the
prevailing market rate over a
given
thirty
day
London
Interbank Offered Rate (LIBOR)
plus a spread of 5.5358 percent
or ten and [45,455/100,000]
percent per annum for the first
35 days and every thirty days
beginning November 23, 1999
until fully paid;
b)
a
penalty
charge
after November 23, 1999 of two
percent (2%) per month until
fully paid;
c)
attorneys fees of twenty
percent (20%) of the total
amount due and unpaid; and
d)
costs of the suit.

Thus, on December 15, 1999, Asianbank

filed with the Regional Trial Court (RTC)
in Makati City a complaint for a sum of money
against Gateway, Geronimo, and Andrew. The
complaint, as later amended, was eventually
raffled to Branch 60 of the court and docketed as
Civil Case No. 99-2102 entitled Asian Bank
Corporation v. Gateway Electronics Corporation,
Geronimo B. De Los Reyes, Jr. and Andrew S. De
Los Reyes.
In its answer to the amended complaint,
Gateway traced the cause of its financial
difficulties, described the steps it had taken to
address its mounting problem, and faulted
Asianbank for trying to undermine its efforts
toward recovery.

SO ORDERED.
Thereafter,
Gateway,
Geronimo,
and
Andrew appealed to the CA, their recourse
docketed as CA-G.R. CV No. 80734. Following the
filing of its and Geronimos joint appellants brief,
Gateway filed on November 10, 2004 a petition
for voluntary insolvency[6] with the RTC in Imus,
Cavite, Branch 22, docketed as SEC Case No.
037-04, in which Asianbank was listed in the
attached Schedule of Obligations as one of the
creditors. On March 16, 2005, Metrobank, as
successor-in-interest of Asianbank, via a Notice of
Creditors Claim, prayed that it be allowed to
participate in the Gatewayss creditors meeting.

Andrew also filed an answer alleging,

among other things, that the deed of suretyship
he executed covering the PhP 10 millionDomestic Bills Purchased Line and the USD 3
million-Omnibus Credit Line did not include PN
No. FCD-0599-2749, the payment of which was
extended several times without his consent.
Geronimo, on the other hand, alleged that
the subject deed of suretyship, assuming the
authenticity of his signature on it, was signed
without his wifes consent and should, thus, be
considered as a mere continuing offer. Like
Andrew, Geronimo argued that he ought to be
relieved of his liability under the surety
agreement inasmuch as he too never consented
to the repeated loan maturity date extensions
given by Asianbank to Gateway.

In its Decision dated October 28, 2005, the

CA affirmed the decision of the Makati City RTC.
In time, Gateway and Geronimo interposed a
motion for reconsideration. This was followed by
a Supplemental Motion for Reconsideration dated
January 20, 2006, stating that in SEC Case No.
037-04, the RTC in Imus, Cavite had issued an

22

Order dated December 2, 2004, declaring

Gateway insolvent and directing all its creditors
to appear before the court on a certain date for
the purpose of choosing among themselves the
assignee of Gateways estate which the courts
sheriff has meanwhile placed in custodia legis.
[7]
Gateway and Geronimo thus prayed that the
assailed decision of the Makati City RTC be set
aside, the insolvency court having acquired
exclusive jurisdiction over the properties of
Gateway by virtue of Section 60 of Act No. 1956,
without prejudice to Asianbank pursuing its claim
in the insolvency proceedings.

A.

An extension granted to the

debtor by the creditor without
the consent of the guarantor
extinguishes the guaranty.
B.
The [CA] interpreted the
supposed Deed of Surety of
petitioner
GBR
as
too
comprehensive
and
all
encompassing as to amount to
absurdity.
C.
The
repeated
extensions
granted by Asianbank to GEC
prevented petitioner GBR from
exercising
his
right
of
subrogation under Article 2080
of the Civil Code. As such,
petitioner
GBR
should
be
released from his obligation
s as surety of GEC.

In its March 17, 2006 Resolution, however,

the CA denied the motion for reconsideration and
its supplement.
Hence, Gateway and Geronimo filed this
petition anchored on the following grounds:

IV
It is a well-settled rule that
when a bank deviates from normal
banking practice in a transaction
and sustains injury as a result
thereof, the bank is deemed to
have assumed the risk and no right
of payment accrues to the latter
against
any
party
to
the
transaction.
By
repeatedly
extending the period for the
payment of GECs obligations and
granting GEC other loans after the
suretyship
agreement
despite
GECs default and in failing to
foreclose the chattel mortgage
constituted as security for GECs
loan contrary to normal banking
practices, Asianbank failed to
exercise reasonable caution for its
own protection and assumed the
risk of non-payment through its
own acts, and thus has no right to
proceed against petitioner GBR as
surety for the payment of GECs
loans.

I
The
[CA]
erred
in
disregarding the established rule
that an action commenced by a
creditor
against
a
judicially
declared insolvent for the recovery
of his claim should be dismissed
and referred to the insolvency
court. Where, therefore, as in this
case, petitioner GEC [referring to
Gateway]
has
been
declared
insolvent x x x, respondent
Asianbanks claim for the payment
of GECs loans should be ventilated
before the insolvency court x x x.
II
The [CA] erred in admitting
as evidence the Deed of Surety
purportedly signed by petitioner
GBR
[referring
to
Geronimo]
despite the unexplained failure of
respondent Asianbank to present
the originals of the Deed of Surety
during the trial.
III
The [CA] erred in holding
that the repeated extensions
granted by respondent Asianbank
to GEC without notice to and the
express consent of petitioner GBR
did not discharge petitioner GBR
from his liabilities as surety GEC in
that:

V
In Agcaoili v. GSIS, this
Honorable Court had occasion to
state that in determining the
precise relief to give, the court will
balance the equities or the
respective interests of the parties
and take into account the relative
hardship that one relief or another
may occasion to them. Upon a
balancing of interests of both

23

petitioner GBR and respondent

Asianbank, greater and irreparable
harm and injury would be suffered
by petitioner GBR than respondent
Asianbank if the assailed Decision
and Resolution of the [CA] would
be upheld x x x. This Honorable
Court x x x should thus exercise its
equity jurisdiction in the instant
case to the end that it may render
complete justice to both parties
and declare petitioner GBR as
released and discharged from any
liability in respect of respondent
Asianbanks claims.[8]

further forbid the payment to the

creditor of any debts due to him
and the delivery to the debtor, or
to any person for him, of any
property belonging to him, and the
transfer of any property by him,
and shall further appoint a time
and place for a meeting of the
creditors to choose an assignee of
the estate. Said order shall [be
published] x x x. Upon the
granting of said order, all civil
proceedings pending against
the said insolvent shall be
stayed. When
a
receiver
is
appointed, or an assignee chosen,
as provided in this Act, the sheriff
shall thereupon deliver to such
receiver or assignee, as the case
may be all the property, assets,
and belongings of the insolvent
which
have
come
into
his
possession
x
x
x. (Emphasis
supplied.)

The Ruling of the Court

Gateway May Be Discharged from Liability
But Not Geronimo
Gateway, having been declared insolvent,
argues that jurisdiction over all claims against all
of its properties and assets properly pertains to
the insolvency court. Accordingly, Gateway adds,
citing Sec. 60 of Act No. 1956, [9] as amended, or
the Insolvency Law, any pending action against
its properties and assets must be dismissed, the
claimant relegated to the insolvency proceedings
for the claimants relief.

Complementing
Sec.
18
which
appropriately comes into play upon the granting
of [the] order of insolvency is the succeeding
Sec. 60 which properly applies to the period
after the commencement of proceedings in
insolvency. The
two
provisions
may
be
harmonized as follows: Upon the filing of the
petition for insolvency, pending civil actions
against the property of the petitioner are not ipso
facto stayed, but the insolvent may apply with
the court in which the actions are pending for a
stay of the actions against the insolvents
property. If the court grants such application,
pending civil actions against the petitioners
property shall be stayed; otherwise, they shall
continue.
Once
an
order
of
insolvency
nevertheless issues, all civil proceedings against
the petitioners property are, by statutory
command, automatically stayed. Sec. 60 is
reproduced below:

The contention, as formulated, is in a

qualified sense meritorious. Under Sec. 18 of Act
No. 1956, as couched, the issuance of an order
declaring the petitioner insolvent after the
insolvency court finds the corresponding petition
for insolvency to be meritorious shall stay all
pending civil actions against the petitioners
property. For reference, said Sec. 18, setting forth
the effects and contents of a voluntary insolvency
order,[10] pertinently provides:
Section 18. Upon receiving
and filing said petition, schedule,
and inventory, the court x x x shall
make an order declaring the
petitioner insolvent, and directing
the sheriff of the province or city in
which the petition is filed to take
possession of, and safely keep,
until the appointment of a receiver
or
assignee,
all
the
deeds,
vouchers,
books
of
account,
papers, notes, bonds, bills, and
securities of the debtor and all his
real and personal property, estate
and effects x x x. Said order shall

SECTION
60. Creditors
proving claims cannot sue; Stay of
action.No creditor, proving his
debt or claim, shall be allowed to
maintain any suit therefor against
the debtor, but shall be deemed to
have waived all right of action and
suit
against
him,
and
all
proceedings already commenced,
or
any
unsatisfied
judgment
already obtained thereon, shall be
deemed to be discharged and

24

surrendered thereby; and after the

debtors discharge, upon proper
application and proof to the court
having
jurisdiction,
all
such
proceedings shall be, dismissed,
and such unsatisfied judgments
satisfied of record: Provided, x x x.
A creditor proving his debt or claim
shall not be held to have waived
his right of action or suit against
the debtor when a discharge has
have
been
refused
or
the
proceedings have been determined
to the without a discharge. No
creditor whose debt is provable
under this Act shall be allowed,
after the commencement of
proceedings in insolvency, to
prosecute to final judgment
any action therefor against the
debtor until the question of the
debtors discharge shall have
been determined, and any such
suit proceeding shall, upon the
application of the debtor or of
any creditor, or the assignee,
be
stayed
to
await
the
determination of the court on
the
question
of
discharge: Provided, That if the
amount due the creditor is in
dispute, the suit, by leave of
the court in insolvency, may
proceed
to
judgment
for
purpose of ascertaining the
amount due, which amount, when
adjudged, may be allowed in the
insolvency
proceedings,but
execution
shall
be
stayed
aforesaid. (Emphasis supplied.)

the purpose of ascertaining the amount due from

Gateway. At any event, on the postulate that
jurisdiction over the properties of the insolventdeclared Gateway lies with the insolvency court,
execution of the CA insolvency judgment against
Gateway can only be pursued before the
insolvency court. Asianbank, no less, tends to
agree to this conclusion when it stated: [E]ven it
if is assumed that the declaration of insolvency of
petitioner Gateway can be taken cognizance of,
such fact does relieve petitioner Geronimo and/or
Andrew delos Reyes from performing their
obligations based on the Deeds of Suretyship x x
x.[11]
Geronimo, however, is a different story.
Asianbank argues that the stay of the
collection suit against Gateway is without bearing
on the liability of Geronimo as a surety, adding
that claims against a surety may proceed
independently from that against the principal
debtor. Pursuing the point, Asianbank avers that
Geronimo may not invoke the insolvency of
Gateway as a defense to evade liability.
Geronimo counters with the argument that
his liability as a surety cannot be separated from
Gateways liability. As surety, he continues, he is
entitled to avail himself of all the defenses
pertaining to Gateway, including its insolvency,
suggesting that if Gateway is eventually released
from what it owes Asianbank, he, too, should also
be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of
the Civil Code, which states:
By guaranty a person, called
the guarantor, binds himself to the
creditor to fulfill the obligation of
the principal debtor in case the
latter should fail to do so.

Applying the aforequoted provisions, it can

rightfully be said that the issuance of the
insolvency order of December 2, 2004 had the
effect of automatically staying the civil action for
a sum of money filed by Asianbank against
Gateway. In net effect, the proceedings before the
CA in CA-G.R. CV No. 80734, but only insofar as
the claim against Gateway was concerned, was,
or ought to have been, suspended after
December 2, 2004, Asianbank having been duly
notified of and in fact was a participant in the
insolvency proceedings. The Court of course
takes stock of the proviso in Sec. 60 of Act No.
1956 which in a way provided the CA with a
justifying tool to continue and to proceed to
judgment in CA-G.R. CV No. 80734, but only for

If a person binds himself

solidarily with the principal debtor,
the provisions of Section 4, Chapter
3, Title I of this Book shall be
observed. In such case the contract
is called a suretyship.
The Courts disquisition in Palmares v.
Court of Appeals on suretyship is instructive,
thus:

25

A surety is an insurer of the

debt, whereas a guarantor is an
insurer of the solvency of the
debtor.
A
suretyship
is
an
undertaking that the debt shall be
paid x x x. Stated differently, a
surety promises to pay the
principals debt if the principal will
not pay, while a guarantor agrees
that the creditor, after proceeding
against the principal, may proceed
against the guarantor if the
principal is unable to pay. A surety
binds himself to perform if the
principal does not, without regard
to his ability to do so. x x x In
other
words,
a
surety
undertakes directly for the
payment and is so responsible
at once if the principal debtor
makes default x x x.

or obligee, before proceeding

against the surety, to resort to and
exhaust his remedies against the
principal, particularly where both
principal and surety are equally
bound.[12]
Clearly, Asianbanks right to collect
payment for the full amount from Geronimo, as
surety, exists independently of its right against
Gateway as principal debtor;[13] it could thus
proceed against one of them or file separate
actions against them to recover the principal debt
covered by the deed on suretyship, subject to the
rule prohibiting double recovery from the same
cause.[14] This legal postulate becomes all the
more cogent in case of an insolvency situation
where, as here, the insolvency court is bereft of
jurisdiction over the sureties of the principal
debtor. As Asianbank aptly points out, a suit
against the surety, insofar as the suretys solidary
liability is concerned, is not affected by an
insolvency proceeding instituted by or against the
principal debtor. The same principle holds true
with respect to the surety of a corporation in
distress which is subject of a rehabilitation
proceeding before the Securities and Exchange
Commission (SEC). As we held inCommercial
Banking Corporation v. CA, a surety of the
distressed corporation can be sued separately to
enforce his liability as such, notwithstanding an
SEC order declaring the former under a state of
suspension of payment.[15]

xxxx
A creditors right to
proceed against the surety
exists independently of his
right to proceed against the
principal. Under Article 1216 of
the Civil Code, the creditor may
proceed against any one of the
solidary debtors or some or all of
them simultaneously. The rule,
therefore, is that if the obligation
is
joint
and
several,
the
creditor has the right to
proceed
even
against
the
surety alone. Since, generally, it
is not necessary for the creditor to
proceed against a principal in order
to hold the surety liable, where, by
the terms of the contract, the
obligation of the surety is the same
as that of the principal, then soon
as the principal is in default, the
surety is likewise in default, and
may be sued immediately and
before any proceedings are had
against the principal. Perforce, x x
x a surety is primarily liable, and
with the rule that his proper
remedy is to pay the debt and
pursue
the
principal
for
reimbursement, the surety cannot
at law, unless permitted by statute
and in the absence of any
agreement limiting the application
of the security, require the creditor

Geronimo also states that, as things stand,

his liability, as compared to that of Gateway, is
contextually more onerous and burdensome,
precluded as he is from seeking recourse against
the insolvent corporation. From this premise,
Geronimo claims that since Gateway cannot,
owing to the order of insolvency, be made to pay
its obligation, he, too, being just a surety, cannot
also be made to pay, obviously having in mind
Art. 2054 of the Civil Code, as follows:
A guarantor may bind
himself for less, but not for more
than the principal debtor, both as
regards the amount and the
onerous nature of the conditions.
Should he have bound
himself for more, his obligations
shall be reduced to the limits of
that of the debtor.
The Court is not convinced. The above
article enunciates the rule that the obligation of a

26

guarantor may be less, but cannot be more than

the obligation of the principal debtor. The rule,
however, cannot plausibly be stretched to mean
that a guarantor or surety is freed from liability as
such guarantor or surety in the event the
principal debtor becomes insolvent or is unable to
pay the obligation. This interpretation would
defeat the very essence of a suretyship contract
which, by definition, refers to an agreement
whereunder one person, the surety, engages to
be answerable for the debt, default, or
miscarriage of another known as the principal.
[16]
Geronimos position that a surety cannot be
made to pay when the principal is unable to pay
is clearly specious and must be rejected.

given
her
consent
thereto.
Accordingly, the security created
by
the
suretyship
shall
be
construed only as a continuing
offer on the part of [Geronimo] and
plaintiff and may only be perfected
as a binding contract upon
acceptance by Mrs. Delos Reyes. x
xx
17.
Moreover,
assuming, gratia argumenti, that
[Geronimo] may be bound by the
suretyship agreement, there is no
showing that he has consented to
the repeated extensions made by
plaintiff in favor of GEC or to a
waiver of notice of such extensions.
It should be pointed out that Mr.
Geronimo delos Reyes executed
the suretyship agreement in his
personal capacity and not in his
capacity as Chairman of the Board
of GEC. His consent, insofar as the
continuing
application
of
the
suretyship agreement to GECs
obligations in view of the repeated
extension extended by plaintiff [is
concerned], is therefore necessary.
Obviously, plaintiff cannot now hold
him liable as a surety to GECs
obligations.[18]

The CA Did Not Err in Admitting

the Deed of Suretyship as Evidence
Going to the next ground, Geronimo
maintains that the CA erred in admitting the Deed
of Suretyship purportedly signed by him, given
that Asianbank failed to present its original copy.
This contention is bereft of merit.
As may be noted, paragraph 6
Asianbanks complaint alleged the following:

of

6. The loan was secured by

the Deeds of Suretyship dated July
23, 1996that were executed by
defendants Geronimo B. De Los
Reyes, Jr. and Andrew S. De Los
Reyes. Attached as Annexes B
and
C,
respectively,
are
photocopies of the Deeds of
Suretyship executed by defendants
Geronimo B. De Los Reyes, Jr. and
Andrew
S.
De
Los
Reyes.
Subsequently, a chattel mortgage
over
defendant
Gateways
equipment for $2 million, United
States currency, was executed.[17]

The Rules of Court prescribes, under its

Secs. 7 and 8, Rule 8, the procedure should a suit
or defense is predicated on a written document,
thus:
Sec. 7. Action or defense
based on document.Whenever an
action or defense is based upon a
written instrument or document,
the substance of such instrument
or document shall be set forth in
the pleading, and the original or
a
copy
thereof
shall
be
attached to the pleading as an
exhibit, which shall be deemed to
be a part of the pleading, or said
copy may with like effect be set
forth in the pleading.

Geronimo traversed in his answer the

foregoing allegation in the following wise: 2.5.
Paragraph 6 is denied, subject to the special and
affirmative defenses and allegations hereinafter
set forth.
The ensuing special and affirmative
defenses were raised in Gateways answer:

Sec. 8. How to contest such

documents.When an action or
defense is founded upon a written
instrument, copied in or attached
to the corresponding pleading as

15.
Granting even that
[Geronimo] signed the Deed of
Suretyship, his wife x x x had not

27

provided
in
the
preceding
section, the genuineness and
due
execution
of
the
instrument shall be deemed
admitted unless the adverse
party, under oath, specifically
denies them, and sets forth
what he claims to be the facts;
but the requirement of an oath
does not apply when the adverse
party does not appear to be a party
to
the
instrument
or
when
compliance with an order for an
inspection
of
the
original
instrument is refused. (Emphasis
supplied.)

specifically denied, and, thus, is deemed to have

admitted, the genuineness and due execution of
the deed in question. In this regard, Sec. 11, Rule
8 of the Rules of Court states:
Sec.
11. Allegations
not
specifically
denied
deemed
admitted.Material averment in
the complaint, other than those as
to the amount of unliquidated
damages,
shall
be
deemed
admitted when not specifically
denied. x x x
Owing to Geronimos virtual admission of
the genuineness and due execution of the deed
of suretyship, Asianbank, contrary to the view of
Gateway and Geronimo, need not present the
original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.
An
admission,
verbal
or
written, made by the party in
the course of the proceedings
in the same case, does not
require proof. The admission may
be contradicted only by showing
that it was made through palpable
mistake or that no such admission
was made. (Emphasis supplied.)

Given the above perspective, Asianbank,

by attaching a photocopy of the Deed of
Suretyship to its underlying complaint, hewed to
the
requirements
of
the
above
twin
provisions. Asianbank, thus, effectively alleged
the due execution and genuineness of the said
deed. From that point, Geronimo, if he intended
to contest the surety deed, should have
specifically denied the due execution and
genuineness of the deed in the manner provided
by Sec. 10, Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.A
defendant must specify each
material allegation of fact the
truth of which he does not
admit
and,
whenever
practicable, shall set forth the
substance of the matters upon
which he relies to support his
denial. Where a defendant desires
to deny only a part of an averment,
he shall specify so much of it as is
true and material and shall deny
only the remainder. Where a
defendant is without knowledge or
information sufficient to form a
belief as to the truth of a material
averment made in the complaint,
he shall so state, and this shall
have
the
effect
of
a
denial. (Emphasis supplied.)

Geronimo Is Liable for PN No. FCD0599-2749

under His Deed of Suretyship
This brings us to the third ground which
involves the issue of the coverage of the
suretyship. Preliminarily, an overview on the
process of taking out loans should first be made.
Generally, especially for large loans, banks first
approve a line or facility out of which a client may
avail itself of loans in the form of promissory
notes without need of further processing and/or
approval every time a draw down is made. In the
instant case, Asianbank approved in favor of
Gateway the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus
Credit Line. Asianbank approved these credit lines
which were covered by a chattel mortgage as
well as the deeds of suretyship, such that loans
extended from these lines would already be
secured and pre-approved. In other words, these
facilities are not financial obligations yet.
Asianbank did not yet lend out any money to
Gateway with the approval of these lines. The
loan transaction occurred or the principal
obligation, as secured by a surety agreement,

In the instant case, Geronimo should have

categorically stated that he did not execute the
Deed of Suretyship and that the signature
appearing on it was not his or was falsified. His
Answer does not, however, contain any such
statement. Necessarily then, Geronimo had not

28

was born after the execution of loan documents,

such as PN No. FCD-0599-2749.

financial
and
commercial
practice. A bank or
financing company
which anticipates
entering
into
a
series of credit
transactions with
a
particular
company,
commonly
requires
the
projected principal
debtor to execute
a
continuing
surety agreement
along
with
its
sureties.
By
executing such an
agreement,
the
principal
places
itself in a position
to enter into the
projected series of
transactions with
its creditor; with
such
suretyship
agreement, there
would be no need
to
execute
a
separate
surety
contract or bond
for each financing
or
credit
accommodation
extended to the
principal
debtor.[20]

Geronimo now excepts from the ruling

that the deed of suretyship he executed covered
PN No. FCD-0599-2749 which embodied several
export packing loans issued by Asianbank to
Gateway. He claims that the deed only secured
the PhP 10 million-Domestic Bills Purchased Line
and the USD 3 million-Omnibus Credit Line.
Geronimo describes as absurd the notion that a
deed of suretyship would secure a loan obligation
contracted three (3) years after the execution of
the surety deed.
Geronimos thesis that the deed in
question cannot be accorded prospective
application is erroneous. To be sure, the
provisions of the subject deed of suretyship
indicate a continuing suretyship. In Fortune
Motors (Phils.) v. Court of Appeals,[19] the Court,
citing cases, defined and upheld the validity of a
continuing suretyship in this wise:
x x x Of course,
a surety is not bound
under any particular
principal
obligation
until that principal
obligation is born.
But there is no
theoretical
or
doctrinal
difficulty
inherent in saying
that the suretyship
agreement itself is
valid and binding
even
before
the
principal
obligation
intended
to
be
secured thereby is
born, any more than
there would be in
saying
that
obligations which are
subject
to
a
condition precedent
are valid and binding
before
the
occurrence of the
condition precedent.

In Dio vs. Court of Appeals,

we again had occasion to
discourse
on
continuing
guaranty/suretyship thus:
[21]

x
x
x
A
continuing guaranty
is one which is not
limited to a single
transaction,
but
which contemplates
a future course of
dealing, covering a
series
of
transactions,
generally
for
an
indefinite time or
until revoked. It is
prospective in its

Comprehensive
or
continuing
surety agreements
are in fact quite
commonplace
in
present
day

29

operation
and
is
generally intended to
provide security with
respect
to
future
transactions
within
certain limits, and
contemplates
a
succession
of
liabilities, for which,
as they accrue, the
guarantor becomes
liable.
Otherwise
stated, a continuing
guaranty
is
one
which
covers
all
transactions,
including
those
arising in the future,
which are within the
description
or
contemplation of the
contract,
of
guaranty, until the
expiration
or
termination thereof.
A guaranty shall be
construed
as
continuing when by
the terms thereof it
is evident that the
object is to give a
standing credit to the
principal debtor to
be used from time to
time
either
indefinitely or until a
certain period x x x.

construed to indicate
a
continuing
guaranty. (Emphasis
supplied.)
By its nature, a continuing suretyship
covers current and future loans, provided that,
with respect to future loan transactions, they are,
to borrow fromDio, as cited above, within the
description or contemplation of the contract of
guaranty. The Deed of Suretyship Geronimo
signed envisaged a continuing suretyship when,
by the express terms of the deed, he warranted
payment of the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus
Credit Line, as evidenced by:
x x x notes, drafts, overdrafts and
other credit obligations on which
the DEBTOR(S) may now be
indebted or may hereafter become
indebted
to
the
CREDITOR,
together with all interests, penalty
and other bank charges as may
accrue thereon and all expenses
which may be incurred by the latter
in collecting any or all such
instruments.[22]
Evidently, under the deed of suretyship,
Geronimo undertook to secure all obligations
obtained under the Domestic Bills Purchased Line
and
Omnibus
Credit
Line,
without
any
specification as to the period of the loan.
Geronimos application of Garcia v. Court
of Appeals, a case covering two separate loans,
denominated as SWAP Loan and Export Loan, is
quite misplaced. There, the Court ruled that the
continuing suretyship only covered the SWAP
Loan as it was only this loan that was referred to
in the continuing suretyship. The Court wrote
in Garcia:

In
other
jurisdictions, it has
been held that the
use
of
particular
words
and
expressions such as
payment
of
any
debt,
any
indebtedness, any
deficiency, or any
sum,
or
the
guaranty
of
any
transaction
or
money
to
be
furnished
the
principal debtor at
any time, or on
such time that the
principal debtor may
require, have been

Particular attention must be paid to

the statement appearing on the
face of the Indemnity [Suretyship]
Agreement x x x evidenced by
those certain loan documents
dated April 20, 1982 x x
x. From this statement, it is clear
that the Indemnity Agreement
refers only to the loan document of
April 20, 1982 which is the SWAP
loan. It did not include the EXPORT
loan. Hence, petitioner cannot be

30

held answerable for the EXPORT

loan.[23] (Emphasis supplied.)

the whole part of said indebtedness

herein secured at maturity, I/WE
jointly and severally, agree and
engage to the CREDITOR, its
successors and assigns, the prompt
payment, without demand or
notice from said CREDITOR of
such notes, drafts, overdrafts
and other credit obligations on
which the DEBTOR(S) may now
be indebted or may hereafter
become
indebted
to
the
CREDITOR, together with all
interests, penalty and other bank
charges as may accrue thereon
and all expenses which may be
incurred by the latter in collecting
any or all such instruments.
[26]
(Emphasis supplied.)

The
Indemnity
Agreement
in Garcia specifically identified loan documents
evidencing obligations of the debtor that the
agreement was intended to secure. In the present
case, however, the suretyship Geronimo assumed
did not limit itself to a specific loan document to
the exclusion of another. The suretyship
document merely mentioned the Domestic Bills
Purchased Line and Omnibus Credit Line as
evidenced by all notes, drafts x x x
contracted/incurred by [Gateway] in favor of
[Asianbank].[24] As explained earlier, such credit
facilities are not loans by themselves. Thus, the
Deed of Suretyship was intended to secure future
loans for which these facilities were opened in the
first place.
Lest it be overlooked, both the trial and
appellate courts found the Omnibus Credit Line
referred to in the Deed of Suretyship as covering
the export packing credit loans Asianbank
extended to Gateway. We agree with this factual
determination. By the very use of the term
omnibus, and in practice, an omnibus credit line
refers to a credit facility whence a borrower may
avail of various kinds of credit loans. Defined as
such, an omnibus line is broad enough to refer to
or cover an export packing credit loan.

In light of the above provision, Geronimo

verily waived his right to notice of the maturity of
notes, drafts, overdraft, and other credit
obligations for which Gateway shall become
indebted. This waiver necessarily includes new
agreements resulting from the novation of
previous agreements due to changes in their
maturity dates.
Additionally, Geronimos lament about
losing his right to subrogation is erroneous. He
argues that by virtue of the order of insolvency
issued by the insolvency court, title and right to
possession to all the properties and assets of
Gateway were vested upon Gateways assignee
in accordance with Sec. 32 of theInsolvency Law.

Geronimos allegation that an export

packing credit loan is separate and distinct from
an omnibus credit line is but a bare and selfserving assertion bereft of any factual or legal
basis. One who alleges something must prove it:
a mere allegation is not evidence. [25] Geronimo
has not discharged his burden of proof. His
contention cannot be given any weight.

The transfer of Gateways property to the

insolvency assignee, if this be the case, does not
negate Geronimos right of subrogation, for such
right may be had or exercised in the insolvency
proceedings. The possibility that he may only
recover a portion of the amount he is liable to pay
is the risk he assumed as a surety of Gateway.
Such loss does not, however, render ineffectual,
let alone invalidate, his suretyship.

As a final and major ground for his release

as surety, Geronimo alleges that Asianbank
repeatedly extended the maturity dates of the
obligations of Gateway without his knowledge
and consent. Pressing this point, he avers that,
contrary to the findings of the CA, he did not
waive his right to notice of extensions of
Gateways obligations.

Geronimos other arguments to escape

liability are puerile and really partake more of a
plea for liberality. They need not detain us long.
In gist, Geronimo argues: first, that he is a
gratuitous surety of Gateway; second, Asianbank
deviated from normal banking practice, such as
when it extended the period for payment of
Gateways obligation and when it opted not to
foreclose the chattel mortgage constituted as
guarantee
of
Gateways
loan
obligation;

Such contention is unacceptable as it

glosses over the fact that the waiver to be
notified of extensions is embedded in surety
document itself, built in the ensuing provision:
In case of default by any
and/or all of the DEBTOR(S) to pay

31

and third, implementing the appealed CAs

decision would cause him great harm and injury.

creditors mere statement that the

creditor will not look to the
surety, or that he need not trouble
himself. The consequences of the
delay, such as the subsequent
insolvency of the principal, or the
fact that the remedies against the
principal may be lost by lapse of
time, are immaterial.[28]

Anent the first argument, suffice it to state

that Geronimo was then the president of Gateway
and, as such, was benefited, albeit perhaps
indirectly, by the loan thus granted by Asianbank.
And as we said in Security Pacific Assurance
Corporation, the surety is liable for the debt of
another although the surety possesses no direct
or personal interest over the obligation nor does
the surety receive any benefit from it.[27]

The Courts Equity Jurisdiction

Finds No Application to the Instant Case

Whether or not Asianbank really deviated

from normal banking practice by extending the
period for Gateway to comply with its loan
obligation or by not going after the chattel
mortgage
adverted
to
is really of
no
moment. Banks are primarily in the business of
extending loans and earn income from their
lending operations by way of service and interest
charges. This is why Asianbank opted to give
Gateway ample opportunity to pay its obligations
instead of foreclosing the chattel mortgage and in
the process holding on to assets of which the
bank has really no direct use.

Geronimo urges the Court to release and

discharge him from any liability arising from
Asianbanks claims if what he terms as complete
justice is to be served. He cites, as supporting
reference, Agcaoili v. GSIS,[29] presenting in the
same breath the following arguments: first, the
Deed of Suretyship is a gratuitous contract from
which he did not benefit; second, Asianbank
assured him that the deed would not be enforced
against him; third, the enforcement of the
judgment of the CA would reduce Geronimo and
his family to a life of penury; and fourth,
Geronimo would be unable to exercise his right of
subrogation, Gateway having already been
declared as insolvent.
The first and last arguments have already
been addressed and found to be without merit.
The second argument is a matter of defense
which has remained unproved and even belied by
Asianbank by its filing of the complaint. We see
no need to further belabor any of them.

The following excerpts from Palmares are

in point:
We agree with respondent
corporation that its mere failure to
immediately sue petitioner on her
obligation does not release her
from liability. Where a creditor
refrains from proceeding against
the principal, the surety is not
exonerated. In other words, mere
want of diligence or forbearance
does not affect the creditors
rightsvis--vis the surety, unless
the
surety
requires
him
by
appropriate notice to sue on the
obligation.
Such
gratuitous
indulgence of the principal does
not discharge the surety whether
given at the principals request or
without it, and whether it is yielded
by the creditor through sympathy
or from an inclination to favor the
principal x x x. The neglect of the
creditor to sue the principal at the
time the debt falls due does not
discharge the surety, even if such
delay continues until the principal
becomes insolvent. And, in the
absence of proof of resultant injury,
a surety is not discharged by the

As regards the third allegation, suffice it to

state that the predicament Geronimo finds
himself in is his very own doing. His misfortune is
but the result of the implementation of a bona
fide contract he freely executed, the terms of
which he is presumed to have thoroughly
examined. He was not at all compelled to act as
surety; he had a choice. It may be more offensive
to public policy or good customs if he be allowed
to go back on his undertaking under the surety
contract. The Court cannot be a party to the
contracts impairment and relieve a surety from
the effects of an unwise but nonetheless a valid
surety contract.
WHEREFORE, the instant petition is
hereby DENIED. The appealed Decision dated
October 28, 2005 of the CA and its March 17,
2006 Resolution in CA-G.R. CV No. 80734 are
hereby AFFIRMED with the modification that any
claim of Asianbank or its successor-in-interest
against Gateway, if any, arising from the

32

judgment in this suit shall be pursued before the

RTC, Branch 22 in Imus, Cavite as the insolvency
court.

