I. NATURE and EXTENT surety).
surety).[However, a significant distinction still lies between a joint and
(A). Escao v. Ortigas, Jr.
526 SCRA 26 (June 29, 2007)
Facts:
On April 28, 1980, Private Development Corporation of the Philippines
(PDCP) entered into a loan agreement with Falcon Minerals, Inc. (Falcon)
amounting to $320,000.00 subject to terms and conditions.
[Nagpautang ang PDCP sa Falcon ng $320K]
On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George
A. Scholey, and George T. Scholey executed an Assumption of Solidary
Liability to assume in [their] individual capacity, solidary liability with
[Falcon] for due and punctual payment of the loan contracted by
Falcon with PDCP.
Two (2) separate guaranties were executed to guarantee payment of the
same loan by other stockholders and officers of Falcon, acting in their
personal and individual capacities. One guaranty was executed by
Escao, Silos, Silverio, Inductivo and Rodriguez.
Two years later, an agreement developed to cede control of Falcon to
Escao, Silos and Matti. 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. An Undertaking dated June 11, 1982 was executed by
the concerned parties, namely: with Escao, Silos and Matti as
SURETIES and Ortigas, Inductivo and Scholeys as OBLIGORS
Falcon eventually availed of the sum of $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 Php
5,031,004.07 which falcon did not satisfy despite demand.
Issue: Whether the obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by
petitioners.
Held/Ruling:
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.
Note that Article 2047 itself specifically calls for the
application of the provisions on joint and solidary obligations to
suretyship contracts. 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
The surety bond and performance bond executed by defendants Lucky
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. In the case of joint and several debtors, Article
1217 makes plain that the solidary debtor who effected the payment to
the creditor may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made.
Such solidary debtor will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the right to recovery
extends only to the proportional share of the other co-debtors, and not
as to the particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay the creditor
has the right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors. Such right to
full reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.
*Petitioners and Matti are jointly liable to Ortigas, Jr. in the amt. of
P1.3M; Legal interest of 12% per annum on P 1.3M computed from
March 14, 1994. Assailed rulings are affirmed. Costs against
petitioners
Suretyship, in essence, contains two types of relationship the principal
(B). Asset Builders vs Stronghold
Asset Builders Corp (ABC) obligee, petitioner
Lucky Star Drilling & Construction Corporation (Lucky Star) -
obligor
Stronghold Insurance Company (Stronghold) surety, respondent
FACTS: ABC entered into an agreement with Lucky Star as part of the
completion of its project to construct the ACG Commercial Complex.
Lucky Star was to supply labor, materials, tools, and equipment
including technical supervision to drill one (1) exploratory production
well on the project site.
To guarantee faithful compliance with their agreement, Lucky Star
engaged respondent Stronghold which issued two (2) bonds in favor of
petitioner ABC.
ABC paid Lucky Star P575,000.00 as advance payment, representing 50%
of the contract price. Lucky Star, thereafter, commenced the drilling
work.
On agreed completion date, Lucky Star managed to accomplish only
10% of the drilling work. ABC sent a demand letter to Lucky Star for the
immediate completion of the drilling work. However, Lucky Star failed to
fulfill its obligation.
ABC sent Notice of Rescission of Contract with Demand for Damages to
Lucky Star and a Notice of Claim for payment to Stronghold to make
good its obligation under its bonds.
Despite notice, ABC did not receive any reply either from Lucky Star or
Stronghold, prompting it to file its Complaint for Rescission with
Damages against both before the RTC.
RTC rendered the assailed decision ordering Lucky Star to pay ABC but
absolving Stronghold from liability. Relevant parts of the decision reads:
Star and Stronghold Insurance are in the nature of accessory contracts
which depend for its existence upon another contract. Thus, when the
agreement between the plaintiff Asset Builders and defendant Lucky
Star was rescinded, the surety and performance bond were
automatically cancelled.
Thus, Asset Builders filed this present petition for review on certiorari
assailing decision of RTC which orders defendant Lucky Star to pay
petitioner Asset Builders the sum of P575,000.00 with damages, but
absolving respondent Stronghold Insurance of any liability on its Surety
Bond and Performance Bond.
Issue: Whether or not respondent insurance company, as surety, can be
held liable under its bonds.
Held: Yes.
As provided in Article 2047, the surety undertakes to be bound solidarily
with the principal obligor. That undertaking makes a surety agreement
an ancillary contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence secondary only
to a valid principal obligation, the surety becomes liable for the debt or
duty of another although it possesses no direct or personal interest over
the obligations nor does it receive any benefit therefrom. Let it be
stressed that notwithstanding the fact that the surety contract is
secondary to the principal obligation, the surety assumes liability as a
regular party to the undertaking.
relationship between the obligee (petitioner) and the obligor (Lucky
Star), and the accessory surety relationship between the principal (Lucky
Star) and the surety (respondent). In this arrangement, the obligee
accepts the suretys solidary undertaking to pay if the obligor does not
pay. Such acceptance, however, does not change in any material way
the obligees relationship with the principal obligor. Neither does it
make the surety an active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the surety the right to
intervene in the principal contract. The suretys role arises only upon
the obligors default, at which time, it can be directly held liable by the
obligee for payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish the drilling work
within the agreed time frame despite petitioners demand for
completion, it was already in delay. Due to this default, Lucky Stars
liability attached and, as a necessary consequence, respondents liability
under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the
petitioner and further failed to return the P575,000.00 downpayment
that was already advanced to it, respondent, as surety, became solidarily
bound with Lucky Star for the repayment of the said amount to
petitioner.
Contrary to the trial courts ruling, respondent insurance company was
not automatically released from any liability when petitioner resorted to
the rescission of the principal contract for failure of the other party to
perform its undertaking. Precisely, the liability of the surety arising from
the surety contracts comes to life upon the solidary obligors default. It
should be emphasized that petitioner had to choose rescission in order
to prevent further loss that may arise from the delay of the progress of
the project. Without a doubt, Lucky Stars unsatisfactory progress in the
drilling work and its failure to complete it in due time amount to non-
performance of its obligation.
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
In fine, respondent should be answerable to petitioner on account of
Lucky Stars non-performance of its obligation as guaranteed by the
performance bond.
Finally, Article 1217 of the New Civil Code acknowledges the right of
reimbursement from a co-debtor (the principal co-debtor, in case of
suretyship) in favor of the one who paid (the surety). Thus, respondent
is entitled to reimbursement from Lucky Star for the amount it may be
required to pay petitioner arising from its bonds.
WHEREFORE, Decision of the RTC, is AFFIRMED with MODIFICATION.
Respondent Stronghold Insurance is hereby declared jointly and
severally liable with Lucky Star for the payment of P575,000.00 and the
payment of P345,000.00 on the basis of its performance bond.
(C). CASTELLVI DE HIGGINS VS. SELLNER
41 PHIL. 142
MALCOLM, J.
Facts
This is an action brought by plaintiffs to recover from defendant the
sum of P10,000. The brief decision of the trial court held that the suit
was premature, and absolved the defendant from the complaint, with
the costs against the plaintiffs. Sellner wrote;
I will, within fifteen days after notice of such default, pay you in cash the
sum of P10,000 and interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining Co. held by you as
security for the payment of said note.
Issue
Determination of defendant's status in the transaction referred to.
Plaintiffs contend that he is a surety; defendant contends that he is a
guarantor. Plaintiffs also admit that if defendant is a guarantor, articles
1830, 1831, and 1834 of the Civil Code govern.
Held
The points of difference between a surety and a guarantor are familiar
to American authorities. A surety and a guarantor are alike in that each
promises to answer for the debt or default of another. A surety and a
guarantor are unlike in that the surety assumes liability as a regular
party to the undertaking, while the liability as a regular party to upon an
independent agreement to pay the obligation if the primary pay or fails
to do so. A surety is charged as an original promissory; the engagement
of the guarantor is a collateral undertaking. The obligation of the surety
is primary; the obligation of the guarantor is secondary.
It is perfectly clear that the obligation assumed by defendant was simply
that of a guarantor, or, to be more precise, of the fiador whose
responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites
that if the promissory note is not paid at maturity, then, within fifteen
days after notice of such default and upon surrender to him of the three
thousand shares of Keystone Mining Company stock, he will assume
responsibility. Sellner is not bound with the principals by the same
instrument executed at the same time and on the same consideration,
but his responsibility is a secondary one found in an independent
Page 1 of 15
collateral agreement, Neither is Sellner jointly and severally liable with
the principal debtors.
(D.)
ROMULO MACHETTI, plaintiffappellee, vs. HOSPICIO DE SAN JOSE,
defendant and appellee, and FIDELITY & SURETY COMPANY OF THE
PHILIPPINE ISLANDS, defendant-appellant.
[G.R. No. L-16666. April 10, 1922.]
Theme: LIABILITY OF GUARANTOR; INSOLVENCY OF PRINCIPAL.
A guarantor cannot be compelled to pay until it is shown that
the principal is unable to pay and such inability is not sufficiently
shown by the mere fact that he has been declared insolvent
under the present Insolvency Law in which the extent of the
insolvent's inability to pay is not determined until the final
liquidation of his estate.
Facts:
- Romulo Machetti, by a written agreement, undertook to
construct a building for the Hospicio de San Jose, the
contract price being P64,000.
- One of the conditions of the agreement was that the
contractor should obtain the "guarantee" of the Fidelity and
Surety Company of the Philippine Islands to the amount of
P12,800 and the following endorsement in the English
language appears upon the contract:
"MANILA, July 15, 1916.
"For value received we hereby
guarantee compliance with the terms and
conditions as outlined in the above
contract.
"FIDELITY & SURETY
COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd.) "OTTO VORSTER,
"Vice-President,"
- Machetti constructed the building under the supervision of
architects representing the Hospicio de San Jose.
- Subsequently it was found that the work had not been
carried out in accordance with the specifications which
formed part of the contract and that the workmanship was
not of the standard required, and
the Hospicio de San Jose therefore refused to pay the
balance of the contract price.
- Machetti thereupon brought this action
- the Hospicio de San Jose answered the complaint and
presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement, in the
total sum of P71,350.
- Machetti was declared insolvent under Insolvency law.
- The Hospicio de San Jose filed a motion asking that the
Fidelity and Surety Company be made cross-defendant to
the exclusion of Machetti and that the proceedings be
continued as to said company, but still remain suspended
as to Machetti. This motion was granted1.
- The Hospicio filed a complaint against the Fidelity and
Surety Company asking for a judgment for P12,800 against
the company upon its guaranty.
CFI:
- rendered judgment against the Fidelity and Surety
Company (FSC) for P12,800 in accordance with the
complaint. FSC appealed.
Issue: whether FSC, being a guarantor, be compelled to pay.
Ruling:
- the court below erred in proceeding with the case against
the guarantor while the proceedings were suspended as to
the principal. The guaranty in the present case was for a
future debt of unknown amount and even regarding the
guaranty as an ordinary fianza under the Civil Code, the
surety cannot be held responsible until the debt is
liquidated. (Civil Code, art. 1825.)
But in this instance the guarantor's case is even stronger than that of an
ordinary surety. In English the term "guarantor" implies an undertaking
of guaranty, as distinguished from suretyship.
Distinguishing features of contracts of guaranty vis--vis surety:
- It is very true that notwithstanding the use of the words
"guarantee" or "guaranty" circumstances may be shown
which convert the contract into one of suretyship but such
circumstances do not exist in the present case: on the
contrary it appears affirmatively that the contract is the
guarantor's separate undertaking in which the principal
does not join, that it rests on a separate consideration
moving from the principal and that although it is written in
continuation of the contract for the construction of the
building, it is a collateral under taking separate and distinct
from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
- Now, while a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor.
This latter liability is what the Fidelity and Surety Company
assumed in the present case.
FSC, being a guarantor, cannot be compelled to pay until it is shown
that Machetti is unable to pay
The Fidelity and Surety Company having bound itself to pay
- payment of the above loan from me in case
only in the event its principal, Machetti, cannot pay it
follows that it cannot be compelled to pay until it is shown
that Machetti is unable to pay. Such inability may be
proven by the return of a writ of execution unsatisfied or by
other means, but is not sufficiently established by the mere
fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final
liquidation of his estate.
1 As will be seen, the original action in
which Machetti was the plaintiff and
the Hospicio de San Jose defendant, has been converted into an
action in which the Hospicio de San Jose is plaintiff and the Fidelity
and Surety Company, the original plaintiff's guarantor, is the
defendant, Machetti having been practically eliminated from the
case.
(E). PALMARES v. CA and MB LENDING
1998 / Regalado / Surety > Distinguished from guaranty
SURETY / SURETYSHIP GUARANTOR / GUARANTY
GUARANTOR: Insurer of the
SURETY: Insurer of the debt
solvency of the debtor
A suretyship is an undertaking A guaranty is an undertaking that
that the debt shall be paid the debtor shall pay
A guarantor agrees that the
A surety promises to pay the creditor, after proceeding against
principal's debt if the principal the principal, may proceed against
will not pay the guarantor if the principal is
unable to pay
A surety binds himself to perform A guarantor does not contract
if the principal does not, without that the principal will pay, but
regard to his ability to do so simply that he is able to do so
A surety undertakes directly for A guarantor contracts to pay if, by
the payment and is so the use of due diligence, the debt
responsible at once if the cannot be made out of the
principal debtor makes default principal debtor
FACTS
Pursuant to a promissory note, MB Lending extended a
30k loan to Sps. Azarraga and Estrella Palmares, payable on or
before 12 May 1990, with compounded interest at 6% per annum to be
computed every 30 days from the date thereof.
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
the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note subject to
the same conditions above-contained.
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
Palmares and Sps. Azarraga were only able to pay 16.3k. MB Lending
filed a complaint against Palmares as the lone party-defendant,
allegedly by reason of Sps. Azarragas insolvency. Palmares main
contention was that she is to be held liable only upon default of the
principal debtor Sps. Azarraga. She avers that immediately after the
loan matured, she offered to settle the obligation, but MB Lending
refused, and instead informed her that they would try to collect from
Sps. Azarraga. In addition, partial payment has been made.
RTC dismissed MB Lendings complaint without
prejudice to the filing of a separate action for a sum of money against
Sps. Azarraga. The offer Palmares made to pay the obligation is
considered a valid tender of payment sufficient to discharge her
secondary liability on the instrument. As co-maker, Palmares is only
secondarily liable on the instrument.
CA reversed RTC and declared Palmares liable to pay
MB Lending the outstanding balance of 13.7k at 6% per month
computed from the date the loan was contracted until fully paid,
penalty charges, attorneys fees, and costs. Palmares is a surety since
she bound herself to be jointly and severally liable with Sps. Azarraga
when she signed as co-maker. Therefore, she is primarily liable and
may be sued for the entire obligation.
ISSUE & HOLDING
WON Palmares is a guarantor or a surety. SURETY; primarily liable.
RATIO
Palmares expressly bound herself to be jointly and severally or solidarily
liable with Sps. Azarraga; therefore, her liability is that of a surety. 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. The mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her of liability.
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
promissory note do not contain any other condition for the
enforcement of MB Lendings right against Palmares. A contract of
suretyship 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.
Several attendant factors support the finding that Palmares is a
surety.
When she was informed about the spouses failure to pay,
she immediately offered to settle the account with MB
Lending.
She presented the receipts of the payments already made,
which were all issued in her name and of the Azarraga
spouses. This can only be construed to mean that the
payments made by the principal debtors were considered
by MB Lending as creditable directly upon the account and
inuring to the benefit of Palmares.
A surety is bound equally and absolutely with the principal, and as
such is deemed an original promisor and debtor from the beginning. In
suretyship, there is but one contract, and the surety is bound by the
same agreement which binds the principal. The contract of a surety
starts with the agreement, which is precisely the situation obtaining in
this case.
Page 2 of 15

A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is immediate and
direct. 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.
