Credit Transactions - Pre-Finals

CREDIT TRANSACTIONS REVIEWER 1
Espina.Millian.Niemes.Omolon.Salva.SIngco
CONTRACTS OF SECURITY
I. Basis and Rationale

Security is something given, deposited or serving as a means to ensure the fulfillment or enforcement of an obligation
or of protecting some interest or property.
II. Kinds of Security Contracts

A. Of personal security
Unsecured transactions or contracts of personal security - supported only by a promise
1. Guaranty
A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the principal
debtor in case the latter fail to do so.
2. Suretyship
A contract whereby a person binds himself solidarily with the principal debtor.
The reference in Art. 2047 to solidary obligations does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty. A surety is almost the same as a solidary debtor, except that he
himself is a principal debtor.
Characteristics of Guaranty and Suretyship:

a. Accessory - It is indispensable condition for its existence that there must be a principal obligation.
b. The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be
reduced to the limits of that of the debtor
c. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.
d. Unilateral - may be entered even w/o the intervention of the principal debtor and it gives rise only to a duty on the
part of the guarantor in relation to the creditor and not vice versa.
e. Nominate
f. Consensual
g. It is a contract between the guarantor/surety and creditor.
a. With respect to the creditor, no such requirement is needed because he binds himself to nothing. However,
when there is merely an offer of a guaranty, or merely a conditional guaranty, in the sense that it requires
action by the creditor before the obligation becomes fixed, it does not become binding until it is accepted
and notice of such acceptance by the creditor is given to the guarantor. But in any case, the creditor is not
precluded from waiving the requirement of notice. The consideration of the guaranty is the same as the
consideration of the principal obligation.
b. Not presumed. It must be expressed and reduced in writing.
c. Falls under the Statute of Frauds since it is a “special promise to answer for the debt, default or
miscarriage of another”.
d. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended
beyond its terms or specified limits. The rule of strictissimi juris commonly pertains to an accommodation
surety because the latter should be protected against unjust pecuniary impoverishment by imposing on
the principal, duties akin to those of a fiduciary.
Case: Nature of undertaking denominated “Guarantor’s Undertaking” agreeing to be bound jointly and severally
PACIFIC BANKING CORPORATION vs IAC
Facts:
Celia Syjuco Regala, applied for and obtained from the plaintiff the issuance and use of Pacificard credit card, under the Terms and Conditions
Governing the Issuance and Use of Pacificard, a copy of which was issued to and received by the said defendant on the date of the application and expressly
agreed that the use of the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appelant Robert Regala, Jr., spouse of
defendant Celia Regala, executed a "Guarantor's Undertaking" in favor of the appellee Bank, whereby the latter agreed "jointly and severally of Celia Aurora
Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia
Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation". It was also agreed that "any
changes of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us from responsibility hereunder, it being understood that I fully agree to such charges, novation or
extension, and that this understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid.
Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and/or services by Pacificard holders
and the cost thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder, and the latter undertook to pay any statements of
account rendered by the plaintiff-appellee for the advances thus made within thirty (30) days from the date of the statement, provided that any overdue account
shall earn interest at the rate of 14% per annum from date of default.
Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit under her Pacificard, for which the plaintiff advanced the cost
amounting to P92,803.98 at the time of the filing of the complaint. In view of defendant Celia Regala's failure to settle her account for the purchases made thru
the use of the Pacificard, a written demand was sent to the latter and also to the defendant Roberto Regala, Jr. under his "Guarantor's Undertaking."
Issue:
Whether or not the undertaking was a contract of Guaranty or a Suretyship.
SC Ruling:
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As
distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound
himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." This
undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala.
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. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent
of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with
the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of
Celia Regala have been fully paid.

Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of
the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future
debts of the principal debtor the amount of which is not yet known.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the
principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The
nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship.
Case: Nature of “Continuing Guaranty” obligating as surety

E ZOBEL INC vs CA
Facts:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated Bank
and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to finance the purchase of
two (2) maritime barges and one tugboat which would be used in their molasses business. The loan was granted subject to the condition that respondent
spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty were executed.
Respondents defaulted in the payment of the entire obligation upon maturity. SOLIDBANK filed a complaint for sum of money with a prayer for a writ
of preliminary attachment, against respondents spouses and petitioner. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of
the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel
mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending
that Article 2080 is not applicable because petitioner is not a guarantor but a surety.
Issue:
Whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.
SC Ruling:
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay
the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may be
distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other
hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of
the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his
contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually
not liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if
the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a
"Continuing Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as " surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of
legal age, married and with business address x x x (hereinafter called the Borrower), for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any time or from time to time hereafter, to make loans or
advances or to extend credit in any other manner to, or at the request or for the account of the Borrower, either with or without purchase or
discount, or to make any loans or advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness x x upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise,
the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or upon demand, to you
of any and all such instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and
all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with
any and all expenses which may be incurred by you in collecting all or any such instruments or other indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights hereunder, and also to make or cause any and all such payments to be made strictly in accordance
with the terms and provisions of any agreement (g), express or implied, which has (have) been or may hereafter be made or entered into by
the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in effect which might in any manner affect any
of the terms or provisions of any such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; x x x "
(Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word "guarantee" is
frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation. As
aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no application to the case at bar. In
Bicol Savings and Loan Association vs. Guinhawa , we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor. But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the obligation.
In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even released
SOLIDBANK from any fault or negligence that may impair the contract.
Case: Guaranty as actually suretyship; distinction between the two

MACHETTI vs HOSPICIO DE SAN JOSE
Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila 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 P128,800.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments
were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08,
was paid. 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 answered the complaint and presented a counterclaim for damages for
the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. Machetti, on petition of his creditors, was later declared
insolvent and an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.
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 granted and the Hospicio filed a complaint against
the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty.
As will be seen, the original action 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.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language
and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an
undertaking of guaranty, as distinguished from suretyship. 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 appear affirmatively that
the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and
that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All
of these circumstances are distinguishing features of contracts of guaranty.
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.
The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay
until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's
inability to pay is not determined until the final liquidation of his estate.
B. Of real security
Secured transactions or contracts of real security - supported by a collateral or an encumbrance of property
1. Pledge
A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing
incorporeal rights for the purpose of securing fulfilment of a principal obligation with the understanding that when
the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.
2. Real Estate Mortgage

A contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to
such security immovable property or real rights over immovable property in case the principal obligation is not
complied with at the time stipulated.
3. Chattel Mortgage
A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the
performance of an obligation.
4. Antichresis
A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the
obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.
III. Causa
The causa of guaranty is the same causa that supports the principal obligation.
TITLE XV – GUARANTY
CHAPTER 1
Nature and Extent of Guaranty
Articles 2047-2048
I. Concept
Characteristic features:
A. Subsidiary
-It takes effect only when the principal debtor fails in his obligation subject to limitation.
Case: Difference between guarantor and surety; effect where guarantor is sued first before the principal debtor
CASTELLVI vs. SELLNER
Facts:
The basis of plaintiff's action is a letter written by defendant Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, of the following tenor:
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the 29th day of May, 1915
by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your favor and due six months after date for Pesos 10,000 is not
fully paid at maturity with interest, 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.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Issue:
Whether or not the defendant Sellner is a surety or a guarantor.
SC Ruling:
Sellner is a guarantor.
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.
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person binds himself to pay or
perform for a third person in case the latter should fail to do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section
fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract
of guaranty, while what is last provided is practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the
title concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of
guaranty between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law
relationship existing between codebtors liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the fiador whose responsibility is
fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and
upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by
the same instrument executed at the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral
agreement, Neither is Sellner jointly and severally liable with the principal debtors.
Case: Liability where company president signed as guarantor