During the pre-trial conference, the parties

submitted the following issues for the resolution
of the trial court: (1) what the rate of interest,
penalty and damages should be; (2) whether the
liability of the defendant (herein petitioner) is
primary or subsidiary; and (3) whether the
defendant Estrella Palmares is only a guarantor
with a subsidiary liability and not a co-maker with
primary liability.5
Thereafter, the parties agreed to submit the case
for decision based on the pleadings filed and the
memoranda to be submitted by them. On
November 26, 1992, the Regional Trial Court of
Iloilo City, Branch 23, rendered judgment
dismissing the complaint without prejudice to the
filing of a separate action for a sum of money
against the spouses Osmea and Merlyn Azarraga
who are primarily liable on the instrument. 6 This
was based on the findings of the court a quo that
the filing of the complaint against herein
petitioner Estrella Palmares, to the exclusion of
the Azarraga spouses, amounted to a discharge
of a prior party; that the offer made by petitioner
to pay the obligation is considered a valid tender
of payment sufficient to discharge a person's
secondary liability on the instrument; as comaker, is only secondarily liable on the
instrument; and that the promissory note is a
contract of adhesion.
Respondent Court of Appeals, however, reversed
the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares
liable to pay respondent corporation:
1. The sum of P13,700.00 representing the
outstanding balance still due and owing
with interest at six percent (6%) per
month computed from the date the loan
was contracted until fully paid;
2. The sum equivalent to the stipulated
penalty of three percent (3%) per month,
of the outstanding balance;
3. Attorney's fees at 25% of the total
amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court,
respondent appellate court declared that
petitioner Palmares is a surety since she bound
herself to be jointly and severally or solidarily
liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As
such, petitioner is primarily liable on the note and
hence may be sued by the creditor corporation
for the entire obligation. It also adverted to the
fact that petitioner admitted her liability in her
Answer although she claims that the Azarraga
spouses should have been impleaded.
Respondent court ordered the imposition of the
stipulated 6% interest and 3% penalty charges on

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a comaker and binds herself to be jointly and
severally liable with the principal debtor in case
the latter defaults in the payment of the loan, is
such undertaking of the former deemed to be
that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the
debtor?
Pursuant to a promissory note dated March 13,
1990, private respondent M.B. Lending
Corporation extended a loan to the spouses
Osmea and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per
annum to be computed every 30 days from the
date thereof.1 On four occasions after the
execution of the promissory note and even after
the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No
payments were made after the last payment on
September 26, 1991.2
Consequently, on the basis of petitioner's solidary
liability under the promissory note, respondent
corporation filed a complaint3 against petitioner
Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.
In her Amended Answer with
Counterclaim,4 petitioner alleged that sometime
in August 1990, immediately after the loan
matured, she offered to settle the obligation with
respondent corporation but the latter informed
her that they would try to collect from the
spouses Azarraga and that she need not worry
about it; that there has already been a partial
payment in the amount of P17,010.00; that the
interest of 6% per month compounded at the
same rate per month, as well as the penalty
charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be
liable on the note but only upon default of the
principal debtor, respondent corporation acted in
bad faith in suing her alone without including the
Azarragas when they were the only ones who
benefited from the proceeds of the loan.

33

the ground that the Usury Law is no longer

enforceable pursuant to Central Bank Circular No.
905. Finally, it rationalized that even if the
promissory note were to be considered as a
contract of adhesion, the same is not entirely
prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres,
he gives his consent.
Hence this petition for review
on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that
Palmares acted as surety and is therefore
solidarily liable to pay the promissory
note.
1. The terms of the promissory note are
vague. Its conflicting provisions do not
establish Palmares' solidary liability.
2. The promissory note contains provisions
which establish the co-maker's liability as
that of a guarantor.
3. There is no sufficient basis for
concluding that Palmares' liability is
solidary.
4. The promissory note is a contract of
adhesion and should be construed against
M. B. Lending Corporation.
5. Palmares cannot be compelled to pay
the loan at this point.
B. Assuming that Palmares' liability is
solidary, the Court of Appeals erred in
strictly imposing the interests and penalty
charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are
denied and contradicted in their material points
by respondent corporation. They are further
refuted by accepted doctrines in the American
jurisdiction after which we patterned our
statutory law on surety and guaranty. This case
then affords us the opportunity to make an
extended exposition on the ramifications of these
two specialized contracts, for such guidance as
may be taken therefrom in similar local
controversies in the future.
The basis of petitioner Palmares' liability under
the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker
of the above-quoted loan, have fully
understood the contents of this Promissory
Note for Short-Term Loan:
That as Co-maker, I am fully aware that I
shall be jointly and severally or solidarily
liable with the above principal maker of
this note;
That in fact, I hereby agree that M.B.
LENDING CORPORATION may demand
payment of the above loan from me in

case the principal maker, Mrs. Merlyn

Azarraga defaults in the payment of the
note subject to the same conditions
above-contained.8
Petitioner contends that the provisions of the
second and third paragraph are conflicting in that
while the second paragraph seems to define her
liability as that of a surety which is joint and
solidary with the principal maker, on the other
hand, under the third paragraph her liability is
actually that of a mere guarantor because she
bound herself to fulfill the obligation only in case
the principal debtor should fail to do so, which is
the essence of a contract of guaranty. More
simply stated, although the second paragraph
says that she is liable as a surety, the third
paragraph defines the nature of her liability as
that of a guarantor. According to petitioner, these
are two conflicting provisions in the promissory
note and the rule is that clauses in the contract
should be interpreted in relation to one another
and not by parts. In other words, the second
paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict
between the two provisions, petitioner avers that
she could be held liable only as a guarantor for
several reasons. First, the words "jointly and
severally or solidarily liable" used in the second
paragraph are technical and legal terms which
are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife
who is likely to enter into such transactions
without fully realizing the nature and extent of
her liability. On the contrary, the wordings used in
the third paragraph are easier to
comprehend. Second, the law looks upon the
contract of suretyship with a jealous eye and the
rule is that the obligation of the surety cannot be
extended by implication beyond specified limits,
taking into consideration the peculiar nature of a
surety agreement which holds the surety liable
despite the absence of any direct consideration
received from either the principal obligor or the
creditor. Third, the promissory note is a contract
of adhesion since it was prepared by respondent
M.B. Lending Corporation. The note was brought
to petitioner partially filled up, the contents
thereof were never explained to her, and her only
participation was to sign thereon. Thus, any
apparent ambiguity in the contract should be
strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability
should be deemed restricted by the clause in the
third paragraph of the promissory note to be that
of a guarantor.

34

Moreover, petitioner submits that she cannot as

yet be compelled to pay the loan because the
principal debtors cannot be considered in default
in the absence of a judicial or extrajudicial
demand. It is true that the complaint alleges the
fact of demand, but the purported demand letters
were never attached to the pleadings filed by
private respondent before the trial court. And,
while petitioner may have admitted in her
Amended Answer that she received a demand
letter from respondent corporation sometime in
1990, the same did not effectively put her or the
principal debtors in default for the simple reason
that the latter subsequently made a partial
payment on the loan in September, 1991, a fact
which was never controverted by herein private
respondent.
Finally, it is argued that the Court of Appeals
gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent
when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the
interest charged on the loan is exorbitant,
iniquitous or unconscionable, and the obligation
has been partially complied with, the court may
equitably reduce the penalty10 on grounds of
substantial justice. More importantly, respondent
corporation never refuted petitioner's allegation
that immediately after the loan matured, she
informed said respondent of her desire to settle
the obligation. The court should, therefore,
mitigate the damages to be paid since petitioner
has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of
the parties, we are constrained to dismiss the
petition for lack of merit, but to except therefrom
the issue anent the propriety of the monetary
award adjudged to herein respondent
corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note
executed between the parties is a contract of
adhesion, it has been the consistent holding of
the Court that contracts of adhesion are not
invalid per se and that on numerous occasions
the binding effects thereof have been upheld. The
peculiar nature of such contracts necessitate a
close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without
categorically invalidating such contracts, the
Court has construed obscurities and ambiguities
in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against
the drafter thereof when justified in light of the
operative facts and surrounding
circumstances.12 The factual scenario obtaining in

the case before us warrants a liberal application

of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called
the guarantor binds himself to the creditor
to fulfill the obligation of the principal
debtor in case the latter should fail to do
so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is
called a suretyship.
It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulation shall control.13 In the case at bar,
petitioner expressly bound herself to be jointly
and severally or solidarily liable with the principal
maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and
severally or solidarily liable" contained in the
second paragraph of her contract are technical
and legal terms which could not be easily
understood by an ordinary layman like her is
diametrically opposed to her manifestation in the
contract that she "fully understood the contents"
of the promissory note and that she is "fully
aware" of her solidary liability with the principal
maker. Petitioner admits that she voluntarily
affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference
to the existence of fraud is unavailing. Fraud
must be established by clear and convincing
evidence, mere preponderance of evidence not
even being adequate. Petitioner's attempt to
prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and,
expectedly, self-serving allegations. 14
Having entered into the contract with full
knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a
misapprehension or in ignorance of their legal
effect, or as to the legal effect of the
undertaking.15 The rule that ignorance of the
contents of an instrument does not ordinarily
affect the liability of one who signs it also applies
to contracts of suretyship. And the mistake of a
surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of liability. 16
Petitioner would like to make capital of the fact
that although she obligated herself to be jointly
and severally liable with the principal maker, her
liability is deemed restricted by the provisions of
the third paragraph of her contract wherein she

35

agreed "that M.B. Lending Corporation may

demand payment of the above loan from me in
case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note," which
makes her contract one of guaranty and not
suretyship. The purported discordance is more
apparent than real.
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor.17 A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking
that the debtor shall pay.18 Stated differently, a
surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the
principal, may proceed against the guarantor if
the principal is unable to pay. 19 A surety binds
himself to perform if the principal does not,
without regard to his ability to do so. A guarantor,
on the other hand, does not contract that the
principal will pay, but simply that he is able to do
so.20 In other words, a surety undertakes directly
for the payment and is so responsible at once if
the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the
principal debtor.21
Quintessentially, the undertaking to pay upon
default of the principal debtor does not
automatically remove it from the ambit of a
contract of suretyship. The second and third
paragraphs of the aforequoted portion of the
promissory note do not contain any other
condition for the enforcement of respondent
corporation's right against petitioner. It has not
been shown, either in the contract or the
pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and
when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is
that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render
himself directly and primarily responsible with
him, and without reference to the solvency of the
principal.22
In a desperate effort to exonerate herself from
liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the
meaning of a contract of indemnity or guaranty
has once been judicially determined under the
rule of reasonable construction applicable to all
written contracts, then the liability of the surety,
under his contract, as thus interpreted and
construed, is not to be extended beyond its strict
meaning.23 The rule, however, will apply only
after it has been definitely ascertained that the
contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in

determining whether a party's undertaking is that

of a surety or a guarantor.
Prescinding from these jurisprudential authorities,
there can be no doubt that the stipulation
contained in the third paragraph of the
controverted suretyship contract merely
elucidated on and made more specific the
obligation of petitioner as generally defined in the
second paragraph thereof. Resultantly, the theory
advanced by petitioner, that she is merely a
guarantor because her liability attaches only
upon default of the principal debtor, must
necessarily fail for being incongruent with the
judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge
the intention of the contracting parties, their
contemporaneous and subsequent acts shall also
be principally considered.24 Several attendant
factors in that genre lend support to our finding
that petitioner is a surety. For one, when
petitioner was informed about the failure of the
principal debtor to pay the loan, she immediately
offered to settle the account with respondent
corporation. Obviously, in her mind, she knew
that she was directly and primarily liable upon
default of her principal. For another, and this is
most revealing, petitioner presented the receipts
of the payments already made, from the time of
initial payment up to the last, which were all
issued in her name and of the Azarraga
spouses.25 This can only be construed to mean
that the payments made by the principal debtors
were considered by respondent corporation as
creditable directly upon the account and inuring
to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's
obligation with that of her principals only goes to
show that, from the very start, petitioner
considered herself equally bound by the contract
of the principal makers.
In this regard, we need only to reiterate the rule
that a surety is bound equally and absolutely with
the principal,26and as such is deemed an original
promisor and debtor from the beginning.27 This is
because in suretyship there is but one contract,
and the surety is bound by the same agreement
which binds the principal.28 In essence, the
contract of a surety starts with the
agreement,29 which is precisely the situation
obtaining in this case before the Court.
It will further be observed that petitioner's
undertaking as co-maker immediately follows the
terms and conditions stipulated between
respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with
his principal by the same instrument, executed at
the same time and upon the same consideration;
he is an original debtor, and his liability is

36

immediate and direct.30 Thus, it has been held

that where a written agreement on the same
sheet of paper with and immediately following
the principal contract between the buyer and
seller is executed simultaneously therewith,
providing that the signers of the agreement
agreed to the terms of the principal contract, the
signers were "sureties" jointly liable with the
buyer.31 A surety usually enters into the same
obligation as that of his principal, and the
signatures of both usually appear upon the same
instrument, and the same consideration usually
supports the obligation for both the principal and
the surety.32
There is no merit in petitioner's contention that
the complaint was prematurely filed because the
principal debtors cannot as yet be considered in
default, there having been no judicial or
extrajudicial demand made by respondent
corporation. Petitioner has agreed that
respondent corporation may demand payment of
the loan from her in case the principal maker
defaults, subject to the same conditions
expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I fail
to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no
longer necessary in order that delay may exist
since the contract itself already expressly so
declares.33 As a surety, petitioner is equally
bound by such waiver.
Even if it were otherwise, demand on the sureties
is not necessary before bringing suit against
them, since the commencement of the suit is a
sufficient demand.34 On this point, it may be
worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice of
the principal's default. Inasmuch as the creditor
owes no duty of active diligence to take care of
the interest of the surety, his mere failure to
voluntarily give information to the surety of the
default of the principal cannot have the effect of
discharging the surety. The surety is bound to
take notice of the principal's default and to
perform the obligation. He cannot complain that
the creditor has not notified
him in the absence of a special agreement to that
effect in the contract of suretyship.35
The alleged failure of respondent corporation to
prove the fact of demand on the principal
debtors, by not attaching copies thereof to its
pleadings, is likewise immaterial. In the absence
of a statutory or contractual requirement, it is not
necessary that payment or performance of his
obligation be first demanded of the principal,
especially where demand would have been
useless; nor is it a requisite, before proceeding

against the sureties, that the principal be called

on to account.36 The underlying principle therefor
is that a suretyship is a direct contract to pay the
debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as
default is made, without any demand upon the
principal whatsoever or any notice of default. 37 As
an original promisor and debtor from the
beginning, he is held ordinarily to know every
default of his principal.38
Petitioner questions the propriety of the filing of a
complaint solely against her to the exclusion of
the principal debtors who allegedly were the only
ones who benefited from the proceeds of the
loan. What petitioner is trying to imply is that the
creditor, herein respondent corporation, should
have proceeded first against the principal before
suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety
exists independently of his right to proceed
against the principal.39Under Article 1216 of the
Civil Code, the creditor may proceed against any
one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has
the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for
the creditor to proceed against a principal in
order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety
is the same that of the principal, then soon as the
principal is in default, the surety is likewise in
default, and may be sued immediately and before
any proceedings are had against the
principal.41 Perforce, in accordance with the rule
that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with
the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute
and in the absence of any agreement limiting the
application of the security, require the creditor or
obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the
principal, particularly where both principal and
surety are equally bound.42
We agree with respondent corporation that its
mere failure to immediately sue petitioner on her
obligation does not release her from liability.
Where a creditor refrains from proceeding against
the principal, the surety is not exonerated. In
other words, mere want of diligence or
forbearance does not affect the creditor's
rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on the
obligation. Such gratuitous indulgence of the
principal does not discharge the surety whether
given at the principal's request or without it, and

37

whether it is yielded by the creditor through

sympathy or from an inclination to favor the
principal, or is only the result of passiveness. The
neglect of the creditor to sue the principal at the
time the debt falls due does not discharge the
surety, even if such delay continues until the
principal becomes insolvent.43 And, in the
absence of proof of resultant injury, a surety is
not discharged by the creditor's mere statement
that the creditor will not look to the surety, 44 or
that he need not trouble himself.45 The
consequences of the delay, such as the
subsequent insolvency of the principal,46 or the
fact that the remedies against the principal may
be lost by lapse of time, are immaterial.47
The raison d'tre for the rule is that there is
nothing to prevent the creditor from proceeding
against the principal at any time.48 At any rate, if
the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and
become subrogated to all the rights and remedies
of the creditor.49
It may not be amiss to add that leniency shown to
a debtor in default, by delay permitted by the
creditor without change in the time when the
debt might be demanded, does not constitute an
extension of the time of payment, which would
release the surety.50 In order to constitute an
extension discharging the surety, it should appear
that the extension was for a definite period,
pursuant to an enforceable agreement between
the principal and the creditor, and that it was
made without the consent of the surety or with a
reservation of rights with respect to him. The
contract must be one which precludes the
creditor from, or at least hinders him in, enforcing
the principal contract within the period during
which he could otherwise have enforced it, and
which precludes the surety from paying the
debt.51
None of these elements are present in the instant
case. Verily, the mere fact that respondent
corporation gave the principal debtors an
extended period of time within which to comply
with their obligation did not effectively absolve
here in petitioner from the consequences of her
undertaking. Besides, the burden is on the surety,
herein petitioner, to show that she has been
discharged by some act of the creditor,52 herein
respondent corporation, failing in which we
cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming
that her liability is solidary, the interests and
penalty charges on the outstanding balance of
the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes
that respondent corporation intentionally delayed

the collection of the loan in order that the

interests and penalty charges would accumulate.
The statement, likewise traversed by said
respondent, is misleading.
In an affidavit53 executed by petitioner, which was
attached to her petition, she stated, among
others, that:
8. During the latter part of 1990, I was
surprised to learn that Merlyn Azarraga's
loan has been released and that she has
not paid the same upon its maturity. I
received a telephone call from Mr. Augusto
Banusing of MB Lending informing me of
this fact and of my liability arising from
the promissory note which I signed.
9. I requested Mr. Banusing to try to
collect first from Merlyn and Osmea
Azarraga. At the same time, I offered to
pay MB Lending the outstanding balance
of the principal obligation should he fail to
collect from Merlyn and Osmea Azarraga.
Mr. Banusing advised me not to worry
because he will try to collect first from
Merlyn and Osmea Azarraga.
10. A year thereafter, I received a
telephone call from the secretary of Mr.
Banusing who reminded that the loan of
Merlyn and Osmea Azarraga, together
with interest and penalties thereon, has
not been paid. Since I had no available
funds at that time, I offered to pay MB
Lending by delivering to them a parcel of
land which I own. Mr. Banusing's secretary,
however, refused my offer for the reason
that they are not interested in real estate.
11. In March 1992, I received a copy of the
summons and of the complaint filed
against me by MB Lending before the RTCIloilo. After learning that a complaint was
filed against me, I instructed Sheila Gatia
to go to MB Lending and reiterate my first
offer to pay the outstanding balance of the
principal obligation of Merlyn Azarraga in
the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr.
Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he
will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal
obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus
informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner
can not be deemed sufficient and substantial in
order to effectively discharge her from liability.

38

There are a number of circumstances which

conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for
not immediately demanding payment from
petitioner. It was petitioner who initially
requested that the creditor try to collect from her
principal first, and she offered to pay only in case
the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent
corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual
offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she
owned. Respondent corporation was acting well
within its rights when it refused to accept the
offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the
latter may be of the same value, or more
valuable than that which is due.54 The obligee is
entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object
of the obligation would constitute novation
requiring the express consent of the parties.55
3. After the complaint was filed against her,
petitioner reiterated her offer to pay the
outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise
rejected. Again, respondent corporation cannot
be blamed for refusing the amount being offered
because it fell way below the amount it had
computed, based on the stipulated interests and
penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have
been paid unless the thing or service in which the
obligation consists has been completely delivered
or rendered, as the case may be.56 In other
words, the prestation must be fulfilled completely.
A person entering into a contract has a right to
insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation
to accept the amount she is willing to pay
because the moment the latter accepts the
performance, knowing its incompleteness or
irregularity, and without expressing any protest
or objection, then the obligation shall be deemed
fully complied with.58 Precisely, this is what
respondent corporation wanted to avoid when it
continually refused to settle with petitioner at
less than what was actually due under their
contract.
This notwithstanding, however, we find and so
hold that the penalty charge of 3% per month
and attorney's fees equivalent to 25% of the total
amount due are highly inequitable and
unreasonable.

It must be remembered that from the principal

loan of P30,000.00, the amount of P16,300.00
had already been paid even before the filing of
the present case. Article 1229 of the Civil Code
provides that the court shall equitably reduce the
penalty when the principal obligation has been
partly or irregularly complied with by the debtor.
And, even if there has been no performance, the
penalty may also be reduced if it is iniquitous or
leonine.
In a case previously decided by this Court which
likewise involved private respondent M.B. Lending
Corporation, and which is substantially on all
fours with the one at bar, we decided to eliminate
altogether the penalty interest for being
excessive and unwarranted under the following
rationalization:
Upon the matter of penalty interest, we
agree with the Court of Appeals that the
economic impact of the penalty interest of
three percent (3 %) per month on total
amount due but unpaid should be
equitably reduced. The purpose for which
the penalty interest is intended that is,
to punish the obligor will have been
sufficiently served by the effects of
compounded interest. Under the
exceptional circumstances in the case at
bar, e.g., the original amount loaned was
only P15,000.00; partial payment of
P8,600.00 was made on due date; and the
heavy (albeit still lawful) regular
compensatory interest, the penalty
interest stipulated in the parties'
promissory note is iniquitous and
unconscionable and may be equitably
reduced further by eliminating such
penalty interest altogether.59
Accordingly, the penalty interest of 3% per month
being imposed on petitioner should similarly be
eliminated.
Finally, with respect to the award of attorney's
fees, this Court has previously ruled that even
with an agreement thereon between the parties,
the court may nevertheless reduce such
attorney's fees fixed in the contract when the
amount thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even
necessary to show, as in other contracts, that it is
contrary to morals or public policy.61 The grant of
attorney's fees equivalent to 25% of the total
amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid
amount involved and the extent of the work
involved in this simple action for collection of a
sum of money. We, therefore, hold that the
amount of P10,000.00 as and for attorney's fee
would be sufficient in this case.62

39

WHEREFORE, the judgment appealed from is

hereby AFFIRMED, subject to the MODIFICATION
that the penalty interest of 3% per month is
hereby deleted and the award of attorney's fees
is reduced to P10,000.00.
SO ORDERED.
G.R. No. 72275 November 13, 1991
PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND
ROBERTO REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private
respondent.

favor by the Pacific Banking

Corporation". It was also agreed
that "any changes of or novation in
the terms and conditions in
connection with the issuance or
use of the Pacificard, or any
extension of time to pay such
obligations, charges or liabilities
shall not in any manner release
me/us from responsibility
hereunder, it being understood that
I fully agree to such charges,
novation or extension, and that this
understanding is a continuing one
and shall subsist and bind me until
the liabilities of the said Celia
Syjuco Regala have been fully
satisfied or paid.
Plaintiff-appellee Pacific Banking
Corporation has contracted with
accredited business establishments
to honor purchases of goods and/or
services by Pacificard holders and
the cost thereof to be advanced by
the plaintiff-appellee for the
account of the defendant
cardholder, and the latter
undertook to pay any statements
of account rendered by the
plaintiff-appellee for the advances
thus made within thirty (30) days
from the date of the statement,
provided that any overdue account
shall earn interest at the rate of
14% per annum from date of
default.
The defendant Celia Regala, as
such Pacificard holder, had
purchased goods and/or services
on credit (Exh. "C", "C-l" to "C112") under her Pacificard, for
which the plaintiff advanced the
cost amounting to P92,803.98 at
the time of the filing of the
complaint.
In view of defendant Celia Regala's
failure to settle her account for the
purchases made thru the use of the
Pacificard, a written demand (Exh.
"D") was sent to the latter and also
to the defendant Roberto Regala, Jr.
(Exh. " ") under his "Guarantor's
Undertaking."
A complaint was subsequently filed
in Court for defendant's (sic)
repeated failure to settle their
obligation. Defendant Celia Regala
was declared in default for her

MEDIALDEA, J.:p
This is a petition for review on certiorari of the
decision (pp 21-31, Rollo) of the Intermediate
Appellate Court (now Court of Appeals) in AC-G.R.
C.V. No. 02753, 1 which modified the decision of
the trial court against herein private respondent
Roberto Regala, Jr., one of the defendants in the
case for sum of money filed by Pacific Banking
Corporation.
The facts of the case as adopted by the
respondent appellant court from herein
petitioner's brief before said court are as follows:
On October 24, 1975, defendant
Celia Syjuco Regala (hereinafter
referred to as Celia Regala for
brevity), applied for and obtained
from the plaintiff the issuance and
use of Pacificard credit card (Exhs.
"A", "A-l",), under the Terms and
Conditions Governing the Issuance
and Use of Pacificard (Exh. "B" and
hereinafter referred to as Terms
and Conditions), a copy of which
was issued to and received by the
said defendant on the date of the
application and expressly agreed
that the use of the Pacificard is
governed by said Terms and
Conditions. On the same date, the
defendant-appelant Robert Regala,
Jr., spouse of defendant Celia
Regala, executed a "Guarantor's
Undertaking" (Exh. "A-1-a") in favor
of the appellee Bank, whereby the
latter agreed "jointly and severally
of Celia Aurora Syjuco Regala, to
pay the Pacific Banking Corporation
upon demand, any and all
indebtedness, obligations, charges
or liabilities due and incurred by
said Celia Aurora Syjuco Regala
with the use of the Pacificard, or
renewals thereof, issued in her

40

failure to file her answer within the

reglementary period. Defendantappellant Roberto Regala, Jr., on
the other hand, filed his Answer
with Counterclaim admitting his
execution of the "Guarantor's
Understanding", "but with the
understanding that his liability
would be limited to P2,000.00 per
month."
In view of the solidary nature of the
liability of the parties, the
presentation of evidence exparte as against the defendant
Celia Regala was jointly held with
the trial of the case as against
defendant Roberto Regala.
After the presentation of plaintiff's
testimonial and documentary
evidence, fire struck the City Hall of
Manila, including the court where
the instant case was pending, as
well as all its records.
Upon plaintiff-appellee's petition
for reconstitution, the records of
the instant case were duly
reconstituted. Thereafter, the case
was set for pre-trial conference
with respect to the defendantappellant Roberto Regala on
plaintiff-appellee's motion, after
furnishing the latter a copy of the
same. No opposition thereto having
been interposed by defendantappellant, the trial court set the
case for pre-trial conference.
Neither did said defendantappellant nor his counsel appear on
the date scheduled by the trial
court for said conference despite
due notice. Consequently, plaintiffappellee moved that the
defendant-appellant Roberto
Regala he declared as in default
and that it be allowed to present its
evidence ex-parte, which motion
was granted. On July 21, 1983,
plaintiff-appellee presented its
evidence ex-parte. (pp. 2326, Rollo)
After trial, the court a quo rendered judgment on
December 5, 1983, the dispositive portion of
which reads:
WHEREFORE, the Court renders
judgment for the plaintiff and
against the defendants
condemning the latter, jointly and
severally, to pay said plaintiff the

amount of P92,803.98, with

interest thereon at 14% per
annum, compounded annually,
from the time of demand on
November 17, 1978 until said
principal amount is fully paid; plus
15% of the principal obligation as
and for attorney's fees and
expense of suit; and the costs.
The counterclaim of defendant
Roberto Regala, Jr. is dismissed for
lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the
court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court
rendered judgment modifying the decision of the
trial court. Private respondent Roberto Regala, Jr.
was made liable only to the extent of the monthly
credit limit granted to Celia Regala, i.e., at
P2,000.00 a month and only for the advances
made during the one year period of the card's
effectivity counted from October 29, 1975 up to
October 29, 1976. The dispositive portion of the
decision states:
WHEREFORE, the judgment of the
trial court dated December 5, 1983
is modified only as to appellant
Roberto Regala, Jr., so as to make
him liable only for the purchases
made by defendant Celia Aurora
Syjuco Regala with the use of the
Pacificard from October 29, 1975
up to October 29, 1976 up to the
amount of P2,000.00 per month
only, with interest from the filing of
the complaint up to the payment at
the rate of 14% per annum without
pronouncement as to costs. (p.
32, Rollo)
A motion for reconsideration was filed by Pacific
Banking Corporation which the respondent
appellate court denied for lack of merit on
September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this
petition. The petitioner contends that while the
appellate court correctly recognized Celia
Regala's obligation to Pacific Banking Corp. for
the purchases of goods and services with the use
of a Pacificard credit card in the total amount of
P92,803.98 with 14% interest per annum, it erred
in limiting private respondent Roberto Regala, Jr.'s
liability only for purchases made by Celia Regala
with the use of the card from October 29, 1975
up to October 29, 1976 up to the amount of
P2,000.00 per month with 14% interest from the
filing of the complaint.
There is merit in this petition.

41

The pertinent portion of the "Guarantor's

Undertaking" which private respondent Roberto
Regala, Jr. signed in favor of Pacific Banking
Corporation provides:
I/We, the undersigned, hereby
agree, jointly and severally with
Celia Syjuco Regala to pay the
Pacific Banking Corporation upon
demand any and all indebtedness,
obligations, charges or liabilities
due and incurred by said Celia
Syjuco Regala with the use of the
Pacificard or renewals thereof
issued in his favor by the Pacific
Banking Corporation. Any changes
of or Novation in the terms and
conditions in connection with the
issuance or use of said Pacificard,
or any extension of time to pay
such obligations, charges or
liabilities shall not in any manner
release me/us from the
responsibility hereunder, it being
understood that the undertaking is
a continuing one and shall subsist
and bind me/us until all the
liabilities of the said Celia Syjuco
Regala have been fully satisfied or
paid. (p. 12,Rollo)
The undertaking signed by Roberto Regala, Jr.
although denominated "Guarantor's
Undertaking," was in substance a contract of
surety. As distinguished from a contract of
guaranty where the guarantor binds himself to
the creditor to fulfill the obligation of the principal
debtor only in case the latter should fail to do so,
in a contract of suretyship, the surety binds
himself solidarily with the principal debtor (Art.
2047, Civil Code of the Philippines).
We need not look elsewhere to determine the
nature and extent of private respondent Roberto
Regala, Jr.'s undertaking. As a surety he bound
himself jointly and severally with the debtor Celia
Regala "to pay the Pacific Banking Corporation
upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred
by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her)
favor by Pacific Banking Corporation." This
undertaking was also provided as a condition in
the issuance of the Pacificard to Celia Regala,
thus:
5. A Pacificard is issued to a
Pacificard-holder against the joint
and several signature of a third
party and as such, the Pacificard
holder and the guarantor assume
joint and several liabilities for any

and all amount arising out of the

use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the
other rights of the guarantor are not thereby lost
by the guarantor becoming liable solidarily and
therefore a surety." It further ruled that although
the surety's liability is like that of a joint and
several debtor, it does not make him the debtor
but still the guarantor (or the surety), relying on
the case of Government of the Philippines v.
Tizon. G.R. No. L-22108, August 30, 1967, 20
SCRA 1182. Consequently, Article 2054 of the
Civil Code providing for a limited liability on the
part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code,
"(A) guarantor may bind himself for less, but not
for more than the principal debtor, both as
regards the amount and the onerous nature of
the conditions. 2 It is likewise not disputed by the
parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia
Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979.
We do not agree however, that Roberto Jr.'s
liability should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of
the debtor's (Celia) indebtedness likewise
expressly waiving any "discharge in case of any
change or novation of the terms and conditions in
connection with the issuance of the Pacificard
credit card." Roberto, in fact, made his
commitment as a surety a continuing one,
binding upon himself until all the liabilities of
Celia Regala have been fully paid. All these were
clear under the "Guarantor's Undertaking"
Roberto signed, thus:
. . . Any changes of or novation in
the terms and conditions in
connection with the issuance or
use of said Pacificard, or any
extension of time to pay such
obligations, charges or liabilities
shall not in any manner release
me/us from the responsibility
hereunder, it being understood that
the undertaking is a continuing one
and shall subsist and bind me/us
until all the liabilities of the said
Celia Syjuco Regala have been fully
satisfied or paid. (p. 12, supra;
emphasis supplied)
Private respondent Roberto Regala, Jr. had been
made aware by the terms of the undertaking of
future changes in the terms and conditions
governing the issuance of the credit card to his
wife and that, notwithstanding, he voluntarily
agreed to be bound as a surety. As in guaranty, a

42

surety may secure additional and future debts of

the principal debtor the amount of which is not
yet known (see Article 2053, supra).
The application by respondent court of the ruling
in Government v. Tizon, supra is misplaced. It was
held in that case that:
. . . although the defendants bound
themselves in solidum, the liability
of the Surety under its bond would
arise only if its co-defendants, the
principal obligor, should fail to
comply with the contract. To
paraphrase the ruling in the case of
Municipality of Orion vs. Concha,
the liability of the Surety is
"consequent upon the liability" of
Tizon, or "so dependent on that of
the principal debtor" that the
Surety "is considered in law as
being the same party as the debtor
in relation to whatever is adjudged,
touching the obligation of the
latter"; or the liabilities of the two
defendants herein "are so
interwoven and dependent as to be
inseparable." Changing the
expression, if the defendants are
held liable, their liability to pay the
plaintiff would be solidary, but the
nature of the Surety's undertaking
is such that it does not incur
liability unless and until the
principal debtor is held liable.
A guarantor or surety does not incur liability
unless the principal debtor is held liable. It is in
this sense that a surety, although solidarily liable
with the principal debtor, is different from the
debtor. It does not mean, however, that the
surety cannot be held liable to the same extent
as the principal debtor. The nature and extent of
the liabilities of a guarantor or a surety is
determined by the clauses in the contract of
suretyship(see PCIB v. CA, L-34959, March 18,
1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The
questioned decision of respondent appellate court
is SET ASIDE and the decision of the trial court is
REINSTATED.
G.R. No. 174926
August 10, 2011
AMERICAN HOME INSURANCE CO. OF NEW
YORK, Petitioner,
vs.
F.F. CRUZ & CO., INC., Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari under
Rule 45 of the Rules of Court filed by American
Home Insurance Co. of New York (American

Home) assailing the Court of Appeals (CA)

Decision1 dated September 29, 2005 and
Resolution2 dated September 25, 2006 in CA-G.R.
CV No. 73960. The assailed Decision affirmed the
Decision3 of the Regional Trial Court (RTC) of
Makati, Branch 137 in Civil Case No. 93-2585,
while the assailed Resolution denied American
Homes motion for reconsideration.
The case stemmed from the following facts:
In June 1990, the Philippine Ports Authority (PPA)
conducted a bidding of a project for the dredging
of the entrance channel and harbor basin of the
Cebu International Port in Cebu City. The PPA
awarded the contract to the winning bidder, F.F.
Cruz & Co., Inc. (FF Cruz). Pursuant to their earlier
agreement, FF Cruz and Genaro Reyes
Construction, Inc. (hereafter referred to as "G.
Reyes") executed a Sub-Contract
Agreement4 whereby the latter agreed to
undertake the performance of 50% of the
dredging projects estimated volume of 600,000
cubic meters. The sub-contract was subject to the
following terms and conditions:
xxxx
5. That the SUB-CONTRACTOR shall file
immediately upon its receipt of NOTICE TO
PROCEED, a PERFORMANCE BOND (callable
anytime on demand) from a duly accredited
surety company equivalent to 10% of the
SUBCONTRACTS TOTAL COST;
6. That the SUB-CONTRACTOR agrees to start to
work on the PROJECT within thirty (30) calendar
days or as directed by the PPA, from the date of
NOTICE TO PROCEED for the PROJECT, and
obligates itself to finish the work within the
contract time stipulated in the contract entered
into by the CONTRACTOR and PPA;
x x x x5
FF Cruz gave G. Reyes an advance payment
of P2.2 million guaranteed by a surety bond for
the same amount issued by American Home. The
surety bond was issued to guarantee payment of
the advance payment made by FF Cruz to G.
Reyes for the dredging project in the event that
the latter fail to comply with the terms and
conditions of the sub-contract.6
As a security for the issuance of the bond, Genaro
Reyes, as president of G. Reyes, and his wife
Lydia Reyes, executed an Indemnity Agreement
where they agreed to jointly and severally
indemnify American Home and keep the latter
harmless against all damages, losses, costs,
stamps, taxes, penalties, charges and expenses
of whatever kind and nature which it may sustain
or incur as a consequence of having become a
surety, or any extension, renewal, substitution or
alteration made thereof.7 They likewise undertook
to pay, reimburse and make good to American