Re: Palmares argument that the complaint was prematurely filed
for lack of demand UNMERITORIOUS
Palmares was saying that Sps. Azarraga cannot as yet be considered in
default, as MB Lending has not yet made either a judicial or extrajudicial
demand. This argument fails. 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. 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. 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.
The alleged failure of MB Lending to prove the fact of
demand on Sps. Azarraga is immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that performance of his
obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite that the principal be called
on to account. A suretyship is a direct contract to pay the debt of
another. As an original promisor and debtor from the beginning, he
is held ordinarily to know every default of his principal.
Re: Palmares argument that the filing of the complaint solely
against her was improper UNMERITORIOUS
Under NCC 1216, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. 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.
MB Lendings mere failure to immediately sue Palmares on her
obligation does not release her from liability.
Where a creditor refrains from proceeding against the principal,
the surety is not exonerated. 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.
In the absence of proof of resultant injury, a surety is not discharged by
the creditor's mere statement that the creditor will not look to the
surety, or that he need not trouble himself. The consequences of the
delay, such as the subsequent insolvency of the principal, or the fact
that the remedies against the principal may be lost by lapse of time, are
immaterial. The raison d'tre for the rule is that there is nothing to
prevent the creditor from proceeding against the principal at any
time.
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.
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
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 enforcing the principal contract within the period
during which he could otherwise have enforced it, and
which precludes the surety from paying the debt
None of these elements are present here. The mere fact that MB
Lending gave Sps. Azarraga an extended period of time within which to
comply with their obligation did not effectively absolve Palmares from
the consequences of her undertaking. Besides, the burden is on the
surety Palmares to show that she has been discharged by some act of
the creditor MB Lending.
SC DECISION: 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.
(F). Gilat Satellite vs. UCPB (2014)
Gilat Satellite Networks Ltd., vs. United Coconut Planters Bank
(UCPB) General Insurance Co., Inc.
Subject:
Liability of a surety on the principal contract is direct, primary and
absolute; The existence of a suretyship agreement does not give the
surety the right to intervene in the principal contract, hence, surety
cannot invoke the arbitration clause between the parties in the principal
contract; Interest, as a form of indemnity, may be awarded to a creditor
in case of inexcusable delay incurred by a debtor in the payment of his
obligation
Facts:
One Virtual placed with Gilat Satellite Network (Gilat) a purchase order
for various telecommunications equipment, promising to pay portions
of the price according to a payment schedule. To ensure the prompt
payment, it obtained a surety bond from defendant UCPB General
Insurance Co., Inc. (UCPB) in favor of Gilat One Virtual failed to pay Gilat
twice, prompting Gilat to write the surety UCPB two demand letters
for payment. However, UCPB failed to settle the amount. Gilat filed a
complaint against UCPB. The RTC, ruling in favor of Gilat, found that
Gilat has already complied with its end of the obligation, i.e. delivery
and installation of the purchased equipment. Demand notwithstanding,
One Virtual and UCPB, as surety, failed to settle the obligation. The
lower court reasoned that UCPB, as surety, 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. However, the RTC denied
Gilats claim for interest on the premise that the interest shall only
accrue when the delay or refusal to pay the principal obligation is
without any justifiable cause. Here, UCPB failed to pay its surety
obligation because of the advice of its principal (One Virtual) not to
pay. The RTC then obligated UCPB to pay Gilat the principal debt (US
$1.2 Million) under the Surety Bond, with legal interest at the rate of
12% per annum computed from the time the judgment becomes final
and executory, plus attorneys fees and litigation expenses. The Court of
Appeals (CA) dismissed the appeal of UCPB based on lack of
jurisdiction. It ruled that
in"enforcing a surety contract, the complementary-contracts-
construed-together doctrine findsapplication." In this case, the CA
considered the arbitration clause contained in the Purchase Agreement
(principal contract) between Gilat and One Virtual as applicable
and binding on the parties to the suretyship agreement (accessory
contract). Hence, the trial courts Decision was vacated. Gilat and One
Virtual were ordered to proceed to arbitration.
Held : Liability of a surety on the principal contract is direct, primary and
absolute
1. The failure of One Virtual, as the principal debtor, to fulfill its
monetary obligation to petitioner Gilat gave the latter an immediate
right to pursue UCPB as the surety.
2. 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. 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. 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.
3. Thus, a surety is not entitled to a separate notice of default or to the
benefit of excussion. It may in fact be sued separately or together with
the principal debtor.
4. Sureties do not insure the solvency of the debtor, but rather the debt
itself. They are contracted precisely to mitigate risks of non-
performance on the part of the obligor. This responsibility necessarily
places a surety on the same level as that of the principal debtor. The
effect is that the creditor is given the right to directly proceed against
either principal debtor or surety. This is the reason why excussion
cannot be invoked. To require the creditor to proceed to arbitration
would render the very essence of suretyship nugatory and diminish its
value in commerce. (See Palmares v. Court of Appeals) The existence of
a suretyship agreement does not give the surety the right to intervene
in the principal contract, hence, surety cannot invoke the arbitration
clause between the parties in the principal contract
5. UCPBs 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,
cannot be sustained.
6. The acceptance of a surety agreement 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 [of the surety agreement]
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
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. (See Stronghold Insurance Co. Inc. v. Tokyu Construction
Co. Ltd.)
7. UCPB cannot invoke in its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that contract. An arbitration
agreement being contractual in nature, it is binding only on the parties
thereto, as well as their assigns and heirs.
8. Section 24 of Republic Act No. 9285 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." UCPB has not presented evidence to show that either Gilat
or One Virtual submitted its contesting claim for arbitration. Interest, by
way of damages or indemnity, may be awarded to a creditor in case of
inexcusable delay incurred by a debtor in the payment of his obligation
9. 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."
10. 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. Delay, as used in Article 1169, is synonymous with
default or mora, which means delay in the fulfilment of obligations. It is
the nonfulfillment of an obligation with respect to time.11. 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.12. If 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. The increased liability is not because of the
contract, but because of the default and the necessity of judicial
collection.13. For delay to merit interest, it must be inexcusable in
nature14. 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. xxx 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
promisee 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
anew 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.
(See Guanio v. Makati-Shangri-la Hotel)
Page 3 of 15
15. Records are bereft of proof to show that UCPBs delay was indeed
justified by the circumstances that is, One Virtuals advice regarding
Gilats alleged breach of obligations.
16. As to the issue of when interest must accrue, our Civil Code is
explicit in stating that it accrues from the time judicial or extrajudicial
demand is made on the surety. This ruling is in accordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that
where there has been an extra-judicial demand before an action for
performance was filed, interest on the amount due begins to run, not
from the date of the filing of the complaint, but from the date of that
extra-judicial demand. 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.
17. Petitioner is rewarded 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.
18. "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 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. x x x When the judgment of the court awarding a
sum of money becomes final and executory, the rate of legal
interest...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." (See Nacar v. Gallery Frames, modifying Eastern
Shipping Lines v. CA)
(G). Willex Plastic, Inc. v. CA, International Corporate Bank (1996)
Doctrine: It is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal
Facts:
1978: Inter-Resin took out a loan from Manila Bank. As
additional security, Inter-Resin and Investment
Underwriting (IUCP) executed a Continuing Surety
Agreement stating that they are liable to Manila Bank
solidarily for the loan taken out by Inter-Resin
1979: Inter-Resin and Willex Plastic executed a Continuing
Guarantee for the loan which Inter-Resin obtained from
Investment Underwriting to the extent of P5M.
1981: Investment Underwriting (IUCP) paid Manila Bank
P4M to satisfy Inter-Resins1978 Obligation
Investment Underwriting (IUCP) then demanded payment
of the P4M from both Inter-Resin and Willexo Inter-Resin
paid IUCP P600K from the proceeds of its fire insurance
Willex denied obligation, it alleged that it is only a
guarantor of the principal, hence its liability was only
secondary to the principal and that it did not receive
consideration nor benefit from the contract between the
bank and Inter-Resin.
Willex insisted that IUCP should pursue Inter-Resin and
apply to the loan the assets of the latter first before going
after it.
Willex further alleged that it is guarantor of a loan to
Manila Bank and not to Interbank, hence the Continuing
Guaranty cannot be retroactive applied as contracts of
suretyship contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for the loans obtained by
Inter-Resin to IUCP? Yes
HELD:
Intent is controlling: clear from the evidence that the
Continuing Guarantee executed by Willex with Inter-Resin
would cover sums obtained (in the past retroactive)
and/or to be obtained by Inter-Resin Industrial from
Interbank -?Although a contract of suretyship is ordinarily
not to be construed as retrospective, in the end the
intention of the parties as revealed by the evidence is
controlling apply it to the 1978 loan.
Guarantor or surety is bound by the same consideration
that makes the contract effective between the principal
parties thereto. . . . It is never necessary that a guarantor or
surety should receive any part or benefit, if such there be,
accruing to his principal.
(H). Rizal Commercial Banking Corp. vs. Arro
Rizal Commercial Banking Corporation, petitioner, vs. Hon. Jose P.
Arro, Judge of the Court of FirstInstance of Davao, and Residoro
Chua, respondents.
Date: 31 July 1982 Ponente: De Castro, J.
Facts:
executed a comprehensive surety agreement to guaranty, above
all, any existing or future indebtedness of Davao Agricultural
Industries Corporation (Daicor), and/or induce the bank at any time or
from time to time to make loans or advances or to extend credit to said
Daicor, provided that the liability shall not exceed at any time
Php100,000.00.
romissory note for Php100,000.00 (for additional capital to the
charcoal buy and sell and the activated carbon importation business)
was issued in favor of petitioner RCBC payable a month after
execution. This was signed by Go in his personal capacity
and in behalf of Daicor. Respondent Chua did not sign in said
promissory note.
for a sum of money against Daicor, Go and Chua.
missed upon his motion, alleging
that the complaint states no cause of action against him as he was not a
signatory to the note and hence he cannot be held liable. This was so
despite RCBCs opposition, invoking the comprehensive surety
agreement which it holds to cover not just the note in question but also
every other indebtedness that Daicor may incur from petitioner bank.
Hence, this petition.
Issue: WON respondent Chua may be held liable with Go and Daicor
under the promissory note, even if he was not a signatory to it, in
light of the provisions of the comprehensive surety agreement wherein
he bound himself with Go and Daicor, as solidary debtors, to pay
existing and future debts of said corporation.
Held: Yes, he may be held liable. Order dismissing the complaint against
respondent Chua reversed and set aside. Case remanded to court of
origin with instruction to set aside motion to dismiss and to require
defendant Chua to answer the complaint.
Ratio:
Go, as president and general manager, respectively, of Daicor, was
to cover existing as well as future obligations which Daicor may incur
with RCBC. This was only subject to the proviso that their liability shall
not exceed at any one time the aggregate principal amount of
Php100,000.00. (Par.1 of said agreement).
application for a loan Daicorwould request for. According to said
agreement, the guaranty is continuing and shall remain in full force or
effect until the bank is notified of its termination.
agreement was still in full force and effect and is thus covered by the
latter agreement. Thus, even if Chua did not sign the promissory note,
he is still liable by virtue of the surety agreement. The only condition
necessary for him to be liable under the agreement was that Daicor is
or may become liable as maker, endorser, acceptor or otherwise.
an accessory obligation dependent upon the principal obligation, i.e.,
the loan obtained by Daicor as evidenced by the promissory note.
guarantee future debts that may be incurred by Daicor with petitioner,
as allowed under NCC 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.
(I). ATOK FINANCE CORPORATION vs. COURT OF APPEALS G.R. No.
80078. May 18, 1993
FACTS:
On 27 July 1979, private respondents Sanyu Chemical Corporation as
principal and Sanyu Trading Corporation along with individual private
stockholders of Sanyu Chemical as sureties, executed a Continuing
Suretyship Agreement in favor of Atok Finance as creditor.
In 1981, Sanyu Chemical assigned its trade receivables outstanding 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 of up to one hundred
twenty (120) days without penalties.
In 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 a sum of money plus penalty
charges starting from 1 September 1983. Atok Finance alleged that
Sanyu Chemical had failed to collect and remit the amounts 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.
After trial the trial court rendered a decision in favor of Atok Finance. On
appeal the CA reversed and set aside the decision of the trial court and
entered a new judgment dismissing the complaint of Atok Finance.
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
ISSUE:
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.
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.
HELD:
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 enforced if not valid. So, even if, as in this case, the
agreement was for a continuing suretyship to include obligations
enumerated in 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 as the principal
obligation between the parties. Furthermore, the 'future debts' alluded
to in Article 2053 refer to debts already existing at the time of the
constitution of the agreement but the amount thereof is unknown,
unlike in the case at bar where the obligation was acquired two years
after the agreement."
A guaranty or a suretyship agreement is an accessory contract in the
sense that it is entered into for the purpose of securing the performance
of 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." Nevertheless, a guaranty may
be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation."
Moreover, Article 2053 of the Civil Code states that 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."
Comprehensive or continuing surety agreements are in fact quite
commonplace 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 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. As we understand it, this is precisely what happened in the case
at bar.
As regards the second issue, 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. It relied on Article 1629 of the Civil Code which provides: In case
the assignor in good faith should have made himself responsible for the
Page 4 of 15
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 the maturity."
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 when the Deed of Assignment was
executed.
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 is not 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 but rather ex
contractu. Under the Deed of Assignment, the effect of non-payment by
the original trade debtors was a 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. 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.
The Petition for Review is hereby GRANTED DUE COURSE, and the
Decision of the Court of Appeals are hereby REVERSED and SET ASIDE.
A new judgment is hereby entered REINSTATING the Decision of the
trial court.
(J.) Dio vs. Court of Appeals (1992)
FACTS: In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru
its representative Uy Tiam, applied for and obtained credit
accommodations from Metrobank in the sum of Php700,000. This was
secured by Continuing Suretyships separately executed by petitioners
Norberto Uy (who agreed to pay Php300,000) and Jacinto Dio (who
bound himself liable up to Php800,000). Uy Tiam paid the obligation
under this letter of credit in 1977. UTEFS obtained another credit
accommodation in 1978, which was likewise settled before he applied
and obtained another in 1979 in the sum of Php815,600. This sum
covered UTEFS purchase of fertilizers from Planters Producst. Uy and
Dio did not sign the application for this credit and were not asked to
execute suretyship or guarantee. UTEFS executed a trust receipt
whereby it agreed to deliver to Metrobank the goods in the event of
non-sale, and if sold, the proceeds will be delivered to Metrobank.
However, UTEFS did not comply with its obligation. As a result,
Metrobank demanded payment from UTEFS and the sureties, Uy &
Dio. The sureties refused to pay on the ground that the obligation for
which they executed the continuing suretyship agreement has been
paid. RTC ruled in favor of the petitioners, CA affirmed.
Issue: WON petitioners are liable for payment of the 1979 transaction
under the continuing suretyship agreement they executed in 1977.
Assuming that they are, what is the extent of their liability?
HELD: The Supreme Court held that Uy & Dio are liable. The
agreement they executed in 1977 is a continuing suretyship, one which
is not limited to a single transaction but which contemplates a
succession of liabilities, for which, as they accrue, the guarantor
becomes liable. The agreement that petitioners signed expressly
provided that it is a continuing guaranty and shall be in full force and
effect until written notice to the bank that it has been revoked by the
surety. As to the 2nd issue, petitioners are only liable up to the maximum
limit fixed in the continuing suretyship agreements (Php800,000 for
Dio and Php300,000 for Uy). The law is clear that 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 (Art.
2054). CA decision ordering petitioners to pay P2,397,883.68 which
represents the amount due inclusive of interest and charges, is
modified.
Additional info:
In Dino v. CA, the Court held that a continuing guaranty is one which
covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to
the two limitations of the credit accommodation:
that the obligation should not exceed P8 million, and
that the accommodation should expire not later than
November 30, 1981. Hence, it was a continuing surety only in regard to
loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
In Dino, the surety Agreement specifically provided that each
suretyship is a continuing one which shall remain in full force and
effect until this bank is notified of its revocation. Since the bank had not
been notified of such revocation, the surety was held liable even for
the subsequent obligations of the principal borrower.