PICZON vs. PICZON
Facts:
The actionable document of appellants which is the basis of this case reads:
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.
(Sgd.) ESTEBAN PICZON
Issue:
Whether or not Esteban Piczon is a guarantor or a surety.
SC Ruling:
Under the terms of the contract, 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."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express assumption of liability by Sosing-Lobos &
Co., Inc. for the payment of the obligation in question, thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of
the agreement, Piczon necessarily must have bound himself as insurer.
a. Solidary guarantor does not lose his character as such vis-à-vis the debtor
PALMARES vs. CA
Facts:
Pursuant to a promissory note, private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on
September 26, 1991.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained.
On the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
Issue:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the
payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of
the debtor?
SC Ruling:
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; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds
himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay,
but simply that he is able to do so. In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of
suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of
respondent corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed
against herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit
by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the
principal.
The stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of
petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her
liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be
principally considered. Several attendant factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about
the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew
that she was directly and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. This can only be construed to mean
that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of
petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start,
petitioner considered herself equally bound by the contract of the principal makers.
A surety is bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from the beginning. This is because
in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal. In essence, the contract of a surety starts with
the agreement.
Solidary Guarantor vs. Solidary Debtor
Solidary Guarantor Solidary Debtor

May recover the entire payment from the debtor (2066) Can recover only the co-debtor’s share
Released by extension of the period Not released by extension
Has action for counter-bond and reimbursement, besides No action except for contribution
subrogation
His obligation is accessory Bound under a principal obligation
B. Consensual
C. Gratuitous or Onerous
a. Gratuitous - the guarantor does not receive any price or remuneration for acting as such (2048).
b. Onerous - the guarantor receives valuable consideration for his guaranty.
Case: Dismissal of complaint by virtue of compromise agreement where payment of balance was guaranteed
SEVERINO vs. SEVERINO
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident of Occidental Negros. Upon the death
of Melecio Severino a number of years ago, he left considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on
the one part, and other heirs of the deceased on the other part. In order to make an end of this litigation a compromise was effected by which Guillermo
Severino, a son of Melecio Severino, took over the property pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in cash upon the execution of the document of compromise, and the
balance in three several payments of P20,000 at the end of one year; two years, and three years respectively. To this contract the appellant Enrique Echaus
affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of
P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had not yet been judicially recognized as
the natural daughter of Melecio Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should retained on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be established. The judicial
decree to this effect was entered in the Court of First Instance of Occidental Negros on June 16, 1925, and as the money which was contemplated to be held in
suspense has never in fact been paid to the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth noting in this
decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit
and that in effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties
thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas Villanueva and
Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to pay the
sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his principal. But the true consideration of this contract
was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the
principal or his guarantor.
Article 2049-2057
I. KINDS
A. By its origin
CONVENTIONAL- constituted by contract
LEGAL- required by substantive or procedural law
JUDICIAL- required by a court from a litigant
B. By its extent
INDEFINITE or UNLIMITED or SIMPLE- cover the principal obligation, accessories and cost incurred after the guarantor
has been judicially asked to pay.
 If the guaranty is given without the knowledge or consent of the debtor, Articles 1236 and 1237 apply.
A guarantor can recover from the debtor what the former had to pay the creditor, even if the guaranty
was without the debtor’s consent or against his will, but the recovery will only be to the extent that the debtor
had been benefited.
LIMITED- excluding accessory obligation
Case: Suit to recover from principal debtor who did not consent to the guaranty
DE GUZMAN VS. SANTOS
Facts:
A mercantile partnership, Phil-Am Constructions Co., with Toole, Abad and Santos as co-partners, was formed with P10,000 of its capital secured by
way of a loan from Paulino Candelaria. The partnership and the co-partnership bound themselves solidarily to pay said indebtedness. Having violated the
conditions of the contract, Candelaria filed an action against PACC and the co-partners for the recovery of the loan. Candelaria obtained a writ of attachment
against the co-partners by virtue of which the sheriif attached the co-partnership properties. No property of the PACC was attached. To discharge the
attachment, PACC as principal and Santiago Lucero and Meliton Carlos as guarantors executed a bond in favor of Candelaria. Defendant Santos neither
intervened nor signed individually in the bond. Attachment was discharged and attached properties were returned to their owners.
Trial court rendered judgment ordering the co-partners to pay the judgment creditor the amount of the loan. Writ of execution having been returned
unsatisfied, said writ was issued against the guarantors upon the motion of Candelaria. Lucero and Carlos, as guarantors, paid P5,000 plus. Plaintiff de Guzman
as, in her capacity as judicial administrator of the estate of the deceased Lucero, sought to recover from Santos what the estate had paid to Candelaria from
defendant. Trial court decided for plaintiff. Defendant Santos appealed contending that he is not liable because he neither applied for nor intervened in the bond
any capacity.
Issue:
Whether or not Santos is legally bound to pay what the plaintiff had advanced to Candelaria even if it was given without his knowledge.
SC Ruling:
Under Article 1822 of the Civil Code, by guaranty one person binds himself to pay or perform for a third person in case the latter should failed to do
so, and Article 1838 of the Civil Code provides that any guarantor who pays for the debtor shall be indemnified by the latter even if the guaranty have been
undertaken without the debtor’s knowledge. Applying the citedprovisions, it is obvious that Santos is legally bound to pay the plaintiff what he has advanced to
Candelaria upon judgment, notwithstanding the fact that the bond was given without his knowledge.
Defendant’s obligation to pay what the plaintiff had advanced is further sanctioned by the general provisions of the Civil Code regarding obligations.
Article 1158 of the Civil Code provides that the payment made by any person whether he has an interest in the performance of the obligation or not, and whether
the payment is known and approved by the debtor or whether he is unaware of it, may be recovered from said debtor.
Any person who makes a payment for the account of another may recover from the debtor the amount payment, unless it was made against the
express will of the latter. In the latter case, he can only recover from the debtor in so far as the payment has been beneficial to the latter. According to this legal
provision, it is evident that the defendant is bound to pay to the plaintiff what the latter had advanced to Candelaria, and this is more so because it appears that
although Lucero executed the bond without his, knowledge, nevertheless he did not object thereto or repudiate the same at any time.
And it cannot be logically deduced that the defendant did not have knowledge of the bond, firstly, because his properties were attached and
attachment could not have been levied without his knowledge, and secondly, because said properties were returned to him and in receiving them he was
necessarily apprised of the fact that a bond had been filed to discharge the attachment. Judgment affirmed.
C. By the person guaranteed