43

Home all sums which the latter shall pay on

account of the bond.8 It was also agreed upon
that their liability attaches as soon as demand is
received by American Home from FF Cruz, or as
soon as it becomes liable to make payment under
the terms of the surety bond.
In a letter dated March 6, 1991, FF Cruz informed
G. Reyes that the former mobilized its dredger
and started operation on March 3, 1991. In the
same letter, FF Cruz requested G. Reyes to
mobilize its equipment on or before March 20,
1991.9
On October 21, 1991, G. Reyes complained to the
PPA about the great deal of silt and waste
materials that had accumulated in the area which
adversely affected its work accomplishment. In
December 1991, G. Reyes informed FF Cruz that
the equipment used for the project had been
encountering difficulties because of siltation
problems. G. Reyes finally admitted that
continuing the project was no longer a wise
investment and called on FF Cruz to take over the
project. FF Cruz thus took over the unfinished
project.10
Consequently, FF Cruz demanded from American
Home the payment of P2.2 million representing
the amount of the bond. American Home, in turn,
informed G. Reyes of FF Cruzs demand. As the
claim left unheeded, FF Cruz made a final
demand on American Home on July 10, 1993. G.
Reyes likewise ignored American Homes demand
to fulfill its obligation set forth in the Indemnity
Agreement it executed in favor of the latter.
On July 29, 1993, American Home filed a
Complaint for Sum of Money11 against G. Reyes,
Genaro G. Reyes and Lydia A. Reyes for the
payment of P2,200,000.00 corresponding to the
amount of the bond, plus attorneys fees and
litigation expenses.12 In its complaint, American
Home sought the enforcement of the Indemnity
Agreement undertaken by G. Reyes in
conjunction with FF Cruzs demand for the
payment of the amount of the surety bond.
G. Reyes et al., in turn, filed an Answer with
Counterclaim and Third-Party Complaint13 against
FF Cruz. G. Reyes denied liability to American
Home on the ground that G. Reyes did not fail to
comply with its obligation to FF Cruz. It explained
that its (G. Reyes) liability would arise only in
case of its failure to comply with the terms and
conditions of the sub-contract. It insisted that it
was FF Cruz who was guilty of breach of its
obligations. In its Third-Party Complaint against
FF Cruz, G. Reyes argued that the siltation
problems caused by the former resulted in the
reduction of G. Reyes project accomplishment
and failure to finish the project. It also claimed
that FF Cruz still has an unpaid balance of more

than P5 million as it recognized only the

accomplishment of 57,284.44 cubic meters
instead of 184,210 cubic meters claimed by G.
Reyes.
In answer to the third-party complaint of G.
Reyes, FF Cruz denied that it caused the siltation
problems and argued that the former abandoned
the project because it was incapable of
performing its obligations. It also explained that it
had no unpaid obligation to G. Reyes as it paid its
accomplishment based on the report of the PPA. 14
FF Cruz thereafter filed a Fourth-Party Complaint
against American Home calling on the surety
bond it provided in favor of G. Reyes.15
During the pre-trial, the parties agreed to limit
the issues, to wit:
1) Is the fourth-party defendant AMERICAN
HOME free from liability on the claim of
fourth-party plaintiff FF Cruz as set forth in
the fourth-party complaint because:
a) The provision in American Surety
Bond No. 304-67535575 that the
same is callable anytime on
demand is null and void?
b) Assuming that it is not, is fourthparty defendant AMERICAN HOME
free from liability because Genaro
G. Reyes Construction, Inc. had
fulfilled all its obligations under the
sub-contract it had with fourthparty plaintiff?
2) Is AMERICAN HOME free from liability
relative to the fourth-party plaintiff claim
as set forth in the complaint because the
damages suffered by fourth-party plaintiff
arose from force majeure?
3) If [fourth-party] defendant AMERICAN
HOME is liable on the surety bond, what is
the amount and nature of the damages
that should be awarded to fourth-party
plaintiff?16
After the presentation of the parties respective
evidence, the RTC rendered a Decision, 17 the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
ordering plaintiff American Home Insurance
Company of New York and third-party plaintiff
Genaro G. Reyes Construction, Incorporated,
jointly and severally, to pay third-party defendant
F.F. Cruz and Company the amount
of P2,200,000.00 representing the full amount of
the surety bond.
The third-party complaint of third-party plaintiff
Genaro G. Reyes Construction, Incorporated,
against third-party defendant F.F. Cruz and
Company, and the counterclaim for attorneys
fees of third-party plaintiff Genaro G. Reyes
Construction, Incorporated, against plaintiff

44

American Home Insurance Company of New York,

are both dismissed, for lack of sufficient merit.
On the counterclaim of third-party defendant F.F.
Cruz and Company, judgment is hereby rendered
ordering third-party plaintiff Genaro G. Reyes
Construction, Incorporated, to pay said thirdparty defendant the following amounts:
1. P310,150.21 representing the
overpayment received by third-party
plaintiff Genaro G. Reyes Construction,
Incorporated, from third-party defendant
F.F. Cruz and Company, with 6% interest
per annum from the filing of the thirdparty complaint on 8 April 1994 until full
payment;
2. 10% of the above amount as attorneys
fees; and
3. costs of suit.
On the complaint of plaintiff American Home
Insurance Company of New York against
defendants and third-party plaintiff Genaro G.
Reyes Construction, Incorporated, Genaro G.
Reyes and Lydia A. Reyes, judgment is hereby
rendered ordering defendants and third-party
plaintiffs Genaro G. Reyes Construction,
Incorporated, Genaro G. Reyes and Lydia A.
Reyes, jointly and severally, to pay plaintiff
American Home Insurance Company of New York
the amount of P2,200,000.00, representing the
full amount of the indemnity agreement, plus
10% thereof as attorneys fees and costs of suit.
SO ORDERED.18
American Home and G. Reyes et al. appealed to
the CA. On September 29, 2005, the appellate
court rendered the assailed decision dismissing
their appeal and, consequently, affirming the RTC
decision. The CA sustained the findings of the RTC
that G. Reyes indeed failed to fulfill its obligation
to dredge 300,000 cubic meters as it only
finished dredging 57,000 cubic meters. The court
opined that there was no proof to show that the
abandonment of the project by G. Reyes was
caused by heavy siltation. Considering that such
failure to finish the project constitutes a violation
of G. Reyes agreement with FF Cruz, American
Home was held liable under the bond it issued to
G. Reyes.19 G. Reyes and American Homes
motions for reconsideration were denied on
September 25, 2006.
Aggrieved, G. Reyes assailed the CA decision and
resolution before this Court in a petition for
review on certiorari,20 but the same was denied
by the Court in a Minute Resolution 21 dated March
5, 2007.
In this petition under consideration, American
Home likewise assails the same decision and
resolution with the following assigned errors:
I.

THE COURT OF APPEALS COMMITTED

SERIOUS ERROR IN CONSIDERING THE
BOND ISSUED BY PETITIONER TO BE A
PERFORMANCE BOND CONTRARY TO THE
EXPRESS TERMS OF THE BOND ITSELF
THAT IT WAS TO GUARANTEE PAYMENT
FOR THE 15% ADVANCE PAYMENT MADE
BY RESPONDENT TO GENARO G. REYES
CONSTRUCTION CORPORATION.
II.
THE COURT OF APPEALS COMMITTED
SERIOUS ERROR IN NOT DISCHARGING
PETITIONER FROM ITS OBLIGATIONS
UNDER THE BOND DUE TO THE
ABANDONMENT OF THE PROJECT BY
GENARO G. REYES CONSTRUCTION
CORPORATION AND THE TAKE-OVER BY
RESPONDENT WITHOUT PETITIONERS
PRIOR NOTICE AND CONSENT.
III.
ASSUMING, WITHOUT ADMITTING, THAT
PETITIONER IS LIABLE UNDER THE BOND,
THE COURT OF APPEALS COMMITTED
SERIOUS ERROR IN ADJUDGING
PETITIONER LIABLE FOR THE ENTIRE OR
FACE VALUE OF THE BOND IN THE
AMOUNT OF P2.2 MILLION CONSIDERING
THAT THE BOND WAS NOT A
PERFORMANCE BOND TO GUARANTEE THE
COMPLETION OF THE PROJECT BUT
MERELY TO GUARANTEE THE PAYMENT OF
THE ADVANCES MADE BY RESPONDENT TO
GENARO G. REYES CONSTRUCTION.22
American Home faults the CA in considering the
surety bond as a performance bond. It insists that
the bond guaranteed only the payment of the
15% advance payment made by FF Cruz to G.
Reyes amounting to P2.2 million and not the
performance of the latters obligations nor the
completion of the dredging operations. It also
avers that making it (American Home) liable
under the bond because of G. Reyes
abandonment of the project is tantamount to
enlarging its liability. American Home also claims
that it was not informed that G. Reyes already
abandoned the project and that FF Cruz took over
to complete the same. This, according to
American Home, is a material alteration of the
terms of the surety bond which thus discharged it
of liability on the surety agreement.
The petition is without merit.
The only issue for resolution is whether or not
American Home is liable to FF Cruz for P2.2
million representing the face value of the surety
bond it issued to G. Reyes.
We rule in the affirmative.
It is well to note that G. Reyes petition in G.R. No.
174913 has been denied by the Court. Hence, the

45

same CA decision and resolution assailed in this

present petition have become final and executory
as to G. Reyes, Genaro Reyes and Lydia A. Reyes
and, in that respect, it shall not be disturbed by
the Court. Consequently, their liability to
American Home pursuant to the Indemnity
Agreement has been settled with finality. They
are, therefore, bound to pay American
Home P2,200,000.00 representing the full
amount of the Indemnity Agreement, plus 10%
thereof as attorneys fees and costs of suit. Their
liability to FF Cruz has also been resolved with
finality.
The Court also notes that the issues raised by
American Home in this petition were not raised
during the trial of the case before the RTC. It must
be recalled that the case below was commenced
by American Home for the collection of sum of
money against G. Reyes pursuant to the
Indemnity Agreement executed by the latter. The
issue on American Homes liability to FF Cruz was
squarely raised only in the fourth-party complaint
filed by the latter against the former.
Settled is the rule that points of law, theories,
issues, and arguments not adequately brought to
the attention of the trial court need not be, and
ordinarily will not be, considered by a reviewing
court. They cannot be raised for the first time on
appeal. To allow this would be offensive to the
basic rules of fair play, justice and due
process.23 In order, however, to remove doubt on
its liability to FF Cruz, we will discuss the merits
of American Homes arguments.
It is undisputed that FF Cruz gave G. Reyes P2.2
million as advance payment. As a security
thereof, G. Reyes posted a surety bond issued by
American Home in favor of FF Cruz, the pertinent
portion of which reads:
To guarantee payment for the 15% advance
payment made by the obligee [FF Cruz] to the
herein principal [G. Reyes] for the Dredging of
Entrance Channel and Harbor Basin of Cebu
International Port Project in the event of the
principals failure to comply with the terms and
conditions of the Sub-Contract Agreement dated
June 11, 1990, copy of which is hereto attached
and made an integral part hereof; it being
expressly understood that the liability of the
surety under this bond shall in no case exceed
the amount of PESOS TWO MILLION TWO
HUNDRED THOUSAND ONLY (P2,200,000.00), Phil.
Cy."24
It is clear from the foregoing that indeed, the
surety bond was issued to guarantee the
payment of the 15% advance payment of P2.2
million made by FF Cruz to G. Reyes. The bond
was not issued to guarantee the completion of
the project. However, the above provision shows

that in order for American Homes liability to

attach, two conditions must be fulfilled: first, that
the advance payment made by FF Cruz to G.
Reyes remains unpaid; and second, G. Reyes fails
to comply with any of the terms and conditions
set forth in the sub-contract.
There may be a dispute as to the amount of
liability as will be discussed later, but it has been
adequately established that FF Cruz was not yet
reimbursed of the advance payment it made. The
fulfillment of the first condition is, therefore,
settled.
In the sub-contract agreement, G. Reyes agreed
to finish the work within the time stipulated in the
contract between FF Cruz and the PPA.
Admittedly, not only did G. Reyes fail to finish the
work on time, it did not altogether complete the
project. If failure to finish the work on time is
violation of the sub-contract agreement, with
more reason that abandonment of the work is
covered by the stipulation. As held by the CA:
By G. REYES own claim, it dredged only 184,000
cubic meters. There thus is no dispute that G.
REYES failed to dredge the 300,000 cubic meters
as agreed in the contract. But even if [w]e are to
assume that G. REYES indeed dredged 184,210
cubic meters, this would still be short of the
300,000 cubic meters it bound itself under the
contract.
In the middle of the project, G REYES unilaterally
abandoned its dredging work and its obligations
under the Sub-Contract Agreement. Without a
doubt, G. REYES failed to fulfill its contractual
obligation. x x x25
The appellate court did not also sustain G. Reyes
explanation that the abandonment of the project
was due to force majeure. We quote with
approval the CA ratiocination in this wise:
The proffered reason that the abandonment was
due to force majeure fails to convince this Court.
G. REYES excuse that it was forced to abandon
the dredging work due to "heavy siltation" is not
supported by facts on record. There is no
evidence of the alleged "heavy siltation." On the
contrary, after G REYES abandoned its dredging
work and FF CRUZ took over the dredging, FF
CRUZ was still able to finish the dredging work on
time. There is thus no basis for G REYES
justification of force majeure. Such was a lame
excuse for the abandonment of the project.26
With the violation of the sub-contract, which
means fulfillment of the second condition, the
liability to pay the advance payment arose.
The payment of the P2.2 million advanced by FF
Cruz is the principal liability of G. Reyes.
However, with the issuance of the surety bond, a
contract of suretyship was entered into making
American Home equally liable.

46

A contract of suretyship is an agreement whereby

a party called the surety, guarantees the
performance by another party, called the
principal or obligor, of an obligation or
undertaking in favor of another party called the
obligee. By its very nature, under the laws
regulating suretyship, the liability of the surety is
joint and several but is limited to the amount of
the bond, and its terms are determined strictly by
the terms of the contract of suretyship in relation
to the principal contract between the obligor and
the obligee.27
The surety is considered in law as possessed of
the identity of the debtor in relation to whatever
is adjudged touching upon the obligation of the
latter. Their liabilities are so interwoven as to be
inseparable. Although the contract of suretyship
is, in essence, secondary only to a valid principal
obligation, the suretys liability to the creditor is
direct, primary, and absolute; he becomes liable
for the debt and duty of another although he
possesses no direct or personal interest over the
obligations nor does he receive any benefit
therefrom.28
As to the amount of American Homes liability,
the RTC found that G. Reyes did not pay back the
full amount ofP2.2 million advance payment.
American Home, however, claims (for the first
time) that G. Reyes actually
reimbursed P598,880.52 to FF Cruz. As plaintiff in
its complaint and defendant in FF Cruzs fourthparty complaint, American Home was duty-bound
to prove that it was entitled to its claim against G.
Reyes under the Indemnity Agreement and that it
was not liable to FF Cruz under the surety bond.
Yet, American Home chose not to present its
evidence to substantiate its claim and defense.
For lack of evidence to show the fact of payment,
we find no reason to disturb the findings of the
trial court as affirmed by the appellate court
that P2.2 million is due FF Cruz.
Factual findings of the trial court, particularly
when affirmed by the CA, are generally binding
on the Court.29 We have repeatedly held that we
are not a trier of facts. We generally rely upon,
and are bound by, the conclusions on factual
matters made by the lower courts, which are
better equipped and have better opportunity to
assess the evidence first-hand, including the
testimony of the witnesses.30
The Courts jurisdiction over a petition for review
on certiorari is limited to reviewing only errors of
law, not of facts, unless the factual findings
complained of are devoid of support from the
evidence on record or the assailed judgment is
based on a misapprehension of facts.31

With the foregoing disquisition, we need not

discuss the other issues raised by American
Home.
WHEREFORE, premises considered, the petition is
DENIED. The Court of Appeals Decision dated
September 29, 2005 and Resolution dated
September 25, 2006 in CA-G.R. CV No. 73960, are
AFFIRMED
CLARITA QUIAMCO, vs
CAPITAL INSURANCE &
SURETY CO., INC.,
Respondent. Promulgated:
This is a petition for review on certiorari1 of the
August 25, 2005 decision2 and November 24,
2005 resolution3 of the Court of Appeals (CA) in
CA-G.R. CV No. 74390.
Petitioner spouses Noe and Clarita Quiamco are
husband and wife engaged in the sea
transportation business. On April 30, 1997, a
decision in a labor case4 was rendered against
Clarita as representative of Sto. Nio Ferry Boat
Services. Petitioners received the decision on May
7, 1997.5
Petitioners then applied for a supersedeas bond
with respondent Capital Insurance & Surety Co.,
Inc., a surety and non-life insurance company.
This bond was required in order to perfect their
appeal to the National Labor Relations
Commission (NLRC). Respondent required
petitioners to do the following: (1) to issue and
deliver to it an undated check in the amount
equivalent to that of the supersedeas bond which
it would issue; (2) to execute a supplementary
counter-guaranty with chattel mortgage over the
sea vessel M/L Gretchen 2 owned by petitioners
and to surrender their original copy of certificate
of ownership over the vessel; (3) to execute an
indemnity agreement wherein petitioners would
agree to indemnify respondent all damages it
might sustain in its capacity as surety and (4) to
pay the premiums. Except for the original copy of
the certificate of ownership of M/L Gretchen 2,
these requirements were complied with.6
Accordingly, the bond was issued on May 23,
1997 and delivered to petitioners who filed it in
the NLRC on May 24, 1997.7
On July 16, 1997, the NLRC dismissed the appeal
for petitioners failure to post the bond within 10
days from receipt of the decision (May 7,
1997).8 This made the decision in the labor case
final against them.
On June 17, 1998, a writ of execution for the
amount of P461,514.67 was served by the sheriff
of the NLRC on respondent to collect on the
supersedeas bond. This was to fully satisfy the
judgment amount in the labor case. Respondent
paid to the NLRC the amount guaranteed by the
bond. It notified petitioners and forthwith

47

deposited the undated check. It was, however,

dishonored because the account was already
closed.9
On December 3, 1998, respondent filed in the
Regional Trial Court (RTC) of Cebu City, Branch
22,10 a complaint for sum of money and damages
with prayer for a writ of preliminary attachment
against petitioners. The RTC ruled in favor of
respondent. It ordered petitioners to pay to
respondent the amount of P461,514.67 plus legal
interest of 6% per annum, attorneys fees
equivalent to 10% of P461,514.67 andP10,000 as
litigation expenses.
On appeal, the CA affirmed the RTCs decision but
deleted the award of attorneys fees and litigation
expenses for lack of basis. Reconsideration was
denied in a resolution dated November 24, 2005.
The CA agreed with the RTC that the surety
agreement between petitioners and respondent
had been perfected. Its perfection was not
dependent on the acceptance by the NLRC of the
appeal of petitioners in the labor case. Thus,
respondent correctly paid the indebtedness of
petitioners.11
Hence this petition raising two issues: (1) whether
the surety agreement was perfected and (2)
whether petitioners are liable to respondent.
Petitioners argue that one of the conditions of the
bond was to stay the execution of the judgment
in the labor case:
"WHEREAS, [petitioners] being dissatisfied with
the decision/judgment desired to stay and
suspend the execution of the same pending
appeal;
WHEREAS, in order to stay the execution of
the above-mentioned decision/judgment,
[petitioners] are willing to post bond
xxxx"12 (Emphasis supplied)
Therefore, they insist that the surety agreement
was not perfected because the execution of the
judgment was not stayed considering that the
NLRC rejected the bond for being posted out of
time and dismissed the appeal.
We disagree.
There is no dispute that the parties entered into a
contract of suretyship wherein respondent as
surety bound itself solidarily with petitioners (the
principal debtors) to fulfill an obligation. 13 The
obligation was to pay the monetary award in the
labor case should the decision become final and
executory against petitioners.
Contracts are perfected by mere consent. This is
manifested by the meeting of the offer and the
acceptance upon the object and cause which are
to constitute the contract.14 Here, the object of
the contract was the issuance of the bond. 15 The
cause or consideration consisted of the premiums
paid. The bond was issued after petitioners

complied with the requirements. At this point, the

contract of suretyship was perfected.
Petitioners cannot insist that the contract was
subject to a suspensive condition,16that is, the
stay of the judgment of the labor arbiter. This was
not a condition for the perfection of the contract
but merely a statement of the purpose of the
bond in its "whereas" clauses. Aside from this,
there was no mention of the condition that before
the contract could become valid and binding,
perfection of the appeal was necessary.17 If the
intention was to make it a suspensive condition,
then the parties should have made it clear in
certain and unambiguous terms.
From the moment the contract is perfected, the
parties are bound to comply with what is
expressly stipulated as well as with what is
required by the nature of the obligation in
keeping with good faith, usage and the law.18 A
surety is considered in law to be on the same
footing as the principal debtor in relation to
whatever is adjudged against the
latter.19 Accordingly, as surety of petitioners,
respondent was obliged to pay on the bond when
a writ of execution was served on it.
Consequently, it now has the right to seek full
reimbursement from petitioners for the amount
paid.20
Moreover, petitioners21 signed an indemnity
agreement which contained the following
stipulations:
INDEMNIFICATION: - To indemnify the SURETY for
all damages, payments, advances, losses, costs,
taxes, penalties, charges, attorneys fees and
expenses of whatever kind and nature that the
SURETY may at any time sustain or incur as a
consequence of having become surety upon the
above-mentioned bond, and to pay,reimburse
and make good to the SURETY, its successors
and assigns, all sums or all money which it
shall pay or become liable to pay by virtue
to said bondeven if said payment/s or liability
exceeds the amount of the bond. The indemnity
for attorneys fees shall be twenty (20%) percent
of the amount claimed by the SURETY, but in no
case less than TWO THOUSAND PESOS
(P2,000.00), whether the SURETYS claim is
settled judicially or extra-judicially.
INCONSTESTABILITY OF PAYMENT MADE BY THE
SURETY: - Any payment or disbursement
made by the SURETY on account of the
above-mentioned bond, either in the belief
that the SURETY was obligated to made such
payment or in the belief that said payment was
necessary in order to avoid a greater loss or
obligation for which the SURETY might be liable
by virtue of the terms of the above-mentioned
bond shall be final, and will not be contested

48

by the undersigned, who jointly and

severally bind themselves to indemnity the
SURETY for any such payment or
disbursement. (Emphasis supplied)
Undoubtedly, under these provisions, they are
obligated to reimburse respondent.22
One final note. It was never respondents
obligation to inquire about the deadline for which
the bond was being issued. It was the duty of
petitioners to make sure it was filed on time. The
delay in filing the bond was purely the result of
petitioners negligence or oversight. They should
bear the consequences.
WHEREFORE, the petition is hereby DENIED.

Said due date expired without the promissors

having paid their obligation. Consequently, on
November 14, 1983 and on June 8, 1984, private
respondent sent petitioner telegrams demanding
payment thereof. 2 On December 11, 1984 private
respondent also sent by registered mail a final
letter of demand to Rene C. Naybe. Since both
obligors did not respond to the demands made,
private respondent filed on January 24, 1986 a
complaint for collection of the sum of P50,000.00
against the three obligors.
On November 25, 1986, the complaint was
dismissed for failure of the plaintiff to prosecute
the case. However, on January 9, 1987, the lower
court reconsidered the dismissal order and
required the sheriff to serve the summonses. On
January 27, 1987, the lower court dismissed the
case against defendant Pantanosas as prayed for
by the private respondent herein. Meanwhile,
only the summons addressed to petitioner was
served as the sheriff learned that defendant
Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in
January 1983, he was approached by his friend,
Rudy Campos, who told him that he was a partner
of Pio Tio, the branch manager of private
respondent in Cagayan de Oro City, in the falcata
logs operation business. Campos also intimated
to him that Rene C. Naybe was interested in the
business and would contribute a chainsaw to the
venture. He added that, although Naybe had no
money to buy the equipment, Pio Tio had assured
Naybe of the approval of a loan he would make
with private respondent. Campos then persuaded
petitioner to act as a "co-maker" in the said loan.
Petitioner allegedly acceded but with the
understanding that he would only be a co-maker
for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a
blank promissory note were brought to him by
Campos at his office. He affixed his signature
thereto but in one copy, he indicated that he
bound himself only for the amount of P5,000.00.
Thus, it was by trickery, fraud and
misrepresentation that he was made liable for the
amount of P50,000.00.
In the aforementioned decision of the lower court,
it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted
signature of the petitioner in the promissory
note. 3 Hence, the latter's uncorroborated
testimony on his limited liability cannot prevail
over the presumed regularity and fairness of the
transaction, under Sec. 5 (q) of Rule 131. The
lower court added that it was "rather odd" for
petitioner to have indicated in a copy and not in
the original, of the promissory note, his supposed
obligation in the amount of P5,000.00 only.

G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK
OF COMMUNICATIONS, respondents.
ROMERO, J.:p
This is a petition for review on certiorari of the
decision of the Court of Appeals affirming that of
the Regional Trial Court of Misamis Oriental,
Branch 18, 1 which disposed of Civil Case No.
10507 for collection of a sum of money and
damages, as follows:
WHEREFORE, defendant
BALDOMERO L. INCIONG, JR. is
adjudged solidarily liable and
ordered to pay to the plaintiff
Philippine Bank of
Communications, Cagayan de Oro
City, the amount of FIFTY
THOUSAND PESOS (P50,000.00),
with interest thereon from May 5,
1983 at 16% per annum until fully
paid; and 6% per annum on the
total amount due, as liquidated
damages or penalty from May 5,
1983 until fully paid; plus 10% of
the total amount due for expenses
of litigation and attorney's fees;
and to pay the costs.
The counterclaim, as well as the
cross claim, are dismissed for lack
of merit.
SO ORDERED.
Petitioner's liability resulted from the promissory
note in the amount of P50,000.00 which he
signed with Rene C. Naybe and Gregorio D.
Pantanosas on February 3, 1983, holding
themselves jointly and severally liable to private
respondent Philippine Bank of Communications,
Cagayan de Oro City branch. The promissory note
was due on May 5, 1983.

49

Finally, the lower court held that, even granting

that said limited amount had actually been
agreed upon, the same would have been merely
collateral between him and Naybe and, therefore,
not binding upon the private respondent as
creditor-bank.
The lower court also noted that petitioner was a
holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of
his concerns, and that, on the witness stand, Pio
Tio denied having participated in the alleged
business venture although he knew for a fact that
the falcata logs operation was encouraged by the
bank for its export potential.
Petitioner appealed the said decision to the Court
of Appeals which, in its decision of August 31,
1990, affirmed that of the lower court. His motion
for reconsideration of the said decision having
been denied, he filed the instant petition for
review on certiorari.
On February 6, 1991, the Court denied the
petition for failure of petitioner to comply with the
Rules of Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent
court had committed any reversible error in its
questioned decision. 4 His motion for the
reconsideration of the denial of his petition was
likewise denied with finality in the Resolution of
April 24, 1991. 5 Thereafter, petitioner filed a
motion for leave to file a second motion for
reconsideration which, in the Resolution of May
27, 1991, the Court denied. In the same
Resolution, the Court ordered the entry of
judgment in this case.6
Unfazed, petitioner filed a notion for leave to file
a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt
No. 3268 to page 14 of the petition in compliance
with Circular No. 1-88. Thus, on August 7, 1991,
the Court granted his prayer that his petition be
given due course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit
executed on May 3, 1988, or after the rendition of
the decision of the lower court, by Gregorio
Pantanosas, Jr., an MTCC judge and petitioner's
co-maker in the promissory note. It supports
petitioner's allegation that they were induced to
sign the promissory note on the belief that it was
only for P5,000.00, adding that it was Campos
who caused the amount of the loan to be
increased to P50,000.00.
The affidavit is clearly intended to buttress
petitioner's contention in the instant petition that
the Court of Appeals should have declared the
promissory note null and void on the following
grounds: (a) the promissory note was signed in
the office of Judge Pantanosas, outside the

premises of the bank; (b) the loan was incurred

for the purpose of buying a second-hand
chainsaw which cost only P5,000.00; (c) even a
new chainsaw would cost only P27,500.00; (d) the
loan was not approved by the board or credit
committee which was the practice, as it exceeded
P5,000.00; (e) the loan had no collateral; (f)
petitioner and Judge Pantanosas were not present
at the time the loan was released in
contravention of the bank practice, and (g)
notices of default are sent simultaneously and
separately but no notice was validly sent to
him. 8 Finally, petitioner contends that in signing
the promissory note, his consent was vitiated by
fraud as, contrary to their agreement that the
loan was only for the amount of P5,000.00, the
promissory note stated the amount of
P50,000.00.
The above-stated points are clearly factual.
Petitioner is to be reminded of the basic rule that
this Court is not a trier of facts. Having lost the
chance to fully ventilate his factual claims below,
petitioner may no longer be accorded the same
opportunity in the absence of grave abuse of
discretion on the part of the court below. Had he
presented Judge Pantanosas affidavit before the
lower court, it would have strengthened his claim
that the promissory note did not reflect the
correct amount of the loan.
Nor is there merit in petitioner's assertion that
since the promissory note "is not a public deed
with the formalities prescribed by law but . . . a
mere commercial paper which does not bear the
signature of . . . attesting witnesses," parol
evidence may "overcome" the contents of the
promissory note. 9 The first paragraph of the parol
evidence rule 10states:
When the terms of an agreement
have been reduced to writing, it is
considered as containing all the
terms agreed upon and there can
be, between the parties and their
successors in interest, no evidence
of such terms other than the
contents of the written agreement.
Clearly, the rule does not specify that the
written agreement be a public document.
What is required is that the agreement be in
writing as the rule is in fact founded on "long
experience that written evidence is so much more
certain and accurate than that which rests in
fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their
contract in writing, to admit weaker evidence to
control and vary the stronger and to show that
the
parties intended a different contract from that
expressed in the writing signed by them." 11 Thus,

50

for the parol evidence rule to apply, a written

contract need not be in any particular form, or be
signed by both parties. 12 As a general rule, bills,
notes and other instruments of a similar nature
are not subject to be varied or contradicted by
parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was
actually in the right direction towards proving
that he and his co-makers agreed to a loan of
P5,000.00 only considering that, where a parol
contemporaneous agreement was the inducing
and moving cause of the written contract, it may
be shown by parol evidence. 15 However, fraud
must be established by clear and convincing
evidence, mere preponderance of evidence, not
even being adequate. 16 Petitioner's attempt to
prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and,
expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the
complaint against Naybe, the principal debtor,
and against Pantanosas, his co-maker,
constituted a release of his obligation, especially
because the dismissal of the case against
Pantanosas was upon the motion of private
respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which
provides that:
The guarantors, even though they
be solidary, are released from their
obligation whenever by some act of
the creditor, they cannot be
subrogated to the rights,
mortgages, and preferences of the
latter.
It is to be noted, however, that petitioner signed
the promissory note as a solidary co-maker and
not as a guarantor. This is patent even from the
first sentence of the promissory note which states
as follows:
Ninety one (91) days after date, for
value received, I/we, JOINTLY and
SEVERALLY promise to pay to the
PHILIPPINE BANK OF
COMMUNICATIONS at its office in
the City of Cagayan de Oro,
Philippines the sum of FIFTY
THOUSAND ONLY (P50,000.00)
Pesos, Philippine Currency,
together with interest . . . at the
rate of SIXTEEN (16) per cent per
annum until fully paid.
A solidary or joint and several obligation is one in
which each debtor is liable for the entire
obligation, and each creditor is entitled to
demand the whole obligation. 17 on the other
hand, Article 2047 of the Civil Code states:

By guaranty a person, called the

guarantor, binds himself to the
creditor to fulfill the obligation of
the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily
with the principal debtor, the
provisions of Section 4, Chapter 3,
Title I of this Book shall be
observed. In such a case the
contract is called a suretyship.
(Emphasis supplied.)
While a guarantor may bind himself
solidarily with the principal debtor, the
liability of a guarantor is different from
that of a solidary debtor. Thus, Tolentino
explains:
A guarantor who binds himself in
solidum with the principal debtor
under the provisions of the second
paragraph does not become a
solidary co-debtor to all intents and
purposes. There is a difference
between a solidary co-debtor and
a fiador in solidum (surety). The
latter, outside of the liability he
assumes to pay the debt before the
property of the principal debtor has
been exhausted, retains all the
other rights, actions and benefits
which pertain to him by reason of
the fiansa; while a solidary codebtor has no other rights than
those bestowed upon him in
Section 4, Chapter 3, Title I, Book
IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil
Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there
are two or more debtors in one and the same
obligation, the presumption is that the obligation
is joint so that each of the debtors is liable only
for a proportionate part of the debt. There is a
solidary liability only when the obligation
expressly so states, when the law so provides or
when the nature of the obligation so requires. 19
Because the promissory note involved in this case
expressly states that the three signatories therein
are jointly and severally liable, any one, some or
all of them may be proceeded against for the
entire obligation. 20 The choice is left to the
solidary creditor to determine against whom he
will enforce collection. 21 Consequently, the
dismissal of the case against Judge Pontanosas
may not be deemed as having discharged
petitioner from liability as well. As regards Naybe,
suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may

51

only have recourse against his co-makers, as

provided by law.
WHEREFORE, the instant petition for review
on certiorari is hereby DENIED and the
questioned decision of the Court of Appeals is
AFFIRMED. Costs against petitioner.
G.R. No. 151953
June 29, 2007
SALVADOR P. ESCAO and MARIO M.
SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that
petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked.
The more perplexing question is whether this
obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint
as argued by petitioners.
On 28 April 1980, Private Development
Corporation of the Philippines (PDCP)1 entered
into a loan agreement with Falcon Minerals, Inc.
(Falcon) whereby PDCP agreed to make available
and lend to Falcon the amount of US$320,000.00,
for specific purposes and subject to certain terms
and conditions.2 On the same day, three
stockholders-officers of Falcon, namely:
respondent Rafael Ortigas, Jr. (Ortigas), George A.
Scholey and George T. Scholey executed an
Assumption of Solidary Liability whereby they
agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and
punctual payment" of the loan contracted by
Falcon with PDCP.3 In the meantime, two separate
guaranties were executed to guarantee the
payment of the same loan by other stockholders
and officers of Falcon, acting in their personal and
individual capacities. One Guaranty 4 was
executed by petitioner Salvador Escao (Escao),
while the other5 by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L.
Inductivo (Inductivo) and Joaquin J. Rodriguez
(Rodriguez).
Two years later, an agreement developed to cede
control of Falcon to Escao, Silos and Joseph M.
Matti (Matti). Thus, contracts were executed
whereby Ortigas, George A. Scholey, Inductivo
and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon
to Escao, Silos and Matti.6 Part of the
consideration that induced the sale of stock was a
desire by Ortigas, et al., to relieve themselves of
all liability arising from their previous joint and
several undertakings with Falcon, including those
related to the loan with PDCP. Thus, an
Undertaking dated 11 June 1982 was executed by
the concerned parties,7 namely: with Escao,

Silos and Matti identified in the document as

"SURETIES," on one hand, and Ortigas, Inductivo
and the Scholeys as "OBLIGORS," on the other.
The Undertaking reads in part:
3. That whether or not SURETIES are able to
immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic],
SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs said
guarantees [sic] to PDCP and PAIC under the
following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment
of FALCONs obligations with it, any of [the]
OBLIGORS shall immediately inform SURETIES
thereof so that the latter can timely take
appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC
against any and/or all of OBLIGORS for collection
of said loans and/or credit facilities, SURETIES
agree to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution,
indemnity, subrogation or other relief in respect
to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for
any reason made to pay any amount to PDCP
and/or PAIC, SURETIES shall reimburse OBLIGORS
for said amount/s within seven (7) calendar days
from such payment;
4. OBLIGORS hereby waive in favor of SURETIES
any and all fees which may be due from FALCON
arising out of, or in connection with, their said
guarantees[sic].8
Falcon eventually availed of the sum of
US$178,655.59 from the credit line extended by
PDCP. It would also execute a Deed of Chattel
Mortgage over its personal properties to further
secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed
on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07, which
Falcon did not satisfy despite demand.9
On 28 April 1989, in order to recover the
indebtedness, PDCP filed a complaint for sum of
money with the Regional Trial Court of Makati
(RTC) against Falcon, Ortigas, Escao, Silos,
Silverio and Inductivo. The case was docketed as
Civil Case No. 89-5128. For his part, Ortigas filed
together with his answer a cross-claim against his
co-defendants Falcon, Escao and Silos, and also
manifested his intent to file a third-party
complaint against the Scholeys and Matti.10 The
cross-claim lodged against Escao and Silos was
predicated on the 1982 Undertaking, wherein
they agreed to assume the liabilities of Ortigas
with respect to the PDCP loan.