Furthermore, this Court has ruled in Dio v. CA:
Under the Civil Code, a guaranty may be given to secure even future
debts, the amount of which may not be known at the time the guaranty
is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not
limited to a single transaction, but which contemplates a future course
of dealing, covering a series of transactions, generally for an indefinite
time or until revoked.
It is prospective in its operation and is generally intended to
provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes liable.
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.
How : A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing
credit to the principal debtor to be used from time to time
either indefinitely or until a certain period; especially if the right
to recall the guaranty is expressly reserved. Hence, where the
contract states that the guaranty is to secure advances to be
made from time to time, it will be construed to be a
continuing one.
(K). FORTUNE MOTORS v. CA
GR 112191
FACTS: In 1981, Joseph Chua and Edgar Rodrigueza executed separate
surety agreements in favor of Fortune Motors (Phils.) Corporation to
cover obligations incurred by Fortune Motors whether they be enforced
or thereafter made (from the time of said surety contracts).
In 1982, Fortune Motors secured cars from Canlubang Automotive
Resources Corporation (CARCO) via trust receipts and drafts made by
CARCO. These were assigned to Filinvest Credit Corporation. Later
Filinvest, when the obligation matured, demanded payment from
Fortune Motor as well as from Chua and Rodrigueza. No payment was
made. A case was filed. Rodrigueza averred that the surety agreement
was void because when it was signed in 1981, the principal obligation
(1982) did not yet exist.
ISSUE: Whether or not the surety agreement is void.
HELD: No. Future obligations can be covered by a surety.
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank
or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.
(L). SOUTH CITY HOMES v. BA FINANCE
GR 94566
FACTS: On January 17, 1983, Joseph L. G. Chua, President of Fortune
Motors Corporation, executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement, in which he "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune Motors Corporation
to BA Finance Corporation. On February 3, 1983, Palawan Lumber
Manufacturing Corporation represented by Joseph L.G. Chua, George D.
Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement in which, said
corporation "jointly and severally unconditionally" guaranteed the "full,
faithful and prompt payment and discharge of any and all indebtedness
of Fortune Motors Corporation to BA Finance Corporation (Folder of
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
Exhibits, pp. 19-20). On the same date, South City Homes, Inc.
represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise
executed a Continuing Suretyship Agreement in which said corporation
"jointly and severally unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation.
Fortune Motors Corporation thereafter executed trust receipts covering
the motor vehicles delivered to it by CARCO under which it agreed to
remit to the Entruster (CARCO) the proceeds of any sale and
immediately surrender the remaining unsold vehicles. ). The drafts and
trust receipts were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO.
Upon failure of the defendant-appellant Fortune Motors Corporation to
pay the amounts due under the drafts and to remit the proceeds of
motor vehicles sold or to return those remaining unsold in accordance
with the terms of the trust receipt agreements, BA Finance Corporation
sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc.,
Aurelio Tablante, Palawan Lumber Manufacturing Corporation, Joseph L.
G. Chua, George D. Tan and Joselito C. Baltazar (Folder of Exhibits, pp.
29-37). Since the defendants-appellants failed to settle their
outstanding account with plaintiff-appellant, the latter filed on
December 22, 1983 a complaint for a sum of money with prayer for
preliminary attachment, with the Regional Trial Court of Manila.
ISSUE: WHETHER OR NOT SURETYSHIP AGREEMENT IS VALID? NO
HELD: Petitioners assert that the suretyship agreement they signed is
void because there was no principal obligation at the time of signing as
the principal obligation was signed six (6) months later. The Civil Code,
however, allows a suretyship agreement to secure future loans even if
the amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for future debts, the
amount of which is not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of Appeals, [ we held:
To fund their acquisition of new vehicles (which are later
retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing
schemes whereby vehicles are delivered by the
manufacturer or assembler on the strength of trust receipts
or drafts executed by the car dealers, which are backed up
by sureties. These trust receipts or drafts are then assigned
and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with
the corresponding right to collect such payment from the
car dealers and/or the sureties. In this manner, car dealers
are able to secure delivery of their stock-in-trade without
having to pay cash therefor; manufacturers get paid
without any receivables/collection problems; and financing
companies earn their margins with the assurance of
payment not only from the dealers but also from the
sureties. When the vehicles are eventually resold, the car
dealers are supposed to pay the financing companies --
and the business goes merrily on. However, in the event the
car dealer defaults in paying the financing company, may
the surety escape liability on the legal ground that the
obligations were incurred subsequent to the execution of
the surety contract?
Page 5 of 15
x x x Of course, a surety is not bound under any particular principal
obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the principal
obligation intended to be secured thereby is born, any more than there
would be in saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank
or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.
(M). PACIFIC BANKING v. IAC
GR 72275
FACTS: The case is a petition for review on certiorari of the decision of
the Intermediate Appellate Court. In the case, Cecilia Regala obtained a
Pacific Credit Card and her spouse, Roberto Regala signed as her
guarantor. The holder of the card purchased goods and/or services
under the pacificard amounting to P92, 803.98. Despite the execution of
demand from the bank, the couple did not comply. The trial 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 defendants appealed to the Intermediate Appellate Court. Wherein
the said court 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.
ISSUE: Whether or not, Roberto Regalado as a guarantor is limited to
pay up to only P2000 per month in the liability of his spouse to the said
bank?
HELD: 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. 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. 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.
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.
ACCORDINGLY, the petition is GRANTED. The questioned decision of
respondent appellate court is SET ASIDE and the decision of the trial
court is REINSTATED.
(N). MOLINO v. SECURITY
GR 136780
(NO DIGEST SA NET SAD. )
(O). GATEWAY v. ASIANBANK
GR 172041
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 delos Reyes
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 for Domestic Bills Purchased Line and the
Omnibus Credit Line.
Later developments saw Asianbank extending to Gateway several export
packing loans .This loan package was later consolidated with A Dollar
Promissory Note (and secured by a chattel mortgage over Gateways
equipment.
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.
Gateway issued two Philippine Commercial International Bank checks as
payment for its arrearages and 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.
Thus Asianbank filed with the RTC in Makati City a complaint for a sum
of money against Gateway, Geronimo, and Andrew.
In its answer to the amended complaint, Gateway traced the cause of its
financial difficulties, described the steps it had taken to address its
mounting problem, and faulted Asianbank for trying to undermine its
efforts toward recovery.
Andrew also filed an answer alleging, among other things, that the deed
of suretyship he executed covering the Domestic Bills Purchased Line
and the Omnibus Credit Line did NOT include the Dollar Promissory
Note, 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.
After due hearing, the RTC rendered judgment holding Gateway,
Geronimo and Andrew jointly and severally liable to pay Asianbank.
Petitioners herein appealed to the CA. Following the filing of its and
Geronimos joint appellants brief, Gateway filed on a petition for
voluntary insolvency6 with the RTC in Imus, Cavite, which was granted.
CA affirmed the decision of the lower court. MR denied, hence this
petition for review under Rule 45.
ISSUE: is Geronimo discharged from liability because of the insolvency
of Gateway, the principal. NO.
HELD: petition denied
NO
Asianbank argues that the stay of the collection suit against Gateway
(because its case is transferred to an insolvency court) is without
bearing on the liability of Geronimo as a surety. 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.
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:
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 xIn other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes
default x x x.
xxxx
A 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,
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
therefore, is that if the obligation is joint and several, the creditor
has the right to proceed even against the surety alone.
A Suretyship contract 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. Geronimos position that
a surety cannot be made to pay when the principal is unable to pay is
clearly specious and must be rejected.
(P). SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs.
RODOLFO M. CUENCA, respondent.
G.R. No. 138544 October 3, 2000
petitioner bank cannot hold herein respondent liable for loans obtained in
excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the latter waived his
right to be notified thereof, or to give consent thereto.
FACTS:
Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a corporation
engaged in logging operations. It was a holder of a Timber License
Agreement issued by the DENR
On 10 November 1980, Security Bank and Trust Co. granted appellant
Sta. Ines a credit line in the amount of (P8,000,000.00) effective til
November 30, 1981 to assist the latter in meeting the additional
capitalization requirements of its logging operations.
To secure payment, it executed a chattel mortgage over some of its
machineries and equipments. And as an additional security, its President
and Chairman of the Board of Directors Rodolfo Cuenca, executed an
Indemnity agreement in favor of Security Bank whereby he bound
himself jointly and severally with Sta. Ines.
Specific stipulations:
The bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice
to the Borrower.
As additional security for the payment of the loan, Rodolfo
M. Cuenca executed an Indemnity Agreement dated 17
December 1980 solidary binding himself:
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly
and severally with the client (SIMC) in favor of the bank for
the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be
indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x
.
1985: Cuenca resigned as President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a public auction to
Adolfo Angala. Before and after this, Sta Ines availed of its credit line.
Page 6 of 15
Sta Ines encountered difficulty in making the amortization payments on
its loans and requested SBTC for a complete restructuring of its
indebtedness. SBTC accommodated SIMCs request and signified its
approval in a letter dated 18 February 1988 wherein SBTC and Sta.
Ines, without notice to or the prior consent of ] Cuenca, agreed to
restructure the past due obligations of defendant-appellant Sta. Ines.
To formalize their agreement to restructure the loan obligations of Sta.
Ines, Security Bank and Sta. Ines executed a Loan Agreement dated 31
October 1989
Sta Ines made payments up to (P1,757,000.00) The defaulted in the
payment of its restructured loan obligations to SBTC despite demands
made upon appellant SIMC and CUENCA,
SBTC filed a complaint for collection of sum of resulting after trial on the
merits in a decision by the court a quo, from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement
novated the 1980 credit accommodation which extinguished the
Indemnity Agreement for which Cuenca was liable solidarily. No
notice/consent to restructure. Since with expiration date, liable only up
to that date and up to that amount (8M). Amounted to extension.of
time with no notice to suret therefore released from liability.
(P2) SECURITY BANK V. CUENCA, (2000)
Surety: Obligations Secured, Art. 2053
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain
the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement,
absent any clear stipulation showing that the latter waived his right to
be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or
major stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.
Issue: Contending that the Indemnity Agreement was in the nature of a
continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989 Loan
Agreement. Correct? NO.
Held: That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation
inordinately.
In Dino v. CA, the Court held that a continuing guaranty is one which
covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to
the two limitations of the credit accommodation:
1. that the obligation should not exceed P8 million, and
2. that the accommodation should expire not later than
November 30, 1981. Hence, it was a continuing surety only
in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total
of P8 million.
In Dino, the surety Agreement specifically provided that each
suretyship is a continuing one which shall remain in full force and
effect until this bank is notified of its revocation. Since the bank had not
been notified of such revocation, the surety was held liable even for
the subsequent obligations of the principal borrower.
(Q). PICZON VS. PICZON
61 SCRA 67 (1974)
Facts: AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of
and with postal address in the municipality of Catbalogan, Province of
Samar, Philippines, in my capacity as the President of the corporation
known as the "SOSING-LOBOS and CO., INC.," as controlling stockholder,
and at the same time as guarantor for the same, do by these presents
contract a loan of Twelve Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is hereby acknowledged, from
the "Piczon and Co., Inc." another corporation, the main offices of the two
corporations being in Catbalogan, Samar, for which I undertake, bind and
agree to use the loan as surety cash deposit for registration with the
Securities and Exchange Commission of the incorporation papers relative
to the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount
with Twelve Per Cent (12%) interest per annum, commencing from the
date of execution hereof, to the "Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan,
Samar, Philippines, this 28th day of September, 1956.
Issue:
Whether or not Esteban was only a guarantor and not a surety.
Ruling
Under the terms of the contract, Annex A, Esteban Piczon expressly
bound himself only as guarantor, and there are no circumstances in the
record from which it can be deduced that his liability could be that of a
surety. A guaranty must be express, (Article 2055, Civil Code) and it
would be violative of the law to consider a party to be bound as a surety
when the very word used in the agreement is "guarantor
(R). BA Finance Corporation v. Court of Appeals,
G.R. No. 94566 July 3, 1992
Under the deed of chattel mortgage, B.A. Finance Corporation was
constituted attorney-in-fact with full power and authority to file,
follow-up, prosecute, compromise or settle insurance claims; to sign
execute and deliver the corresponding papers, receipts and
documents to the Insurance Company as may be necessary to prove
the claim, and to collect from the latter the proceeds of insurance to
the extent of its interests, in the event that the mortgaged car
suffers any loss or damage.
Facts: Spouses Manuel and Lilia Cuady obtained from Supercars, Inc.
bought a Ford Escort 1300, four-door sedan in installments. To secure
the faithful and prompt compliance of the obligation under the said
promissory note, the Cuady spouses constituted a chattel mortgage on
the aforementioned motor vehicle. Supercars, Inc. assigned the
promissory note, together with the chattel mortgage, to B.A. Finance
Corporation. The Cuadys made partial payment leaving an un
paid balance.In addition thereto, the Cuadys owe B.A. Finance .B.A.
Finance Corporation, as the assignee of the mortgage lien obtained the
renewal of the insurance coverage over the aforementioned motor
vehicle for the with Zenith Insurance Corporation, when the Cuadys
failed to renew said insurance coverage themselves. Under the terms
and conditions of the said insurance coverage, any loss under the policy
shall be payable to the B.A. Finance Corporation.
The motor vehicle figured in an accident and was badly damaged. The
unfortunate happening was reported to the B.A. Finance Corporation
and to the insurer, Zenith Insurance Corporation. The Cuadys asked the
B.A. Finance Corporation to consider the same as a total loss, and to
claim from the insurer the face value of the car insurance policy and
apply the same to the payment of their remaining account and give
them the surplus thereof, if any. But instead of heeding the request of
the Cuadys, B.A. Finance Corporation prevailed upon the former to just
have the car repaired. Not long thereafter, however, the car bogged
down. The Cuadys wrote B.A. Finance Corporation requesting the latter
to pursue their prior instruction of enforcing the total loss provision in
the insurance coverage. When B.A. Finance Corporation did not respond
favorably to their request, the Cuadys stopped paying their monthly
installments on the promissory note. In view of the failure of the Cuadys
to pay the remaining installments on the note, B.A. Finance Corporation
sued them.
B.A. Finance Corporation contended that even if it failed to enforce the
total loss provision in the insurance policy of the motor vehicle subject
of the chattel mortgage, said failure does not operate to extinguish the
unpaid balance on the promissory note, considering that the
circumstances obtaining in the case at bar do not fall under Article 1231
of the Civil Code relative to the modes of extinguishment of obligations.
Issue: Whether or not BA Finance ca still collect on the deficiency of the
Chattel Mortgage.
Held: In granting B.A. Finance Corporation the aforementioned powers
and prerogatives, the Cuady spouses created in the formers favor an
agency. Thus, under Article 1884 of the Civil Code of the Philippines,
B.A. Finance Corporation is bound by its acceptance to carry out the
agency, and is liable for damages which, through its non-performance,
the Cuadys, the principal in the case at bar, may suffer; in such case, the
assignee of the mortgage agreement is bound by the same stipulation
and if the assignee failed to file and prosecute the insurance claim when
the car was damaged totally, the mortgagor is relieved from his
obligation to pay as he suffered a loss because of the failure of the
mortgagee to file the claim.
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
Under the deed of chattel mortgage, B.A. Finance Corporation was
constituted attorney-in-fact with full power and authority to file, follow-
up, prosecute, compromise or settle insurance claims; to sign execute
and deliver the corresponding papers, receipts and documents to the
Insurance Company as may be necessary to prove the claim, and to
collect from the latter the proceeds of insurance to the extent of its
interests, in the event that the mortgaged car suffers any loss or
damage.
(S). FIDELIZA J. AGLIBOT, Petitioner,
v. INGERSOL L. SANTIA, Respondent.
G.R. No. 185945 : December 5, 2012
FACTS:
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. Allegedly as a guaranty for the payment of the note,
Aglibot issued and delivered to Santia eleven (11) post-dated personal
checks drawn from her own account maintained at Metrobank. Upon
presentment of the 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 B.P. 22 were filed
before the MTCC.
MTCC acquitted Aglibot. On appeal, the RTC rendered a decision
absolving Aglibot and dismissing the civil aspect of the case on the
ground of failure to fulfill a condition precedent of exhausting all means
to collect from the principal debtor.
On appeal, the Court of Appeals ruled that the RTC erred when it
dismissed the civil aspect of the case. Hence, the CA ruled that Aglibot is
personally liable for the loan.
Thus, Aglibot filed this instant petition for certiorari. She argued that she
was merely a guarantor of the obligation and therefore, entitled to the
benefit of excussion under Article of the 2058 of the Civil Code. She
further posited that she is not personally liable on the checks since she
merely contracted the loan in behalf of PLCC.
ISSUES:
I. Whether or not Aglibot is entitled to the benefit of excussion?
II. Whether or not Aglibot is personally liable on the checks?
HELD: The petition is bereft of merit.
CIVIL LAW: guaranty; benefit of excussion; Statute of Frauds;
contracts
FIRST ISSUE: Aglibot cannot invoke the benefit of excussion.
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. Thus, the creditor may hold the guarantor liable only after
Page 7 of 15
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. This rule is contained in
Article 2062 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 2059 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. Under the
above provision, concerning a guaranty agreement, which is a promise
to answer for the debt or default of another, the law clearly requires that
it, or some note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified, although under Article 1358 of
the Civil Code, a contract of guaranty does not have to appear in a
public document. 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.
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.
MERCANTILE LAW: accommodation party
SECOND ISSUE: Aglibot is an accommodation party and therefore
liable to Santia.
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. The facts 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.
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. 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. 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.
Petition is DENIED. Court of Appeals is AFFIRMED.
(T). TEXAS v ALONZO
No available Net Digest
(U). VISAYAS SURETY V CA GR 127261 9/72001
Action for recovery of goods and chattel wrongfully attained. Who is an
intervenor?
An individual who is not already a party to an existing lawsuit but who
makes himself or herself a party either by joining with the plaintiff or
uniting with the defendant in resistance of the plain-tiff's claims.
FACTS:
The case is a petition to review and set aside a decision of the
Court of Appeals affirming that of the Regional TrialCourt, Bian,
Laguna, Branch 24, holding the surety liable to the intervenor in lieu of
the principal on a replevin bond.
On February 2, 1993, the spouses Danilo and Mila Ibajan filed with the
Regional Trial Court, Laguna, Bian a complaintagainst spouses Jun and
Susan Bartolome, for replevin to recover from them the possession of
an Isuzu jeepney, with damages.
Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney
which was forcibly and unlawfully taken by defendants Jun and Susan
Bartolome on December 8, 1992, while parked at their residence.
On February 8, 1993, plaintiffs filed a replevin bond through petitioner
Visayan Surety & Insurance Corporation. Thecontract of surety provided
that Danilo and Mila are jointly and severally binding themselves in the
sum of Three HundredThousand Pesos (P300,000.00) for the return of
the property to the defendant, if the return thereof be adjudged, and
for the payment to the defendant of such sum as he/she may recover
from the plaintiff in the action.
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan,
filed with the trial court a motion for leave of court tointervene, stating
that he has a right superior to the plaintiffs over the ownership and
possession of the subject vehicle andthe he trial court granted the
motion to intervene.
On August 8, 1993, the trial court issued an order granting the motion
to quash the writ of replevin and ordering plaintiff MilaIbajan to return
the subject jeepney to the intervenor Dominador Ibajan.
On September 1, 1993, The trial court issued a writ of replevin in favor
of intervenor Dominador Ibajan but it was returnedunsatisfied and on
March 7, 1994, intervenor Dominador Ibajan filed with the trial court a
motion/application for judgment against plaintiffs bond.
Respective motions for reconsideration were made by both parties and
petitioner Visayan Surety contends that it is notliable to the intervenor,
Dominador Ibajan, because the intervention of the intervenor makes
him a party to the suit, but not a beneficiary to the plaintiffs bond. The
intervenor was not a party to the contract of surety, hence, he was not
bound bythe contract.
Hence, this petition.
ISSUE: Whether or not the surety is liable to an intervenor on a replevin
bond posted by petitioner in favor of respondents.
HELD: The petition is meritorious. It is a basic principle in law that
contracts can bind only the parties who had entered into it; it cannot
favor or prejudice third person. Contracts take effect between the
parties, their assigns, and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The obligation of a
surety cannot be extended by implication beyond its specified limits.
When a surety executes a bond, itdoes not guarantee that the plaintiffs
cause of action is meritorious, and that it will be responsible for all the
costs that may be adjudicated against its principal in case the action
fails. The extent of a suretys liability is determined only by the clause of
the contract of suretyship.
A contract of surety is not presumed; it cannot extend to more than
what is stipulated. Since the obligation of the surety cannot be extended
by implication, it follows that the surety cannot be held liable to
theintervenor when the relationship and obligation of the surety is
limited to the defendants specified in the contract of surety.
(V) Estate of K.H. Hemady vs Luzon Surety Co., Inc.
Civil Law Wills and Succession Transmissible Obligations
FACTS: Luzon Surety filed a claim against the estate of K.H. Hemady
based on indemnity agreements (counterbonds) subscribed by distinct
principals and by the deceased K.H. Hemady as surety (solidary
guarantor). As a contingent claim, Luzon Surety prayed for the
allowance of the value of the indemnity agreements it had executed.
The lower court dismissed the claim of Luzon Surety on the ground that
whatever losses may occur after Hemadys death, are not chargeable to
his estate, because upon his death he ceased to be a guarantor.
ISSUES: What obligations are transmissible upon the death of the
decedent? Are contingent claims chargeable against the estate?
HELD: Under the present Civil Code (Article 1311), the rule is that
Contracts take effect only as between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. While in our successional system the responsibility of
the heirs for the debts of their decedent cannot exceed the value of the
inheritance they receive from him, the principle remains intact that
these heirs succeed not only to the rights of the deceased but also to
his obligations. Articles 774 and 776 of the New Civil Code expressly so
provide, thereby confirming Article 1311.
In Mojica v. Fernandez, the Supreme Court ruled Under the Civil
Code the heirs, by virtue of the rights of succession are subrogated to
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
all the rights and obligations of the deceased (Article 661) and can not
be regarded as third parties with respect to a contract to which the
deceased was a party, touching the estate of the deceased x x x which
comes in to their hands by right of inheritance; they take such property
subject to all the obligations resting thereon in the hands of him from
whom they derive their rights. The third exception to the
transmissibility of obligations under Article 1311 exists when they are
not transmissible by operation of law. The provision makes reference to
those cases where the law expresses that the rights or obligations are
extinguished by death, as is the case in legal support, parental authority,
usufruct, contracts for a piece of work, partnership and agency. By
contrast, the articles of the Civil Code that regulate guaranty or
suretyship contain no provision that the guaranty is extinguished upon
the death of the guarantor or the surety.
The contracts of suretyship in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the undertaking, nor by
stipulations of the contracts themselves, nor by provision of law, his
eventual liability therefrom necessarily passed upon his death to his
heirs. The contracts, therefore, give rise to contingent claims provable
against his estate. A contingent liability of a deceased person is part and
parcel of the mass of obligations that must be paid if and when the
contingent liability is converted into a real liability. Therefore, the
settlement or final liquidation of the estate must be deferred until such
time as the bonded indebtedness is paid.
(W) YULIM INTERNATIONAL COMPANY LTD., v. INTERNATIONAL
EXCHANGE BANK (NOW UNION BANK OF THE PHILIPPINES)
FACTS: On June 2, 2000, iBank, a commercial bank, granted Yulim, a
domestic partnership, a credit facility in the form of an Omnibus Loan
Line for P5,000,000.00, as evidenced by a Credit Agreement3 which was
secured by a Chattel Mortgage4 over Yulims inventories in its
merchandise warehouse at 106 4th Street, 9th Avenue, Caloocan City. As
further guarantee, the partners, namely, James, Jonathan and Almerick,
executed a Continuing Surety Agreement in favor of iBank. Yulim
availed of its aforesaid credit facility with iBank.
The promissory notes (PN) were later consolidated under a single
promissory note, PN No. SADDK001014188, for P4,246,310.00, to
mature on February 28, 2002. Yulim defaulted on the said note.
On April 5, 2002, iBank sent demand letters to Yulim, through its
President, James, and through Almerick,8 but without success. iBank
then filed a Complaint for Sum of Money with Replevin9against Yulim
and its sureties.
On August 8, 2002, the Court granted the application for a writ of
replevin. Pursuant to the Sheriffs Certificate of Sale dated November 7,
2002, the items seized from Yulims warehouse were worth only
P140,000.00, not P500,000.00 as the petitioners have insisted.
On October 2, 2002, the petitioners moved to dismiss the complaint
insisting that their loan had been fully paid after they assigned to iBank
their Condominium Unit No. 141, with parking space, at 20 Landsbergh
Place in Tomas Morato Avenue, Quezon City. They claimed that while
Page 8 of 15
the pre-selling value of the condominium unit was P3.3 Million, its
market value has since risen to P5.5 Million. The RTC, however, did not
entertain the motion to dismiss for non-compliance with Rule 15 of the
Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating that they
have paid their loan by way of assignment of a condominium unit to
iBank, as well as insisting that iBanks penalties and charges were
exorbitant, oppressive and unconscionable.
RTC:
It ordered Yulim alone to pay iBank the amount of P4,246,310.00, plus
interest at 16.50% per annum from February 28, 2002 until fully paid,
plus costs of suit, and dismissed the complaint against petitioners
James, Jonathan and Almerick, stating that there was no iota of
evidence that the loan proceeds benefited their families.
CA:
The CA ruled that the petitioners failed to prove that they have already
paid Yulims consolidated loan obligations totaling P4,246,310.00, for
which it issued to iBank PN No. SADDK001014188 for the said amount.
It held that the existence of a debt having been established, the burden
to prove with legal certainty that it has been extinguished by payment
devolves upon the debtors who have offered such defense. The CA
found the records bereft of any evidence to show that Yulim had fully
settled its obligation to iBank, further stating that the so-called
assignment by Yulim of its condominium unit to iBank was nothing but
a mere temporary arrangement to provide security for its loan pending
the subsequent execution of a real estate mortgage. Specifically, the CA
found nothing in the Deed of Assignment which could signify that iBank
had accepted the said property as full payment of the petitioners loan.
The CA cited Manila Banking Corporation v. Teodoro, Jr.22 which held
that an assignment to guarantee an obligation is in effect a mortgage
and not an absolute conveyance of title which confers ownership on the
assignee.
Concerning the solidary liability of petitioners James, Jonathan and
Almerick, the CA disagreed with the trial courts ruling that it must first
be shown that the proceeds of the loan redounded to the benefit of the
family of the individual petitioners before they can be held liable. Article
161 of the Civil Code and Article 121 of the Family Code cited by the
RTC apply only where the liability is sought to be enforced against the
conjugal partnership itself. In this case, regardless of whether the loan
benefited the family of the individual petitioners, they signed as
sureties, and iBank sought to enforce the loan obligation against them
as sureties of Yulim. Thus, the appellate court granted the appeal of
iBank, and denied that of the petitioners.
Hence, this petition.
ISSUE: Whether or not the Deed of Assignment executed by the
petitioners shall be considered as full and final payment of their
obligation
HELD: The SC held that the individual petitioners here did not deny that
they executed the Continuing Surety Agreement, wherein they jointly
and severally with the PRINCIPAL [Yulim], hereby unconditionally and
irrevocably guarantee full and complete payment when due, whether at
stated maturity, by acceleration, or otherwise, of any and all credit
accommodations that have been granted to Yulim by iBank, including
interest, fees, penalty and other charges. Under Article 2047 of the Civil
Code, these words are said to describe a contract of suretyship.
In a contract of suretyship, one lends his credit by joining in the
principal debtors obligation so as to render himself directly and
primarily responsible with him without reference to the solvency of the
principal.26 According to the above Article, if a person binds himself
solidarily with the principal debtor, the provisions of Articles 1207 to
1222, or Section 4, Chapter 3, Title I, Book IV of the Civil Code on joint
and solidary obligations, shall be observed. Thus, where there is a
concurrence of two or more creditors or of two or more debtors in one
and the same obligation, Article 1207 provides that among
them, [t]here is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires
solidarity.
As regards the petitioners contention that iBank in its letter dated May
4, 2001 had accepted/approved the assignment of its condominium
unit in Tomas Morato Avenue as full and final payment of their various
loan obligations, the Court is far from persuaded. The assignment being
in its essence a mortgage, it was but a security and not a satisfaction of
the petitioners indebtedness.34 Article 125535 of the Civil Code
invoked by the petitioners contemplates the existence of two or more
creditors and involves the assignment of the entire debtors property,
not a dacion en pago. Under Article 1245 of the Civil Code, [d]ation in
payment, whereby property is alienated to the creditor in satisfaction of
a debt in money, shall be governed by the law on sales. Nowhere in the
Deed of Assignment can it be remotely said that a sale of the
condominium unit was contemplated by the parties, the consideration
for which would consist of the amount of outstanding loan due to iBank
from the petitioners.
II. EFFECTS OF GUARANTY
(A.) Wise Co. vs. Tanglao G.R. No. 42518 (August 29, 1936)
FACTS- Cornelio David is an agent of Wise & Co. He was indebted to
the company due to a liquidation of accounts indicating his said liability.
The company was able to secure a writ of attachment on his property. In
an effort to avoid the execution of the attachment, David had his
attorney (Dionisio Tanglao) sign a power of attorney in his favor. It
contained the following proviso: To sign for me (Tanglao) as guarantor
for himself (David) in his indebtedness to Wise & Company of Manila,
which indebtedness appears in civil case No. 41129, of the Court of First
Instance of Manila, and to mortgage my lot (No. 517-F of the
subdivision plan Psd-20, being a portion of lot No. 517 of the cadastral
survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said
obligations to the Wise & Company, Inc., of Manila.
David then executed a compromise agreement with Wise & Co. which
named some of his properties (including the ones he mortgaged to
Tanglao) as security for his indebtedness. As Cornelio David paid only a
part of the indebtedness, Wise & Co. filed an action against Atty.
Tanglao to recover the unpaid balance.
ISSUE: W/N Tanglao is liable for the balance
HELD: No. Nothing is stated in the compromise agreement to the effect
that Atty. Tanglao become Davids surety for the payment of the
judgment debt. Tanglao did not contract any personal responsibility for
the payment of the sum of P640. The only obligation which he
contracted was that resulting from the mortgage. However, a
foreclosure suit was not instituted against Atty. Tanglao but a purely
personal action for the recovery of the amount still owned by Atty.
Tanglao. Even granting that Atty. Tanglao may be considered a surety
(or guarantor), the action does not lie against him on the ground that all
the legal remedies against him have not previously been asked for and
David has property sufficient to pay the balance of the debt the
payment of which is sought of Tanglao in his alleged capacity as surety.
A guaranty or surety must be expressed and cannot be presumed.
Further, 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 legal remedies against the debtor.
(B) PBCOM vs CA G.R. No. 90267 (March 22, 1991)
Facts: On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety
Agreement in favor of Philippine Bank of Communications (PBCOM)
with defendant-appellee Joseph L.G. Chua, as one of the sureties.
October 1, 1981, Fortune Motors (Phils.), Inc. executed another Surety
Agreement in favor of PBCOM with Chua likewise acting as one of the
sureties. From March 7, 1983 to May 3, 1983 Fortune Motors, (Phils.)
thru its authorized officers and/or representatives executed several trust
receipts in favor of PBCOM. On March 6, 1981, Forte Merchant Finance,
Inc., executed a Surety Agreement in favor of PBCOM with Joseph L.G.