52

Escao, Ortigas and Silos each sought to seek a

settlement with PDCP. The first to come to terms
with PDCP was Escao, who in December of 1993,
entered into a compromise agreement whereby
he agreed to pay the bankP1,000,000.00. In
exchange, PDCP waived or assigned in favor of
Escao one-third (1/3) of its entire claim in the
complaint against all of the other defendants in
the case.11 The compromise agreement was
approved by the RTC in a Judgment12 dated 6
January 1994.
Then on 24 February 1994, Ortigas entered into
his own compromise agreement13 with PDCP,
allegedly without the knowledge of Escao, Matti
and Silos. Thereby, Ortigas agreed to pay
PDCP P1,300,000.00 as "full satisfaction of the
PDCPs claim against Ortigas,"14 in exchange for
PDCPs release of Ortigas from any liability or
claim arising from the Falcon loan agreement,
and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial
Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver
of its claims against him.15
In the meantime, after having settled with PDCP,
Ortigas pursued his claims against Escao, Silos
and Matti, on the basis of the 1982 Undertaking.
He initiated a third-party complaint against Matti
and Silos,16 while he maintained his cross-claim
against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao,
Silos and Matti. On 5 October 1995, the RTC
issued the Summary Judgment, ordering Escao,
Silos and Matti to pay Ortigas, jointly and
severally, the amount of P1,300,000.00, as well
as P20,000.00 in attorneys fees.17 The trial court
ratiocinated that none of the third-party
defendants disputed the 1982 Undertaking, and
that "the mere denials of defendants with respect
to non-compliance of Ortigas of the terms and
conditions of the Undertaking, unaccompanied by
any substantial fact which would be admissible in
evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a
motion for summary judgment, even if such facts
were raised in the pleadings."18 In an Order dated
7 March 1996, the trial court denied the motion
for reconsideration of the Summary Judgment and
awarded Ortigas legal interest of 12% per annum
to be computed from 28 February 1994.19
From the Summary Judgment, recourse was had
by way of appeal to the Court of Appeals. Escao
and Silos appealed jointly while Matti appealed by
his lonesome. In a Decision20 dated 23 January
2002, the Court of Appeals dismissed the appeals
and affirmed the Summary Judgment. The
appellate court found that the RTC did not err in
rendering the summary judgment since the three

appellants did not effectively deny their execution

of the 1982 Undertaking. The special defenses
that were raised, "payment and excussion," were
characterized by the Court of Appeals as
"appear[ing] to be merely sham in the light of the
pleadings and supporting documents and
affidavits."21 Thus, it was concluded that there
was no genuine issue that would still require the
rigors of trial, and that the appealed judgment
was decided on the bases of the undisputed and
established facts of the case.
Hence, the present petition for review filed by
Escao and Silos.22 Two main issues are raised.
First, petitioners dispute that they are liable to
Ortigas on the basis of the 1982 Undertaking, a
document which they do not disavow and have in
fact annexed to their petition. Second, on the
assumption that they are liable to Ortigas under
the 1982 Undertaking, petitioners argue that they
are jointly liable only, and not solidarily. Further
assuming that they are liable, petitioners also
submit that they are not liable for interest and if
at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge,
whether in their petition or their memorandum
before the Court, the appropriateness of the
summary judgment as a relief favorable to
Ortigas. Under Section 3, Rule 35 of the 1997
Rules of Civil Procedure, summary judgment may
avail if the pleadings, supporting affidavits,
depositions and admissions on file show that,
except as to the amount of damages, there is no
genuine issue as to any material fact and that the
moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to
demonstrate before us that there existed a
genuine issue as to any material fact that would
preclude summary judgment. Thus, we affirm
with ease the common rulings of the lower courts
that summary judgment is an appropriate
recourse in this case.
The vital issue actually raised before us is
whether petitioners were correctly held liable to
Ortigas on the basis of the 1982 Undertaking in
this Summary Judgment. An examination of the
document reveals several clauses that make it
clear that the agreement was brought forth by
the desire of Ortigas, Inductivo and the Scholeys
to be released from their liability under the loan
agreement which release was, in turn, part of the
consideration for the assignment of their shares
in Falcon to petitioners and Matti. The whereas
clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with
PDCP, and that "amongst the consideration for
OBLIGORS and/or their principals aforesaid selling
is SURETIES relieving OBLIGORS of any and all
liability arising from their said joint and several

53

undertakings with FALCON."23 Most crucial is the

clause in Paragraph 3 of the Undertaking wherein
petitioners "irrevocably agree and undertake to
assume all of OBLIGORs said guarantees [sic] to
PDCP x x x under the following terms and
conditions."24
At the same time, it is clear that the assumption
by petitioners of Ortigass "guarantees" [sic] to
PDCP is governed by stipulated terms and
conditions as set forth in sub-paragraphs (a) to
(c) of Paragraph 3. First, upon receipt by "any of
OBLIGORS" of any demand from PDCP for the
payment of Falcons obligations with it, "any of
OBLIGORS" was to immediately inform
"SURETIES" thereof so that the latter can timely
take appropriate measures. Second, should "any
and/or all of OBLIGORS" be impleaded by PDCP in
a suit for collection of its loan, "SURETIES
agree[d] to defend OBLIGORS at their own
expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other
relief"25 in respect to any of the claims of PDCP.
Third, if any of the "OBLIGORS is for any reason
made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such
payment."26
Petitioners claim that, contrary to paragraph 3(c)
of the Undertaking, Ortigas was not "made to
pay" PDCP the amount now sought to be
reimbursed, as Ortigas voluntarily paid PDCP the
amount of P1.3 Million as an amicable settlement
of the claims posed by the bank against him.
However, the subject clause in paragraph 3(c)
actually reads "[i]n the event that any of
OBLIGORS is for any reason made to pay any
amount to PDCP x x x"27 As pointed out by
Ortigas, the phrase "for any reason" reasonably
includes any extra-judicial settlement of
obligation such as what Ortigas had undertaken
to pay to PDCP, as it is indeed obvious that the
phrase was incorporated in the clause to render
the eventual payment adverted to therein
unlimited and unqualified.
The interpretation posed by petitioners would
have held water had the Undertaking made clear
that the right of Ortigas to seek reimbursement
accrued only after he had delivered payment to
PDCP as a consequence of a final and executory
judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to
relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only
after Ortigas had been subjected to a final and
executory adverse judgment.
Paragraph 1 of the Undertaking enjoins
petitioners to "exert all efforts to cause PDCP x x

x to within a reasonable time release all the

OBLIGORS x x x from their guarantees [sic] to
PDCP x x x"28 In the event that Ortigas and his
fellow "OBLIGORS" could not be released from
their guaranties, paragraph 2 commits petitioners
and Matti to cause the Board of Directors of
Falcon to make a call on its stockholders for the
payment of their unpaid subscriptions and to
pledge or assign such payments to Ortigas, et al.,
as security for whatever amounts the latter may
be held liable under their guaranties. In addition,
paragraph 1 also makes clear that nothing in the
Undertaking "shall prevent OBLIGORS, or any one
of them, from themselves negotiating with PDCP
x x x for the release of their said guarantees
[sic]."29
There is no argument to support petitioners
position on the import of the phrase "made to
pay" in the Undertaking, other than an unduly
literalist reading that is clearly inconsistent with
the thrust of the document. Under the Civil Code,
the various stipulations of a contract shall be
interpreted together, attributing to the doubtful
ones that sense which may result from all of them
taken jointly.30 Likewise applicable is the provision
that if some stipulation of any contract should
admit of several meanings, it shall be understood
as bearing
that import which is most adequate to render it
effectual.31 As a means to effect the general
intent of the document to relieve Ortigas from
liability to PDCP, it is his interpretation, not that
of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the nonfulfillment of any of the other conditions set in
paragraph 3, as they claim. Following the general
assertion in the petition that Ortigas violated the
terms of the Undertaking, petitioners add that
Ortigas "paid PDCP BANK the amount of P1.3
million without petitioners ESCANO and SILOSs
knowledge and consent."32 Paragraph 3(a) of the
Undertaking does impose a requirement that any
of the "OBLIGORS" shall immediately inform
"SURETIES" if they received any demand for
payment of FALCONs obligations to PDCP, but
that requirement is reasoned "so that the
[SURETIES] can timely take appropriate
measures"33 presumably to settle the obligation
without having to burden the "OBLIGORS." This
notice requirement in paragraph 3(a) is markedly
way off from the suggestion of petitioners that
Ortigas, after already having been impleaded as a
defendant in the collection suit, was obliged
under the 1982 Undertaking to notify them before
settling with PDCP.
The other arguments petitioners have offered to
escape liability to Ortigas are similarly weak.

54

Petitioners impugn Ortigas for having settled with

PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP
and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but
as an officer of Falcon. However, such position,
according to petitioners, could not be justified
since Ortigas later voluntarily paid PDCP the
amount of P1.3 Million. Such circumstances,
according to petitioners, amounted to estoppel on
the part of Ortigas.
Even as we entertain this argument at depth, its
premises are still erroneous. The Partial
Compromise Agreement between PDCP and
Ortigas expressly stipulated that Ortigass offer to
pay PDCP was conditioned "without [Ortigass]
admitting liability to plaintiff PDCP Banks
complaint, and to terminate and dismiss the said
case as against Ortigas solely."34 Petitioners
profess it is "unthinkable" for Ortigas to have
voluntarily paid PDCP without admitting his
liability,35 yet such contention based on
assumption cannot supersede the literal terms of
the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the
payment to PDCP after he had already assigned
his obligation to petitioners through the 1982
Undertaking. Yet the fact is PDCP did pursue a
judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not
being a party to such Undertaking, PDCP was not
precluded by a contract from pursuing its claim
against Ortigas based on the original Assumption
of Solidary Liability.
At the same time, the Undertaking did not
preclude Ortigas from relieving his distress
through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly
states that "nothing herein shall prevent
OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of
their said guarantees [sic]."36 Simply put, the
Undertaking did not bar Ortigas from pursuing his
own settlement with PDCP. Neither did the
Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid
PDCP through his own settlement. The stipulation
that if Ortigas was "for any reason made to pay
any amount to PDCP[,] x x x SURETIES shall
reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such
payment"37 makes it clear that petitioners remain
liable to reimburse Ortigas for the sums he paid
PDCP.
We now turn to the set of arguments posed by
petitioners, in the alternative, that is, on the
assumption that they are indeed liable.

Petitioners submit that they could only be held

jointly, not solidarily, liable to Ortigas, claiming
that the Undertaking did not provide for express
solidarity. They cite Article 1207 of the New Civil
Code, which states in part that "[t]here is a
solidary liability only when the obligation
expressly so states, or when the law or the nature
of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as
Matti, are jointly and severally liable for the
Undertaking, as the language used in the
agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas
group) and the sureties (Escao group). Ortigas
points out that the Undertaking uses the word
"SURETIES" although the document, in describing
the parties. It is further contended that the
principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners
are solidarily liable "because the total loan
obligation can not be paid or settled to free or
release the OBLIGORS if one or any of the
SURETIES default from their obligation in the
Undertaking."39
In case, there is a concurrence of two or more
creditors or of two or more debtors in one and the
same obligation, Article 1207 of the Civil Code
states that among them, "[t]here is a solidary
liability only when the obligation expressly so
states, or when the law or the nature of the
obligation requires solidarity." Article 1210
supplies further caution against the broad
interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself
imply indivisibility."
These Civil Code provisions establish that in case
of concurrence of two or more creditors or of two
or more debtors in one and the same obligation,
and in the absence of express and indubitable
terms characterizing the obligation as solidary,
the presumption is that the obligation is only
joint. It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary in
character to prove such fact with a
preponderance of evidence.
The Undertaking does not contain any express
stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their
obligations to the Ortigas group, or any such
terms to that effect. Hence, such obligation
established in the Undertaking is presumed only
to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to
overcome the presumption of jointness of
obligations. We rule and so hold that he failed to
discharge such burden.

55

Ortigas places primary reliance on the fact that

the petitioners and Matti identified themselves in
the Undertaking as "SURETIES", a term repeated
no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification
sufficiently establishes that the obligation of
petitioners to him was joint and solidary in
nature.
The term "surety" has a specific meaning under
our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed.
In such case the contract is called a suretyship.
[Emphasis supplied]40
As provided in Article 2047 in a surety agreement
the surety undertakes to be bound solidarily with
the principal debtor. Thus, a surety agreement is
an ancillary contract as it presupposes the
existence of a principal contract. It appears that
Ortigass argument rests solely on the solidary
nature of the obligation of the surety under
Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in
the Undertaking, however, this argument can
only be viable if the obligations established in the
Undertaking do partake of the nature of a
suretyship as defined under Article 2047 in the
first place. That clearly is not the case here,
notwithstanding the use of the nomenclature
"SURETIES" in the Undertaking.
Again, as indicated by Article 2047, a suretyship
requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation
of segregate identity from the obligation between
the principal debtor and the creditor. The
suretyship does bind the surety to the creditor,
inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in
lieu of proceeding against the principal debtor for
the same obligation.41 At the same time, there is
also a legal tie created between the surety and
the principal debtor to which the creditor is not
privy or party to. The moment the surety fully
answers to the creditor for the obligation created
by the principal debtor, such obligation is
extinguished.42 At the same time, the surety may
seek reimbursement from the principal debtor for
the amount paid, for the surety does in fact
"become subrogated to all the rights and
remedies of the creditor." 43
Note that Article 2047 itself specifically calls for
the application of the provisions on joint and

solidary obligations to suretyship

contracts.44 Article 1217 of the Civil Code thus
comes into play, recognizing the right of
reimbursement from a co-debtor (the principal
debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).45However, a significant
distinction still lies between a joint and several
debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel
any one of the joint and several debtors or the
surety alone to answer for the entirety of the
principal debt. The difference lies in the
respective faculties of the joint and several
debtor and the surety to seek reimbursement for
the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a
solidary co-debtor and a surety:
A guarantor who binds himself in solidum with
the principal debtor under the provisions of the
second paragraph does not become a solidary codebtor to all intents and purposes. There is a
difference between a solidary co-debtor and a
fiador in solidum (surety). The latter, outside of
the liability he assumes to pay the debt before
the property of the principal debtor has been
exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no
other rights than those bestowed upon him in
Section 4, Chapter 3, Title I, Book IV of the Civil
Code.
The second paragraph of [Article 2047] is
practically equivalent to the contract of
suretyship. The civil law suretyship is,
accordingly, nearly synonymous with the
common law guaranty; and the civil law
relationship existing between the co-debtors
liable in solidum is similar to the common law
suretyship.46
In the case of joint and several debtors, Article
1217 makes plain that the solidary debtor who
effected the payment to the creditor "may claim
from his co-debtors only the share which
corresponds to each, with the interest for the
payment already made." Such solidary debtor will
not be able to recover from the co-debtors the full
amount already paid to the creditor, because the
right to recovery extends only to the proportional
share of the other co-debtors, and not as to the
particular proportional share of the solidary
debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor
to the creditor, the surety who does pay the
creditor has the right to recover the full amount
paid, and not just any proportional share, from
the principal debtor or debtors. Such right to full
reimbursement falls within the other rights,
actions and benefits which pertain to the surety

56

by reason of the subsidiary obligation assumed

by the surety.
What is the source of this right to full
reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which
assures that "[t]he guarantor who pays for a
debtor must be indemnified by the latter," such
indemnity comprising of, among others, "the total
amount of the debt."47 Further, Article 2067 of the
Civil Code likewise establishes that "[t]he
guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had
against the debtor."48

existence of a surety agreement that in turn gives

rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a
corresponding set of rights and obligations as
between the "SURETIES" which petitioners and
Matti did not clearly intend.
It is not impossible that as between Escao, Silos
and Matti, there was an agreement whereby in
the event that Ortigas were to seek
reimbursement from them per the terms of the
Undertaking, one of them was to act as surety
and to pay Ortigas in full, subject to his right to
full reimbursement from the other two obligors. In
such case, there would have been, in fact, a
surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was
indeed such an agreement, it does not appear on
the record. More consequentially, no such
intention is reflected in the Undertaking itself, the
very document that creates the conditional
obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The
mere utilization of the term "SURETIES" could not
work to such effect, especially as it does not
appear who exactly is the principal debtor whose
obligation is "assured" or "guaranteed" by the
surety.
Ortigas further argues that the nature of the
Undertaking requires "solidary obligation of the
Sureties," since the Undertaking expressly seeks
to "reliev[e] obligors of any and all liability arising
from their said joint and several undertaking with
[F]alcon," and for the "sureties" to "irrevocably
agree and undertake to assume all of obligors
said guarantees to PDCP."50 We do not doubt that
a finding of solidary liability among the
petitioners works to the benefit of Ortigas in the
facilitation of these goals, yet the Undertaking
itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as
solidary. Moreover, the aims adverted to by
Ortigas do not by themselves establish that the
nature of the obligation requires solidarity. Even if
the liability of petitioners and Matti were
adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his
payment to PDCP would still be accomplished
through the complete execution of such a
judgment.
Petitioners further claim that they are not liable
for attorneys fees since the Undertaking
contained no such stipulation for attorneys fees,
and that the situation did not fall under the
instances under Article 2208 of the Civil Code
where attorneys fees are recoverable in the
absence of stipulation.
We disagree. As Ortigas points out, the acts or
omissions of the petitioners led to his being

Articles 2066 and 2067 explicitly pertain to

guarantors, and one might argue that the
provisions should not extend to sureties,
especially in light of the qualifier in Article 2047
that the provisions on joint and several
obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentinos
observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary
or several obligations, however, does not mean
that suretyship is withdrawn from the applicable
provisions governing guaranty."49 For if that were
not the implication, there would be no material
difference between the surety as defined under
Article 2047 and the joint and several debtors, for
both classes of obligors would be governed by
exactly the same rules and limitations.
Accordingly, the rights to indemnification and
subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as
well to sureties as defined under Article 2047.
These rights granted to the surety who pays
materially differ from those granted under Article
1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter
extends "only [to] the share which corresponds to
each [co-debtor]." It is for this reason that the
Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as
"SURETIES," they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to
hold, in light of the general presumption favoring
joint liability, the Court would have to be satisfied
that among the petitioners and Matti, there is one
or some of them who stand as the principal
debtor to Ortigas and another as surety who has
the right to full reimbursement from the principal
debtor or debtors. No suggestion is made by the
parties that such is the case, and certainly the
Undertaking is not revelatory of such intention. If
the Court were to give full fruition to the use of
the term "sureties" as conclusive indication of the

57

impleaded in the suit filed by PDCP. The

Undertaking was precisely executed as a means
to obtain the release of Ortigas and the Scholeys
from their previous obligations as sureties of
Falcon, especially considering that they were
already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate
petitioners to work for the release of Ortigas from
his surety agreements with Falcon. Specific
provisions likewise mandate the immediate
repayment of Ortigas should he still be made to
pay PDCP by reason of the guaranty agreements
from which he was ostensibly to be released
through the efforts of petitioners. None of these
provisions were complied with by petitioners, and
Article 2208(2) precisely allows for the recovery
of attorneys fees "[w]hen the defendants act or
omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect
his interest."
Finally, petitioners claim that they should not be
liable for interest since the Undertaking does not
contain any stipulation for interest, and assuming
that they are liable, that the rate of interest
should not be 12% per annum, as adjudged by
the RTC.
The seminal ruling in Eastern Shipping Lines, Inc.
v. Court of Appeals51 set forth the rules with
respect to the manner of computing legal
interest:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern
in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due
should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages

except when or until the demand can be

established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time
quantification of damages may be deemed to
have been reasonably ascertained). The actual
base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then
an equivalent to a forbearance of credit.52
Since what was the constituted in the
Undertaking consisted of a payment in a sum of
money, the rate of interest thereon shall be 12%
per annum to be computed from default, i.e.,
from judicial or extrajudicial demand. The interest
rate imposed by the RTC is thus proper. However,
the computation should be reckoned from judicial
or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial
demand to petitioners and Matti after he paid
PDCP, but on 14 March 1994, Ortigas made a
judicial demand when he filed a Third-Party
Complaint praying that petitioners and Matti be
made to reimburse him for the payments made to
PDCP. It is the filing of this Third Party Complaint
on 14 March 1994 that should be considered as
the date of judicial demand from which the
computation of interest should be
reckoned.53 Since the RTC held that interest
should be computed from 28 February 1994, the
appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART.
The Order of the Regional Trial Court dated 5
October 1995 is modified by declaring that
petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent
Rafael Ortigas, Jr. in the amount
of P1,300,000.00. The Order of the Regional Trial
Court dated 7 March 1996 is MODIFIED in that the
legal interest of 12% per annum on the amount
of P1,300,000.00 is to be computed from 14
March 1994, the date of judicial demand, and not
from 28 February 1994 as directed in the Order of
the lower court. The assailed rulings are affirmed
in all other respects. Costs against petitioners.
SO ORDERED.

58

LIM TAY, petitioner,

vs.
COURT OF APPEALS, GO FAY AND CO. INC.,
SY GUIOK, and THE ESTATE OF ALFONSO
LIM, respondents.

. . . On January 8, 1980,
Respondent-Appellee Sy Guiok
secured a loan from the [p]etitioner
in the amount of P40,000 payable
within six (6) months. To secure the
payment of the aforesaid loan and
interest thereon, Respondent Guiok
executed a Contract of Pledge in
favor of the [p]etitioner whereby he
pledged his three hundred (300)
shares of stock in the Go Fay &
Company Inc., Respondent
Corporation, for brevity's sake.
Respondent Guiok obliged himself
to pay interest on said loan at the
rate of 10% per annum from the
date of said contract of pledge. On
the same date, Alfonso Sy Lim
secured a loan from the [p]etitioner
in the amount of P40,000 payable
in six (6) months. To secure the
payment of his loan, Sy Lim
executed a "Contract of Pledge"
covering his three hundred (300)
shares of stock in Respondent
Corporation. Under said contract,
Sy Lim obliged himself to pay
interest on his loan at the rate of
10% per annum from the date of
the execution of said contract.
Under said "Contracts of Pledge,"
Respondent[s] Guiok and Sy Lim
covenanted, inter alia, that:
3. In the event of the
failure of the
PLEDGOR to pay the
amount within a
period of six (6)
months from the
date hereof, the
PLEDGEE is hereby
authorized to
foreclose the pledge
upon the said shares
of stock hereby
created by selling
the same at public or
private sale with or
without notice to the
PLEDGOR, at which
sale the PLEDGEE
may be the
purchaser at his
option; and the
PLEDGEE is hereby
authorized and
empowered at his
option to transfer the

PANGANIBAN, J.:
The duty of a corporate secretary to record
transfers of stocks is ministerial. However, he
cannot be compelled to do so when the
transferee's title to said shares has no prima
facie validity or is uncertain. More specifically, a
pledgor, prior to foreclosure and sale, does not
acquire ownership rights over the pledged shares
and thus cannot compel the corporate secretary
to record his alleged ownership of such shares on
the basis merely of the contract of pledge.
Similarly, the SEC does not acquire jurisdiction
over a dispute when a party's claim to being a
shareholder is, on the face of the complaint,
invalid or inadequate or is otherwise negated by
the very allegations of such complaint.
Mandamus will not issue to establish a right, but
only to enforce one that is already established.
Statement of the Case
There are the principles, used by this Court in
resolving this Petition for Review
on Certiorari before us, assailing the October 24,
1996 Decision 1 of the Court of Appeals 2 in CAGR SP No. 40832, the dispositive portion of which
reads:
IN THE LIGHT OF ALL THE
FOREGOING, the Petition at bench
is DENIED DUE COURSE and is
hereby DISMISSED. With costs
against the [p]etitioner. 3
By the foregoing disposition, the Court of Appeals
effectively affirmed the March 7, 1996
Decision 4 of the Securities and Exchange
Commission (SEC) en banc:
WHEREFORE, in view of all the
foregoing, judgment is hereby
rendered dismissing the appeal on
the ground that mandamus will
only issue upon a clear showing of
ownership over the assailed shares
of stock, [t]he determination of
which, on the basis of the foregoing
facts, is within the jurisdiction of
the regular courts and not with the
SEC. 5
The SEC en banc upheld the August 16, 1993
Decision 6 of SEC Hearing Officer Rolando C.
Malabonga, which dismissed the action for
mandamus filed by petitioner.
The Facts
As found by the Court of Appeals, the facts of the
case are as follows:

59

said shares of stock

on the books of the
corporation to his
own name and to
hold the certificate
issued in lieu thereof
under the terms of
this pledge, and to
sell the said shares
to issue to him and
to apply the
proceeds of the sale
to the payment of
the said sum and
interest, in the
manner hereinabove
provided;
4. In the event of the
foreclosure of this
pledge and the sale
of the pledged
certificate, any
surplus remaining in
the hands of the
PLEDGEE after the
payment of the said
sum and interest,
and the expenses, if
any, connected with
the foreclosure sale,
shall be paid by the
PLEDGEE to the
PLEDGOR;
5. Upon payment of
the said amount and
interest in full, the
PLEDGEE will, on
demand of the
PLEDGOR, redeliver
to him the said
shares of stock by
surrendering the
certificate delivered
to him by the
PLEDGOR or by
retransferring each
share to the
PLEDGOR, in the
event that the
PLEDGEE, under the
option hereby
granted, shall have
caused such shares
to be transferred to
him upon the books
of the issuing
company."(idem, sup
ra)

Respondent Guiok and Sy Lim

endorsed their respective shares of
stock in blank and delivered the
same to the [p]etitioner. 7
However, Respondent Guiok and Sy
Lim failed to pay their respective
loans and the accrued interests
thereon to the [p]etitioner. In
October, 1990, the [p]etitioner filed
a "Petition for Mandamus" against
Respondent Corporation, with the
SEC entitled "Lim Tay versus Go Fay
& Company. Inc., SEC Case No.
03894", praying that:
PRAYER
WHEREFORE,
premises considered,
it is respectfully
prayed that an order
be issued directing
the corporate
secretary of
[R]espondent Go Fay
& Co., Inc. to register
the stock transfers
and issue new
certificates in favor
of Lim Tay. It is
likewise prayed that
[R]espondent Go Fay
& Co., Inc[.] be
ordered to pay all
dividends due and
unclaimed on the
said certificates to
[P]laintiff Lim Tay.
Plaintiff further prays
for such other relief
just and equitable in
the premises. ( page
34,Rollo)
The [p]etitioner alleged, inter alia,
in his Petition that the controversy
between him as stockholder and
the Respondent Corporation was
intra-corporate in view of the
obstinate refusal of the corporate
secretary of Respondent
Corporation to record the transfer
of the shares of stock of
Respondent Guiok and Sy Lim in
favor of and under the name of the
[p]etitioner and to issue new
certificates of stock to the
[p]etitioner.
The Respondent Corporation filed
its Answer to the Complaint and

60

alleged, as Affirmative Defense,

that:
AFFIRMATIVE
DEFENSE
7. Respondent
repleads and
incorporates herein
by reference the
foregoing
allegations.
8. The Complaint
states no cause of
action against
[r]espondent.
9. Complainant is not
a stockholder of
[r]espondent. Hence,
the Honorable
Commission has no
jurisdiction to enter
the present
controversy since
their [sic] is no
intracorporate
relationship between
complainant and
respondent.
10. Granting
arguendo that a
pledge was
constituted over the
shareholdings of Sy
Guiok in favor of the
complainant and that
the former defaulted
in the payment of his
obligations to the
latter, the same did
not automatically
vest [i]n complainant
ownership of the
pledged shares.
( pace 37, Rollo)
In the interim, Sy Lim died.
Respondents Guiok and the
Intestate Estate of Alfonso Sy Lim,
represented by Conchita Lim, filed
their Answer-In-Intervention with
the SEC alleging, inter alia, that:
xxx xxx xxx
3. Deny specifically
the allegation under
paragraph 5 of the
Complaint that,
failure to pay the
loan within the
contract period
automatically

foreclosed the
pledged shares of
stocks and that the
share of stocks are
automatically
purchased by the
plaintiff, for being
false and distorted,
the truth being that
pursuant to the [sic]
paragraph 3 of the
contract of pledges,
Annexes "A" and "B",
it is clear that upon
failure to pay the
amount within the
stipulated period, the
pledgee is
authorized to
foreclose the pledge
and thereafter, to
sell the same to
satisfy the loan.
[H]owever, to this
point in time, plaintiff
has not performed
any operative act of
foreclosing the
shares of stocks of
[i]ntervenors in
accordance with the
Chattel Mortgage
law, [n]either was
there any sale of
stocks by way of
public or private
auction made
after foreclosure in
favor of the plaintiff
to speak about, and
therefore, the
respondent company
could not be force[d]
to [sic] by way of
mandamus, to
transfer the subject
shares of stocks from
the name of your
[i]ntervenors to that
of the plaintiff in the
absence of clear and
legal basis for such;
4. DENY specifically
the allegations under
paragraphs 6, 7 and
8 of the complaint as
to the existence of
the alleged

61

intracorporate
dispute between
plaintiff and
company for being
without proper and
legal basis. In the
first place, plaintiff is
not a stockholder of
the respondent
corporation; there
was no foreclosure of
shares executed in
accordance with the
Chattel Mortgage
Law whatsoever;
there were no sales
consummated that
would transfer to the
plaintiff the subject
shares of stocks and
therefore, any
demand to transfer
the shares of stocks
to the name of the
plaintiff has no legal
basis. In the second
place, [i]ntervenors
had been in the past
negotiating possible
compromise and at
the same time, had
tendered payment of
the loan secured by
the subject pledges
but plaintiff refused
unjustifiably to
oblige and accept
payment o[r] even
agree on the
computation of the
principal amount of
the loan and
interest on top of a
substantial amount
offered just to settle
and compromise the
indebtedness of
[i]ntervenors;
II. SPECIAL
AFFIRMATIVE
DEFENSES
Intervenors replead
by way of reference
all the foregoing
allegations to form
part of the special
affirmative defenses;

5. This Honorable
Commission has no
jurisdiction over the
person of the
respondent and
nature of the action,
plaintiff having no
personality at all to
compel respondent
by way of mandamus
to perform certain
corporate
function[s];
6. The complaint
states no cause of
action;
7. That respondent is
not [a] real party in
interest;
8. The appropriation
of the subject shares
of stocks by plaintiff,
without compliance
with the formality of
law, amounted to
"[p]actum
commis[s]orium"
therefore, null and
void;
9. Granting for the
sake of argument
only that there was a
valid foreclosure and
sale of the subject
st[o]cks in favor of
the plaintiff which
[i]ntervenors deny
still paragraph 5 of
the contract allows
redemption, for
which intervenors
are willing to redeem
the share of stocks
pledged;
10. Even the Chattel
Mortgage law
allowed redemption
of the [c]hattel
foreclosed;
11. As a matter of
fact, on several
occasions,
[i]ntervenors had
made
representations with
the plaintiff for the
compromise and
settlement of all the

62

obligations secured
by the subject
pledges even
offering to pay
compensation over
and above the value
of the obligations,
interest[s] and
dividends accruing to
the share of stocks
but, plaintiff unjustly
refused to accept the
offer of payment;
( pages 39-42, Rollo)
The [r]espondents-[i]ntervenors
prayed the SEC that judgment be
rendered in their favor, as follows:
IV. PRAYER
It is respectfully
prayed to this
Honorable
Commission after
due hearing, to
dismiss the case for
lack of merit,
ordering plaintiff to
accept payment for
the loans secured by
the subject shares of
stocks and to pay
plaintiff:
1. The sum of P50,000.00, as moral
damages;
2. the sum of P50,000.00, as
attorneys fees; and,
3. costs of suit.
Other reliefs just and
equitable [are]
likewise prayed for.
( pages 42-43, Rollo)
After due proceedings, the
[h]earing [o]fficer promulgated a
Decision dismissing [p]etitioner's
Complaint on the ground that
although the SEC had jurisdiction
over the action, pursuant to the
Decision of the Supreme Court in
the case of "Rural Bank of
Salinas, et al. vs. Court of
Appeals, et al., 210 SCRA 510", he
failed to prove the legal basis for
the secretary of the Respondent
Corporation to be compelled to
register stock transfers in favor of
the [p]etitioner and to issue new
certificates of stock under his name
( pages 67-77, Rollo). The
[p]etitioner appealed the Decision

of the [h]earing [o]fficer to the SEC,

but, on March 7, 1996, the SEC
promulgated a Decision, dismissing
[p]etitioner's appeal on the
grounds that: (a) the issue between
the [p]etitioner and the
[r]espondents being one involving
the ownership of the shares of
stock pledged by Respondent
Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by
the [p]etitioner; (b) the latter had
no cause of action for mandamus
against the Respondent
Corporation, the right of ownership
of the [p]etitioner over the 300
shares of stock pledged by
Respondent Guiok and Sy Lim not
having been as yet, established,
preparatory to the institution of
said Petition for Mandamus with
the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals
ruled:
In ascertaining whether or not the
SEC had exclusive jurisdiction over
[p]etitioner's action, the [a]ppellate
[c]ourt must delve into and
ascertain: (a) whether or not there
is a need to enlist the expertise
and technical know-how of the SEC
in resolving the issue of the
ownership of the shares of stock;
(b) the status of the relationships
of the parties; [and] (c) the nature
of the question that is the subject
of the controversy. Where the
controversy is purely a civil matter
resoluble by civil law principles and
there is no need for the application
of the expertise and technical
know-how of the SEC, then the
regular courts have jurisdiction
over the action. 8 [citations
omitted]
On the issue of whether mandamus can be
availed of by the petitioner, the Court of Appeals
agreed with the SEC,viz.:
. . . [T]he [p]etitioner failed to
establish a clear and legal right to
the writ of mandamus prayed for
by him. . . . Mandamus will not
issue to enforce a right which is in
substantial dispute or to which a
substantial doubt exists . . . . The
principal function of the writ of
mandamus is to command and