Chua as one of the sureties. On May 13, 1983 to March 16, 1984, Forte
Merchant Finance, Inc. obtained credit accommodations from PBCOM in
the form of trust receipt and loans represented by promissory notes. On
October 24, 1983 Chua executed a Deed of Exchange transferring a
parcel of land with improvements to JALECO Development, Inc., in
exchange for 12,000 shares of said Corporation. As a result, Register of
Deeds of Rizal covering the aforementioned parcel of land was issued in
the name of JALECO Development, Inc. Chua sold 6,000 shares of
JALECO Development, Inc., to Mr. Chua Tiong King and another 6,000
shares of JALECO Development, Inc. to Guillermo Jose, Jr. and Caw Le Ja
Chua, wife of Chua sold the 6,000 share of JALECO Development, Inc., to
Chua Tiong King. In the meanwhile, for failure of both Fortune Motors
(Phils.), Inc. and Forte Merchant Finance, Inc. to meet their respective
financial obligations with PBCOM, the latter filed Civil Case against
Fortune Motors (Phils.), Inc., Joseph L. G. Chua, George D. Tan, Edgar L.
Rodriguez and Jose C. Alcantara and Civil Case against Forte Merchant
Finance, Inc., Joseph L. G. Chua, George O. Tan and Edgar L. Rodriguez
with the Regional Trial Court of Manila, both for Sum of Money with
Writ of Preliminary Attachment where PBCOM was able to obtain a
notice of levy on the properties of Fortune Motors (Phils.). When
plaintiff was able to locate Chua's former property situated in
Dasmarias, Makati, Metro Manila which was already transferred to
JALECO Development, Inc., by virtue of the Deed of Exchange. PBCOM
filed Civil Case for annulment of Deed of Exchange with the Regional
Trial Court of Makati,Metro Manila. A decision was rendered on
September 18, 1986 dismissing said case.
Issue: Whether or not the Deed of Exchange between Jaleco and Chua
was used to defraud PBCOM
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
Held: Yes. As surety for the financial obligations of Fortune Motors
(Phils.), Inc. and the Forte Merchant Finance, Inc., with the petitioner,
respondent Chua bound himself solidarily liable with the two (2)
principal debtors. (Article 2047, Civil Code) The petitioner may therefore
demand payment of the whole financial obligations of Fortune Motors
(Phils.), Inc. and Forte Finance, Inc., from Chua, if the petitioner chooses
to go directly after him. Hence, since the only property of Chua was sold
to JALECO after the debts became due, the petitioner has the right to
file an annulment of the deed of exchange between Chua and JALECO
wherein Chua sold his only property to JALECO to protect his interests.
Upon investigation with the Securities and Exchange Commission (SEC),
the petitioner gathered the following facts based on the SEC records: a)
JALECO was organized on November 2, 1982 with a capital stock of
P5,000,000.00; b) the stockholders of said corporation were mostly
members of the immediate family of Joseph L. G. Chua; c) on April 4,
1983, a Board Resolution was passed authorizing the issuance of 12,000
shares of stocks worth Pl,200,000.00 to a new subscriber and non-
stockholder Joseph L. G. Chua; and d) prior to the acquisition by the
corporation of the property located at Dasmarias Village, Makati, the
percentage of the shareholding of the members of the family of Joseph
L. G. Chua was 88% while after the acquisition of the property and the
issuance of the shares to Chua, they owned 94% of the corporation. In
the instant case, the evidence clearly shows that Chua and his
immediate family control JALECO. The Deed of Exchange executed by
Chua and JALECO had for its subject matter the sale of the only
property of Chua at the time when Chua's financial obligations became
due and demandable. The records also show that despite the "sale",
respondent Chua continued to stay in the property, subject matter of
the Deed of Exchange. These circumstances tend to show that the Deed
of Exchange was not what it purports to be. Instead, they tend to show
that the Deed of Exchange was executed with the sole intention to
defraud Chua's creditorthe petitioner. It was not a bona fide
transaction between JALECO and Chua. Chua entered a sham or
simulated transaction with JALECO for the sole purpose of transferring
the title of the property to JALECO without really divesting himself of
the title and control of the said property.
(C) Bitanga vs. Pyramid Const.
G.R. No. 173526
August 28, 2008
FACTS: Pyramid filed with the RTC a Complaint for specific performance
and damages with application for the issuance of a writ of preliminary
attachment against the petitioner and wife Marilyn.
Respondent alleged in its Complaint that, it entered into an agreement
with Macrogen Realty, of which Bitanga is the President, to construct for
the latter the Shoppers Gold Building located in Paraaque City.
Respondent commenced civil, structural, and architectural works on the
construction project. However, Macrogen failed to settle respondents
progress billings. Petitioner, through his representatives and agents,
assured respondent that the outstanding account of Macrogen would
be paid and relying on the assurances made by petitioner, respondent
continued the construction project.
Later, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including
payment of unsettled accounts, had not been complied with by
Macrogen. Respondent instituted with the Construction Industry
Arbitration Commission (CIAC) a case for arbitration against Macrogen
Realty seeking payment by the latter of its unpaid billings and project
costs. Before the arbitration case could be set for trial, Pyramid and
Page 9 of 15
Macrogen entered into a Compromise Agreement, with petitioner
acting as signatory for and in behalf of Macrogen Realty.
Under the Compromise Agreement, Macrogen Realty agreed to pay
respondent the total amount of P6,000,000.00 by
installments. Petitioner guaranteed the obligations of Macrogen
Realty under the Compromise Agreement by executing a Contract
of Guaranty in favor of respondent, by virtue of which he irrevocably
and unconditionally guaranteed the full and complete payment of the
principal amount of liability of Macrogen. Upon joint motion of
respondent and Macrogen Realty, the CIAC approved the Compromise
Agreement.
Macrogen Realty failed and refused to pay all the monthly installments
agreed upon in the Compromise Agreement. Hence respondent moved
for the issuance of a writ of execution against Macrogen, which CIAC
granted.
The sheriff filed a return stating that he was unable to locate any
property of Macrogen Realty, except its bank deposit of P20,242.33,
with the Planters Bank, Buendia Branch.
Respondent then made, a written demand on petitioner, as guarantor of
Macrogen to pay the liability or to point out available properties of the
Macrogen within the Philippines sufficient to cover the obligation
guaranteed. It also made verbal demands on petitioner. Yet,
respondents demands were left unheeded.
Petitioner filed with the RTC his Answer to respondents Complaint. As a
special and affirmative defense, petitioner argued that the benefit of
excussion was still available to him as a guarantor since he had set it up
prior to any judgment against him. According to petitioner, respondent
failed to exhaust all legal remedies to collect from Macrogen the
amount due under the Compromise Agreement, considering that
Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premise, petitioner could not
be held liable as guarantor.
ISSUE: WON petitioner cam avail of the benefit of excussion
HELD: petition denied for lack of merit; CA affirmed; Bitanga (alone; not
including his wife who is not a party to the compromise agreement) is
liable as per Compromise Agreement or the contract of guaranty.
NO. Under a contract of guarantee, the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so. The guarantor who pays for a debtor, in turn, must
be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of excussion
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latters
demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover the
amount of the debt
It must be stressed that despite having been served a demand letter at
his office, petitioner still failed to point out to the respondent properties
of Macrogen Realty sufficient to cover its debt as required under Article
2060 of the Civil Code. Such failure on petitioners part forecloses his
right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only
property of Macrogen Realty which he found was its deposit
of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes
petitioner from interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the Bitanga cannot be compelled to
pay Pyramid because the Macrogen Realty has allegedly sufficient
assets. Reason: The said [petitioner] had not genuinely controverted the
return made by Sheriff Bisnar, who affirmed that, after exerting diligent
efforts, he was not able to locate any property belonging to the
Macrogen Realty, except for a bank deposit with the Planters Bank at
Buendia, in the amount of P20,242.23. It is axiomatic that the liability of
the guarantor arises when the insolvency or inability of the debtor to
pay the amount of debt is proven by the return of the writ of execution
that had not been unsatisfied
(D) JN Devt. vs. Phil Export G.R. No. 151060 (Aug. 31, 2005)
NB: This case has 4 issues regarding guarantee.
Important Dates: Loan Dec. 13, 1979 Guarantee Dec. 17, 1979 Dec. 17,
1979 (1 year) TRB Demand Oct. 8, 1980 PhilGuarantee paid TRB Mar. 10,
1981
FACTS: On 13 December 1979 Traders Royal Bank (TRB) extend to JN
Development Corporation (JN) an Export Packing Credit Line for P2m.
The loan was covered by several securities, including a real estate
mortgage, and a letter of guarantee from respondent PhilGuarantee. JN
failed to pay the loan to TRB upon its maturity, thus, on 8 October 1980
TRB requested PhilGuarantee to make good its guarantee.
PhilGuarantee paid TRB P934,824.34 on 10 March 1981. Subsequently,
PhilGuarantee made several demands on JN, but the latter failed to pay.
JN, proposed to settle the obligation by way of development and sale
of the mortgaged property. PhilGuarantee thus filed a Complaint for
collection of money and damages against herein petitioners. RTC: held
that since PhilGuarantees guarantee was good for only one year from
17 December 1979 until 17 December 1980, and since it was not
renewed after the expiry of said period, PhilGuarantee had no more
legal duty to pay TRB on 10 March 1981.
ISSUE (1/4): Whether the date of default, not the actual date of
payment, determines the liability of the guarantor.
HELD: DATE OF DEFAULT determines the liability of the guarantor! The
guarantee was only up to 17 December 1980. JNs obligation with TRB
fell due on 30 June 1980, and demand on PhilGuarantee was made by
TRB on 08 October 1980. That payment was actually made only on 10
March 1981 does not take it out of the terms of the guarantee. What is
controlling is that default and demand on PhilGuarantee had taken
place while the guarantee was still in force.
ISSUE(2/4): Whether PhilGuarantee was correct in paying the guarantee,
without TRB exhausting the property of JN.
HELD: YES! PhilGuarantee was correct and may demand recovery of
what it has paid to TRB from JN. Excussion is a waivable right of a
guarantor. Under a contract of guarantee, the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so. The guarantor who pays for a debtor, in turn,
must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of excussion.
While a guarantor enjoys the benefit of excussion, nothing prevents him
from paying the obligation once demand is made on him. Excussion,
after all, is a right granted to him by law and as such he may opt to
make use of it or waive it. PhilGuarantees waiver of the right of
excussion cannot prevent it from demanding reimbursement from
petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.
ISSUE(3/4): Whether PhilGuarantees failure to give its express consent
to the alleged extensions granted by TRB to JN had extinguished the
guarantee.
HELD: NO! Right is waivable by guarantor. The requirement that the
guarantor should consent to any extension granted by the creditor to
the debtor under Art. 2079 is for the benefit of the guarantor and is
waivable. Indeed, a guarantor is not precluded from waiving his right to
be notified of or to give his consent to extensions obtained by the
debtor. Such waiver is not contrary to public policy as it is purely
personal and does not affect public interest. In the instant case,
PhilGuarantees waiver can be inferred from its actual payment to TRB
after the latters demand, despite JNs failure to pay the
renewal/guarantee fee as indicated in the guarantee.
ISSUE(4/4): Whether TRBs foreclosure of the real estate mortgage
executed as security for the loan agreement had extinguished
PhilGuarantees obligation; thus, PhilGuarantees recourse should be
directed against TRB, as per the pari-passu provision in the contract of
guarantee.
HELD: NO! It did not extinguish the obligation. Petitioners cannot
invoke the pari-passu clause in the guarantee, not being parties to the
said agreement. The clause is clearly for the benefit of the guarantor
and no other. The complaint a quo was filed by PhilGuarantee as
guarantor for JN, and its cause of action was premised on its payment
of JNs obligation after the latters default. PhilGuarantee was well within
its rights to demand reimbursement for such payment made, regardless
of whether the creditor, TRB, was subsequently able to obtain payment
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
from JN. If double payment was indeed made, then it is JN which should
go after TRB, and not PhilGuarantee. Petitioners have no one to blame
but themselves, having allowed the foreclosure of the property for the
full value of the loan despite knowledge of PhilGuarantees payment to
TRB. Having been aware of such payment, they should have opposed
the foreclosure, or at the very least, filed a supplemental pleading with
the trial court informing the same of the foreclosure sale.
(E) Prudential Bank vs. IAC G.R. No. 74886 (Dec. 8, 1992)
FACTS: MORA Defendant-appellant Philippine Rayon Mills, Inc. entered
into a contract with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a five-year deferred payment plan. To effect
payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company
in favor of Nissho. By virtue of said application, the Prudential Bank
opened Letter of Credit. Against this letter of credit, drafts were drawn
and issued by Nissho, which were all paid by the Prudential Bank. Upon
the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the
same. To enable the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the Prudential Bank,
a trust receipt which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company. At the back of the trust
receipt is a printed form to be accomplished by two sureties who, by the
very terms and conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail to pay the
total amount or any portion of the drafts issued by Nissho and paid for
by Prudential Bank.
The statement at the dorsal portion of the said trust receipt, which
petitioner describes as a "solidary guaranty clause", reads: In
consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and
undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said PRUDENTIAL BANK AND
TRUST COMPANY may call upon us to pay arising out of or pertaining
to, and/or in any event connected with the default of and/or non-
fulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL
BANK AND TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid: before making demand on me/us.
(Sgd.) Anacleto R. Chi Philippine Rayon Mills (defendant-appellant)
ceased operation. However, despite repeated formal demands, its
obligation arising from the letter of credit and trust receipt remain
unpaid. Hence the filing of an action for collection of a sum of money
against Philippine Rayon Mills and Anacleto Chi.
RTC: Dismissed the case as to Chi. Ordered Philippine Rayon Mills to pay
the amounts due. IAC: Affirmed the RTC in all respects. It held that Chi is
not liable on the trust receipt either as surety or as guarantor. This is
because his signature at the dorsal portion thereof was useless; and
even if he could be bound by such signature as a simple guarantor, he
cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay
until after petitioner has exhausted and resorted all legal remedies
against the principal debtor, Philippine Rayon Mills.
ISSUE: W/N Anacleto Chi is merely a simple guarantor; and if so has his
liability as such already attach?
W/N Anacleto Chi is solidarily liable with Philippine Rayon Mills?
Page 10 of 15
HELD: Chi is not solidarily liable with Philippine Rayon Mills. His
obligation is only that of a guarantor. The questioned solidary guaranty
clause yields no other conclusion than that the obligation of Chi is only
that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be
exhausted was not filled up. Under Article 2058 of the Civil Code, the
defense of exhaustion (excussion) may be raised by a guarantor before
he may be held liable for the obligation. Petitioner likewise admits that
the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves.
It does not refer to the undertaking between either one or both of them
on the one hand and the petitioner on the other with respect to the
liability described under the trust receipt. Elsewise stated, their liability is
not divisible as between them, i.e., it can be enforced to its full extent
against any one of them. Furthermore, any doubt as to the import, or
true intent of the solidary guaranty clause should be resolved against
the petitioner.
The trust receipt, together with the questioned solidary guaranty clause,
is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It
is, therefore, a contract of adhesion; as such, it must be strictly
construed against the party responsible for its preparation. The Court
disagrees with the IAC that solidary guaranty clause was effectively
disregarded simply because it was not signed and witnessed by two (2)
persons and acknowledged before a notary public. While indeed, the
clause ought to have been signed by two (2) guarantors, the fact that it
was only Chi who signed the same did not make his act an idle
ceremony or render the clause totally meaningless. By his signing, Chi
became the sole guarantor.
The attestation by witnesses and the acknowledgement before a notary
public are not required by law to make a party liable on the instrument.
The rule is that contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a contract be
in some form in order that it may be valid or enforceable, or that it be
proved in a certain way, that requirement is absolute and indispensable.