63

on Abejo v. De la Cruz, 13 which upheld the

jurisdiction of the SEC over a suit filed by an
unregistered stockholder seeking to enforce his
rights. He also seeks support from Rural Bank of
Salinas, Inc. v. Court of Appeals, 14 which ruled
that the right of a transferee or an assignee to
have stocks transferred to his name was an
inherent right flowing from his ownership of the
said stocks.
The registration of shares in a stockholder's
name, the issuance of stock certificates, and the
right to receive dividends which pertain to the
said shares are all rights that flow from
ownership. The determination of whether or not a
shareholder is entitled to exercise the abovementioned rights falls within the jurisdiction of
the SEC. However, if ownership of the shares is
not clearly established and is still unresolved at
the time the action for mandamus is filed, then
jurisdiction lies with the regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth
the jurisdiction of the SEC as follows:
Sec. 5. In addition to the regulatory
and adjudicative functions of the
Securities and Exchange
Commission over corporations,
partnerships and other forms of
associations registered with it as
expressly granted under existing
laws and decrees, it shall have
original and exclusive jurisdiction
to hear and decide cases involving:
(a) Devices or schemes employed
by or any acts of the board of
directors, business associates, its
officers or partners, amounting to
fraud and misrepresentation which
may be detrimental to the interest
of the public and/or of
stockholders, partners, members of
associations or organizations
registered with the Commission;
(b) Controversies arising out of
intra-corporate or partnership
relations, between and among
stockholders, members, or
associates; between any or all of
them and the corporation,
partnership or association of which
they are stockholders, members or
associates, respectively; and
between such corporation,
partnership or association and the
State insofar as it concerns their
individual franchise or right to exist
as such entity;
(c) Controversies in the election or
appointment of directors, trustees,

expedite, and not to inquire and

adjudicate and, therefore it is not
the purpose of the writ to establish
a legal right, but to enforce one
which has already been
established. 9 [citations omitted]
The Court of Appeals debunked petitioner's claim
that he had acquired ownership over the shares
by virtue of novation, holding that respondents'
indorsement and delivery of the shares were
pursuant to Articles 2093 and 2095 of the Civil
Code and that petitioner's receipt of dividends
was in compliance with Article 2102 of the same
Code. Petitioner's claim that he had acquired
ownership of the shares by virtue of prescription
was likewise dismissed by Respondent Court in
this wise:
The prescriptive period for the
action of Respondent[s] Guiok and
Sy Lim to recover the shares of
stock from the [p]etitioner accrued
only from the time they paid their
loans and the interests thereon and
[made] a demand for their
return. 10
Hence, the petitioner brought before us this
Petition for Review on Certiorari in accordance
with Rule 45 of the Rules of Court.11
Assignment of Errors
Petitioner submits, for the consideration of this
Court, these issues: 12
(a) Whether the Securities and
Exchange Commission had
jurisdiction over the complaint filed
by the petitioner; and
(b) Whether the petitioner is
entitled to the relief of mandamus
as against the respondent Go Fay &
Co., Inc.
In addition, petitioner contends that it has
acquired ownership of the shares "through
extraordinary prescription," pursuant to Article
1132 of the Civil Code, and through respondents'
subsequent acts, which amounted to a novation
of the contracts of pledge. Petitioner also claims
that there was dacion en pago, in which the
shares of stock were deemed sold to petitioner,
the consideration for which was the
extinguishment of the loans and the interests
thereon. Petitioner likewise claims that laches
bars respondents from recovering the subject
shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intracorporate and falls within the exclusive
jurisdiction of the SEC, petitioner relies heavily

64

officers or managers of such

corporations, partnerships or
associations.
(d) Petitions of corporations,
partnerships or associations to be
declared in the state of suspension
of payments in cases where the
corporation, partnership or
association possesses property to
cover all its debts but foresees the
impossibility of meeting them when
they respectively fall due or in
cases where the corporation,
partnership or association has no
sufficient assets to cover its
liabilities, but is under the
Management Committee created
pursuant to this decree. 15
Thus, a controversy "among stockholders,
partners or associates themselves" 16 is intracorporate in nature and falls within the
jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or
tribunal over the subject matter is determined by
the allegations in the complaint. 17 In the present
case, however, petitioner's claim that he was
the owner of the shares of stock in question has
no prima facie basis.
In his Complaint, petitioner alleged that, pursuant
to the contracts of pledge, he became the owner
of the shares when the term for the loans expired.
The Complaint contained the following pertinent
averments:
xxx xxx xxx
3. On [J]anuary 8, 1990, under a
Contract of Pledge, Lim Tay
received three hundred (300)
shares of stock of Go Fay & Co.,
Inc., from Sy Guiok as security for
the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00)
Philippine currency, the sum of
which was payable within six (6)
months [with interest] at ten
percentum (10%) per annum from
the date of the execution of the
contract; a copy of this Contract of
Pledge is attached as
Annex "A" and made part hereof;
4. On the same date January 8,
1980, under a similar Contract of
Pledge, Lim Tay received three
hundred (300) shares of stock of
Go Pay & Co., Inc. from Alfonso Sy
Lim as security for the payment of
a loan of [f]orty [t]housand [p]esos
(P40,000.00) Philippine currency,
the sum of which was payable

within six (6) months [with interest]

at ten percentum (10%) per annum
from the date of the execution of
the contract; a copy of this
Contract of Pledge is attached as
Annex "B" and made part hereof;
5. By the express terms of the
agreements, upon failure of the
borrowers to pay the stated
amounts within the contract period,
the pledge is foreclosed and the
shares of stock are purchased by
[p]laintiff, who is expressly
authorized and empowered to
transfer the duly endorsed shares
of stock on the books of the
corporation to his own
name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were
made integral parts of the Complaint, contain this
common proviso:
3. In the event of the failure of the
PLEDGOR to pay the amount within
a period of six (6) months from the
date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge
upon the said shares of stock
hereby created by selling the same
at public or private sale with or
without notice to the PLEDGOR, at
which sale the PLEDGEE may be
the purchaser at his option; and
the PLEDGEE is hereby authorized
and empowered at his option, to
transfer the said shares of stock on
the books of the corporation to his
own name and to hold the
certificate issued in lieu thereof
under the terms of this pledge, and
to sell the said shares to issue to
him and to apply the proceeds of
the sale to the payment of the said
sum and interest, in the manner
hereinabove provided;
This contractual stipulation, which was part of the
Complaint, shows that plaintiff was
merely authorized to foreclose the pledge upon
maturity of the loans, not to own them. Such
foreclosure is not automatic, for it must be done
in a public or private sale. Nowhere did the
Complaint mention that petitioner had in fact
foreclosed the pledge and purchased the shares
after such foreclosure. His status as a mere
pledgee does not, under civil law, entitle him to
ownership of the subject shares. It is also
noteworthy that petitioner's Complaint did not
aver that said shares were acquired through
extraordinary prescription, novation or laches.

65

Moreover, petitioner's claim, subsequent to the

filing of the Complaint, that he acquired
ownership of the said shares through these three
modes is not indubitable and still has to be
resolved. In fact, as will be shown, such
allegation-has no merit. Manifestly, the Complaint
by itself did not contain any prima facie showing
that petitioner was the owner of the shares of
stocks. Quite the contrary, it demonstrated that
he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis
for the SEC to exercise jurisdiction over the
controversy. In fact, the very allegations of the
Complaint and its annexes negated the
jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth
in Abejo v. De la Cruz and Rural Bank of Salinas,
Inc. v. Court of Appeals is misplaced. In Abejo, he
Abejo spouses sold to Telectronic Systems, Inc.
shares of stock in Pocket Bell Philippines, Inc.
Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to
record the transfer of the shares in the corporate
books and instead asked for the annulment of the
sale, claiming that he and his wife had a
preemptive right over some of the shares, and
that his wife's shares were sold without
consideration or consent.
At the time the Bragas questioned the validity of
the sale, the contract had already been
perfected, thereby demonstrating that Telectronic
Systems, Inc. was already the prima facie owner
of the shares and, consequently, a stockholder of
Pocket Bell Philippines, Inc. Even if the sale were
to be annulled later on, Telectronic Systems, Inc.
had, in the meantime, title over the shares from
the time the sale was perfected until the time
such sale was annulled. The effects of an
annulment operate prospectively and do not, as a
rule, retroact to the time the sale was made.
Therefore, at the time the Bragas questioned the
validity of the tranfers made by the Abejos,
Telectronic Systems, Inc. was already a prima
facie shareholder of the corporation, thus making
the dispute between the Bragas and the Abejos
"intra-corporate" in nature. Hence, the Court held
that "the issue is not on ownership of shares but
rather the non-performance by the corporate
secretary of the ministerial duty of recording
transfers of shares of stock of the corporation of
which he is secretary." 19
Unlike Abejo, however, petitioner's ownership
over the shares in this case was not yet perfected
when the Complaint was filed. The contract of
pledge certainly does not make him the owner of
the shares pledged. Further, whether prescription
effectively transferred ownership of the shares,
whether there was a novation of the contracts of

pledge, and whether laches had set in were

difficult legal issues, which were unpleaded and
unresolved when herein petitioner asked the
corporate secretary of Go Fay to effect the
transfer, in his favor, of the shares pledged to
him.
In Rural Bank of Salinas, Melenia Guerrero
executed deeds of assignment for the shares in
favor of the respondents in that case. When the
corporate secretary refused to register the
transfer, an action for mandamus was instituted.
Subsequently, a motion for intervention was filed,
seeking the annulment of the deeds of
assignment on the grounds that the same were
fictitious and antedated, and that they were in
fact donations because the considerations
therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural
Bank of Salinas were already prima
facie shareholders when the deeds of assignment
were questioned. If the said deeds were to be
annulled later on, respondents would still be
considered shareholders of the corporation from
the time of the assignment until the annulment of
such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of
mandamus, directing the corporate secretary of
respondent corporation to have the shares
transferred to his name in the corporate books, to
issue new certificates of stock and to deliver the
corresponding dividends to him. 20
In order that a writ of mandamus may issue, it is
essential that the person petitioning for the same
has a clear legal right to the thing demanded and
that it is the imperative duty of the respondent to
perform the act required. It neither confers
powers nor imposes duties and is never issued in
doubtful cases. It is simply a command to
exercise a power already possessed and to
perform a duty already imposed. 21
In the present case, petitioner has failed to
establish a clear legal right. Petitioner's
contention that he is the owner of the said shares
is completely without merit. Quite the contrary
and as already shown, he does not have any
ownership rights at all. At the time petitioner
instituted his suit at the SEC, his ownership claim
had no prima facie leg to stand on. At best, his
contention was disputable and uncertain
Mandamus will not issue to establish a legal right,
but only to enforce one that is already clearly
established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares

66

Petitioner initially argued that ownership of the

shares pledged had passed to him, upon
Respondents Sy Guiok and Sy Lim's failure to pay
their respective loans. But on appeal, petitioner
claimed that ownership over the shares had
passed to him, not via the contracts of pledge,
but by virtue of prescription and by respondents'
subsequent acts which amounted to a novation of
the contracts of pledge. We do not agree.
At the outset, it must be underscored that
petitioner did not acquire ownership of the shares
by virtue of the contracts of pledge. Article 2112
of the Civil Code states:
The creditor to whom the credit has
not been satisfied in due time, may
proceed before a Notary Public to
the sale of the thing pledged. This
sale shall be made at a public
auction, and with notification to the
debtor and the owner of the thing
pledged in a proper case, stating
the amount for which the public
sale is to be held. If at the first
auction the thing is not sold, a
second one with the same
formalities shall be held; and if at
the second auction there is no sale
either, the creditor may
appropriate the thing pledged. In
this case he shall be obliged to give
an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a
common proviso, which we quote again for the
sake of clarity:
3. In the event of the failure of the
PLEDGOR to pay the amount within
a period of six (6) months from the
date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge
upon the said shares of stock
hereby created by selling the same
at public or private sale with or
without notice to the PLEDGOR, at
which sale the PLEDGEE may be
the purchaser at his option; and
"the PLEDGEE is hereby authorized
and empowered at his option to
transfer the said shares of stock on
the books of the corporation to his
own name, and to hold the
certificate issued in lieu thereof
under the terms of this pledge, and
to sell the said shares to issue to
him and to apply the proceeds of
the sale to the payment of the said
sum and interest, in the manner
hereinabove
provided; 22

There is no showing that petitioner made any

attempt to foreclose or sell the shares through
public or private auction, as stipulated in the
contracts of pledge and as required by Article
2112 of the Civil Code. Therefore, ownership of
the shares could not have passed to him. The
pledgor remains the owner during the pendency
of the pledge and prior to foreclosure and sale, as
explicitly provided by Article 2103 of the same
Code:
Unless the thing pledged is
expropriated, the debtor continues
to be the owner thereof.
Nevertheless, the creditor may
bring the actions which pertain to
the owner of the thing pledged in
order to recover it from, or defend
it against a third person.
No Ownership
by Prescription
Petitioner did not acquire the shares by
prescription either. The period of prescription of
any cause of action is reckoned only from the
date the cause of action accrued.
Since a cause of action requires as an essential
element not only a legal right of the plaintiff and
a correlative obligation of the defendant, but also
an act or omission of the defendant in violation of
said legal right, the cause of action does not
accrue until the party obligated refuses, expressly
or impliedly, to comply with its
duty." 23Accordingly, a cause of action on a
written contract accrues when a breach or
violation thereof occurs.
Under the contracts of pledge, private
respondents would have a right to ask for the
redelivery of their certificates of stock upon
payment of their debts to petitioner, consonant
with Article 2105 of the Civil Code, which reads:
The debtor cannot ask for the
return of the thing pledged against
the will of the creditor, unless and
until he has paid the debt and its
interest, with expenses in a proper
case. 24
Thus, the right to recover the shares based on the
written contract of pledge between petitioner and
respondents would arise only upon payment of
their respective loans. Therefore, the prescriptive
period within which to demand the return of the
thing pledged should begin to run only after the
payment of the loan and a demand for the thing
has been made, because it is only then that
respondents acquire a cause of action for the
return of the thing pledged.
Prescription should not begin to run on the action
to demand the return of the thing pledged while
the loan still exists. This is because the right to

67

ask for the return of the thing pledged will not

arise so long as the loan subsists. In the present
case, the prescriptive period did not begin to run
when the loan became due. On the other hand, it
is petitioner's right to demand payment
that may be in danger of prescription.
Petitioner contends that he can be deemed to
have acquired ownership over the certificates of
stock through extraordinary prescription, as
provided for in Article 1132 of the Civil Code
which states:
Art. 1132. The ownership of
movables prescribes through
uninterrupted possession for four
years in good faith.
The ownership of personal property
also prescribes through
uninterrupted possession for eight
years, without need of any other
condition. . . . .
Petitioner's argument is untenable. What is
required by Article 1132 is possession in the
concept of an owner. In the present case,
petitioner's possession of the stock certificates
came about because they were delivered to him
pursuant to the contracts of pledge. His
possession as a pledgee cannot ripen into
ownership by prescription. As aptly pointed out
by Justice Jose C. Vitug:
Acquisitive prescription is a mode
of acquiring ownership by a
possessor through the requisite
lapse of time. In order to ripen into
ownership, possession must be in
the concept of an owner, public,
peaceful and uninterrupted. Thus,
possession with a juridical title,
such as by a usufructory, a trustee,
a lessee, agent or a pledgee, not
being in the concept of an owner,
cannot ripen into ownership by
acquisitive prescription unless the
juridical relation is first expressly
repudiated and such repudiation
has been communicated to the
other party. 25
Petitioner expressly repudiated the pledge, only
when he filed his Complaint and claimed that he
was not a mere pledgee, but that he was already
the owner of the shares. Based on the foregoing,
petitioner has not acquired the certificates of
stock through extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue
of a novation of the contract of pledge. Novation
is defined as "the extinguishment of an obligation
by a subsequent one which terminates it, either

by changing its object or principal conditions, by

substituting a new debtor in place of the old one,
or by subrogating a third person to the rights of
the creditor." 26 Novation of a contract must not
be presumed. "In the absence of an express
agreement, novation takes place only when the
old and the new obligations are incompatible on
every point." 27
In the present case, novation cannot be
presumed by (a) respondents' indorsement and
delivery of the certificates of stock covering the
600 shares, (b) petitioner's receipt of dividends
from 1980 to 1983, and (c) the fact that
respondents have not instituted any action to
recover the shares since 1980.
Respondents' indorsement and delivery of the
certificates of stock were pursuant to paragraph 2
of the contract of pledge which reads:
2. The said certificates had been
delivered by the PLEDGOR
endorsed in blank to be held by the
PLEDGEE under the pledge as
security for the payment of the
aforementioned sum and interest
thereon
accruing. 28
This stipulation did not effect the transfer of
ownership to petitioner. It was merely in
compliance with Article 2093 of the Civil
Code, 29 which requires that the thing pledged be
placed in the possession of the creditor or a third
person of common agreement; and Article
2095, 30 which states that if the thing pledged are
shares of stock, then the "instrument proving the
right pledged" must be delivered to the creditor.
Moreover, the fact that respondents allowed the
petitioner to receive dividends pertaining to the
shares was not meant to relinquish ownership
thereof. As stated by respondent corporation, the
same was done pursuant to an agreement
between the petitioner and Respondents Sy Guiok
and Sy Lim, following Article 2102 of the civil
Code which provides:
It the pledge earns or produces
fruits, income, dividends, or
interests, the creditor shall
compensate what he receives with
those which are owing him; but if
none are owing him, or insofar as
the amount may exceed that which
is due, he shall apply it to the
principal. Unless there is a
stipulation to the contrary, the
pledge shall extend to the interest
and the earnings of the right
pledged.
Novation cannot be inferred from the mere fact
that petitioner has not, since 1980, instituted any

68

action to recover the shares. Such action is in fact

premature, as the loan is still outstanding.
Besides, as already pointed out, novation is never
presumed or inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the
certificates of stock are deemed sold to
petitioner, the consideration for which is the
extinguishment of the loans and the accrued
interests thereon. Dacion en pago is a form of
novation in which a change takes place in the
object involved in the original contract. Absent an
explicit agreement, petitioner cannot simply
presume dacion en pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the
individual respondents with respect to the
recovery of the shares of stock serves to bar
them from asserting rights over said shares on
the basis of laches." 31
Laches has been defined as "the failure or
neglect, for an unreasonable length of time, to do
that which by exercising due diligence could or
should have been done earlier; it is negligence or
omission to assert a right within a reasonable
time, warranting a presumption that the party
entitled to assert it either has abandoned it or
declined to assert it." 32
In this case, it is in fact petitioner who may be
guilty of laches. Petitioner had all the time to
demand payment of the debt. More important,
under the contracts of pledge, petitioner could
have foreclosed the pledges as soon as the loans
became due. But for still unknown or unexplained
reasons, he failed to do so, preferring instead to
pursue his baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and
the assailed Decision is AFFIRMED. Costs against
petitioner.
SO ORDERED.
RAMONA RAMOS and
G.R. No. 178218
THE ESTATE OF LUIS T.
RAMOS,
Present:
Petitioner
s,
CORONA, C.J.,
Chairperson,
LEONARDO-DE
- versus CASTRO,
DEL CASTILLO,
ABAD,* and
PHILIPPINE NATIONAL
MENDOZA,* JJ.
BANK,
OPAL
PORTFOLIO
Promulgated:
INVESTMENTS
(SPVAMC),
INC.
and
December 14, 2011
GOLDEN
DRAGON

STAR EQUITIES, INC.,

Responde
nts.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
LEONARDO DE CASTRO, J.:
Assailed in this Petition for Review
on Certiorari[1] under Rule 45 of the Rules of Court
are the Decision[2] dated November 8, 2006 and
the Resolution[3]dated May 28, 2007 of the Court
of Appeals in CA-G.R. CV No. 64360.
From the records of the case, the following
facts emerge:
The Real Estate Mortgage
In 1973, Luis Ramos obtained a credit line
under an agricultural loan account from the
Philippine National Bank (PNB), Balayan Branch,
forP83,000.00.[4] To secure the loan, the parties
executed a Real Estate Mortgage[5]on October 23,
1973, the relevant provisions of which stated:
That
for
and
in
consideration of certain loans,
overdrafts
and
other
credit
accommodations obtained from the
Mortgagee, which is hereby fixed
atP83,000.00 Philippine
Currency
and to secure the payment of the
same and those others that the
Mortgagee may extend to the
Mortgagor, including interest and
expenses, and other obligations
owing by the Mortgagor to the
Mortgagee, whether direct or
indirect principal or secondary, as
appear in the accounts, books and
records of the Mortgagee, the
Mortgagor does hereby transfer
and convey by way of mortgage
unto the Mortgagee, its successors
or assigns, the parcels of land
which are described in the list
inserted at the back of this
document, or in a supplementary
list attached hereto, together with
all the buildings and improvements
now existing or which may
hereafter be erected or constructed
thereon and all easements, sugar
quotas,
agricultural
or
land

69

644, 259, (T-265) RT-646, (T-261) RT-643 [7] of the

Registry of Deeds of Batangas. From the year
1973, Luis Ramos would renew the loan every
year after paying the amounts falling due therein.

indemnities, aids or subsidies,

including all other rights or benefits
annexed to or inherent therein now
existing or which may hereafter
exist, and also other assets
acquired with the proceeds of the
loan hereby secured all of which
the mortgagor declares that he is
the absolute owner free from all
liens and encumbrances. In case
the
Mortgagor
executes
subsequent promissory note or
notes either as a renewal of the
former note, as an extension
thereof, or as a new loan, or is
given
any
other
kind
of
accommodations
such
as
overdrafts,
letters
of
credit,
acceptances and bills of exchange,
releases of import shipments on
Trust Receipts, etc., this mortgage
shall also stand as security for the
payment of the said promissory
note
or
notes
and/or
accommodations
without
the
necessity of executing a new
contract and this mortgage shall
have the same force and effect as
if the said promissory note or notes
and/or
accommodations
were
existing on the date thereof. This
mortgage shall also stand as
security for said obligations and
any and all other obligations of the
Mortgagor to the Mortgagee of
whatever kind and nature whether
such
obligations
have
been
contracted before, during or after
the
constitution
of
this
mortgage. However,
if
the
Mortgagor
shall
pay
to
the
Mortgagee,
its
successors
or
assigns the obligations secured by
this
mortgage,
together
with
interests, cost and other expenses,
on or before the date they are due,
and shall keep and perform all the
covenants and agreements herein
contained for the Mortgagor to
keep and perform, then this
mortgage shall be null and void,
otherwise, it shall remain in full
force and effect.[6]

[8]

The Sugar Quedan Financing Loans

On March 31, 1989, Luis Ramos and PNB
entered into a Credit Line Agreement [9] in the
amount of P50,000,000.00 under the banks
sugar quedanfinancing program. The agreement
pertinently provided thus:
For and in consideration of
the Bank agreeing to extend to the
Borrower a Revolving Credit Line
(the Line) in an amount not to
exceed PESOS: FIFTY MILLION ONLY
(P50,000,000.00), under the Banks
Sugar Quedan Financing Program
for Crop Year 88/89, the parties
hereto hereby agree as follows:
SECTION 1. TERMS OF THE LINE
1.01 Amount and Purpose of the
Line. The Line shall be available to
the Borrower in an aggregate
amount
not
to
exceed FIFTY
MILLION
ONLY Pesos(P50,000,000.00). x x x
Availments on the Line shall be
used by the Borrower exclusively
for additional capital in sugar
quedan financing.
1.02 Availability
Period;
Availments. (a) Subject to the
terms and conditions hereof, the
Line shall be available to the
Borrower in several availments
(individually an Availment
and
collectively
the
Availments) on any Banking
Day x x x during the period
commencing on the Effectivity
Date x x x and terminating on the
earliest of (i) August 31, 19__, or
(ii) the date the Bank revokes the
Line, or (iii) the date the Borrower
ceases to be entitled to avail of the
Line under the terms hereof.
xxxx

The properties included in the mortgage

were the parcels of land covered under Transfer
Certificate of Title (TCT) Nos. 17217, (T-262) RT-

1.03 Promissory
Notes. Availments on the Line

70

shall
be
evidenced
by
promissory notes (individually
a Note and collectively the
Notes)
issued
by
the
Borrower in favor of the Bank
in the form and substance
acceptable to the Bank. Each
Note shall be (i) dated the date of
Availment, (ii) in the principal
amount of such Availment, with
interest thereon at the rate as
provided in Section 1.04 hereof,
and (iii) payable on the date
occurring sixty (60) days from date
of the availment, but in no case
later than August 31, 19__ (the
Initial Repayment Date).

On June 6, 1989, Luis Ramos procured

another availment of P7,800,000.00that was
likewise contained in a promissory note [14] and for
which he executed another Contract of
Pledge[15] on
the
aforementioned quedans on
even date.
Thereafter, Luis Ramos was granted a
renewal on the promissory notes dated April 3,
1989 and June 6, 1989. Hence, he executed in
favor of PNB the promissory notes dated October
3, 1989 and October 9, 1989.[16]
Luis Ramos eventually failed to settle his
sugar quedan financing
loans
amounting
to P15,600,000.00. On December 28, 1989, he
issued an Authorization[17] in favor of PNB, stating
as follows:

xxxx

AUTHORIZATION

SECTION 3. SECURITY

KNOW
ALL
PRESENTS:

3.01 Security Document. The full

payment of any and all sums
payable by the Borrower hereunder
and under the Notes, the Renewal
Notes and the other documents
contemplated hereby and the
performance of all obligations of
the Borrower hereunder and under
the Notes, the Renewal Notes and
such
other
documents
shall
be secured by a pledge (the
Pledge)
on
the
Borrowers
quedans for crop year ____, as
more particularly described in and
subject to the terms and conditions
of that Contract of Pledge to be
executed by the Borrower in favor
of the Bank, which Contract shall in
any event be in form and
substance acceptable to the Bank
(the
Security
Document).
[10]
(Emphases ours.)

MEN

BY

THESE

In consideration of my
Sugar
Quedan
Financing
line
granted by Philippine National
Bank, Balayan Branch in the
amount
of P50.0
Million,
as
evidenced by Credit Agreement
dated March
31,
1989, the
undersigned,
as
borrower,
authorizes
the
Philippine
National Bank, Balayan Branch,
or any of its duly authorized
officer, to dispose and sell all
the
Quedan
Receipts
(Warehouse Receipts) pledged
to said bank, after maturity
date of the Sugar Quedan
Financing line.
The Sugar Quedan Receipts
are
hereunder
specifically
enumerated:
Official Warehouse Receipt
(Quedan) Serial Nos.:
1) NASR RS 18081 Crop
Year 1988-89 (16,129.03
50 kilo bags)
2) NASR RS 18080 Crop
Year 1988-89 (16,393.44
50 kilo bags)

Pursuant to the above agreement, Luis

Ramos obtained an availment ofP7,800,000.00,
which was evidenced by a promissory note dated
April 3, 1989.[11] Accordingly, Luis Ramos
executed a Contract of Pledge[12] in favor of PNB
on April 6, 1989. Pledged as security for the
availment were two official warehouse receipts
(quedans) for refined sugar issued by Noahs Ark
Sugar Refinery (Noahs Ark), which bore the serial
numbers NASR RS-18080 and NASR RS-18081.
[13]
The said quedans were duly indorsed to PNB.

Incidentally, the
above-mentioned
sugar quedans became the subject of three other

71

cases between PNB and Noahs Ark, which cases

have since reached this Court.[18]

On March 26, 1999, the RTC rendered a

Decision[24] in favor of the spouses Ramos,
holding that:

The Agricultural Crop Loan

A careful analysis of the

evidence on record clearly shows
that there is merit to the [spouses
Ramos]
complaint
that
their
obligation with [PNB] has long been
paid and satisfied.

Meanwhile, on August 7, 1989, the spouses

Luis Ramos and Ramona Ramos (spouses Ramos)
also obtained an agricultural loan of P160,000.00
from PNB. Said loan was evidenced by a
promissory note[19] issued by the spouses on even
date. The said loan was secured by the real
estate mortgage previously executed by the
parties on October 23, 1973.

As the records show, PNB

admitted that [Luis Ramos] has
already paid his sugar crop loan in
the amount of P160,000.00 x x
x. The reason why it refused to
release the certificates of titles to
the [spouses Ramos] was allegedly
because the said titles were also
mortgaged to secure the other
obligations
of
Luis
Ramos,
particularly the sugar crop loan in
the
amount
of P15.6
Million. However, even assuming
that its argument is correct that the
said certificates of titles were also
security
for
the
said
sugar
financing loan, the same is of no
consequence since the [spouses
Ramos] have likewise fully paid the
sugar loan when they effectively
transferred the sugar quedans to
[PNB] by issuing a letter authority,
authorizing it to dispose and sell all
the Quedan Receipts (Warehouse
Receipts) of the [spouses Ramos]
which they pledged to the bank on
December 29, 1989 x x x. [Luis
Ramos] executed the said letter of
authority to the PNB when he could
not anymore afford to pay his loan
which became due. There is no
doubt that [PNB] accepted the said
quedans with the understanding
that the same shall be treated as
payment of [spouses Ramos]
obligation, considering that it did
not hesitate to proceed to demand
from Noahs Ark Sugar Refinery,
the delivery of the sugar stocks to
them as new owners thereof. It is,
therefore, very clear that the
authorization issued by [Luis
Ramos] in favor of [PNB],
giving the latter the right to
dispose and sell the pledged
warehouse
receipts/quedans
totally terminated the contract

On November 2, 1990, the spouses Ramos

fully settled the agricultural loan of P160,000.00.
[20]
They then demanded from PNB the release of
the real estate mortgage. PNB, however, refused
to heed the spouses demand. [21]
On February 28, 1996, the spouses Ramos
filed
a
complaint
for
Specific
Performance[22] against the PNB, Balayan Branch,
which was docketed as Civil Case No. 3241 in the
Regional
Trial
Court
(RTC)
of
Balayan,
Batangas. The spouses claimed that the actions
of PNB impaired their rights in the properties
included in the real estate mortgage. They
alleged that they lost business opportunities
since they could not raise enough capital, which
they could have acquired by mortgaging or
disposing of the said properties. The spouses
Ramos prayed for the trial court to order PNB to
release the real estate mortgage on their
properties and to return to the spouses the TCTs
of the properties subject of the mortgage.
In its Answer,[23] PNB countered that the
spouses Ramos had no cause of action against it
since the latter knew that the real estate
mortgage secured not only their P160,000.00
agricultural loan but also the other loans the
spouses obtained from the bank. Specifically,
PNB
alleged
that
the
spouses
sugar quedan financing loan of P15,600,000.00
remained unpaid as the quedans were dishonored
by the warehouseman Noahs Ark. PNB averred
that it filed a civil action for specific performance
against Noahs Ark involving the quedans and the
case was still pending at that time. As PNB was
still unable to collect on the quedans, it claimed
that the spouses Ramos loan obligations were
yet to be fully satisfied. Thus, PNB argued that it
could not release the real estate mortgage in
favor of the spouses.

72

of
pledge
between
the
[spouses Ramos] and [PNB]. In
effect there was a novation of
their agreement and dation in
payment set in between the
parties thereby extinguishing
the loan obligation of the
[spouses Ramos], as provided
in Article 1245 of the Civil
Code.

authority, which authorized PNB to sell

the quedanreceipts of the spouses Ramos. PNB
also contended that the real estate mortgage
executed by the spouses Ramos in its favor
secured not only the spouses Ramos agricultural
crop loan in the amount of P160,000.00, but also
their 1989 sugarquedan financing loan.[27]
On the other hand, the spouses Ramos
averred that the authorization issued by Luis
Ramos in favor of PNB, authorizing the latter to
dispose
and
sell
the
pledged
sugar quedans terminated the contract of pledge
between the spouses Ramos and PNB. There was
in effect a novation of the contract of pledge and,
thereafter, dation in payment set in between the
parties.[28] The spouses Ramos also claimed that
the condition in the parties real estate mortgage,
which stated that the mortgage shall also stand
as security for said obligations and any and all
other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature,
whether such obligations have been contracted
before, during or after the constitution of
mortgage[,] was essentially a contract of
adhesion and violated the doctrine of mutuality of
contract.[29]

Article 1245 of the Civil

Code provides that dation in
payment is a special form of
payment whereby property is
alienated by the debtor to the
creditor in satisfaction of a debt in
money. As stated differently by the
noted
commentatorManresa, dacion
en
pago is the transfer of ownership of
a thing by the debtor to the
creditor as an accepted equivalent
of
the
performance
of
an
obligation. This was what precisely
plaintiff Luis Ramos did in this
case. He alienated the ownership
of the sugar quedans and the
goods covered by said quedans to
[PNB] in satisfaction of his loan
obligation with [PNB].

On November 8, 2006, the Court of

Appeals promulgated its assailed decision,
reversing the judgment of the RTC. The appellate
court elucidated thus:

xxxx

In the instant appeal, the

trial court ruled that the issuance
of [the] authorization letter by
[spouses Ramos] in favor of [PNB]
terminated the contract of pledge
between the parties and in effect
dation in payment sets-in.

WHEREFORE, the defendant

Philippine National Bank, Balayan
Branch is hereby ORDERED to
RELEASE the real estate mortgage
on the properties of the [spouses
Ramos] and to return to them all
the transfer certificates of titles
which were pledged as security for
the agricultural loan which had
long been paid and satisfied and to
pay the costs.[25] (Emphasis ours.)

We
do
not
agree. First, the
authorization
letter
did
not
provide
that
ownership of the goods pledged
would pass to [PNB] for failure of
[spouses Ramos] to pay the loan
on time. This is contrary to the
concept of Dacion en pago as the
delivery and transmission of
ownership of a thing by the debtor
to the creditor as an accepted
equivalent of the performance of
the
obligation. Second,the
authorization merely provided for
the appointment of [PNB] as
attorney-in-fact
with
authority,
among other things, to sell or

PNB filed a Notice of Appeal[26] involving

the above decision, which was given due course
by the RTC in an Order dated May 11, 1999. The
records of the case were then forwarded to the
Court of Appeals where the case was docketed as
CA-G.R. CV No. 64360.
Before the appellate court, PNB contested
the ruling of the RTC that the spouses Ramos
have already settled their sugar quedan financing
loan with PNB when they issued a letter of

73

otherwise dispose of the said real

rights, in case of default by
[spouses Ramos], and to apply the
proceeds to the payment of the
loan. This provision is a standard
condition in pledge contracts and is
in conformity with Article 2087 of
the Civil Code, which authorizes
the pledgee to foreclose the pledge
and alienate the pledged property
for the payment of the principal
obligation. Lastly, there was no
meeting of the minds between
[spouses Ramos] and [PNB] that
the loan would be extinguished by
dation in payment.

the Decision dated March 26, 1999

of the Regional Trial Court of
Balayan, Batangas, Branch 9, is
hereby REVERSED and a new one is
entered ordering [PNB] to hold the
release
of
all
the
transfer
certificates of titles which were
pledged as security for the
agricultural
loan
of
[spouses
Ramos].[30]
On November 30, 2006, the spouses
Ramos filed a Motion for Reconsideration [31] of the
Court of Appeals decision. The spouses then
asserted that it was unclear whether the parties
intended that the real estate mortgage would
also secure the sugar quedan financing loan,
which was specifically secured by the pledge on
the quedans. They
alleged
that
the
sugar quedan financing loan, the contract of
pledge and the promissory notes did not even
make any reference to the real estate
mortgage. PNB apparently violated its implied
duty of good faith by wrongfully retaining the
spouses Ramos collateral and improperly
invoking the obscure terms of the real estate
mortgage it prepared.