With respect to a guaranty, which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified. While the
acknowledgement of a surety before a notary public is required to make
the same a public document, under Article 1358 of the Civil Code, a
contract of guaranty does not have to appear in a public document.
Excussion is not a condition sine qua non for the institution of an action
against a guarantor. In Southern
Motors, Inc. vs. Barbosa, this Court stated: Although an ordinary
personal guarantor not a mortgagor or pledgor may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a
deferment of the execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to satisfy
the obligation involved in the case. Chi's liability is limited to the
principal obligation in the trust receipt plus all the accessories thereof
including judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to pay. Interest
and damages, being accessories of the principal obligation, should also
be paid; these, however, shall run only from the date of the filing of the
complaint. Attorney's fees may even be allowed in appropriate cases.
SC: Philippine Rayon Mills is principally liable on the 12 drafts and the
trust receipt. Anacleto Chi is secondarily liable on the trust receipt. The
Court ordered him to pay the face value thereof if the writ of execution
for the enforcement of judgment is returned unsatisfied.
(F) MIRA HERMANOS, INC. (Plaintiff-appellee)
Vs. MANILA TOBACCONISTS, INC., ET. AL. (Defendants) and
PROVIDENT INSURANCE CO. (Defendant-Appellant)
G.R. No. L-48979, September 29, 1943
THE CASE:
The case is a petition, which assails the decision of the Court of Appeals.
THE FACTS:
By virtue of a written contract entered into between plaintiff Mira
Hermanos, Inc. (Mira Hermanos) and defendant Manila Tobacconists,
Inc. (Tobacconists), with the following stipulations:
1) Mira Hermanos, Inc. agrees to deliver the latters
merchandise for sale on consignment under certain
specified terms.
2) Manila Tobacconists agree 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.
3) Mira Hermanos, Inc. requires the Manila Tobacconists, Inc.,
a bond of P3,000.00, which would be executed by a
bonding company to secure the fulfillment of the latters
obligation under the contract.
The following events thereafter transpired:
1) Manila Tobacconists, Inc, secured the said bond from
Provident Insurance Co.
2) In October 1940, the volume of the business of the
Tobacconists increased so that the merchandise received
by it on consignment from Mira Hermanos exceeded
P3,000.00 in value. Hence, the latter required the former to
post an additional bond of P2,000.00. This was secured by
the defendant Manila Compania de Seguros from Provident
Insurance.
3) 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. This
indebtedness was recognized by the Tobacconists but was
unable to pay the same.
4) Mira Hermanos made a demand upon the two surety
companies for the payment of said sum. Provident
Insurance 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 Compania de Seguros.
5) Manila Compania de Seguros refused to pay the balance. It
contended that so long as the liability of the Tobacconists
did not exceed P3,000.00, it was not bound to pay anything
because its bond referred only to the obligation of the
Tobacconists in excess of P3,000.00 and up to P5,000.00.
6) Hence, Mira Hermanos brought the present action against
the Manila Tobacconists, Inc,, Provident Insurance Co., and
Manila Compania 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 RULING OF THE TRIAL COURT:
The trial court ruled in favor of Manila Compania de Seguros.
Hence, plaintiff Mira Hermanos appealed the trial courts ruling before
the Court of Appeals.
THE RULING OF THE COURT OF APPEALS:
The CA affirmed the ruling of the trial court. Hence, Mira Hermanos
filed the present petition before the Supreme Court.
THE ISSUES:
1) Whether the bond of P2,000.00 given by the Manila
Compania de Seguros was limited to and responded for
the obligation of the Tobacconists only insofar as it
might exceeds the amount of P3,000.00 secured by the
bond of the Provident Insurance Co.
2) Whether or not Provident Insurance Co. is entitled to
the benefit of division provided in Article 1837 of the
Old Civil Code.
THE RULING OF THE SUPREME COURT:
The Supreme Court affirmed the judgment of the trial court, with
the only modification that it shall be entered against the
defendants Manila Tobacconists, Inc., and Provident Insurance Co.
jointly and severally. It ordered appellants to pay the costs of suit.
THE BASIS OF THE SUPREME COURT RULING:
REGARDING THE FIRST ISSUE: Whether the bond of P2,000.00
given by the Manila Compania de Seguros was limited to and
responded for the obligation of the Tobacconists only insofar as it
might exceeds the amount of P3,000.00 secured by the bond of the
Provident Insurance Co.
HELD: Yes. The bond of P2,000.00 given by the Manila Compania
de Seguros was limited to and responded for the obligation of the
Tobacconists only insofar as it might exceeds the amount of
P3,000.00 secured by the bond of the Provident Insurance Co.
1) The said 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 Compania de Seguros is no
longer raised before the Supreme Court. The issued had
already been resolved.
REGARDING THE SECOND ISSUE: Whether or not Provident
Insurance Co. is entitled to the benefit of division provided in
Article 1837 of the Old Civil Code.
HELD: No. Provident Insurance Co. is not entitled to the benefit of
division provided in Article 1837 of the Old Civil Code.
1) Article 1837 of the Old Civil Code refers to several sureties
of only one debtor for the same debt.
2) In the instant case , although the two bonds on their face
appear to guarantee the same debt co-extensively up to
P2,000.00 (that of the Provident Insurance Co. along
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
extending beyond that sum up to P3,000.00), it was
pleaded and conclusively proven that in reality, said bonds,
or the two sureties do not guarantee the same debt.
3) Provident Insurance Co. guarantees only the first P3,000.00
and the Manila Compania de Seguros, only the excess over
and above said amount up to P5,000.00. Article 1837 does
not apply to this factual situation.
(G) MANILA SURETY AND FIDELITY, INC. (Plaintiff-appellant)
Vs. BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN,
GONZALO P. AMBOY and ANDRES TUNAC (Defendants-appellees)
G.R. No. L-9353, May 21, 1957
THE CASE:
The case is a petition, which assails the decision of the trial court. The
latter rendered a decision, in which it ruled that any amount spent by
the Government in the continuation of the work, in excess of the
contract price, will be charged against the surety bond furnished by the
plaintiff.
THE FACTS:
Batu Construction & Company (Batu Construction), a partnership the
members of which are the other three defendants, requested to post a
surety bond for P8,812 in favor of the Government of the Philippines to
secure the faithful performance of the construction of the Bacarra
Bridge, Project PR-72 (3) in the Province of Ilocos Norte. The
Government and Batu Construction entered into a construction contract
on July 11, 1950.
Plaintiff Manila Surety and Fidelity, Inc. (Manila Surety) posted the said
bond, with the following agreements:
1) Defendants would indemnify Manila Surety for any
damage, loss, costs, or charges, or expenses, or attorneys
fees that the latter may sustain as a consequence of having
become surety upon the said bond.
2) The attorneys fees shall not be less that 15% of the total
amount claimed in any action which Manila Surety may
institute against the defendants.
3) Such indemnity shall be paid to Manila Surety as soon as it
has become liable for the payment of any amount.
On May 30, 1951, due to the unsatisfactory progress of the work of the
bridge, the Director of Public Works, with the approval of the Secretary
of Public Works and Communications, annulled the construction
contract referred to and notified the plaintiff Manila Surety that the
Government would hold it liable for any amount incurred for the
completion of the bridge, in excess of the contract price.
On December 19, 1951, Ricardo Fernandez and 105 other persons
brought an action in the trial court of Laoag, Ilocos Norte, against the
defendants/partners as well as Manila Surety for the collection of
unpaid wages amounting to P5,960.10. Manila Surety also filed a writ of
attachment on the properties of Batu Construction and the defendant-
partnership.
Defendant Andres Tunac contended that:
1) He has not put up an indemnity bond in favor of plaintiff
Manila Surety. He contended that he had never entered
into any indemnity agreement with the surety company
because the partnership or the Batu Construction was
Page 11 of 15
 fulfilling its obligations in accordance to the terms of the
construction contract.
2) The Republic of the Philippines had no authority to annul
the contact at its own initiative.
3) The trial court of Laoag, Ilocos Norte had no jurisdiction to
hear and decide the case because defendants were not in
imminent danger of insolvency.
4) The signing by defendant Carlos N. Baquiran of the
indemnity agreement for and in behalf of the partnership
Batu Construction did not bind the latter to the plaintiff as
the partnership is not bound.
5) Defendant Tunac is not also bound because he is not a
party to the said agreement.
6) The action brought by the construction workers was
maliciously filed against him in order to annoy him and
damage his professional reputation as an engineer in Ilocos
Norte.
7) The writ of attachment was not proper because he and the
construction partnership was not found to be insolvent.
8) He prays that the complaint be dismissed as to him and the
defendant Batu Construction, with costs against plaintiff.
The other defendants also held the same contentions.
THE RULING OF THE TRIAL COURT:
The trial court rendered a decision in favor of Batu Construction
and the partnership. It dismissed the complaint filed by Manila
Surety. Hence, the latter filed the present petition before the Supreme
Court.
THE ISSUES:
1) Whether the last paragraph of Article 2071 of the new
Civil Code taken from Article 1843 of the old Civil Code
may be availed of by a surety.
2) Whether Batu Construction and the partnership is liable
to pay Manila Surety.
THE RULING OF THE SUPREME COURT:
The Supreme Court reversed and set aside the decision of the trial
court of Laoag. It ordered that:
1) The case be remanded to the said court for determination
of the amount of security that would protect plaintiff
Manila Surety from any proceedings by the creditor or from
the danger of insolvency of the defendants.
2) The defendants put up such amount of security as may be
established by competent evidence, without
pronouncement as to costs.
THE BASIS OF THE SUPREME COURT RULING:
REGARDING THE FIRST ISSUE: Whether the last paragraph of
Article 2071 of the new Civil Code taken from Article 1843 of the
old Civil Code may be availed of by a surety.
HELD: Yes. The last paragraph of Article 2071 of the new Civil
Code taken from Article 1843 of the old Civil Code may be availed
of by a surety.
1) The contract entered into by Manila Surety and Batu
Construction is a surety, and not a guarantee. A surety is
an insurer of the debt, while a guarantor is the insurer of
the solvency of the debtor.
2) Plaintiffs cause of action does not fall under Paragraph 2 of
Article 2071 of the new Civil Code because there is not
proof of the defendants insolvency. The fact that the
contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency.
3) Such cause of action does not also fall under Paragraph 3
of Article 2071 of the new Civil Code because the
defendants have not bound themselves to relieve the
plaintiff from the guaranty within a specified period which
already has expired. It is by the reason that the surety
bond does not fix any period of time and the indemnity
agreement stipulates one year extendible or renewable
until the bond be completely cancelled by the person or
entity in whose behalf the bond was executed or by a Court
of competent jurisdiction.
REGARDING THE SECOND ISSUE: Whether Batu Construction and
the partnership is liable to pay Manila Surety.
HELD: Yes. Batu Construction and the partnership is liable to pay
Manila Surety.
1) Plaintiffs cause of action comes under Paragraph 1 of
Article 2071 of the new Civil Code because the action
brought by Ricardo Fernandez and 105 persons in the
Court of Laoag, is in connection with the Bacarra Bridge.
2) In Paragraph 1 of Article 2071 of the new Civil Code
provides that the guarantor of surety be sued for payment
of an amount for which the surety bond was put up to
secure the fulfillment of the obligation undertaken by the
principal debtor.
3) The suit for the payment of the unpaid wages is a suit for
the payment of an amount for which the surety bond was
put up or posted to secure the faithful performance of the
obligation undertaken by the principal debtors (the
defendants) in favor or the creditor, the Government of the
Philippines.
TUASON, TUASON, INC. (Plaintiff-appellee)
Vs. (H) TUASON, TUASON, INC. (Plaintiff-appellee)
Vs. ANTONIO MACHUCA (Defendant-appellant)
G.R. No. L-22177, December 2, 1924
THE CASE:
The case is a petition which assails the decision of the trial court, which
ordered respondent Antonio Machuca a sum of money to plaintiff
Tuason, Tuason and Company.
THE FACTS:
The Universal Trading Company imported sundry goods, which were
deposited in the customhouse of the Insular Custom, and consigned
through the Bank of the Philippine Islands. In order that it be allowed to
withdraw such goods, the former executed a bond in the sum of
P9,663.00 by Manila Compania de Seguros.
Subsequently, the Bank of the Philippine Islands claimed the value of
the goods, and the Insular Collector of Customs obligated Manila
Compania de Seguros to pay the sum of P9,663, the amount of the
bond. Before paying this amount to the Insular Collector of Customs,
the Manila Compania de Seguros obtained from the Universal Trading
Company and Tuason, Tuason & Co., a solidary note for the sum of
P9,663 executed by said companies in its favor.
Before signing the note, plaintiff Tuason, Tuason & Co., in turn, cause
the Universal Trading Company and its president Antonio Machuca,
personally, to sign a document (Exhibit B), wherein they bound
themselves solidarily liable to pay, reimburse, and refund to the
company all such sums or amounts of money as it, or its representative,
may pay or become bound to pay, upon its obligation with manila
Compania de Seguros, whether or not it shall have actually paid such
sum or sums or any part thereof.
The Universal Trading Company was declared insolvent. Hence, Manila
Compania de Seguros brought an action in the lower court against
Tuason, Tuason & Co. to recover the value of the naote for P9,9,663. It
obtained final judgment therein, which was affirmed by the Supreme
Court on appeal, for the total sum of P12,197.27, which includes the
value of the note with interest therein.
In the present case, Tuason, Tuason, Inc. brought this action to recover
from Antonion Machuca the following amounts, totaling P15,353.19:
1) The sum of P12,197.27 which it was sentence to pay in the
case filed against it by Manila Compania de Seguros.
2) Attorneys fees amounting to P3,000.00
3) Courts costs and sheriffs fees amounting to P155
4) Interest in the sum of P1,180.46
5) Interest on the sum of P15,535.65
6) Interest on the sum of P16,535.65 at the rate of 10% per
annum
THE RULING OF THE LOWER COURT:
The lower court rendered judgment against defendant Antonio
Machuca. It ordered that defendant pay the above describe sum of
money totaling P15,353.19. Hence, defendant appealed the ruling of
the lower court before the Supreme Court.
THE ISSUES:
1) Whether or not the document executed by Albina
Tuason in favor or Manila Compania de Seguros
(assuming and making hers the obligation of Tuason,
Tuason & Co.) was a novation of the contract by
substitution of the debtor, and would relieve Tuason,
Tuason & Co. from all obligations in favor of Manila
Compania de Seguros.
2) Whether the plaintiff has the right to recover of the
defendant the sum of P9,663, the value of the note
executed by the plaintiff in favor of Manila Compania
de Seguros, which the plaintiff is under obligatioin to
pay by virtue of final judgment.
THE RULING OF THE SUPREME COURT:
The Supreme Court modified the rulling of the lower court. It
ordered that:
1) The defendant be liable to pay the plaintiff the sum of
P9,663, with interest thereon at the rate of 10 percent per
annum from July 19, 1923, when the complaint was filed
until full payment thereof.
2) The defendant also be liable to pay the sume of P1,653.65
for attorneys fees, without special pronouncement as to
costs.
THE BASIS OF THE SUPREME COURT RULING:
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
REGARDING THE FIRST ISSUE: Whether or not the document executed
by Albina Tuason in favor or Manila Compania de Seguros (assuming
and making hers the obligation of Tuason, Tuason & Co.) was a
novation of the contract by substitution of the debtor, and would relieve
Tuason, Tuason & Co. from all obligations in favor of Manila Compania
de Seguros.
HELD: No. The document executed by Albina Tuason in favor or
Manila Compania de Seguros (assuming and making hers the obligation
of Tuason, Tuason & Co.) was not a novation of the contract by
substitution of the debtor, and would not relieve Tuason, Tuason & Co.
from all obligations in favor of Manila Compania de Seguros.
1) Manila Compania de Seguros accepted the document only
as an additional security for its credit and not as a novation
of the contract.