Article 1245 of the Civil

Code provides that the law on
sales shall govern an agreement of
dacion en pago. A contract of sale
is perfected at the moment there is
a meeting of the minds of the
parties thereto upon the thing
which is the object of the contract
and upon the price. x x x.
xxxx
In this case, there was no
meeting of the mind between the
parties that would lead us to
conclude that dation in payment
has set-in. The trial court based its
decision that there was dation in
payment
solely
on
the
authorization letter, which we do
not agree. This is because the
authorization
letter
merely
authorizes the Philippine National
Bank, Balayan Branch, or any of its
duly authorized officer, to dispose
and sell all the Quedan Receipts
(Warehouse Receipts) pledge to
said bank, after maturity date of
the Sugar Quedan Financing Loan.

Subsequently, the spouses Ramos filed a

Motion for Leave to File Supplemental Argument.
[32]
They added that PNB could not have acquired
a security interest on the real estate mortgage for
the purpose of the sugar quedanfinancing loan
because when the real estate mortgage was
constituted, the credit line from whence the
sugar quedan financing loan was sourced did not
yet exist. The spouses Ramos also argued that
PNB was in bad faith in retaining the collateral of
their real estate mortgage as it knew or should
have known that the said security was already
void given that the agricultural crop loan secured
by the mortgage was already fully paid.
In the assailed Resolution dated May 28,
2007, the Court of Appeals denied the spouses
Ramos motion for reconsideration as it found no
compelling reason to reverse its Decision dated
November 8, 2006.

Moreover, in case of doubt

as to whether a transaction is a
pledge or dation in payment, the
presumption is in favor of pledge,
the
latter
being
the
lesser
transmission of rights and interest.

hereby

xxxx

On June 18, 2007, the counsel for the

spouses Ramos notified the Court of Appeals that
Luis Ramos had passed away and that the latters
wife, Ramona Ramos, acted as the legal
representative of Luis estate.

WHEREFORE, the appeal is

GRANTED. ACCORDINGLY,

Thereafter, Ramona Ramos and the estate

of Luis Ramos (petitioners) filed the instant

74

petition in a final bid to have the real estate

mortgage declared null and void as regards their
sugar quedan financing loan, as well as to compel
PNB to return the TCTs of the properties included
in the said mortgage.

SHOULD THE GENERAL TERMS OF

THE REAL ESTATE MORTGAGE
EXECUTED BY BORROWER LUIS T.
RAMOS IN FAVOR OF LENDER PNB
BE UNDERSTOOD TO INCLUDE IN
ITS COVERAGE THE BORROWERS
SUGAR QUEDAN FINANCING LOAN
THAT IS DIFFERENT FROM HIS
AGRICULTURAL
CROP
LOAN
UNDISPUTEDLY AGREED UPON BY
THE PARTIES TO BE COVERED BY
THE COLLATERAL?

On September 10, 2007, PNB filed a Motion

for Substitution of Party,[33]alleging that it has sold
to Golden Dragon Star Equities, Inc.
all of its
rights, titles and interests in and all obligations
arising out of or in connection with several cases,
including the instant case. Afterwards, Golden
Dragon Star Equities, Inc. assigned to Opal
Portfolio Investments (SPV-AMC) Inc. all of its
rights and obligations as a purchaser under the
contract of sale with PNB. Thus, PNB prayed that
it be substituted by Opal Portfolio Investments
(SPV-AMC) Inc. as party respondent in the
petition.

3.
SHOULD
THE
REAL
ESTATE
MORTGAGE EXECUTED IN 1973 BE
CONSIDERED VALID AND EXISTING
SECURITY DEVICE AGREEMENT FOR
SUGAR QUEDAN FINANCING LOAN
OBTAINED PURSUANT TO CREDIT
LINE AGREEMENT EXECUTED ONLY
IN 1989?[37]

In the Resolution[34] dated October 10,

2007, the Court denied the above motion of PNB
and instead ordered that Opal Portfolio
Investments (SPV-AMC) Inc. and Golden Dragon
Star Equities, Inc. be included as respondents in
addition to PNB. The said corporations were then
required to file their comment on the petition
within ten days from notice.[35] On January 25,
2008, Opal Portfolio Investments (SPV-AMC) Inc.
and Golden Dragon Star Equities, Inc. manifested
that they were adopting as their own the
comment filed by PNB.[36]

Petitioners principally argue that the scope

and coverage of the real estate mortgage
excluded
the
sugar quedan financing
loan. Petitioners assert that the mortgage
contained a blanket mortgage clause or a dragnet
clause, which stated that the mortgage would
secure not only the loans already obtained but
also any other amount that Luis Ramos may loan
from PNB. Petitioners posit that a dragnet clause
will cover and secure a subsequent loan only if
said loan is made in reliance on the original
security
containing
the
dragnet
clause. Petitioners state that said condition did
not exist in the instant case, as the
sugar quedan financing loan was not obtained in
reliance on the previously executed real estate
mortgage. Such fact was supposedly apparent
from
the
documents
pertaining
to
the
sugar quedanfinancing loans, i.e., the credit line
agreement, the various promissory notes and the
contracts of pledge.

The Issues
Petitioners raise the following issues:
1.
IS THE MEANING OF THE GENERAL
TERMS OF THE REAL ESTATE
MORTGAGE CLEAR AND LEAVE NO
DOUBT THAT THERE IS NO NEED
TO DETERMINE WHETHER THE
PARTIES INTENDED TO CREATE AND
PROVIDE SECURITY INTEREST ON
THE REAL ESTATE COLLATERAL OF
BORROWER LUIS T. RAMOS FOR
THE SUGAR QUEDAN FINANCING
LOAN GRANTED TO HIM BY LENDER
PNB,
IN
ADDITION
TO
THE
AGRICULTURAL CROP LOAN THAT
WAS UNDISPUTEDLY AGREED UPON
BY THEM TO BE COVERED BY THE
COLLATERAL?

PNB responded that the issue of whether

the parties intended for the real estate mortgage
to secure the sugar quedan financing loan was
never raised in the RTC or in the Court of
Appeals. Therefore, the same cannot be raised
for the first time in the motion for reconsideration
of the Court of Appeals decision and in the instant
petition. Likewise, PNB asserts that the spouses
Ramos consented to the terms of the real estate
mortgage that the real properties subject thereof
should be used to secure future and subsequent

2.

75

loans of the mortgagor. Since the spouses never

contested the validity and enforceability of the
real estate mortgage, the same must be
respected and should govern the relations of the
parties therein.

petitioners theory may not be allowed at such

late a stage in the case.
The general rule is that issues raised for
the first time on appeal and not raised in the
proceedings in the lower court are barred by
estoppel. Points of law, theories, issues, and
arguments not brought to the attention of the
trial court ought not to be considered by a
reviewing court, as these cannot be raised for the
first time on appeal. To consider the alleged facts
and arguments raised belatedly would amount to
trampling on the basic principles of fair play,
justice, and due process.[38]

PNB also avers that the Court of Appeals

did not err in ruling that there was no dacion en
pago and/or novation under the circumstances
prevailing in the instant case. The Authorization
issued by Luis Ramos in favor of PNB did not
terminate the contract of pledge between the
parties as PNB was merely authorized to dispose
and sell the sugar quedans to be applied as
payment to the obligation. Hence, no transfer of
ownership occurred. Article 2103 of the Civil
Code expressly states that unless the thing
pledged is expropriated, the debtor continues to
be the owner thereof. PNB argued that when it
accepted the Authorization, it recognized that it
was merely being authorized by Luis Ramos to
dispose of thequedans. Therefore, until the
spouses Ramos fully settle their loans from PNB,
the latter believes that it has every right to retain
possession of the properties offered as collateral
thereto.

Jurisprudence, nonetheless, provides for

certain exceptions to the above rule. First, it is
a settled rule that the issue of jurisdiction may be
raised at any time, even on appeal, provided that
its application does not result in a mockery of the
tenets of fair play. Second, as held in Lianga
Lumber Company v. Lianga Timber Co., Inc.,[39] in
the interest of justice and within the sound
discretion of the appellate court, a party may
change his legal theory on appeal only when the
factual bases thereof would not require
presentation of any further evidence by the
adverse party in order to enable it to properly
meet the issue raised in the new theory.

After due consideration of the issues

raised, we are compelled to deny the petition.
To begin with, we note that, indeed,
petitioners are presently raising issues that were
neither invoked nor discussed before the RTC and
the main proceedings before the Court of
Appeals. The very issues laid down by petitioners
for our consideration were first brought up only in
their motion for reconsideration of the Court of
Appeals Decision dated November 8, 2006.

None of the above exceptions, however,

applies to the instant case. As regards the first
exception, the issue of jurisdiction was never
raised at any point in this case. Anent the second
exception, the Court finds that the application of
the same in the case would be improper, as
further evidence is needed in order to answer
and/or refute the issue raised in petitioners new
theory.

In their complaint before the RTC and in

their reply to PNBs appeal to the Court of
Appeals, petitioners relied on the theory that they
have already settled all of their loan obligations
with PNB, including their sugar quedan financing
loan, such that they were entitled to the release
of the real estate mortgage that secured the said
obligations. When the Court of Appeals rendered
the assailed decision, petitioners foisted a new
argument in their motion for reconsideration that
the
parties
did
not
intend
for
the
sugar quedan financing loan to be covered by the
real
estate
mortgage. Before
this
Court,
petitioners are now reiterating and expounding
on
their
argument
that
their
sugar quedan financing loan was beyond the
ambit of the previously executed real estate
mortgage. We rule that such a change in

To recapitulate, petitioners are now

claiming that the sugar quedan financing loan it
availed from PNB was not obtained in reliance on
the real estate mortgage. Petitioners even insist
that the credit line agreement, the promissory
notes and the contracts of pledge entered into by
the parties were silent as to the applicability
thereto of the real estate mortgage. Otherwise
stated, petitioners are harping on the intention of
the parties vis--vis the security arrangement for
the credit line agreement and the availments
thereof constituting the sugar quedan financing
loan. The impropriety of the petitioners posturing
is further confounded by the fact that the credit
line
agreement
under
PNBs
sugar quedan financing
program
and
the
availments thereto were entered into by Luis
Ramos and PNB as far back as the year

76

1989. Petitioners new theory, on the other hand,

was only raised much later on the spouses
motion for reconsideration of the Court of Appeals
decision dated November 8, 2006, or after a
period of more or less seventeen years since the
execution of the credit line agreement. The
Court, therefore, finds itself unable to give credit
to the new theory proffered by petitioners since
to do so would gravely offend the rights of PNB to
due process.

does not contain. It is only when

the
contract
is
vague
and
ambiguous
that
courts
are
permitted
to
resort
to
the
interpretation of its terms to
determine the parties' intent.[41]
Here, it cannot be denied that the real
estate mortgage executed by the parties
provided that it shall stand as security for any
subsequent promissory note or notes either as
a renewal of the former note, as an extension
thereof, or as a new loan, or is given any other
kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust
Receipts, etc. The same real estate mortgage
likewise
expressly
covered any
and
all
other obligations of the Mortgagor to the
Mortgagee of
whatever
kind
and
nature whether
such
obligations
have
been contracted before, during or after the
constitution of this mortgage. Thus, from
the clear and unambiguous terms of the
mortgage contract, the same has application
even to future loans and obligations of the
mortgagor of any kind, not only agricultural crop
loans.

Even if the Court were willing to overlook

petitioners procedural misstep on appeal, their
belatedly proffered theory still fails to convince us
that the Court of Appeals committed any
reversible error in its resolution of the present
case.
According to petitioners, their case
requires an application of Article 1371 of the Civil
Code, which provides that in order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts shall be
principally considered. To their mind, the mere
fact that the 1989 credit line agreement, the
promissory notes and the contracts of pledge
executed in relation to the sugarquedan financing
loan contained no reference to the real estate
mortgage is sufficient proof that the parties did
not intend the real estate mortgage to secure the
sugar quedan financing loan, but only the
agricultural crop loans. The Court finds that it
cannot uphold this proposition.

Such a blanket clause or dragnet

clause in mortgage contracts has long been
recognized in our jurisprudence. Thus, in another
case, we held:

In Prisma Construction & Development

Corporation v. Menchavez,[40]we discussed the
settled principles that:

As a general rule, a mortgage

liability is usually limited to the
amount
mentioned
in
the
contract. However, the amounts
named as consideration in a
contract of mortgage do not limit
the
amount
for
which
the
mortgage may stand as security
if, from the four corners of the
instrument,
the
intent
to
secure
future
and
other
indebtedness
can
be
gathered. This stipulation is valid
and binding between the parties
and is known as the "blanket
mortgage clause" (also known as
the "dragnet clause)."

Obligations
arising
from
contracts have the force of law
between the contracting parties
and should be complied with in
good faith. When the terms of a
contract are clear and leave no
doubt as to the intention of the
contracting parties, the literal
meaning
of
its
stipulations
governs. In such cases, courts
have no authority to alter the
contract by construction or to make
a new contract for the parties; a
court's duty is confined to the
interpretation of the contract the
parties
made
for
themselves
without regard to its wisdom or
folly, as the court cannot supply
material stipulations or read into
the contract words the contract

In the present case, the

mortgage contract indisputably
provides that the subject properties
serve as security, not only for the
payment of the subject loan, but

77

also for "such other loans or

advances already obtained, or still
to be obtained." The crosscollateral
stipulation
in
the
mortgage contract between the
parties is thus simply a variety of a
dragnet clause. After agreeing to
such
stipulation,
the
petitioners cannot insist that
the
subject
properties
be
released from mortgage since
the security covers not only the
subject loan but the two other
loans
as
well.[42] (Emphases
supplied.)

and before any such foreclosure,

the pledgor, not the pledgee, is the
owner of the goods. x x x.[45]
A close reading of the Authorization
executed by Luis Ramos reveals that it was
nothing more than a letter that gave PNB the
authority
to
dispose
of
and
sell
the
sugar quedans after
the
maturity
date
thereof. As held by the Court of Appeals, the said
grant of authority on the part of PNB is a standard
condition in a contract of pledge, in accordance
with the provisions of Article 2087 of the Civil
Code that it is also of the essence of these
contracts that when the principal obligation
becomes due, the things in which the pledge or
mortgage consists may be alienated for the
payment to the creditor. More importantly,
Article 2115 of the Civil Code expressly provides
that the sale of the thing pledged shall extinguish
the principal obligation, whether or not the
proceeds of the sale are equal to the amount of
the principal obligation, interest and expenses in
a proper case. As we adverted to in Sayo, it is
the foreclosure of the thing pledged that results
in the satisfaction of the loan liabilities to the
pledgee of the pledgors. Thus, prior to the actual
foreclosure
of
the
thing
pleged,
the
sugar quedan financing loan in this case is yet to
be settled.

Moreover,
petitioners
reliance
on Prudential
Bank
v.
Alviar[43] is
sorely
misplaced. In Prudential, the fact that another
security was given for subsequent loans did not
remove such loans from the ambit of the dragnet
clause in a previous real estate mortgage
contract. However, it was held in Prudential that
the special security for subsequent loans must
first be exhausted before the creditor may
foreclose on the real estate mortgage. In other
words, the creditor is allowed to hold on to the
previous security (the real estate mortgage) in
case of deficiency after resort to the special
security given for the subsequent loans. Verily,
even under the Prudential ruling cited by
petitioners, they are not entitled to the release of
the real estate mortgage and the titles to the
properties mentioned therein.

As matters stand, with more reason that

PNB cannot be compelled to release the real
estate mortgage and the titles involved therein
since
the
issue
of
whether
the
sugar quedan financing loan will be fully paid
through the pledged sugar receipts remains the
subject of pending litigation.

Ultimately, we likewise find no reason to

overturn the assailed ruling of the Court of
Appeals that the contract of pledge between
petitioners and PNB was not terminated by the
Authorization letter issued by Luis Ramos in favor
of PNB. The status of PNB as a pledgee of the
sugar quedans involved in this case had long
been confirmed by the Court in its Decision dated
July 9, 1998 in Philippine National Bank v. Sayo,
Jr.[44] and the same is neither disputed in the
instant case. We reiterate our ruling in Sayo that:

WHEREFORE,
the
petition
is DENIED. The Decision dated November 8,
2006 and the Resolution dated May 28, 2007 of
the Court of Appeals in CA-G.R. CV No. 64360 are
hereby AFFIRMED. Costs against petitioners.
G.R. No. 156132
February 6, 2007
CITIBANK, N.A. (Formerly First National City
Bank) and INVESTORS FINANCE
CORPORATION, doing business under the
name and style of FNCB Finance, Petitioners,
vs.
MODESTA R. SABENIANO, Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its
Decision1 in the above-entitled case, the
dispositive portion of which reads

The creditor, in a contract of

real security, like pledge, cannot
appropriate without foreclosure the
things given by way of pledge. Any
stipulation
to
the
contrary,
termed pactum commissorio, is null
and
void. The
law
requires
foreclosure in order to allow a
transfer of title of the good given
by way of security from its pledgor,

78

IN VIEW OF THE FOREGOING, the instant Petition

is PARTLY GRANTED. The assailed Decision of
the Court of Appeals in CA-G.R. No. 51930, dated
26 March 2002, as already modified by its
Resolution, dated 20 November 2002, is
hereby AFFIRMED WITH MODIFICATION, as
follows
1. PNs No. 23356 and 23357
are DECLARED subsisting and
outstanding. Petitioner Citibank
is ORDEREDto return to respondent the
principal amounts of the said PNs,
amounting to Three Hundred Eighteen
Thousand Eight Hundred Ninety-Seven
Pesos and Thirty-Four Centavos
(P318,897.34) and Two Hundred Three
Thousand One Hundred Fifty Pesos
(P203,150.00), respectively, plus the
stipulated interest of Fourteen and a half
percent (14.5%) per annum, beginning 17
March 1977;
2. The remittance of One Hundred FortyNine Thousand Six Hundred Thirty Two US
Dollars and Ninety-Nine Cents
(US$149,632.99) from respondents
Citibank-Geneva accounts to petitioner
Citibank in Manila, and the application of
the same against respondents
outstanding loans with the latter,
is DECLARED illegal, null and void.
Petitioner Citibank is ORDERED to refund
to respondent the said amount, or its
equivalent in Philippine currency using the
exchange rate at the time of payment,
plus the stipulated interest for each of the
fiduciary placements and current accounts
involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay
respondent moral damages in the amount
of Three Hundred Thousand Pesos
(P300,000.00); exemplary damages in the
amount of Two Hundred Fifty Thousand
Pesos (P250,000.00); and attorneys fees
in the amount of Two Hundred Thousand
Pesos (P200,000.00); and
4. Respondent is ORDERED to pay
petitioner Citibank the balance of her
outstanding loans, which, from the
respective dates of their maturity to 5
September 1979, was computed to be in
the sum of One Million Sixty-Nine
Thousand Eight Hundred Forty-Seven
Pesos and Forty Centavos (P1,069,847.40),
inclusive of interest. These outstanding
loans shall continue to earn interest, at
the rates stipulated in the corresponding
PNs, from 5 September 1979 until
payment thereof.

Subsequent thereto, respondent Modesta R.

Sabeniano filed an Urgent Motion to Clarify and/or
Confirm Decision with Notice of Judgment on 20
October 2006; while, petitioners Citibank, N.A.
and FNCB Finance2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6
November 2006.
The facts of the case, as determined by this Court
in its Decision, may be summarized as follows.
Respondent was a client of petitioners. She had
several deposits and market placements with
petitioners, among which were her savings
account with the local branch of petitioner
Citibank (Citibank-Manila3 ); money market
placements with petitioner FNCB Finance; and
dollar accounts with the Geneva branch of
petitioner Citibank (Citibank-Geneva). At the
same time, respondent had outstanding loans
with petitioner Citibank, incurred at CitibankManila, the principal amounts aggregating
to P1,920,000.00, all of which had become due
and demandable by May 1979. Despite repeated
demands by petitioner Citibank, respondent failed
to pay her outstanding loans. Thus, petitioner
Citibank used respondents deposits and money
market placements to off-set and liquidate her
outstanding obligations, as follows

Respondents outstanding obligation (principal and

26 October 1979)
Les
s:

Proceeds from respondents money market p

petitioner FNCB Finance (principal and interes
September 1979)
Deposits in respondents bank accounts with
Citibank

Proceeds of respondents money market plac

dollar accounts with Citibank-Geneva (peso e
26 October 1979)
Balance of respondents obligation
Respondent, however, denied having any
outstanding loans with petitioner Citibank. She
likewise denied that she was duly informed of the
off-setting or compensation thereof made by
petitioner Citibank using her deposits and money
market placements with petitioners. Hence,
respondent sought to recover her deposits and
money market placements.
Respondent instituted a complaint for
"Accounting, Sum of Money and Damages"
against petitioners, docketed as Civil Case No.
11336, before the Regional Trial Court (RTC) of
Makati City. After trial proper, which lasted for a
decade, the RTC rendered a Decision4 on 24
August 1995, the dispositive portion of which
reads

79

WHEREFORE, in view of all the foregoing, decision

is hereby rendered as follows:
(1) Declaring as illegal, null and void the
setoff effected by the defendant Bank
[petitioner Citibank] of plaintiffs
[respondent Sabeniano] dollar deposit
with Citibank, Switzerland, in the amount
of US$149,632.99, and ordering the said
defendant [petitioner Citibank] to refund
the said amount to the plaintiff with legal
interest at the rate of twelve percent
(12%) per annum, compounded yearly,
from 31 October 1979 until fully paid, or
its peso equivalent at the time of
payment;
(2) Declaring the plaintiff [respondent
Sabeniano] indebted to the defendant
Bank [petitioner Citibank] in the amount
of P1,069,847.40 as of 5 September 1979
and ordering the plaintiff [respondent
Sabeniano] to pay said amount, however,
there shall be no interest and penalty
charges from the time the illegal setoff
was effected on 31 October 1979;
(3) Dismissing all other claims and
counterclaims interposed by the parties
against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC
Decision to the Court of Appeals, docketed as CAG.R. CV No. 51930. On 26 March 2002, the
appellate court promulgated its Decision,5 ruling
entirely in favor of respondent, to wit
Wherefore, premises considered, the assailed 24
August 1995 Decision of the court a quo is
hereby AFFIRMED with MODIFICATION, as
follows:
1. Declaring as illegal, null and void the
set-off effected by the defendantappellant Bank of the plaintiff-appellants
dollar deposit with Citibank, Switzerland,
in the amount of US$149,632.99, and
ordering defendant-appellant Citibank to
refund the said amount to the plaintiffappellant with legal interest at the rate of
twelve percent (12%) per annum,
compounded yearly, from 31 October
1979 until fully paid, or its peso equivalent
at the time of payment;
2. As defendant-appellant Citibank failed
to establish by competent evidence the
alleged indebtedness of plaintiff-appellant,
the set-off of P1,069,847.40 in the account
of Ms. Sabeniano is hereby declared as
without legal and factual basis;
3. As defendants-appellants failed to
account the following plaintiff-appellants
money market placements, savings

account and current accounts, the former

is hereby ordered to return the same, in
accordance with the terms and conditions
agreed upon by the contending parties as
evidenced by the certificates of
investments, to wit:
(i) Citibank NNPN Serial No. 023356
(Cancels and Supersedes NNPN No.
22526) issued on 17 March
1977, P318,897.34 with 14.50%
interest p.a.;
(ii) Citibank NNPN Serial No. 23357
(Cancels and Supersedes NNPN No.
22528) issued on 17 March
1977, P203,150.00 with 14.50
interest p.a.;
(iii) FNCB NNPN Serial No. 05757
(Cancels and Supersedes NNPN No.
04952), issued on 02 June
1977, P500,000.00 with 17%
interest p.a.;
(iv) FNCB NNPN Serial No. 05758
(Cancels and Supersedes NNPN No.
04962), issued on 02 June
1977, P500,000.00 with 17%
interest per annum;
(v) The Two Million (P2,000,000.00)
money market placements of Ms.
Sabeniano with the Ayala
Investment & Development
Corporation (AIDC) with legal
interest at the rate of twelve
percent (12%) per annum
compounded yearly, from 30
September 1976 until fully paid;
4. Ordering defendants-appellants to
jointly and severally pay the plaintiffappellant the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) by way
of moral damages, FIVE HUNDRED
THOUSAND PESOS (P500,000.00) as
exemplary damages, and ONE HUNDRED
THOUSAND PESOS (P100,000.00) as
attorneys fees.
Acting on petitioners Motion for Partial
Reconsideration, the Court of Appeals issued a
Resolution,6 dated 20 November 2002, modifying
its earlier Decision, thus
WHEREFORE, premises considered, the
instant Motion for Reconsideration is PARTIALLY
GRANTED as Sub-paragraph (V) paragraph 3 of
the assailed Decisions dispositive portion is
hereby ordered DELETED.
The challenged 26 March 2002 Decision of the
Court is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26
March 2002, as modified by the Resolution of the
same court, dated 20 November 2002, was still

80

principally in favor of respondent, petitioners filed

the instant Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court. After giving
due course to the instant Petition, this Court
promulgated on 16 October 2006 its Decision,
now subject of petitioners Motion for Partial
Reconsideration.1awphi1.net
Among the numerous grounds raised by
petitioners in their Motion for Partial
Reconsideration, this Court shall address and
discuss herein only particular points that had not
been considered or discussed in its Decision.
Even in consideration of these points though, this
Court remains unconvinced that it should modify
or reverse in any way its disposition of the case in
its earlier Decision.
As to the off-setting or compensation of
respondents outstanding loan balance with her
dollar deposits in Citibank-Geneva
Petitioners take exception to the following
findings made by this Court in its Decision, dated
16 October 2006, disallowing the off-setting or
compensation of the balance of respondents
outstanding loans using her dollar deposits in
Citibank-Geneva
Without the Declaration of Pledge, petitioner
Citibank had no authority to demand the
remittance of respondents dollar accounts with
Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal
compensation under Article 1278 of the Civil
Code since, petitioner Citibank itself admitted
that Citibank-Geneva is a distinct and separate
entity. As for the dollar accounts, respondent was
the creditor and Citibank-Geneva is the debtor;
and as for the outstanding loans, petitioner
Citibank was the creditor and respondent was the
debtor. The parties in these transactions were
evidently not the principal creditor of each other.
Petitioners maintain that respondents
Declaration of Pledge, by virtue of which she
supposedly assigned her dollar accounts with
Citibank-Geneva as security for her loans with
petitioner Citibank, is authentic and, thus, valid
and binding upon respondent. Alternatively,
petitioners aver that even without said
Declaration of Pledge, the off-setting or
compensation made by petitioner Citibank using
respondents dollar accounts with CitibankGeneva to liquidate the balance of her
outstanding loans with Citibank-Manila was
expressly authorized by respondent herself in the
promissory notes (PNs) she signed for her loans,
as well as sanctioned by Articles 1278 to 1290 of
the Civil Code. This alternative argument is
anchored on the premise that all branches of
petitioner Citibank in the Philippines and abroad
are part of a single worldwide corporate entity

and share the same juridical personality. In

connection therewith, petitioners deny that they
ever admitted that Citibank-Manila and CitibankGeneva are distinct and separate entities.
Petitioners call the attention of this Court to the
following provision found in all of the
PNs7 executed by respondent for her loans
At or after the maturity of this note, or when
same becomes due under any of the provisions
hereof, any money, stocks, bonds, or other
property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the
discretion of the said bank to the full or partial
payment of this note.
It is the petitioners contention that the term
"Citibank, N.A." used therein should be deemed
to refer to all branches of petitioner Citibank in
the Philippines and abroad; thus, giving petitioner
Citibank the authority to apply as payment for
the PNs even respondents dollar accounts with
Citibank-Geneva. Still proceeding from the
premise that all branches of petitioner Citibank
should be considered as a single entity, then it
should not matter that the respondent obtained
the loans from Citibank-Manila and her deposits
were with Citibank-Geneva. Respondent should
be considered the debtor (for the loans) and
creditor (for her deposits) of the same entity,
petitioner Citibank. Since petitioner Citibank and
respondent were principal creditors of each other,
in compliance with the requirements under Article
1279 of the Civil Code,8 then the former could
have very well used off-setting or compensation
to extinguish the parties obligations to one
another. And even without the PNs, off-setting or
compensation was still authorized because
according to Article 1286 of the Civil Code,
"Compensation takes place by operation of law,
even though the debts may be payable at
different places, but there shall be an indemnity
for expenses of exchange or transportation to the
place of payment."
Pertinent provisions of Republic Act No. 8791,
otherwise known as the General Banking Law of
2000, governing bank branches are reproduced
below
SEC. 20. Bank Branches. Universal or
commercial banks may open branches or other
offices within or outside the Philippines upon prior
approval of the Bangko Sentral.
Branching by all other banks shall be governed by
pertinent laws.
A bank may, subject to prior approval of the
Monetary Board, use any or all of its branches as
outlets for the presentation and/or sale of the

81

financial products of its allied undertaking or its

investment house units.
A bank authorized to establish branches or other
offices shall be responsible for all business
conducted in such branches and offices to the
same extent and in the same manner as though
such business had all been conducted in the head
office. A bank and its branches and offices shall
be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines.
The entry of foreign banks in the Philippines
through the establishment of branches shall be
governed by the provisions of the Foreign Banks
Liberalization Act.
The conduct of offshore banking business in the
Philippines shall be governed by the provisions of
Presidential Decree No. 1034, otherwise known as
the "Offshore Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. In
case of a foreign bank which has more than one
(1) branch in the Philippines, all such branches
shall be treated as one (1) unit for the purpose of
this Act, and all references to the Philippine
branches of foreign banks shall be held to refer to
such units.
SEC. 75. Head Office Guarantee. In order to
provide effective protection of the interests of the
depositors and other creditors of Philippine
branches of a foreign bank, the head office of
such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are
creditors of a branch in the Philippines of a
foreign bank shall have preferential rights to the
assets of such branch in accordance with existing
laws.
Republic Act No. 7721, otherwise known as the
Foreign Banks Liberalization Law, lays down the
policies and regulations specifically concerning
the establishment and operation of local
branches of foreign banks. Relevant provisions of
the said statute read
Sec. 2. Modes of Entry. - The Monetary Board may
authorize foreign banks to operate in the
Philippine banking system through any of the
following modes of entry: (i) by acquiring,
purchasing or owning up to sixty percent (60%) of
the voting stock of an existing bank; (ii) by
investing in up to sixty percent (60%) of the
voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or
(iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail
itself of only one (1) mode of entry: Provided,
further, That a foreign bank or a Philippine
corporation may own up to a sixty percent (60%)

of the voting stock of only one (1) domestic bank

or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office
of foreign bank branches shall guarantee prompt
payment of all liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the
General Banking Law of 2000 expressly states
that the bank and its branches shall be treated as
one unit. It should be pointed out, however, that
the said provision applies to a universal 9 or
commercial bank,10 duly established and
organized as a Philippine corporation in
accordance with Section 8 of the same
statute,11 and authorized to establish branches
within or outside the Philippines.
The General Banking Law of 2000, however, does
not make the same categorical statement as
regards to foreign banks and their branches in
the Philippines. What Section 74 of the said law
provides is that in case of a foreign bank with
several branches in the country, all such
branches shall be treated as one unit. As to the
relations between the local branches of a foreign
bank and its head office, Section 75 of the
General Banking Law of 2000 and Section 5 of the
Foreign Banks Liberalization Law provide for a
"Home Office Guarantee," in which the head
office of the foreign bank shall guarantee prompt
payment of all liabilities of its Philippine branches.
While the Home Office Guarantee is in accord
with the principle that these local branches,
together with its head office, constitute but one
legal entity, it does not necessarily support the
view that said principle is true and applicable in
all circumstances.
The Home Office Guarantee is included in
Philippine statutes clearly for the protection of
the interests of the depositors and other creditors
of the local branches of a foreign bank. 12 Since
the head office of the bank is located in another
country or state, such a guarantee is necessary
so as to bring the head office within Philippine
jurisdiction, and to hold the same answerable for
the liabilities of its Philippine branches. Hence,
the principle of the singular identity of that the
local branches and the head office of a foreign
bank are more often invoked by the clients in
order to establish the accountability of the head
office for the liabilities of its local branches. It is
under such attendant circumstances in which the
American authorities and jurisprudence presented
by petitioners in their Motion for Partial
Reconsideration were rendered.
Now the question that remains to be answered is
whether the foreign bank can use the principle for
a reverse purpose, in order to extend the liability
of a client to the foreign banks Philippine branch
to its head office, as well as to its branches in

82

other countries. Thus, if a client obtains a loan

from the foreign banks Philippine branch, does it
absolutely and automatically make the client a
debtor, not just of the Philippine branch, but also
of the head office and all other branches of the
foreign bank around the world? This Court rules in
the negative.
There being a dearth of Philippine authorities and
jurisprudence on the matter, this Court, just as
what petitioners have done, turns to American
authorities and jurisprudence. American
authorities and jurisprudence are significant
herein considering that the head office of
petitioner Citibank is located in New York, United
States of America (U.S.A.).
Unlike Philippine statutes, the American
legislation explicitly defines the relations among
foreign branches of an American bank. Section 25
of the United States Federal Reserve Act13 states
that
Every national banking association operating
foreign branches shall conduct the accounts of
each foreign branch independently of the
accounts of other foreign branches established by
it and of its home office, and shall at the end of
each fiscal period transfer to its general ledger
the profit or loss accrued at each branch as a
separate item.
Contrary to petitioners assertion that the
accounts of Citibank-Manila and Citibank-Geneva
should be deemed as a single account under its
head office, the foregoing provision mandates
that the accounts of foreign branches of an
American bank shall be conducted independently
of each other. Since the head office of petitioner
Citibank is in the U.S.A., then it is bound to treat
its foreign branches in accordance with the said
provision. It is only at the end of its fiscal period
that the bank is required to transfer to its general
ledger the profit or loss accrued at each branch,
but still reporting it as a separate item. It is by
virtue of this provision that the Circuit Court of
Appeals of New York declared in Pan-American
Bank and Trust Co. v. National City Bank of New
York14 that a branch is not merely a tellers
window; it is a separate business entity.
The circumstances in the case of McGrath v.
Agency of Chartered Bank of India, Australia &
China15 are closest to the one at bar. In said case,
the Chartered Bank had branches in several
countries, including one in Hamburg, Germany
and another in New York, U.S.A., and yet another
in London, United Kingdom. The New York branch
entered in its books credit in favor of four German
firms. Said credit represents collections made
from bills of exchange delivered by the four
German firms. The same four German firms
subsequently became indebted to the Hamburg

branch. The London branch then requested for

the transfer of the credit in the name of the
German firms from the New York branch so as to
be applied or setoff against the indebtedness of
the same firms to the Hamburg branch. One of
the question brought before the U.S. District
Court of New York was "whether or not the debts
and the alleged setoffs thereto are mutual,"
which could be answered by determining first
whether the New York and Hamburg branches of
Chartered Bank are individual business entities or
are one and the same entity. In denying the right
of the Hamburg branch to setoff, the U.S. District
Court ratiocinated that
The structure of international banking houses
such as Chartered bank defies one rigorous
description. Suffice it to say for present
analysis, branches or agencies of an
international bank have been held to be
independent entities for a variety of
purposes (a) deposits payable only at branch
where made; Mutaugh v. Yokohama Specie Bank,
Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird
Undergarment Corp. v. Gomez, 1931, 139 Misc.
742, 249 N.Y.S. 319; (b) checks need be honored
only when drawn on branch where
deposited; Chrzanowska v. Corn Exchange Bank,
1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed
1919, 225 N.Y. 728, 122 N.E. 877; subpoena
duces tecum on foreign banks record barred; In
re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a
foreign branch separate for collection of
forwarded paper; Pan-American Bank and Trust
Company v. National City Bank of New York, 2
Cir., 1925, 6 F. 2d 762, certiorari denied 1925,
269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in
law there is nothing innately unitary about
the organization of international banking
institutions.
Defendant, upon its oral argument and in its
brief, relies heavily on Sokoloff v. National City
Bank of New York,1928, 250 N.Y. 69, 164 N.E.
745, as authority for the proposition that
Chartered Bank, not the Hamburg or New York
Agency, is ultimately responsible for the amounts
owing its German customers and, conversely, it is
to Chartered Bank that the German firms owe
their obligations. The Sokoloff case, aside from its
violently different fact situation, is centered on
the legal problem of default of payment and
consequent breach of contract by a branch
bank. It does not stand for the principle that
in every instance an international bank with
branches is but one legal entity for all
purposes. The defendant concedes in its brief
(p. 15) that there are purposes for which the
various agencies and branches of Chartered Bank
may be treated in law as separate entities. I fail

83

to see the applicability of Sokoloff either as a

guide to or authority for the resolution of this
problem. The facts before me and the cases
catalogued supra lend weight to the view that we
are dealing here with Agencies independent of
one another.
xxxx
I hold that for instant purposes the Hamburg
Agency and defendant were independent
business entities, and the attempted setoff may
not be utilized by defendant against its debt to
the German firms obligated to the Hamburg
Agency.
Going back to the instant Petition, although this
Court concedes that all the Philippine branches of
petitioner Citibank should be treated as one unit
with its head office, it cannot be persuaded to
declare that these Philippine branches are
likewise a single unit with the Geneva branch. It
would be stretching the principle way beyond its
intended purpose.
Therefore, this Court maintains its original
position in the Decision that the off-setting or
compensation of respondents loans with
Citibank-Manila using her dollar accounts with
Citibank-Geneva cannot be effected. The parties
cannot be considered principal creditor of the
other. As for the dollar accounts, respondent was
the creditor and Citibank-Geneva was the debtor;
and as for the outstanding loans, petitioner
Citibank, particularly Citibank-Manila, was the
creditor and respondent was the debtor. Since
legal compensation was not possible, petitioner
Citibank could only use respondents dollar
accounts with Citibank-Geneva to liquidate her
loans if she had expressly authorized it to do so
by contract.
Respondent cannot be deemed to have
authorized the use of her dollar deposits with
Citibank-Geneva to liquidate her loans with
petitioner Citibank when she signed the PNs16 for
her loans which all contained the provision that
At or after the maturity of this note, or when
same becomes due under any of the provisions
hereof, any money, stocks, bonds, or other
property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the
discretion of the said bank to the full or partial
payment of this note.
As has been established in the preceding
discussion, "Citibank, N.A." can only refer to the
local branches of petitioner Citibank together
with its head office. Unless there is any showing
that respondent understood and expressly agreed
to a more far-reaching interpretation, the
reference to Citibank, N.A. cannot be extended to

all other branches of petitioner Citibank all over

the world. Although theoretically, books of the
branches form part of the books of the head
office, operationally and practically, each branch
maintains its own books which shall only be later
integrated and balanced with the books of the
head office. Thus, it is very possible to identify
and segregate the books of the Philippine
branches of petitioner Citibank from those of
Citibank-Geneva, and to limit the authority
granted for application as payment of the PNs to
respondents deposits in the books of the former.
Moreover, the PNs can be considered a contract
of adhesion, the PNs being in standard printed
form prepared by petitioner Citibank. Generally,
stipulations in a contract come about after
deliberate drafting by the parties thereto, there
are certain contracts almost all the provisions of
which have been drafted only by one party,
usually a corporation. Such contracts are called
contracts of adhesion, because the only
participation of the party is the affixing of his
signature or his "adhesion" thereto. This being
the case, the terms of such contract are to be
construed strictly against the party which
prepared it.17
As for the supposed Declaration of Pledge of
respondents dollar accounts with CitibankGeneva as security for the loans, this Court
stands firm on its ruling that the non-production
thereof is fatal to petitioners cause in light of
respondents claim that her signature on such
document was a forgery. It bears to note that the
original of the Declaration of Pledge is with
Citibank-Geneva, a branch of petitioner Citibank.
As between respondent and petitioner Citibank,
the latter has better access to the document. The
constant excuse forwarded by petitioner Citibank
that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to
Citibank-Manila only supports this Courts finding
in the preceding paragraphs that the two
branches are actually operating separately and
independently of each other.
Further, petitioners keep playing up the fact that
respondent, at the beginning of the trial, refused
to give her specimen signatures to help establish
whether her signature on the Declaration of
Pledge was indeed forged. Petitioners seem to
forget that subsequently, respondent, on advice
of her new counsel, already offered to cooperate
in whatever manner so as to bring the original
Declaration of Pledge before the RTC for
inspection. The exchange of the counsels for the
opposing sides during the hearing on 24 July
1991 before the RTC reveals the apparent
willingness of respondents counsel to undertake
whatever course of action necessary for the

84

production of the contested document, and the

evasive, non-committal, and uncooperative
attitude of petitioners counsel.18
Lastly, this Courts ruling striking down the
Declaration of Pledge is not entirely based on
respondents allegation of forgery. In its Decision,
this Court already extensively discussed why it
found the said Declaration of Pledge highly
suspicious and irregular, to wit
First of all, it escapes this Court why petitioner
Citibank took care to have the Deeds of
Assignment of the PNs notarized, yet left the
Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take
greater cautionary measures with the preparation
and execution of the Declaration of Pledge
because it involved respondents "all present and
future fiduciary placements" with a Citibank
branch in another country, specifically, in
Geneva, Switzerland. While there is no express
legal requirement that the Declaration of Pledge
had to be notarized to be effective, even so, it
could not enjoy the same prima
facie presumption of due execution that is
extended to notarized documents, and petitioner
Citibank must discharge the burden of proving
due execution and authenticity of the Declaration
of Pledge.
Second, petitioner Citibank was unable to
establish the date when the Declaration of Pledge
was actually executed. The photocopy of the
Declaration of Pledge submitted by petitioner
Citibank before the RTC was undated. It
presented only a photocopy of the pledge
because it already forwarded the original copy
thereof to Citibank-Geneva when it requested for
the remittance of respondents dollar accounts
pursuant thereto. Respondent, on the other hand,
was able to secure a copy of the Declaration of
Pledge, certified by an officer of Citibank-Geneva,
which bore the date 24 September 1979.
Respondent, however, presented her passport
and plane tickets to prove that she was out of the
country on the said date and could not have
signed the pledge. Petitioner Citibank insisted
that the pledge was signed before 24 September
1979, but could not provide an explanation as to
how and why the said date was written on the
pledge. Although Mr. Tan testified that the
Declaration of Pledge was signed by respondent
personally before him, he could not give the
exact date when the said signing took place. It is
important to note that the copy of the Declaration
of Pledge submitted by the respondent to the RTC
was certified by an officer of Citibank-Geneva,
which had possession of the original copy of the
pledge. It is dated 24 September 1979, and this
Court shall abide by the presumption that the

written document is truly dated. Since it is

undeniable that respondent was out of the
country on 24 September 1979, then she could
not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly
filled-out. The pledge was in a standard printed
form. It was constituted in favor of Citibank, N.A.,
otherwise referred to therein as the Bank. It
should be noted, however, that in the space
which should have named the pledgor, the name
of petitioner Citibank was typewritten, to wit
The pledge right herewith constituted shall
secure all claims which the Bank now has or in
the future acquires against Citibank, N.A.,
Manila (full name and address of the Debtor),
regardless of the legal cause or the transaction
(for example current account, securities
transactions, collections, credits, payments,
documentary credits and collections) which gives
rise thereto, and including principal, all
contractual and penalty interest, commissions,
charges, and costs.
The pledge, therefore, made no sense, the
pledgor and pledgee being the same entity. Was a
mistake made by whoever filled-out the form?
Yes, it could be a possibility. Nonetheless,
considering the value of such a document, the
mistake as to a significant detail in the pledge
could only be committed with gross carelessness
on the part of petitioner Citibank, and raised
serious doubts as to the authenticity and due
execution of the same. The Declaration of Pledge
had passed through the hands of several bank
officers in the country and abroad, yet,
surprisingly and implausibly, no one noticed such
a glaring mistake.
Lastly, respondent denied that it was her
signature on the Declaration of Pledge. She
claimed that the signature was a forgery. When a
document is assailed on the basis of forgery, the
best evidence rule applies
Basic is the rule of evidence that when the
subject of inquiry is the contents of a document,
no evidence is admissible other than the original
document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised
Rules of Court. Mere photocopies of documents
are inadmissible pursuant to the best evidence
rule. This is especially true when the issue is
that of forgery.
As a rule, forgery cannot be presumed and must
be proved by clear, positive and convincing
evidence and the burden of proof lies on the
party alleging forgery. The best evidence of a
forged signature in an instrument is the
instrument itself reflecting the alleged forged
signature. The fact of forgery can only be
established by a comparison between the alleged

85

forged signature and the authentic and genuine

signature of the person whose signature is
theorized upon to have been forged. Without the
original document containing the alleged forged
signature, one cannot make a definitive
comparison which would establish forgery. A
comparison based on a mere xerox copy or
reproduction of the document under controversy
cannot produce reliable results.
Respondent made several attempts to have the
original copy of the pledge produced before the
RTC so as to have it examined by experts. Yet,
despite several Orders by the RTC, petitioner
Citibank failed to comply with the production of
the original Declaration of Pledge. It is admitted
that Citibank-Geneva had possession of the
original copy of the pledge. While petitioner
Citibank in Manila and its branch in Geneva may
be separate and distinct entities, they are still
incontestably related, and between petitioner
Citibank and respondent, the former had more
influence and resources to convince CitibankGeneva to return, albeit temporarily, the original
Declaration of Pledge. Petitioner Citibank did not
present any evidence to convince this Court that
it had exerted diligent efforts to secure the
original copy of the pledge, nor did it proffer the
reason why Citibank-Geneva obstinately refused
to give it back, when such document would have
been very vital to the case of petitioner Citibank.
There is thus no justification to allow the
presentation of a mere photocopy of the
Declaration of Pledge in lieu of the original, and
the photocopy of the pledge presented by
petitioner Citibank has nil probative value. In
addition, even if this Court cannot make a
categorical finding that respondents signature on
the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully
suppressed the presentation of the original
document, and takes into consideration the
presumption that the evidence willfully
suppressed would be adverse to petitioner
Citibank if produced.
As far as the Declaration of Pledge is concerned,
petitioners failed to submit any new evidence or
argument that was not already considered by this
Court when it rendered its Decision.
As to the value of the dollar deposits in CitibankGeneva ordered refunded to respondent
In case petitioners are still ordered to refund to
respondent the amount of her dollar accounts
with Citibank-Geneva, petitioners beseech this
Court to adjust the nominal values of
respondents dollar accounts and/or her overdue
peso loans by using the values of the currencies
stipulated at the time the obligations were
established in 1979, to address the alleged

inequitable consequences resulting from the

extreme and extraordinary devaluation of the
Philippine currency that occurred in the course of
the Asian crisis of 1997. Petitioners base their
request on Article 1250 of the Civil Code which
reads, "In case an extraordinary inflation or
deflation of the currency stipulated should
supervene, the value of the currency at the time
of the establishment of the obligation shall be the
basis of payment, unless there is an agreement
to the contrary."
It is well-settled that Article 1250 of the Civil
Code becomes applicable only when there is
extraordinary inflation or deflation of the
currency. Inflation has been defined as the sharp
increase of money or credit or both without a
corresponding increase in business transaction.
There is inflation when there is an increase in the
volume of money and credit relative to available
goods resulting in a substantial and continuing
rise in the general price level.19 In Singson v.
Caltex (Philippines), Inc.,20 this Court already
provided a discourse as to what constitutes as
extraordinary inflation or deflation of currency,
thus
We have held extraordinary inflation to exist
when there is a decrease or increase in the
purchasing power of the Philippine currency
which is unusual or beyond the common
fluctuation in the value of said currency, and such
increase or decrease could not have been
reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of
the establishment of the obligation.
An example of extraordinary inflation, as cited by
the Court in Filipino Pipe and Foundry Corporation
vs. NAWASA,supra, is that which happened to
the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany
experienced a case of hyperinflation. In early
1921, the value of the German mark was 4.2 to
the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices
went up rapidly, so that by October 1923, it had
reached 4.2 trillion to the U.S. dollar!" (Bernardo
M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).
As reported, "prices were going up every week,
then every day, then every hour. Women were
paid several times a day so that they could rush
out and exchange their money for something of
value before what little purchasing power was left
dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their
money out of the windows to their waiting wives,
who would rush to unload the nearly worthless
paper. A postage stamp cost millions of marks
and a loaf of bread, billions." (Sidney

86

Rutberg, "The Money Balloon", New York: Simon

and Schuster, 1975, p. 19, cited in "Economics,
An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is
never assumed. The party alleging it must lay
down the factual basis for the application of
Article 1250.
Thus, in the Filipino Pipe case, the Court
acknowledged that the voluminous records and
statistics submitted by plaintiff-appellant proved
that there has been a decline in the purchasing
power of the Philippine peso, but this downward
fall cannot be considered "extraordinary" but was
simply a universal trend that has not spared our
country. Similarly, in Huibonhoa vs. Court of
Appeals, the Court dismissed plaintiff-appellant's
unsubstantiated allegation that the Aquino
assassination in 1983 caused building and
construction costs to double during the period
July 1983 to February 1984. In Serra vs. Court of
Appeals, the Court again did not consider the
decline in the peso's purchasing power from 1983
to 1985 to be so great as to result in an
extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant
case also raises as basis for the application of
Article 1250 the Philippine economic crisis in the
early 1980s --- when, based on petitioner's
evidence, the inflation rate rose to 50.34% in
1984. We hold that there is no legal or factual
basis to support petitioner's allegation of the
existence of extraordinary inflation during this
period, or, for that matter, the entire time frame
of 1968 to 1983, to merit the adjustment of the
rentals in the lease contract dated July 16, 1968.
Although by petitioner's evidence there was a
decided decline in the purchasing power of the
Philippine peso throughout this period, we are
hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article
1250.
Rather, we adopt with approval the following
observations of the Court of Appeals on
petitioner's evidence, especially the NEDA
certification of inflation rates based on consumer
price index:
xxx (a) from the period 1966 to 1986, the official
inflation rate never exceeded 100% in any single
year; (b) the highest official inflation rate
recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period,
the Philippines experienced a single-digit inflation
in ten (10) years (i.e., 1966, 1967, 1968, 1969,
1975, 1976, 1977, 1978, 1983 and 1986); (d) in
other years (i.e., 1970, 1971, 1972, 1973, 1974,
1979, 1980, 1981, 1982, 1984 and 1989) when
the Philippines experienced double-digit inflation
rates, the average of those rates was only

20.88%; (e) while there was a decline in the

purchasing power of the Philippine currency from
the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal
erosion of the value of the Philippine peso which
is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the
trend of decline in the value of the peso in the
past three to four decades. Unfortunate as this
trend may be, it is certainly distinct from the
phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied
without an official declaration thereof by
competent authorities.
The burden of proving that there had been
extraordinary inflation or deflation of the currency
is upon the party that alleges it. Such
circumstance must be proven by competent
evidence, and it cannot be merely assumed. In
this case, petitioners presented no proof as to
how much, for instance, the price index of goods
and services had risen during the intervening
period.21 All the information petitioners provided
was the drop of the U.S. dollar-Philippine peso
exchange rate by 17 points from June 1997 to
January 1998. While the said figure was based on
the statistics of the Bangko Sentral ng
Pilipinas (BSP), it is also significant to note that
the BSP did not categorically declare that the
same constitute as an extraordinary inflation. The
existence of extraordinary inflation must be
officially proclaimed by competent authorities,
and the only competent authority so far
recognized by this Court to make such an official
proclamation is the BSP.22
Neither can this Court, by merely taking judicial
notice of the Asian currency crisis in 1997,
already declare that there had been extraordinary
inflation. It should be recalled that the Philippines
likewise experienced economic crisis in the
1980s, yet this Court did not find that
extraordinary inflation took place during the said
period so as to warrant the application of Article
1250 of the Civil Code.
Furthermore, it is incontrovertible that Article
1250 of the Civil Code is based on equitable
considerations. Among the maxims of equity are
(1) he who seeks equity must do equity, and (2)
he who comes into equity must come with clean
hands. The latter is a frequently stated maxim
which is also expressed in the principle that he
who has done inequity shall not have
equity.23 Petitioner Citibank, hence, cannot invoke
Article 1250 of the Civil Code because it does not
come to court with clean hands. The delay in the
recovery24 by respondent of her dollar accounts
with Citibank-Geneva was due to the unlawful act

87

of petitioner Citibank in using the same to

liquidate respondents loans. Petitioner Citibank
even attempted to justify the off-setting or
compensation of respondents loans using her
dollar accounts with Citibank-Geneva by the
presentation of a highly suspicious and irregular,
and even possibly forged, Declaration of Pledge.
The damage caused to respondent of the
deprivation of her dollar accounts for more than
two decades is unquestionably relatively more
extensive and devastating, as compared to
whatever damage petitioner Citibank, an
international banking corporation with
undoubtedly substantial capital, may have
suffered for respondents non-payment of her
loans. It must also be remembered that petitioner
Citibank had already considered respondents
loans paid or liquidated by 26 October 1979 after
it had fully effected compensation thereof using
respondents deposits and money market
placements. All this time, respondents dollar
accounts are unlawfully in the possession of and
are being used by petitioner Citibank for its
business transactions. In the meantime,
respondents businesses failed and her properties
were foreclosed because she was denied access
to her funds when she needed them most. Taking
these into consideration, respondents dollar
accounts with Citibank-Geneva must be deemed
to be subsisting and continuously deposited with
petitioner Citibank all this while, and will only be
presently withdrawn by respondent. Therefore,
petitioner Citibank should refund to respondent
the U.S. $149,632.99 taken from her CitibankGeneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of
payment, plus the stipulated interest for each of
the fiduciary placements and current accounts
involved, beginning 26 October 1979.
As to respondents Motion to Clarify and/or
Confirm Decision with Notice of Judgment
Respondent, in her Motion, is of the mistaken
notion that the Court of Appeals Decision, dated
26 March 2002, as modified by the Resolution of
the same court, dated 20 November 2002, would
be implemented or executed together with this
Courts Decision.
This Court clarifies that its affirmation of the
Decision of the Court of Appeals, as modified, is
only to the extent that it recognizes that
petitioners had liabilities to the respondent.
However, this Courts Decision modified that of
the appellate courts by making its own
determination of the specific liabilities of the
petitioners to respondent and the amounts
thereof; as well as by recognizing that respondent
also had liabilities to petitioner Citibank and the
amount thereof.

Thus, for purposes of execution, the parties need

only refer to the dispositive portion of this Courts
Decision, dated 16 October 2006, should it
already become final and executory, without any
further modifications.
As the last point, there is no merit in respondents
Motion for this Court to already declare its
Decision, dated 16 October 2006, final and
executory. A judgment becomes final and
executory by operation of law and, accordingly,
the finality of the judgment becomes a fact upon
the lapse of the reglementary period without an
appeal or a motion for new trial or
reconsideration being filed.25 This Court cannot
arbitrarily disregard the reglementary period and
declare a judgment final and executory upon the
mere motion of one party, for to do so will be a
culpable violation of the right of the other parties
to due process.
IN VIEW OF THE FOREGOING, petitioners Motion
for Partial Reconsideration of this Courts
Decision, dated 16 October 2006, and
respondents Motion for this Court to declare the
same Decision already final and executory, are
both DENIED for lack of merit.
G.R. No. 170540
October 28, 2009
EUFEMIA BALATICO VDA. DE
AGATEP, Petitioner,
vs.
ROBERTA* L. RODRIGUEZ and NATALIA
AGUINALDO VDA. DE LIM, Respondents.
DECISION
PERALTA, J.:
Before the Court is a petition for review on
certiorari under Rule 45 of the Rules of Court
seeking the reversal and setting aside of the
Decision1 of the Court of Appeals (CA) dated
September 9, 2005 in CA-G.R. CV No. 83163
which affirmed the May 12, 2004 Decision of the
Regional Trial Court (RTC) of Aparri, Cagayan,
Branch 8, in Civil Case No. 08-298. Petitioner also
assails the CA Resolution2 dated November 16,
2005 denying her motion for reconsideration.
The factual and procedural antecedents of the
case are as follows:
The present case arose from a dispute involving a
parcel of land located at Zinundungan, Lasam,
Cagayan with an area of 1,377 square meters and
covered by Transfer Certificate of Title (TCT) No.
T-10759 of the Register of Deeds of the Province
of Cagayan.3
The subject property was previously owned by
herein respondent Natalia Aguinaldo Vda. de Lim.
On July 18, 1975, Lim mortgaged the lot to the
Philippine National Bank (PNB), Tuguegarao
Branch, to secure a loan ofP30,000.00 which she
obtained from the said bank. The mortgage
contract was duly annotated on TCT No. T-10759.

88

Lim was not able to pay her loan prompting PNB

to foreclose the property. On April 13, 1983, the
subject parcel of land was sold at public auction
to PNB as the highest bidder.4 Lim failed to
redeem the property. After the expiration of the
one-year redemption period allowed by law, PNB
consolidated its ownership over the disputed
land.5 As a consequence, TCT No. T-10759 in the
name of Lim was canceled and a new certificate
of title (TCT No. T-65894) was issued in the name
of PNB on November 8, 1985.6
Meanwhile, on August 18, 1976, while the
mortgage was still in effect, Lim sold the subject
property to herein petitioner's husband, Isaac
Agatep (Agatep), for a sum
of P18,000.00.7 However, the sale was not
registered. Neither did Lim deliver the title to
petitioner or her husband. Nonetheless, Agatep
took possession of the same, fenced it with
barbed wire and introduced improvements
thereon. Subsequently, Agatep died in 1978.
Despite his death, his heirs, including herein
petitioner, continued to possess the property.
In July 1992, the subject lot was included among
PNB's acquired assets for sale. Later on, an
invitation to bid was duly published. On April 20,
1993, the disputed parcel of land was sold to
herein respondent Roberta L. Rodriguez
(Rodriguez), who is the daughter of respondent
Lim.8 Subsequently, TCT No. T-65894, in the name
of PNB, was canceled and a new title (TCT No. T89400) was issued in the name of Rodriguez. 9
On January 27, 1995, herein petitioner filed a
Complaint10 for "reconveyance and/or damages"
with the RTC of Aparri, Cagayan against herein
respondents.
Later, the complaint was amended to implead
PNB as a party-defendant. 11
On January 20, 2000, the RTC dismissed the
amended complaint for failure of herein petitioner
(then plaintiff) to file her Pre-Trial
Brief.12 Petitioner filed a motion for
reconsideration but the RTC denied it. Thereafter,
trial ensued.
On May 12, 2004, the RTC rendered judgment in
favor of herein respondents.13 The dispositive
portion of the Decision reads as follows:
WHEREFORE, the Court hereby renders judgment
to wit:
1. Dismiss the instant complaint for
reconveyance for lack of merit;
2. Sustain the legality of TCT No.
1055914 in the name of defendant Roberta
Rodriguez; and
3. Award actual damages in favor of
plaintiff Eufemia Balatico Vda. de Agatep
against defendant Natalia Aguinaldo Vda.
de Lim in the amount of Php18,000.00

with legal interest to be computed from

the filing of the instant case up to the full
completion of its payment.
SO DECIDED.15
In awarding damages in favor of herein petitioner,
the RTC ruled that Lim enriched herself at the
expense of petitioner and her husband by
benefiting from the proceeds of the sale but
failing to deliver the object of such sale. Hence,
on grounds of justice and equity, petitioner
should be awarded an adequate compensation
for the value of the loss suffered.
Herein petitioner filed an appeal with the CA
contending that the RTC erred in not considering
the merit of the evidence and arguments proven
and submitted by petitioner on the issues defined
and agreed upon by the parties. Petitioner also
averred that the RTC erred in deciding the case
on issues different from those defined and agreed
upon by the parties during the pre-trial
conference and that the trial court further erred
in dismissing the amended complaint.
On September 9, 2005, the CA rendered its
Decision dismissing herein petitioner's appeal for
lack of merit and affirming the assailed Decision
of the RTC.
Petitioner filed a motion for reconsideration, but
the CA denied it in its Resolution dated November
16, 2005.
Hence, the present petition with the following
assignment of errors:
IV.1. IN AFFIRMING THE DECISION OF THE TRIAL
COURT IN DISMISSING THE AMENDED COMPLAINT
AGAINST THE PNB, THE APPELLATE COURT
COMMITTED A REVERSIBLE ERROR;
IV.2. IN HOLDING THAT "NOTWITHSTANDING THE
DISMISSAL OF THE AMENDED COMPLAINT AS
AGAINST PNB, THE TRIAL COURT IN ITS DECISION
NONETHELESS FULLY PASSED UPON THE MERITS
OF APPELLANT'S CAUSE OF ACTION AGAINST THE
SAID MORTGAGEE BANK," THE APPELLATE COURT
COMMITTED A REVERSIBLE ERROR;
IV.3. AS A NECESSARY CONSEQUENCE OF THE
ERROR IV.2, THE RULING OF THE APPELLATE
COURT THAT PNB IS A MORTGAGEE, BUYER AND
LATER SELLER IN GOOD FAITH, IS A REVERSIBLE
ERROR;
IV.4. THE DECISION, ANNEX A, ERRED IN
REJECTING PETITIONER'S ARGUMENTS THAT PNB
DID NOT ACQUIRE OWNERSHIP OVER THE
PROPERTY IN QUESTION;
IV.5. THE DECISION, ANNEX A, ERRED IN RULING
THAT PETITIONER'S CONTENTION THAT THE TRIAL
COURT DECIDED THE CASE UPON SUCH ISSUES
DIFFERENT FROM THOSE AGREED UPON DURING
THE PRE-TRIAL CONFERENCE DESERVES SCANT
CONSIDERATION; AND

89

IV.6. THE DECISION, ANNEX A, ERRED IN RULING

THAT PETITIONER IS NOT ENTITLED TO HER
CAUSE OF ACTION OF RECONVEYANCE.16
In her first assigned error, petitioner contends
that Section 6, Rule 18 of the Rules of Court does
not require another pre-trial, as well as the filing
of another pre-trial brief, when the complaint is
amended to implead another defendant.
The Court does not agree.
In Tiu v. Middleton,17 the Court, giving emphasis
on the importance of a pre-trial, held that:
Pre-trial is an answer to the clarion call for the
speedy disposition of cases. Although it was
discretionary under the 1940 Rules of Court, it
was made mandatory under the 1964 Rules and
the subsequent amendments in 1997. Hailed as
"the most important procedural innovation in
Anglo-Saxon justice in the nineteenth century,
pre-trial seeks to achieve the following:
(a) The possibility of an amicable
settlement or of a submission to
alternative modes of dispute resolution;
(b) The simplification of the issues;
(c) The necessity or desirability of
amendments to the pleadings;
(d) The possibility of obtaining stipulations
or admissions of facts and of documents
to avoid unnecessary proof;
(e) The limitation of the number of
witnesses;
(f) The advisability of a preliminary
reference of issues to a commissioner;
(g) The propriety of rendering judgment on
the pleadings, or summary judgment, or of
dismissing the action should a valid
ground therefor be found to exist;
(h) The advisability or necessity of
suspending the proceedings; and
(i) Such other matters as may aid in the
prompt disposition of the action.18
In consonance with these objectives, Section 6,
Rule 18 of the Rules of Court, as amended,
provides:
SEC. 6. Pre-trial brief. The parties shall file with
the court and serve on the adverse party, in such
manner as shall ensure their receipt thereof at
least three (3) days before the date of the pretrial, their respective pre-trial briefs which shall
contain, among others:
(a) A statement of their willingness to
enter into amicable settlement or
alternative modes of dispute resolution,
indicating the desired terms thereof;
(b) A summary of admitted facts and
proposed stipulation of facts;
(c) The issues to be tried or resolved;
(d) The documents or exhibits to be
presented, stating the purpose thereof;

(e) A manifestation of their having availed,

or their intention to avail, themselves of
discovery procedures or referral to
commissioners; and
(f) The number and names of the
witnesses, and the substance of their
respective testimonies.
Failure to file the pre-trial brief shall have the
same effect as failure to appear at the pre-trial.
The pre-trial brief serves as a guide during the
pre-trial conference so as to simplify, abbreviate
and expedite the trial if not to dispense with it. It
is a devise essential to the speedy disposition of
disputes, and parties cannot brush it aside as a
mere technicality.19 In addition, pre-trial rules are
not to be belittled or dismissed, because their
non-observance may result in prejudice to a
partys substantive rights. Like all rules, they
should be followed except only for the most
persuasive of reasons when they may be relaxed
to relieve a litigant of an injustice not
commensurate with the degree of his
thought[less]ness in not complying with the
procedure.20
Petitioner posits that even if an amended
complaint is filed for the purpose of impleading
another party as defendant, where no additional
cause of action was alleged and the amount of
prayer for damages in the original complaint was
the same, another pre-trial is not required and a
second pre-trial brief need not be filed.
It must be pointed out, however, that in the
cases21 cited by petitioner to support her
argument, the Court found no need for a second
pre-trial precisely because there are no additional
causes of action alleged and the impleaded
defendants merely adopted and repleaded all the
pleadings of the original defendants. Petitioner's
reliance on the above-cited cases is misplaced
because, in the present case, the RTC correctly
found that petitioner had a separate cause of
action against PNB. A separate cause of action
necessarily means additional cause of action.
Moreover, the defenses adopted by PNB are
completely different from the defenses of Lim and
Rodriguez, necessitating a separate
determination of the matters enumerated under
Section 6, Rule 18 of the Rules of Court insofar as
PNB and petitioner are concerned. On these
bases, we find no error in the ruling of the CA
which sustained the trial court's dismissal of the
amended complaint against PNB for failure of
petitioner to file her pre-trial brief.
Corollarily, Sections 4 and 5 of the same Rule
state:
Sec. 4. Appearance of parties. It shall be the
duty of the parties and their counsel to appear at
the pre-trial. The non-appearance of a party may

90

be excused only if a valid cause is shown therefor

or if a representative shall appear in his behalf
fully authorized in writing to enter into an
amicable settlement, to submit to alternative
modes of dispute resolution, and to enter into
stipulations or admissions of facts and of
documents.
Sec. 5. Effect of failure to appear. The failure of
the plaintiff to appear when so required pursuant
to the next preceding section shall be cause for
dismissal of the action. The dismissal shall be
with prejudice, unless otherwise ordered by the
court. x x x
In the present case, the Court observes that in
the Order of the RTC dated June 6, 2000,22 the
trial court noted the absence of both the
petitioner and her counsel during the scheduled
pre-trial conference with respect to the amended
complaint impleading PNB. Under the abovequoted Rules, such absence is an additional
ground to dismiss the action against PNB.
Whether an order of dismissal should be
maintained under the circumstances of a
particular case or whether it should be set aside
depends on the sound discretion of the trial
court.23 Considering the circumstances
established on record in the instant case, the
Court finds no cogent reason to set aside the
order of the RTC dismissing the complaint of
petitioner against PNB.
With respect to the second and third assignment
of errors, petitioner argues that the CA erred in
sustaining the RTC when it passed upon the
merits of petitioner's cause of action against PNB
notwithstanding the fact that the complaint
against the latter was already dismissed.
Petitioner contends that a person who was not
impleaded in a case could not be bound by the
decision rendered therein. Petitioner then
proceeds to conclude that the CA erred in
sustaining the trial court's finding that PNB was a
mortgagee, buyer and seller in good faith.
The Court is not persuaded.
It is true that the judgment of the trial and
appellate courts in the present case could not
bind the PNB for the latter is not a party to the
case. However, this does not mean that the trial
and appellate courts are precluded from making
findings which are necessary for a just, complete
and proper resolution of the issues raised in the
present case. The Court finds no error in the
determination by the trial and appellate courts of
the question of whether or not PNB was a
mortgagee, buyer and, later on, seller in good
faith as this would bear upon the ultimate issue of
whether petitioner is entitled to reconveyance.
Petitioner insists that PNB is not a mortgagee in
good faith asserting that, if it only exercised due

diligence, it would have found out that petitioner

and her husband were already in adverse
possession of the subject property as early as two
years before the same was sold to them. This
claim, however, is contradicted by no less than
petitioner's averments in her Brief filed with the
CA wherein she stated that "[i]mmediately after
the sale, the land was delivered to Isaac Agatep x
x x Since that time up to the present, Isaac
Agatep and after his death, the Appellant have
been in continuous, uninterrupted, adverse and
public possession of the said parcel of land."24The
foregoing assertion only shows that petitioner's
husband took possession of the subject lot only
after the same was sold to him.
In any case, the Court finds no error in the
findings of both the RTC and the CA that PNB is
indeed an innocent mortgagee for value. When
the lots were mortgaged to PNB by Lim, the titles
thereto were in the latter's name, and they
showed neither vice nor infirmity. In accepting the
mortgage, PNB was not required to make any
further investigation of the titles to the properties
being given as security, and could rely entirely on
what was stated in the aforesaid title. The public
interest in upholding the indefeasibility of a
certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance
thereon, protects a buyer or mortgagee who, in
good faith, relies upon what appears on the face
of the certificate of title.25
In her fourth assigned error, petitioner contends
that PNB did not acquire ownership over the
disputed lot because the said property was not
delivered to it. Petitioner asserts that the
execution of a public document does not
constitute sufficient delivery to PNB, considering
that the subject property is in the adverse
possession, under claim of ownership, of
petitioner and her predecessor-in-interest.
Petitioner further assails the ruling of the CA that
PNB, who was the buyer in the foreclosure sale,
became the absolute owner of the property
purchased when it consolidated its ownership
thereof for failure of the mortgagor Lim to
redeem the subject property during the period of
one year after the registration of the sale.
The Court finds petitioner's arguments untenable.
The Court's ruling in Manuel R. Dulay Enterprises,
Inc. v. Court of Appeals26 is instructive, to wit:
Petitioner's contention that private respondent
Torres never acquired ownership over the subject
property since the latter was never in actual
possession of the subject property nor was the
property delivered to him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code
provides:

91

When the sale is made through a public

instrument, the execution thereof shall be
equivalent to the delivery of the thing which is
the object of the contract, if from the deed the
contrary does not appear or cannot clearly be
inferred.
Under the aforementioned article, the mere
execution of the deed of sale in a public
document is equivalent to the delivery of the
property. Likewise, this Court had held that:
It is settled that the buyer in a foreclosure sale
becomes the absolute owner of the property
purchased if it is not redeemed during the period
of one year after the registration of the sale. As
such, he is entitled to the possession of the said
property and can demand it at any time following
the consolidation of ownership in his name and
the issuance to him of a new transfer certificate
of title. The buyer can, in fact, demand
possession of the land even during the
redemption period except that he has to post a
bond in accordance with Section 7 of Act No.
3133, as amended. No such bond is required after
the redemption period if the property is not
redeemed. Possession of the land then becomes
an absolute right of the purchaser as confirmed
owner.
Therefore, prior physical delivery or possession is
not legally required since the execution of the
Deed of Sale is deemed equivalent to delivery. 27
This ruling was reiterated in Spouses Sabio v. The
International Corporate Bank, Inc.28 wherein it
was held that:
Notwithstanding the presence of illegal occupants
on the subject property, transfer of ownership by
symbolic delivery under Article 1498 can still be
effected through the execution of the deed of
conveyance. As we held inPower Commercial and
Industrial Corp. v. Court of Appeals [274 SCRA
597, 610], the key word is control, notpossession,
of the subject property. Considering that the deed
of conveyance proposed by respondents did not
stipulate or infer that petitioners could not
exercise control over said property, delivery can
be effected through the mere execution of said
deed.
x x x It is sufficient that there are no legal
impediments to prevent petitioners from gaining
physical possession of the subject property. As
stated above, prior physical delivery or
possession is not legally required and the
execution of the deed of sale or conveyance is
deemed equivalent to delivery. This deed
operates as a formal or symbolic delivery of the
property sold and authorizes the buyer or
transferee to use the document as proof of
ownership. Nothing more is required.29

Thus, the execution of the Deed of Sale in favor

of PNB, after the expiration of the redemption
period, is deemed equivalent to delivery.1avvphi1
As to petitioner's contention that the execution of
a public document in favor of PNB did not
constitute sufficient delivery to it because the
property involved is in the actual and adverse
possession of petitioner and her husband, it must
be noted that petitioner and her husband's
possession of the disputed lot is derived from
their right as buyers of the subject parcel of land.
As buyers or transferees, petitioner and her
husband simply stepped into the shoes of Lim,
who, prior to selling the subject property to them,
mortgaged the same to PNB. As Lim's successorsin-interest, their possession could not be said to
be adverse to that of Lim. Thus, they are also
bound to recognize and respect the mortgage
entered into by the latter. Their possession of the
disputed lot could not, therefore, be considered
as a legal impediment which could prevent PNB
from acquiring ownership and possession thereof.
It bears to reiterate the undisputed fact, in the
instant case, that Lim mortgaged the subject
property to PNB prior to selling the same to
petitioner's husband. Settled is the rule that a
mortgage is an accessory contract intended to
secure the performance of the principal
obligation. One of its characteristics is that it is
inseparable from the property. It adheres to the
property regardless of who its owner may
subsequently be.30
This is true even in the case of a real estate
mortgage because, pursuant to Article 2126 of
the Civil Code, the mortgage directly and
immediately subjects the property upon which it
is imposed, whoever the possessor may be, to
the fulfillment of the obligation for whose security
it was constituted. It is inseparable from the
property mortgaged as it is a right in rem - a lien
on the property whoever its owner may be. It
subsists notwithstanding a change in ownership;
in short, the personality of the owner is
disregarded. Thus, all subsequent purchasers
must respect the mortgage whether the transfer
to them be with or without the consent of the
mortgagee, for such mortgage until discharged
follows the property.31
Petitioner avers that she and her husband were
not aware of the mortgage contract which was
executed between PNB and Lim prior to the sale
of the subject property by the latter to her
husband. The fact remains, however, that the
mortgage was registered and annotated on the
certificate of title covering the subject property.
It is settled that registration in the public registry
is notice to the whole world.32 Every conveyance,
mortgage, lease, lien, attachment, order,

92

judgment, instrument or entry affecting

registered land shall, if registered, filed or
entered in the Office of the Register of Deeds of
the province or city where the land to which it
relates lies, be constructive notice to all persons
from the time of such registering, filing or
entering.33 Under the rule of notice, it is
presumed that the purchaser has examined every
instrument of record affecting the title. Such
presumption may not be rebutted. He is charged
with notice of every fact shown by the record and
is presumed to know every fact shown by the
record and to know every fact which an
examination of the record would have disclosed.
This presumption cannot be overcome by any
claim of innocence or good faith. Otherwise, the
very purpose and object of the law requiring a
record would be destroyed. Such presumption
cannot be defeated by proof of want of
knowledge of what the record contains any more
than one may be permitted to show that he was
ignorant of the provisions of the law. The rule that
all persons must take notice of the facts which
the public record contains is a rule of law. The
rule must be absolute; any variation would lead
to endless confusion and useless litigation.34 In
the present case, since the mortgage contract
was registered, petitioner may not claim lack of
knowledge thereof as a valid defense. The
subsequent sale of the property to petitioner's
husband cannot defeat the rights of PNB as the
mortgagee and, subsequently, the purchaser at
the auction sale whose rights were derived from a
prior mortgage validly registered.
In her fifth assignment of error, petitioner
contends that the trial court deviated from the
issues identified in the Pre-Trial Order and that the
case was decided on issues different from those
agreed upon during the pre-trial. Settled is the
rule that a pre-trial order is not meant to be a
detailed catalogue of each and every issue that is
to be or may be taken up during the trial. Issues
that are impliedly included therein or may be
inferable therefrom by necessary implication are
as much integral parts of the pre-trial order as
those that are expressly stipulated.35 In the case
before us, a cursory reading of the issues
enumerated in the Pre-Trial Order of the RTC
would readily show that the complete and proper
resolution of these issues would necessarily
include all other matters pertinent to determining
whether herein petitioner is the lawful owner of
the subject property and is, therefore, entitled to
reconveyance. It would be illogical not to touch
on the question of whether the mortgage contract
between Lim and PNB is binding on petitioner and
her husband or whether PNB lawfully foreclosed
and acquired ownership of the subject property

because a resolution of these issues is

determinative of whether there are no
impediments in petitioner and her husband's
acquisition of ownership of the disputed lot.
Coming to the last assigned error, the Court
agrees with the disquisition of the CA that an
action for reconveyance is one that seeks to
transfer property, wrongfully registered by
another, to its rightful and legal owner.36 From the
foregoing discussions, the Court finds no
sufficient reason to depart from the findings of
the RTC and the CA that, based on the evidence
on record, there was no wrongful registration of
the property, first in the name of PNB as the
purchaser when the property was auctioned and,
subsequently, in the name of respondent
Rodriguez who bought the subject property when
the same was offered for sale by PNB. Hence, the
CA did not commit error in affirming the RTC's
dismissal of herein petitioner's complaint for
reconveyance.
WHEREFORE, the petition is DENIED. The assailed
Decision and Resolution of the Court of Appeals,
dated September 9, 2005 and November 16,
2005, respectively, in CA-G.R. CV No. 83163 are
AFFIRMED.
SO ORDERED.
G.R. No. 149569
May 28, 2004
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RBL ENTERPRISES, INC.; RAMON B. LACSON
SR.; and Spouses EDWARDO and HERMINIA
LEDESMA,respondents.
DECISION
PANGANIBAN, J.:
Having released fifty percent of the loan proceeds
on the basis of the signed loan and mortgage
contracts, petitioner can no longer require the
borrowers to secure the lessors conformity to the
Mortgage Contract as a condition precedent to
the release of the loan balance. The conformity of
the lessor was not necessary to protect the
banks interest, because respondents were
unquestionably the absolute owners of the
mortgaged property. Furthermore, the registration
of the mortgage created a real right to the
properties which, in subsequent transfers by the
mortgagor, the transferees are legally bound to
respect.
The Case
Before us is a Petition for Review1 under Rule 45
of the Rules of Court, seeking to set aside the
August 22, 2001 Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 49749. The dispositive
portion of the Decision reads as follows:
"WHEREFORE, premises considered[,] the
judgment appealed from is

93

hereby AFFIRMED, with x x

xMODIFICATION as follows:
"1. The amount of actual damages
and losses is reduced
from P985,722.15 to
merely P380,713.55 with legal
interest from the date of the filing
of the complaint. The interest
payable on the loan is ordered
reduced by using the agreed
interest rate of 18% per annum in
the computation[;]
"2. The amount of moral damages
is reduced from P100,000.00
to P50,000.00;
"3. The amount of exemplary
damages is reduced
from P50,000.00 to P30,000.00;
and
"4. The award of attorneys fees is
reduced from P200,000.00
to P50,000.00."3
The Facts
The facts of the case are narrated in the assailed
Decision of the CA, as follows:
"1. On April 28, 1993, [respondents]
instituted an action against [Petitioner]
PNB and the Provincial Sheriff of Negros
Occidental alleging among others, the
following:
"(a) Sometime in 1987,
[respondents] opened a prawn
hatchery in San Enrique, Negros
Occidental, and for this purpose,
leased from Nelly Bedrejo a parcel
of land where the operations were
conducted;
"(b) In order to increase
productions and improve the
hatchery facilities, [respondents]
applied for and was approved a
loan of P2,000,000.00, by
[Petitioner] PNB. To secure its
payment, [respondents] executed
in favor of PNB, a real estate
mortgage over two (2) parcels of
land, located at Bago City, Negros
Occidental, covered by Transfer
Certificate of Title Nos. T-13005
and T-12642 in the names of
[respondents], and another real
[estate] and chattel mortgage over
the buildings, culture tanks and
other hatchery facilities located in
the leased property of Nelly
Bedrejo;
"(c) PNB partially released to
[respondents] on several dates, the

total sum of P1,000,000.00 less the

advance interests, which amount
[respondents] used for introducing
improvements on the leased
property where the hatchery
business was located.
"(d) During the mid-part of the
construction of the improvements,
PNB refused to release the balance
of P1,000,000.00 allegedly because
[respondents] failed to comply with
the banks requirement that Nelly
Bedrejo should execute an
undertaking or a lessors
conformity provided in Real Estate
and Chattel Mortgage contract
dated August 3, 1989, which
states, par. 9.07. It is a condition
of this mortgage that while the
obligations remained unpaid, the
acquisition by the lessor of the
permanent improvements covered
by this Real Estate Mortgage as
provided for in the covering Lease
Contract, shall be subject to this
mortgage. For this purpose, the
mortgagor hereby undertakes to
secure the lessors conformity
hereto.
"(e) For said alleged failure of
[respondents] to comply with the
additional requirement and the
demand of PNB to pay the released
amount of P1,000,000.00, PNB
foreclosed the mortgaged
properties, to the detriment of
[respondents].
"(f) Due to the non-release of the
remaining balance of the loan
applied for and approved, the
productions-operations of the
business were disrupted causing
losses to [respondents], and
thereafter, to the closure of the
business.
"2. On June 29, 1990, [Petitioner] PNB filed
its Answer with Counterclaim alleging that
the lessors conformity was not an
additional requirement but was already
part of the terms and conditions contained
in the Real Estate and Chattel
Mortgage dated August 3, 1989, executed
between [respondents] and [petitioner];
and that the release of the balance of the
loan was conditioned on the compliance
and submission by the [respondents] of
the required lessors conformity.

94

"3. On November 8, 1993, a writ of

preliminary injunction was issued by
the court a quo prohibiting PNB and the
Provincial Sheriff of Negros Occidental
from implementing the foreclosure
proceedings including the auction sale of
the properties of the [respondents] subject
matter of the real [estate] and chattel
mortgages."4
The Regional Trial Court (RTC) ruled that
Philippine National Bank (PNB) had breached its
obligation under the Contract of Loan and should
therefore be held liable for the consequential
damages suffered by respondents. The trial court
held that PNBs refusal to release the balance of
the loan was unjustified for the following reasons:
1) the banks partial release of the loan of
respondents had estopped it from requiring them
to secure the lessors signature on the Real
Estate and Chattel Mortgage Contract; 2) Nelly
Bedrejo, the lessor, had no interest in the
property and was not in any manner connected
with respondents business; thus, the fulfillment
of the condition was legally impossible; and 3)
the interests of PNB were amply protected, as the
loan had overly been secured by collaterals with
a total appraised value of P3,088,000.
The RTC further observed that while the loan
would mature in three years, the lease contract
between Bedrejo and respondents would expire in
ten years. According to a provision in the
Contract, upon its expiration, all improvements
found on the leased premises would belong to the
lessor. Thus, in the event of nonpayment of the
loan at its maturity, PNB could still foreclose on
those improvements, the subject of the chattel
mortgage.
Ruling of the Court of Appeals
Affirming the lower court, the CA held that Nelly
Bedrejo, who was not a party to the Mortgage
Contract, could not be compelled to affix her
signature thereto. The appellate court further
ruled that the registration of the mortgage not
only revealed PNBs intention to give full force
and effect to the instrument but, more important,
gave the mortgagee ample security against
subsequent owners of the chattels.
The CA, however, reduced the amount of actual
damages for lack of competent proof of the lost
income and the unrealized profits of RBL, as well
as for the additional expenses and liabilities
incurred by respondents as a result of petitioners
refusal to release the balance of the loan. Moral
and exemplary damages as well as attorneys
fees were likewise lessened.
Hence, this Petition.5
Issues

Petitioner raises the following alleged errors for

our consideration:
"A.
Whether or not the Court of Appeals
committed serious error when it held that
Petitioner PNB has no legal basis to
require respondents to secure the
conformity of the lessor and owner of the
property where their hatchery business is
being conducted notwithstanding that
respondents obligated themselves in no
uncertain terms to secure such conformity
pursuant to par. 9.07 of the Real Estate
and Chattel Mortgage and considering
further that respondents authority to
mortgage the lessors property and
leasehold rights are annotated [on] the
titles of the mortgage[d] properties.
"B.
Whether or not the Court of Appeals erred
in holding Petitioner PNB liable for actual,
moral and exemplary damages as well as
attorneys fees for the non-release of the
balance of the loan applied by
respondents even though there is no
evidence that such non-release was
attended by malice or bad faith."6
Simply put, the issues are as follows: 1) whether
the non-release of the balance of the loan by PNB
is justified; and 2) whether it is liable for actual,
moral and exemplary damages as well as
attorneys fees.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Was PNBs Non-Release of the Loan
Justified?
Petitioner maintains that the lessors signature in
the conforme portion of the Real Estate and
Chattel Mortgage Contract was a condition
precedent to the release of the balance of the
loan to respondents. Petitioner invokes paragraph
9.07 of the Contract as legal basis for insisting
upon respondents fulfillment of the aforesaid
clause.
We are not persuaded. If the parties truly
intended to suspend the release of
the P1,000,000 balance of the loan until the
lessors conformity to the Mortgage Contract
would have been obtained, such condition should
have been plainly stipulated either in that
Contract or in the Credit Agreement. The tenor of
the language used in paragraph. 9.07, as well as
its position relative to the whole Contract,
negated the supposed intention to make the
release of the loan subject to the fulfillment of the
clause. From a mere reading thereof, respondents
could not reasonably be expected to know that it

95

was petitioners unilateral intention to suspend

the release of the P1,000,000 balance until the
lessors conformity to the Mortgage Contract
would have been obtained.
Respondents had complied with all the
requirements set forth in the recommendation
and approval sheet forwarded by petitioners
main office to the Bacolod branch for
implementation; and the Credit Agreement had
been executed thereafter. Naturally, respondents
were led to believe and to expect the full release
of their approved loan accommodation. This
belief was bolstered by the initial release of the
first P1,000,000 portion of the loan.
We agree with the RTC in its ruling on this point:
"x x x. In the instant case, there is a clear
and categorical showing that when the
parties have finally executed the contract
of loan and the Real Estate and Chattel
Mortgage Contract, the applicant complied
with the terms and conditions imposed by
defendant bank on the recommendation
and approval sheet, hence, defendant
bank waived its right to further require the
plaintiffs other conditions not specified in
the previous agreement. Should there
[appear] any obscurity after such
execution, the same should not favor the
party who caused such obscurity.
Therefore, such obscurity must be
construed against the party who drew up
the contract. Art. 1377 of the Civil Code
applies x x x [even] with greater force [to]
this type of contract where the contract is
already prepared by a big concern and
[the] other party merely adheres to
it."7 (Citations omitted)
Conditions Precedent
Conditions precedent are not favored. Unless
impelled by plain and unambiguous language or
by necessary implication, courts will not construe
a stipulation as laden with such burden,
particularly when that stipulation would result in
a forfeiture or in inequitable consequences.8
Nowhere did PNB explicitly state that the release
of the second half of the loan accommodation
was subject to the mortgagors procurement of
the lessors conformity to the Mortgage Contract.
Absent such a condition, the efficacy of the Credit
Agreement stood, and petitioner was obligated to
release the balance of the loan. Its refusal to do
so constituted a breach of its reciprocal obligation
under the Loan Agreement.
Flimsy was the insistence of petitioner that the
lessor should be compelled to sign the Mortgage
Contract, since she was allegedly a beneficiary
thereof. The chattel mortgage was a mere
accessory to the contract of loan executed

between PNB and RBL. The latter was

undisputably the absolute owner of the properties
covered by the chattel mortgage. Clearly, the
lessor was never a party to either the loan or the
Mortgage Contract.
The Real Nature of a Mortgage
The records show that all the real estate and
chattel mortgages were registered with the
Register of Deeds of Bago City, Negros
Occidental, and annotated at the back of the
mortgaged titles. Thus, petitioner had ample
security to protect its interest. As correctly held
by the appellate court, the lessors nonconformity
to the Mortgage Contract would not cause
petitioner any undue prejudice or disadvantage,
because the registration and the annotation were
considered sufficient notice to third parties that
the property was subject to an encumbrance. 9
Article 2126 of the Civil Code describes the real
nature of a mortgage: it is a real right following
the property, such that in subsequent transfers
by the mortgagor, the transferee must respect
the mortgage. A registered mortgage lien is
considered inseparable from the property
inasmuch as it is a right in rem.10 The mortgage
creates a real right or a lien which, after being
recorded, follows the chattel wherever it goes.
Under Article 2129 of the same Code, the
mortgage on the property may still be foreclosed
despite the transfer.
Indeed, even if the mortgaged property is in the
possession of the debtor, the creditor is still
protected. To protect the latter from the formers
possible disposal of the property, the chattel
mortgage is made effective against third persons
by the process of registration.
PNB violated the Loan Agreement when it refused
to release the P1,000,000 balance. As regards the
partial release of that amount, over which
respondents executed three Promissory Notes,
the bank is deemed to have complied with its
reciprocal obligation. The Promissory Notes
compelled them to pay that initial amount when
it fell due. Their failure to pay any overdue
amortizations under those Promissory Notes
rendered them liable thereunder.
Effect of Failure of Consideration
Since PNB failed to release the P1,000,000
balance of the loan, the Real Estate and Chattel
Mortgage Contract became unenforceable to that
extent. Relevantly, we quote this Courts ruling
in Central Bank of the Philippines v. Court of
Appeals:11
"The consideration of the accessory
contract of real estate mortgage is the
same as that of the principal contract. For
the debtor, the consideration of his
obligation to pay is the existence of a

96

debt. Thus, in the accessory contract of

real estate mortgage, the consideration of
the debtor in furnishing the mortgage is
the existence of a valid, voidable, or
unenforceable debt.
xxx
xxx
xxx
"[W]hen there is partial failure of
consideration, the mortgage becomes
unenforceable to the extent of such
failure. Where the indebtedness actually
owing to the holder of the mortgage is less
than the sum named in the mortgage, the
mortgage cannot be enforced for more
than the actual sum due."12
Second Issue:
Propriety of Award for Damages and
Attorneys Fees
In reducing the award for actual damages
from P985,722.15 to P380,713.55, the CA
explained:
"The alleged projected cash flow and net
income for the 5-year period of operations
were not substantiated by any other
evidence to sufficiently establish the
attainability of the projection. No evidence
was also introduced to show the accounts
payable of and other expenses incurred by
[respondents]. The court a quo therefore,
erred when it ruled that [respondents]
incurred actual damages and losses
amounting toP985,722.15 from 1990 to
1992, when no evidence was presented to
establish the same.
"Compensatory or actual damages cannot
be presumed. They cannot be allowed if
there are no specific facts, which should
be a basis for measuring the amount. The
trial court cannot rely on speculation as to
the fact and amount of damages, but must
depend on actual proof that damage had
been suffered. The amount of loss must
not only be capable of proof but must
actually be proven with reasonable degree
of certainty, premised upon competent
proof or best evidence to support his claim
for actual damages.
"At most, the court a quo may declare as
lost income and unrealized profits, the
amount of P380,713.55 for the 3-year
period of business operations from 1990
when PNB refused to release the loans
until closure of business in 1992, based on
the highest quarterly taxable income
earned in 1989 in the amount
ofP28,754.80, with a conservative and
reasonable increase of 10% per year on
the net income. The amount of actual

damages is therefore, reduced

from P985,722.15 to P380,713.55 x x x."13
We see no reason to overturn these findings.
True, indemnification for damages comprises not
only the loss that was actually suffered, but also
the profits -- referred to as compensatory
damages -- that the obligee failed to obtain. To
justify a grant of actual or compensatory
damages, however, it would be necessary to
prove the amount of loss with a reasonable
degree of certainty, based upon competent proof
and the best evidence obtainable by the injured
party.14 The quarterly income tax report of
Respondent RBL Enterprises, Inc., which was
presented by petitioner and used by the appellate
court as basis for computing the average profits
earned by respondents in their business, provided
a reasonable means for ascertaining their claims
for lost profits. Thus, we believe that the
assessment by the Court of Appeals was fair and
just.
On the other hand, the award for moral and
exemplary damages should be deleted, because
respondents failed to prove malice or bad faith on
the part of petitioner.
Moral damages are explicitly authorized in
breaches of contract when the defendant has
acted fraudulently or in bad faith.15 Concededly,
the bank was remiss in its obligation to release
the balance of the loan extended to respondents.
Nothing in the findings of the trial and the
appellate courts, however, sufficiently indicate a
deliberate intent on the part of PNB to cause
harm to respondents.
Exemplary damages, in turn, are intended to
serve as an example or a correction for the public
good. Courts may award them if the defendant is
found to have acted in a wanton, fraudulent,
reckless, oppressive, or malevolent
manner.16 Given the above premises and the
circumstances here obtaining, the exemplary
damages granted by the courts a quo cannot be
sustained.
Finally, the award of attorneys fees as part of the
damages is just and equitable under the
circumstances.17 Such fees may be awarded when
parties are compelled to litigate or to incur
expenses to protect their interest by reason of an
unjustified act of the opposing party.18 In the
present case, petitioners refusal to release the
balance of the loan has compelled respondents to
institute an action for injunction and damages in
order to protect their clear rights and interests.
WHEREFORE, the Petition is PARTLY GRANTED.
The assailed Decision is hereby AFFIRMED, with
theMODIFICATION that the award of actual and
exemplary damages is deleted. No costs.
SO ORDERED.

97

G.R. No. L-49576 November 21, 1991

JOSEFINA B. CENAS and THE PROVINCIAL
SHERIFF OF RIZAL, petitioners,
vs.
SPS. ANTONIO P. SANTOS and DRA.
ROSARIO M. SANTOS and HON. PEDRO C.
NAVARRO, Presiding Judge, CFI-Rizal, Br.
III, respondents.
W. Espiritu Taganas for petitioners.
Sta. Ana & Fonacier Law Office for private
respondents.

On April 17, 1977, petitioner Cenas, as the

assignee of the mortgage loan of the Pulidos
which remained unpaid, filed with the Office of
the Provincial Sheriff of Rizal, a verified petition
for extra-judicial foreclosure of the mortgage
constituted over the subject property.
Accordingly, the subject property was advertised
for sale at public auction on May 15, 1978.
On the other hand, private respondents, spouses
Antonio P. Santos and Dra. Rosario M. Santos,
apprised of the impending auction sale of the said
property, filed an affidavit of adverse claim with
the Provincial Sheriff of Rizal, claiming that they
had become the absolute owners of the property
by virtue of Certificate of Redemption, dated July
20, 1977, issued by the City Sheriff of Quezon
City; and on May 11, 1978, filed with the
respondent court a verified Petition for Prohibition
with Preliminary Injunction to enjoin the Provincial
Sheriff of Rizal from proceeding with the public
auction sale of the property in question. To this
petition, petitioners filed their Answer on May 18,
1978.
Private respondents filed a Motion to Amend
Petition together with the Amended Petition,
which was opposed by the petitioners. The trial
court, in its Order of July 17, 1978, denied the
motion and ordered the parties to submit
simultaneous memoranda.
After the parties have submitted their respective
memoranda, the trial court rendered its judgment
dated August 28, 1978 in favor of private
respondents, the dispositive portion of which
reads:
WHEREFORE, premises considered,
the respondent Provincial Sheriff of
Rizal and any other persons acting
in his behalf are hereby enjoined
from proceeding with the auction
sale predicated upon the petition
for extra-judicial foreclosure prayed
for by respondent Josefina B.
Cenas.
The trial court held that the redemption of the
subject property effected by the herein private
respondents, "wipe out and extinguished the
mortgage executed by the Pulido spouses favor of
the Pasay City Savings and Loan Association, Inc."
Petitioners filed a Motion for Reconsideration but
the trial court, in its Order of December 4, 1978,
denied the same. Hence, the instant petition.
The First Division of this Court, in the Resolution
of March 2, 1979, gave due course to the petition.
Petitioners failed to file their brief on June 9, 1979
while respondents failed to file their brief within
the required period. Consequently, this case was
considered submitted for decision without

BIDIN, J.:p
This is a petition for review on certiotari seeking
to annual and set aside the August 28, 1978
decision ** of the then Court of First Instance of
Rizal in Civil Case No. 20435 enjoining the
Provincial Sheriff of Rizal and any other person in
his behalf from proceeding with the auction sale
predicted upon the petition for extra-judicial
foreclosure prayed for by petitioner Josefina B.
Cenas; and the December 4, 1978 Order of the
same court denying the motion for
reconsideration.
On May 3, 1976, the spouses Jose Pulido and
Iluminada M. Pulido mortgaged to Pasay City
Savings and Loan Association, Inc. their land
covered by TCT No. 471634, subject of this case,
to secure a loan of P10,000.00. The said
mortgage was registered with the Registry of
Deeds on the same date and was duly annotated
in the title of the property.
On May 18, 1976, the said mortgaged land was
levied upon by the City Sheriff of Quezon City
pursuant to a writ of execution issued by the then
Court of First Instance of Quezon City in Civil Case
No. Q-2029 entitled, "Milagros C. Punzalan vs.
Iluminada Manuel-Pulido"; and eventually, on July
19, 1976, the same was sold to herein petitioner
Josefina B. Cenas who was the highest bidder in
the execution sale.
On January 18, 1977, Pasay City Savings and
Loan Association, Inc. assigned to petitioner
Cenas all its rights, interests, and participation to
the said mortgage, for the sum of P8,110.00,
representing the unpaid principal obligation of
the Pulidos as of October 6, 1976, including
interest due and legal expenses. Thus, petitioner
became the purchaser at the public auction sale
of the subject property as well as the assignee of
the mortgage constituted thereon.
On July 19, 1977, herein private respondent Dra.
Rosario M. Santos redeemed the said property,
paying the total sum of P15,718.00, and was
accordingly issued by the City Sheriff of Quezon
City a Certificate of Redemption.

98

respondent's brief in the resolution of November

26, 1979.
Petitioners raised two (2) assignment of errors, to
wit:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE
PRE-EXISTING MORTGAGE OBLIGATION OF THE
JUDGMENT DEBTOR CONSTITUTFD ON HER
PROPERTY WAS WIPED OUT AND EXTINGUISHED
UPON THE PAYMENT OF THE REDEMPTION PRICE
WITH THE SHERIFF REPRESENTING THE
PURCHASE PRICE PLUS INTEREST DUE THEREON
WITH THE REDEMPTION PERIOD OF ONE (1) YEAR
FROM THE DATE OF THE EXECUTION SALE OF THE
SAID PROPERTY TO SATISFY THE JUDGMENT DEBT
OF THE SAID JUDGMENT DEBTOR.
II
THE TRIAL COURT ERRED IN NOT DISMISSING THE
INSTANT ACTION FILED BY THE HEREIN PRIVATE
RESPONDENTS FOR NOT BEING PROSECUTED IN
THE NAME OF THE REAL PARTY IN INTEREST AS
PROVIDED BY SECTION 2, RULE 3 OF THE
REVISED RULES OF COURT.
The instant petition is impressed with merit.
There appears to be no question that respondents
Santos spouses are the real parties in interest in
this case.
Under Section 29, Rule 39 of the Rules of Court, a
real property sold by virtue of a writ of execution,
may be redeemed by
(a) The judgment debtor, or
his successor in interest in the
whole or any part of the property;
(b) A creditor having a lien by
attachment, judgment or mortgage
on the property sold, or on some
part thereof, subsequent to the
judgment under which the property
was sold. Such redeeming creditor
is termed redemptioner. (Emphasis
supplied)
The judgment debtor, whose property was levied
on execution, may transfer his right of
redemption to anyone whom he may desire. The
term "successor in interest" includes, among
others, one to whom the debtor has conveyed his
interest in the property for the purpose of
redemption (Magno v. Viola de Soto, 61 Phil. 80).
It is not disputed that Dra. Rosario M. Santos as
an assignee of her sister Iluminada M. Pulido's
right of redemption, redeemed the questioned
property as "successor in interest" of said
judgment debtor. The latter interposed no
objection thereto while petitioner Josefina Cenas
acceded unconditionally to the redemption of the
property sold on execution.
However, the main issue in this case is whether
or not the redemption of the questioned property

by herein private respondents wiped out and

extinguished the pre-existing mortgage obligation
of the judgment debtor, Iluminada M. Pulido for
the security of which (mortgage debt) the subject
property had been encumbered.
The answer is in the negative.
Section 30, Rule 39 of the Rules of Court,
provides for the time, manner and the amount to
be paid to redeem a sold by virtue of a writ of
execution. Pertinent portion reads:
Sec. 30. Time and manner of, and
amounts payable on, successive
redemptions. Notice to be given
and filed. The judgment debtor,
or redemptioner, may redeem the
property from the purchaser, at any
time within twelve (12) months
after the sale, on paying the
purchaser the amount of his
purchase, with one per centum per
month interest thereon in addition,
up to the time of redemption,
together with the amount of any
assessments or taxes which the
purchaser may have paid thereon
after purchase, and interest on
such last-named amount at the
same rate; and if the purchaser be
also a creditor having a prior lien
to that of the redemptioner, other
than the judgment under which
such purchase was made, the
amount of such other lien, with
interest. . . . . (Emphasis supplied)
Under the above-quoted provision, if the
purchaser is also a creditor having a prior lien to
that of the redemptioner, other than the
judgment under which such purchase was made,
the redemptioner has to pay, in addition to the
prescribed amounts, such other prior lien of the
creditor-purchaser with interest.
In the instant case, it will be recalled that on May
3,1976, the Pulidos mortgaged the subject
property to Pasay City Savings and Loan
Association, Inc. who, in turn, on January 8, 1977,
assigned the same to petitioner Cenas.
Meanwhile, on July 19, 1976, pursuant to the writ
of execution issued in Civil Case No. Q-2029
(Petitioner Cenas is not a party in this case No. Q2029), the subject property was sold to petitioner
Cenas, being the highest bidder in the execution
sale. On July 19, 1977, private respondent Dra.
Rosario M. Santos redeemed the subject property.
Therefore, there is no question that petitioner
Cenas as assignee of the mortgage constituted
over the subject property, is also a creditor
having a prior (mortgage) lien to that of Dra.
Rosario M. Santos. Accordingly, the acceptance of

99

the redemption amount by petitioner Cenas,

without demanding payment of her prior lien
the mortgage obligation of the Pulidos cannot
wipe out and extinguish said mortgage obligation.
The mortgage directly and immediately subjects
the property upon which it is imposed, whoever
the possessor may be, to the fulfillment of the
obligation for whose security it was constituted
(Art. 2126, Civil Code). Otherwise stated, a
mortgage creates a real right which is
enforceable against the whole world. Hence, even
if the mortgaged property is sold (Art. 2128) or its
possession transferred to another (Art. 2129), the
property remains subject to the fulfillment of the
obligation for whose security it was constituted
(Padilla, Civil Code annotated, Vol. VII, p. 207,
1975 ed.).
It will be noted that Rule 39 of the Rules of Court
is silent as to the effect of the acceptance by the
purchaser, who is also a creditor, having a prior
lien to that of the redemptioner, of the
redemption amount, without demanding payment
of her prior lien. Neither does it provide whether
or not the redemption of the property sold in
execution sale freed the redeemed property from
prior liens. However, where the prior lien consists
of a mortgage constituted on the property
redeemed, as in the case at bar, such redemption
does not extinguish the mortgage (Art. 2126).
Furthermore, a mortgage previously registered,
like in the instant case, cannot be prejudiced by
any subsequent lien or encumbrance annotated
at the back of the certificate of title (Gonzales v.
Intermediate Appellate Court, 157 SCRA 587
[1988]).
Moreover, it must be stressed that private
respondents redeemed the property in question
as "successor in interest" of the judgment debtor,
and as such are deemed subrogated to the rights
and obligations of the judgment debtor and are
bound by exactly the same condition relative to
the redemption of the subject property that
bound the latter as debtor and mortgagor (Sy vs.
Court of Appeals, 172 SCRA 125 [1989]; citing the
case of Gorospe vs. Santos, G.R. No. L-30079,
January 30, 1976, 69 SCRA 191). Private
respondents, by stepping in the judgment
debtor's shoes, had the obligation to pay the
mortgage debt, otherwise, the debt would and
could be enforced against the property
mortgaged (Tambunting vs. Rehabilitation
Finance Corporation, 176 SCRA 493 [1989]).
Nevertheless, considering the lapse of time that
the parties have been in status quo and the fact
that private respondents erroneously believed
that the questioned property was freed from any
lien after the redemption, equity dictates that the
foreclosure be allowed only after the private

respondents shall have been afforded the chance

to settle the mortgage obligation but failed to do
so.
WHEREFORE, the questioned August 28, 1978
judgment of the trial court is Reversed and Set
Aside. Petitioner Josefina B. Cenas may proceed
with the foreclosure of the mortgaged property
after the private respondents shall have failed to
settle the mortgage debt plus interest and legal
expenses, within thirty (30) days from finality of
this decision.
SO ORDERED.

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