2) In the document Albina Tuason declares that she assumes
and makes hers the obligation to pay the amount of said
judgment to Manila Compania de Seguros within one year
and mortgages a property described in the document as
security for this obligation.
3) The action brought by the plaintiff is that which surety, who
pays the debt of the debtor, is entitled to bring to recover
the amount thus paid.
REGARDING THE SECOND ISSUE: Whether the plaintiff has the right
to recover of the defendant the sum of P9,663, the value of the note
executed by the plaintiff in favor of Manila Compania de Seguros, which
the plaintiff is under obligation to pay by virtue of final judgment.
HELD: Yes. The plaintiff has the right to recover of the defendant the
sum of P9,663, the value of the note executed by the plaintiff in favor of
Manila Compania de Seguros, which the plaintiff is under obligation to
pay by virtue of final judgment.
However, defendant is not liable to pay the plaintiff the expenses
incurred by it in the litigation between it and Manila Compania de
Seguros. That litigation was originated by the plaintiff having failed to
fulfil its obligation with Manila Compania de Seguros, and it cannot
charge the defendant with expenses which it was compelled to make by
reason of its own fault.
(I) KUENZLE AND STREIFF (Plaintiff-appellant)
Vs. JOSE TAN SUNCO ET AL (Defendants-Appellees)
G.R. No. L-5208, December 1, 1909
THE CASE:
The case is an action to set aside four judgments rendered by a justice
of the peace of the City of Manila upon the ground that they were
procured by collusion and fraud, to the injury and damage of the
plaintiff.
THE FACTS:
1) Respondent Tan Sunco was a surety for Chung Chu Sing for
the payment by the latter of the purchase price of certain
merchandise purchased by the latter and A. Keller and Co.
2) The time within which said merchandise was to be paid for
under the terms of the purchase had expired long before
said four judgments were obtained from the court. The
debt remained unpaid.
3) The total debt was composed of four invoices of varying
amounts P395.50, P450, P565, and P320.20.
Page 12 of 15
 4) An action had been commenced against the said debtor,
Chung Chu Sing, by the present plaintiff for the recovery of
the indebtedness due it.
5) Shortly before judgment was secured in that action, the
said Tan Sunco began four separate actions against the
said debtor upon the said invoices in the court of the
justice of the peace of the City of Manila.
6) Soon thereafter, Tan Sunco and the said debtor appeared
before the court, and the debtor then and there confessed
judgment in favor of said Tan Sunco in each one of said
actions.
7) Tan Sunco obtained against the debtor four separate
judgments, and that immediately upon the recovery of said
judgments, the plaintiff Sunco caused to be levied
thereunder executions upon all the property of the said
debtor.
8) The latters properties were not sufficient to pay the
judgments under which the levies were made.
9) The action at bar was commenced and the sales under said
executions were enjoined pending the determination
thereof.
THE CONTENTION OF THE PLAINTIFF:
1) The said four judgments ought to be set wholly aside on
account of their having been obtained, as he claims, by
collusion and fraud, because the debtor did not owe
anything to Sunco at the time the four judgments were
secured.
2) Sunco had not yet paid the sums for which he had become
surety and in connection with which he obtained the
judgments.
THE ISSUES:
1) Whether or not there was collusion or fraud committed
by the principal debtor or the surety.
2) Whether or not Sunco (the surety) had the right to
defend himself against any proceedings of the creditor
and from the danger of insolvency of the debtor.
3) Whether or not Sunco has the right to execute the
judgments against the property of the principal debtor
prior to paying the obligation as surety.
THE RULING OF THE SUPREME COURT:
The Supreme Court affirmed the judgment of the lower court. It
ordered that:
1) The appellant Kuenzle and Streiff pay the costs of suit.
2) Sunco be prevented from executing said judgments against
the property of the judgment debtor until he has paid the
debt for which he stands surety.
THE BASIS OF THE SUPREME COURT RULING:
REGARDING THE FIRST ISSUE: Whether or not there was collusion
or fraud committed by the principal debtor or by the surety.
HELD: No. There was no collusion or fraud committed by the
principal debtor. The defendant Sunco availed himself of the right
to enforce the action against the debtor.
1) The methods employed by Sunco to realize his end were
unusual but not of themselves fraudulent.
2) The evidence adduced by plaintiff is entirely insufficient to
establish such fraud and collusion as would justify a
decision setting aside the judgment assailed.
REGARDING THE SECOND ISSUE: Whether or not Sunco (the
surety) had the right to defend himself against any proceedings of
the creditor and from the danger of insolvency of the debtor.
HELD: Yes. Sunco (the surety) had the right to defend himself
against any proceedings of the creditor and from the danger of
insolvency of the debtor.
1) Article 1838 of the old Civil Code provides for the
enforcement of the right of the surety against the debtor
after he has paid the debts.
2) Article 1843 also provides for his protection before he has
$250,000.00, and US $2,000,000.00.
paid but after he has become liable to do so. The one gives
a right of action after payment, the other a protective
remedy before payment.
REGARDING THE THIRD ISSUE: Whether or not Sunco has the right
to execute the judgments against the property of the principal
debtor prior to paying the obligation as surety.
HELD: No. Sunco does not have the right to execute the
judgments against the property of the principal debtor prior to
paying the obligation as surety.
1) While the surety has the right to obtain as he did the
judgments against the principal debtor, he ought not to be
allowed to realize said judgments to the point of actual
collection of the same until he has satisfied or cause to be
satisfied the obligation the payment of which he assumes.
2) This limitation is to prevent a great opportunity for
collusion and improper practices between the surety and
his principal would be offered, which might result to the
injury and prejudice of the creditor who holds the claim
against them.
(J).TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF
THE PHILIPPINES (Petitioner)
Vs. ASIA PACES CORPORATION, ET. AL (Respondents)
G.R. No. 187403, February 12, 2014
THE CASE:
The case is a petition for review on certiorari, which assails the Decision
and Resolution of the Court of Appeals. The CA upheld the ruling of the
Regional Trial Court of Makati in favor of respondents Philippine
Phoenix Surety and Insurance, Inc. and others.
THE FACTS:
On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and
Paces Industrial Corporation (PICO) entered into a sub-contracting
agreement with the Electrical Projects Company of Libya (ELPCO) as
main contractor, for the construction and erection of a double circuit
bundle phase conductor transmission line in the country of Libya.
To finance its working capital requirements, ASPAC obtained loans from
foreign banks Banque Indosuez and PCI Capital (Hongkong) Limited
(PCI Capital) which, upon the latters request, were secured by several
Letters of Guarantee issued by petitioner Trade and Investment
Development Corporation of the Philippines (TIDCORP).
Then Philippine Export and Foreign Loan Guarantee Corporation, a
government owned and controlled corporation created for the
following purposes:
1) Among others, guaranteeing with prior concurrence of the
Monetary Board, subject to the rules and regulations that
the Monetary Board may prescribe.
2) Approve foreign loans, in whole or in part, granted to any
entity, enterprise or corporation organized or licensed to
engage in business in the Philippines.
Under the Letters of Guarantee, the TIDCORP irrevocably and
unconditionally guaranteed full payment of ASPACs loan obligations to
Banque Indosuez and PCI Capital in the event of default by the latter.
The three (3) letters of guarantee amounted to US $250,000.00, US
ASPAC, PICO, and ASPACs
President, respondent Nicolas Balderrama executed several Deeds of
Undertaking, binding themselves to jointly and severally pay TIDCORP
for whatever damages or liabilities it may incur under the
aforementioned Letters of Guarantee.
On the other hand, ASPAC entered into surety agreements with
bonding companies Paramount, Phoenix, Mega Pacific and Fortune.
There were three (3) surety bonds amounting to P2,752,000.00,
P1,845,000.00, P1,849,000.00, P11,970,000.00, and P5,030,000.00.
ASPAC defaulted on its loan obligations to Banque Indosuez and PCI
Capital, prompting them to demand payment from TIDCORP under the
Letters of Guarantee. The demand letter of Banque Indosuez was sent
to TIDCORP. The latter, in turn, demanded payment from Paramount,
Phoenix, Mega Pacific, and Fortune under the Surety Bonds. However,
this was done to no avail.
The Government of the Republic of the Philippines, specifically the
Minister of Finance, requested the members of the international
banking community to grant government financial institutions such as
TIDCORP, a 90-day roll over from their foreign debts beginning October
17, 1983. Hence, TIDCORP and various creditor banks such as Banque
Indosuez and PCI Capital, forged a Restructuring Agreement, extending
the maturity dates of the Letters of Guarantee. However, the bonding
companies did not give their consent to the payment extensions.
TIDCORP fully settled its obligations under the Letters of Guarantee, and
filed a collection case against ASPAC, PICO, and Balderrama on accounts
of their obligations under the Deeds of Undertaking and the bonding
companies on account of their obligations under the Surety Bonds.
THE RULIING OF THE TRIAL COURT:
The RTC partially granted TIDCORPs complaint and ruled that:
1) ASPAC, PICO, and Balderrama be held jointly and severally
liable to TIDCROP in the sum of P277,891,359.66 pursuant
to the Deeds of Undertaking.
2) The bonding companies Paramount, Phoenix, Mega Pacific,
and Fortune be absolved from liabilities on the ground that
the moratorium request and the consequent payment
extensions granted in TIDCORPs favor was made without
their consent. Such absence of consent extinguished their
obligations under the Surety Bonds.
Aggrieved on the RTCs ruling in absolving the bonding companies from
liabilities, TIDCORP filed an appeal before the Court of Appeals.
Balderrama also filed a separate appeal.
THE RULING OF THE COURT OF APPEALS:
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
The CA affirmed the ruling of the RTC. It ruled that:
1) The moratorium request had the effect of an extension
granted to a debtor, which extension was without the
consent of the guarantor, and thus released the surety
companies from their respective liabilities under the issued
surety bonds under Article 2079 of the Civil Code.
2) Regarding the appeal of Balderrama, he is liable with
ASPAC and PICO to pay TIDCORP the attorneys fees.
TIDCORP and Balderrama filed separate motions for reconsideration,
which were denied by the CA. Hence, the both petitioner TIDCORP and
respondent Balderrama filed the present petition before the Supreme
Court.
THE MAIN ISSUE: Whether or not the bonding companies liabilities to
TIDCORP under the Surety Bonds have been extinguished by the
payment extensions granted by Banque Indosuez and PCI Capital to
TIDCORP under the Restructuring Agreement.
THE RULING OF THE SUPREME COURT:
The Supreme Court granted the petition. It ordered that:
1) The Decision and Resolution of the Court of Appeals be
modified.
2) Respondents Philippine Phoenix Surety and Insurance, Inc.,
Mega Pacific Insurance Corporation, Fortune Life and
General Insurance Company be obliged to fulfill their
respective obligations to petitioner TIDCOR under the
Surety Bonds.
3) The obligations arising from the Surety Bonds issued by
Paramount Insurance Corporation and covered by its
Compromise Agreement with TIDCORP be discounted.
THE BASIS OF THE SUPREME COURT RULING:
REGARDING THE MAIN ISSUE: Whether or not the bonding
companies liabilities to TIDCORP under the Surety Bonds have been
extinguished by the payment extensions granted by Banque Indosuez
and PCI Capital to TIDCORP under the Restructuring Agreement.
HELD: No. The bonding companies liabilities to TIDCORP under the
Surety Bonds have not been extinguished by the payment extensions
granted by Banque Indosuez and PCI Capital to TIDCORP under the
Restructuring Agreement.
REASONS:
1) A payment extension, in Article 2079 of the Civil Code,
refers to a payment extension granted by the creditor
to the principal debtor without the consent of the
guarantor or surety.
In this case, the Surety Bonds are surety
contracts which secure the debt of ASPAC, the
principal debtor, under the Deeds of Bonds
are suretyship contracts which secure the
debts of ASPAC, the principal debtor under
the Deeds of Undertaking to pay TIDCORP
(the creditor), the damages and liabilities it
may incur under the Letters of Guarantee,
within the bounds of the bonds respective
coverage reports and amounts.
No payment extension was, however, granted
by TIDCORP in favor of ASPAC in this regard.
Page 13 of 15
 Hence, Article 2079 of the Civil Code should
not be applied with respect to the bonding
companies liabilities to TIDCORP under the
Surety Bonds.
2) The payment extensions granted by Banque Indosuez
and PCI Capital pertain to TIDCORPs own debt under
the Letters of Guarantee wherein TIDCORP irrevocably
and unconditionally guaranteed full payment of
ASPACs loan obligations to the banks in the event of
ASPACs default.
The Letters of Guarantee secured ASPACs loan
agreements to the banks. Therefore, TIDCORP
acted as a guarantor, with ASPAC as the
principal debtor, and the banks as creditors.
III. EXTINGUISHMENT
A.STRONGHOLD INSURANCE COMPANY, INC., vs. REPUBLIC-ASAHI
GLASS CORPORATION
G.R. No. 147561 June 22, 2006
Facts: Republic-Asahi entered with Jose Santos Jr., proprietor of JDS
Construction, for the construction of roadways and drainage system,
which was supposed to be completed within a period of 240 days. In
order to guarantee the faithful and satisfactory performance of its
undertakings JDS post a performance bond of P795,000.00 with
Petitioner Stronghold Insurance Co., Inc. (SICI). Respondent called the
attention of JDS to the alleged alarmingly slow pace of the construction,
which resulted in the fear that the construction will not be finished
within the stipulated period. However, such was unheeded by JDS.
Dissatisfied with the progress of the work, Republic-Asahi extrajudicially
rescinded the contract, but such rescission shall not be construed as a
waiver of respondents right to recover damages from JDS and latters
sureties. Thus, because of the failure to comply with the provisions of
the contract, it had to hire another contractor to finish the project, for
which it incurred additional expenses. Thereafter, respondent sent a
letter to petitioner SICI filing its claim under the bond. Respondent then
sent again another letter reiterating the same demand but was
unheeded. This prompted respondent to file a complaint against JDS
and SICI for payment representing additional expenses and damages.
According to the Sheriffs Return, summons were duly served on SICI,
however, Jose Santos Jr. died the previous year, and JDS was no longer
at its address, and such whereabouts were unknown. SICI filed its
answer, alleging that the respondents money claims have been
extinguished by the death of Santos. Even if this were not the case, it
had been released from liability under the performance bond because
there was no liquidation, with the active participation and involvement,
pursuant to procedural due process, of herein surety and Santos, hence
there was no ascertainment of the corresponding liabilities of Santos
and SICI under the performance bond. Thus, such liquidation would be
impossible since Santos is already dead. The complaint against JDS and
SICI was dismissed on the ground that the claim against JDS did not
survive the death of Santos. On Motion for Reconsideration, the
dismissal of the case was reconsidered and the case was reinstated,
however, the case against Santos remains undisturbed. On appeal, the
Court of Appeals ruled that SICIs obligation under the surety
agreement was not extinguished by the death of Santos. Consequently
Respondent could still go after SICI for the bond. Hence, this petition.
Issue: Whether or not the claims against SICI was extinguished from the
death of Santos
Held: As a general rule, the death of either the creditor or the debtor
does not extinguish the obligation. Obligations are transmissible to the
heirs, except when the transmission is prevented by the law, the
stipulations of the parties, or the nature of the obligation. Only
obligations that are personal10 or are identified with the persons
themselves are extinguished by death.
Section 5 of Rule 8612 of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the estate
of a deceased debtor. Evidently, those claims are not actually
extinguished. What is extinguished is only the obligees action or suit
filed before the court, which is not then acting as a probate court.
In the present case, whatever monetary liabilities or obligations Santos
had under his contracts with respondent were not intransmissible by
their nature, by stipulation, or by provision of law. Hence, his death did
not result in the extinguishment of those obligations or liabilities, which
merely passed on to his estate. Death is not a defense that he or his
estate can set up to wipe out the obligations under the performance
bond. Consequently, petitioner as surety cannot use his death to escape
its monetary obligation under its performance bond.
B. SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs. SOLID
BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION,
KENNETH NG LI and MA. VICTORIA NG LI, respondents
NATURE: Petition for review on certiorari under Rule 45 [Originally
Special Civil Action but party requested to convert it to petition for review]
SUMMARY: Spouses Toh executed a continuing guaranty in favor of Solid
Bank for the credit facility with certain conditions granted by the bank to
First Business Paper Corporation. Spouses Li, who are also with the
spouses Toh under the guaranty, ran away without paying the loan of
FBPC. Solid Bank then tried to proceed against Toh. Toh said that they
were only signing in capacity as stockholders and did not intend to
guaranty after being removed as Chairman of the Board(Luis) and Vice
President (Vicky). Also, they alleged that they were just asked to sign
blank pieces of paper. The lower court found that spouses Toh should not
be held liable but CA reversed and found them to have voluntarily
entered into the guaranty. The SC upheld the finding of CA but absolved
the spouses because of the acts of Solid Bank in extending the credit
beyond the conditions set forth in the original contract. According to
them, to hold Tohs liable would be injustice since Solid Bank clearly
extended the credit line without even exercising diligence and following
the terms of the contract.
DOCTRINE:
Any doubt on the terms and conditions of the surety agreement
should be resolved in favor of the surety.
Art 2055 The liability of a surety is measured by the terms of his
contract, and while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by its terms.
Art 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty.
If the suretyship contract was made upon the condition that the
principal shall furnish the creditor additional security, and the
security being furnished under these conditions is afterwards
released by the creditor, the surety is wholly discharged, without
regard to the value of the securities released, for such a transaction
amounts to an alteration of the main contract.
FACTS:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND
an omnibus line credit facility worth P10 million in favor of
respondent First Business Paper Corporation (FBPC). The terms
and conditions of the agreement as well as the checklist of
documents necessary to open the credit line were stipulated in a
letter-advise
o One of the requirements was a continuing guaranty
signed by spouses Li [President and GM] and Toh
[Chairman and VP]
It is not disputed that the credit facility as well as its terms and
conditions was not cancelled or terminated, and that there was no
prior notice of such fact as required in the letter-advise if any was
done.
A continuing guaranty was signed 30 days after the letter advise
o The terms of the instrument defined the contract
arising therefrom as a surety agreement and
provided for the solidary liability of the signatories
thereto for and in consideration of loans or
advances and credit in any other manner to, or at
the request or for the account of FBPC.
o The Continuing Guaranty set forth no maximum limit
on the indebtedness that respondent FBPC may incur
and for which the sureties may be liable, stating that
the credit facility covers any and all existing
indebtedness of, and such other loans and credit
facilities which may hereafter be granted to FIRST
BUSINESS PAPER CORPORATION.
o The surety also contained a de facto acceleration
clause if default be made in the payment of any of
the instruments, indebtedness, or other obligation
guaranteed by petitioners and respondents.
o So as to strengthen this security, the Continuing
Guaranty waived rights of the sureties against delay
or absence of notice or demand on the part of
respondent Bank, and gave future consent to the
Banks action to extend or change the time
payment, and/or the manner, place or terms of
payment,
The effectivity of the Continuing Guaranty was not contingent
upon any event or cause other than the written revocation
thereof with notice to the Bank that may be executed by the
sureties.
FBPC opened thirteen (13) letters of credit and obtained loans
totaling P15,227,510.00. As the letters of credit were secured,
FBPC through its officers Kenneth Ng Li, Ma. Victoria Ng Li and
Redentor Padilla as signatories executed a series of trust receipts
over the goods allegedly purchased from the proceeds.
6 months after (Jan 1994), bank received information that
Spouses Li had fraudulently departed from their conjugal home.
The bank then served a demand letter upon FBPC and spouses
Toh invoking the acceleration clause and demanded to be paid
within 24 hours
On 17 January 1994 respondent Bank filed a complaint for sum of
money with ex parte application for a writ of preliminary
attachment against FBPC, spouses Kennet Ng Li and Ma. Victoria
Ng Li, and spouses Luis Toh and Vicky Tan Toh
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
Meanwhile, with the implementation of the writ of preliminary
attachment resulting in the impounding of purported properties
of FBPC, the trial court was deluged with third-party claims
contesting the propriety of the attachment. In the end, the Bank
relinquished possession of all the attached properties to the
third-party claimants except for 2 insignificant items as it could
barely cope with the yearly premiums on the attachment bonds.
Tohs allegations
o They were part of incorporation and Luis Toh had
been one of the signatories for checking account
with Solid Bank.
o They were asked to sign papers in blank and the
continuing guaranty could have been one of them
o It was impossible for them to have freely and
consciously executed the surety in May when they
have already divested their shares in March 1993.
Also, Luis was removed as authorized 2 days after the
surety.
o They also resigned in June of that year and obtained
from Li their exclusion from several surety
agreements with various banks (supported by
evidence)
Trial Court: FBPC liable but spouses Toh not liable because they
did not voluntarily execute the surety
CA: Liable because there is not showing that they did not
voluntarily and freely executed the surety.
o The Court of Appeals ratiocinated that the provisions
of the surety agreement did not indicate that
Spouses Luis and Vicky Toh x x x signed the
instrument in their capacities as Chairman of the
Board and Vice-President, respectively, of FBPC
only. Hence, the court a quo deduced, [a]bsent
any such indication, it was error for the trial court to
have presumed that the appellees indeed signed the
same not in their personal capacities.
o There was also no written revocation so the Guaranty
remained in full force and effect
ISSUE # 1: Whether or not Spouses Toh were bound by the surety
(Court said that it should have been yes, but later on decided NO)
RATIO # 1:
This Court holds that the Continuing Guaranty is a valid and
binding contract of petitioner-spouses as it is a public document
that enjoys the presumption of authenticity and due execution.
We are bound by the consistent finding of the courts a quo that
petitioner- spouses Luis Toh and Vicky Tan Toh voluntarily
affixed their signature[s] on the surety agreement and were thus
at some given point in time willing to be liable under those
forms
Similarly, there is no basis for petitioners to limit their
responsibility thereon so long as they were corporate officers and
stockholders of FBPC. Nothing in the Continuing Guaranty
restricts their contractual undertaking to such condition or
eventuality.
Verily, if petitioners intended not to be charged as sureties after
their withdrawal from FBPC, they could have simply terminated
the agreement by serving the required notice of revocation upon
the bank as expressly allowed therein.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the
surety agreement they signed so must we also hold respondent
Bank to its representations in the letter- advise of 16 May
1993. Particularly, as to the extension of the due dates of the
letters of credit, we cannot exclude from the Continuing Guaranty
Page 14 of 15
 the preconditions of the Bank that were plainly stipulated in the
letter-advise.
o Fairness and justice dictate our doing so, for the bank
itself liberally applies the provisions of cognate
agreements whenever convenient to enforce its
contractual rights, such as, when it harnessed a
provision in the trust receipts executed by
respondent FBPC to declare its entire indebtedness
as due and demandable and thereafter to exact
payment thereof from petitioners as sureties
o We cannot disregard the provisions of the letter
advise in sizing up the panoply of commercial
obligations between the parties.
The stipulations violated:
o Domestic letters of credit be supported by fifteen
percent (15%) marginal deposit extendible three (3)
times for a period of thirty (30) days for each
extension, subject to twenty-five percent (25%)
partial payment per extension.
An extension of the period for enforcing the indebtedness does
not by itself bring about the discharge of the sureties unless the
extra time is not permitted within the terms of the waiver
o Under Art. 2055 of the Civil Code, the liability of a
surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by its
terms.
It is admitted in the Complaint of respondent Bank before the trial
court that several letters of credit were irrevocably extended for
ninety (90) days with alarmingly flawed and inadequate
considerationthe indispensable marginal deposit of fifteen
percent (15%) and the twenty- five percent (25%) prerequisite for
each extension of thirty (30) days. It bears stressing that the
requisite marginal deposit and security for every thirty (30)-day
extension specified in the letter-advise were not set aside or
abrogated nor was there any prior notice of such fact, if any was
done.
o These irregular extensions were candidly admitted by
Victor Ruben L. Tuazon, an account officer and
manager of respondent Bank
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver stipulated
in the Continuing Guaranty. Evidently, they constitute illicit
extensions prohibited under Art. 2079
o An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes
the guaranty
This act of the Bank is not mere failure or delay on its part to
demand payment after the debt has become due, as was the case
in unpaid five (5) letters of credit which the Bank did not extend,
defer or put off, but comprises conscious, separate and binding
agreements to extend the due date, as was admitted by the Bank
itself
As a result of these illicit extensions, petitioner-spouses Luis Toh
and Vicky Tan Toh are relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate
against the enforcement of the Continuing Guaranty against the
accommodation sureties. Firstly, the guaranty was executed more
than thirty (30) days from the original acceptance period as
required in the letter-advise.Thereafter, barely two (2) days after
the Continuing Guaranty was signed, corporate agents of FBPC
were replaced on 12 May 1993 and other adjustments in the
corporate structure of FBPC ensued in the month of June 1993,
which the Bank did not investigate although such were made
known to it.
By the same token, there is no explanation on record for the utter
worthlessness of the trust receipts in favor of the Bank when
these documents ought to have added more security to the
indebtedness of FBPC.
o Bank security officer saw 2 delivery vans coming out of
the compound which took the last supplies.
The consequence of these omissions is to discharge
the surety, petitioners herein, under Art. 2080 of the
Civil Code, or at the very least, mitigate the liability
of the surety up to the value of the property or lien
released
If the creditor x x x has acquired a lien
upon the property of a principal, the
creditor at once becomes charged with
the duty of retaining such security, or
maintaining such lien in the interest of
the surety, and any release or
impairment of this security as a
primary resource for the payment of a
debt, will discharge the surety to the
extent of the value of the property or
lien released x x x x [for] there
immediately arises a trust relation
between the parties, and the creditor
as trustee is bound to account to the
surety for the value of the security in
his hands
For the same reason, the grace period granted by respondent
Bank represents unceremonious abandonment and forfeiture of
the fifteen percent (15%) marginal deposit and the twenty-five
percent (25%) partial payment as fixed in the letter-advise.
These payments are unmistakably additional securities intended
to protect both respondent Bank and the sureties in the event
that the principal debtor FBPC becomes insolvent during the
extension period.
o For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its
unauthorized extensions to pay granted to FBPC,
petitioner-spouses Luis Toh and Vicky Tan Toh are
discharged as sureties under the Continuing
Guaranty.
Finally, the foregoing omission or negligence of respondent Bank
in failing to safe-keep the security provided by the marginal
deposit and the twenty-five percent (25%) requirement results in
the material alteration of the principal contract, i.e., the letter-
advise, and consequently releases the surety
o As has been said, if the suretyship contract was
made upon the condition that the principal shall
furnish the creditor additional security, and the
security being furnished under these conditions is
afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of the
securities released, for such a transaction amounts to
an alteration of the main contract.
DISPOSITION: Reversed and Set Aside CA decision. Reinstated Trial
Court decision.
C. PHILIPPINE NATIONAL BANK vs. MANILA SURETY and FIDELITY
CO., INC. and THE COURT OF APPEALS
July 30, 1965
Summary: ATACO constituted PNB as its assignee and attorney-in-fact
to receive and collect from the Bureau of Public Works the amount to
pay for the asphalt delivered to it under a trust receipt guaranteed by
Manila Surety. PNB was able to regularly collect. However, due to
unexplained reasons, PNB was not able to collect until the investigators
found out that more money were payable to ATACO from BPW. The
latter allowed another creditor to collect funds due to ATACO under the
same purchase order. Court ruled that PNB was negligent in having
stopped collecting from BPW before ATACOs debt is fully collected,
thereby allowing funds to be taken by other creditors to the prejudice
of the surety.
Doctrine: Extinguishment of liability of surety: ART. 2080. The
guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be
subrogated to the rights, mortgages and preferences of the latter.
FACTS:
PNB had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount,
2,000 tons worth P279,000.00 were released and delivered to Adams &
Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. u
To pay for the asphalt, ATACO constituted the Bank its
assignee and attorney-in-fact to receive and collect from
the Bureau of Public Works (Bureau) the amount out of
funds payable to the assignor under Purchase Order No.
71947. The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said
credit accommodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby
appointed as our Attorney-in-Fact for us and in our
name, place and stead, to collect and to receive the
payments to be made by virtue of the aforesaid
Purchase Order, with full power and authority to
execute and deliver on our behalf, receipt for all
payments made to it; to endorse for deposit or
encashment checks, money order and treasury
warrants which said Bank may receive, and to apply
said payments to the settlement of said credit
accommodation.
3. This power of attorney shall also remain irrevocable
until our total indebtedness to the said Bank have
been fully liquidated.
ATACO delivered to the Bureau, and the latter accepted,
asphalt to the total value of P431,466.52. Of this amount
the Bank regularly collected. Thereafter, for unexplained
reasons, the Bank ceased to collect, until its investigators
found that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed mother
creditor to collect funds due to ATACO under the same
purchase order. Its demands on the principal debtor and
the Surety having been refused, the Bank sued both to
recover the balance plus interests and costs.
TC: Ordered Manila Surety to pay PNB the balance. Manila
Surety appealed.
CA: The Bank to have been negligent in having stopped
collecting from the Bureau the moneys falling due in favor
of the principal debtor, ATACO, before the debt was fully
CRED TRANS digests GUARANTY & SURETYSHIP (Art 2047-2084)
collected, thereby allowing such funds to be taken and
exhausted by other creditors to the prejudice of the surety,
and held that the Bank's negligence resulted in exoneration
of Manila Surety
Bank contends the power of attorney obtained from
ATACO was merely in additional security in its favor, and
that it was the duty of the surety, and not that of the
creditor, to see to it that the obligor fulfills his obligation,
and that the creditor owed the surety no duty of active
diligence to collect any, sum from the principal debtor.
WON Manila Suretys obligation as surety has already been
extinguished pursuant to Art. 2080. YES.
CA did not hold the Bank answerable for negligence in
failing to collect from the principal debtor but for its neglect
in collecting the sums due to the debtor from the Bureau,
contrary to its duty as holder of an exclusive and
irrevocable power of attorney to make such collections,
since an agent is required to act with the care of a good
father of a family and becomes liable for the damages
which the principal may suffer through his non-
performance
Certainly, the Bank could not expect that the Bank would
diligently perform its duty under its power of attorney, but
because they could not have collected from the Bureau
even if they had attempted to do so. It must not be
forgotten that the Bank's power to collect was expressly
made irrevocable, so that the Bureau could very well refuse
to make payments to the principal debtor itself, and
a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional
security still, by allowing the assigned funds to be
exhausted without notifying the surety, the Bank deprived
the former of any possibility of recoursing against that
security. The Bank thereby exonerated the surety, pursuant
to Article 2080.
The appellant points out to its letter of demand addressed
to the Bureau and its letter to ATACO informing the debtor
of its outstanding balance. SUch has no bearing on the
issue whether the Bank has exercised due diligence in
collecting from the Bureau since the letter was addressed
to ATACO, and the funds were to come from elsewhere.
As to the letter of demand on the Public Works office, it
does not appear that any reply thereto was made; nor that
the demand was pressed, nor that the debtor or the surety
were ever apprised that payment was not being made. The
fact remains that because of the Bank's inactivity the other
creditors were enabled to collect P173,870.31, when the
balance due to Bank was only P158,563.18. The finding of
negligence is thus not only conclusive on us but fully
supported by the evidence.
Even if the CA erred on the second reason it advanced in
support of the decision now under appeal, because the
rules on application of payments, giving preference to
secured obligations are only operative in cases where there
are several distinct debts, and not where there is only one
that is partially secured, the error is of no importance, since
the principal reason based on the Bank's negligence
furnishes adequate support to the decision of the CA that
the surety was thereby released.
DISPOSITIVE: WHEREFORE, the appealed decision is affirmed, with
costs against appellant Philippine National Bank.
Page 15 of 15