 Guaranty proper
 Sub-guaranty (to guarantee the guarantor’s solvency)
 Counter-guarantee (in favor of the guarantor)
D. By the liability of the guarantor

NORMAL or ORDINARY- simple guarantee; guarantee proper; subsidiary
SOLIDARY- suretyship
A guarantor is the insurer of the solvency of the debtor; binds himself to pay if the principal is unable to pay.
A surety is the insurer of the debt; he undertakes to pay if the principal does not pay.
Cases:
Romulo Machetti, vs. Hospicio De San Jose and Fidelity & Surety Company Of The Philippine Islands
Facts:
It appears from the evidence that 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 P128,800 and the following endorsement in appears upon the contract:
For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.
FIDELITY AND 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 and, as the work progressed, payments
were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08,
was paid. 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 answered the complaint and presented a counterclaim for damages for
the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was declared insolvent and an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law,
Act No. 1956.
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 granted and the Hospicio filed a complaint against
the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. The CFI rendered judgment against the Fidelity and
Surety Company for P12,800 in accordance with the complaint. As will be seen, the original action 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.
Issue:
Whether or not Fidelity and Surety Company’s liability is that of a surety or guarantor?
SC Ruling:
In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. 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 undertaking 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. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay
until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's
inability to pay is not determined until the final liquidation of his estate. The judgment appealed from is therefore reversed without costs and without prejudice to
such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti.
OoO
PNB VS. LUZON SURETY Co., INC.
Facts:
Defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling company, Inc. applied for a crop loan with the plaintiff,
Philippine National Bank, which application was approved on March 6, 1952 in the amount of P32,400. Villarosa executed a Chattel Mortgage on standing crop
to guaranty the crop loan.
As of September 27, 1953 as shown in the accounts, there was a balance of P63,222.78 but as of the date when the complaint was filed on June 8,
1960, because of the interest accrued, it has reached a much higher sum. Due to its non-payment, plaintiff filed this complaint which sought reliefnot only
against the planter but also against the 3 bondsmen, Luzon Surety, Central surety and Associated surety.
Issue:
Whether or not the CA was justified in absolving Luzon Surety Co., Inc. from liability to petitioner PNB.
SC Ruling:
The surety bond executed by and between the PNB on one hand and Augusto Villarosa and respondent Luzon Surety Company, Inc., on theother is
hereby reproduced, viz:
“That we Augusto Villarosa, as principal and Luzon Surety Company, Inc., as surety, are held and firmly bound unto Philippine National Bank,
Bacolod City , Philippines, in the sum of P10,000,for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns jointly and severally, firmly by these presents:”
The foregoing evidences clearly the liability of Luzon Surety to petitioner PNB not merely as a guarantor but as a surety-liable as a regular party to
the undertaking.
A surety bond filed for the release of the seized importations during the pendency of the case guarantees not the legality of the importation but
merely the payment of the appraised value of the goods released. The surety has no right to question the legality of the seizure and certain CB circulars.
The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would increase its liability to more than P10,000
which is the maximum if its bond. We cannot agree to this reasoning. In the case of Tawaga vs. Aldanes, Plaridel Surety Insurance Co. vs. P.L Galang
Machinery Co., it was held:
“If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than that in the principal
obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. It should be noted, however,
that the interest runs from the time the complaint is filed, not from the time the debt becomes due and demandable.”
OoO
ONG vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK
Facts:
Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-
spouses Alfredo and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial International Bank or E-PCIB) filed a
case for collection of a sum of money against petitioners-spouses. The complaint alleged that in 1991, BMC needed additional capital for its business and applied
for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3)
promissory notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand
payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMC’s insolvency, or if it is declared to
be in a state of suspension of payments. Respondent bank granted BMC’s loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after
its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from
petitioners-spouses as sureties. On October 13, 1992, a Memorandum of Agreement (MOA) was executed by debtor BMC, the petitioners-spouses as President
and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC
on November 27, 1992.
Thereafter, petitioners-spouses moved to dismiss the complaint. They argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the
debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMC’s sureties in their contracts of loan with respondent bank.
Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed against them.
Spouses Ong’s Contention:

Petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who
acted only as sureties for some of BMC’s debts, would be compelled to make the payment. They add that compelling them to pay is contrary to Article 2063 of
the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly,
petitioners rely on Article 2081 of the Civil Code which provides that: "the guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those which are purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set up
the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise be allowed to avail of
these defenses.
SC Ruling:
We find no merit in petitioners’ contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions refer to contracts of
guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMC’s debts. There is a sea of difference in the
rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A
contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of
the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a
suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the
surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable
to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as
an original promissor and debtor from the beginning.
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with
the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos ( P5,000,000.00). Under Article 1216 of the Civil
Code, respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of
payment and filing of collection suits against BMC. Respondent bank’s right to collect payment from the surety exists independently of its right to proceed directly
against the principal debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor.
OoO
INTERNATIONAL FINANCE CORPORATION VS. IMPERIAL TEXTILE MILLS, INC.
Facts:
On December 17, 1974, International Finance Corporation (IFC) and Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in 16 semi-annual installments of US$437,500.00 with interest at the rate of 10%.
On December 17, 1974, a ‘Guarantee Agreement’ was executed where Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
(Grandtex) agreed to guarantee PPIC’s obligations.
PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and December 1,
1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted.
With PPIC’s failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real properties owned by PPIC at
Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders during the
auction sale. IFC’s bid was for P99,269,100.00 which was equivalent to US$5,250,000.00. The outstanding loan, however, amounted to US$8,083,967.00 thus
leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC,
the outstanding balance remained unpaid.
IFC filed a complaint with the RTC Manila which held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to pay IFC its
claimed attorney’s fees. However, the TC relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFC’s complaint against ITM. CA reversed
the decision stating ITM as guarantor.
Issue:
Whether or not ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.
SC Ruling:
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was “jointly and severally” liable. To put emphasis on
the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety.
When qualified by the term “jointly and severally,” the use of the word “guarantor” to refer to a “surety” does not violate the law. As Article 2047
provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- “as primary obligor
and not merely as surety” -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law
characterizes as a suretyship.
Indubitably therefore, ITM bound itself to be solidarily liable with PPIC. ITM thereby brought itself to the level of PPIC and could not be deemed
merely secondarily liable. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.
We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to
name ITM as a primary obligor and that ITM’s undertaking was collateral to and distinct from the Loan Agreement. The Court stresses that a suretyship is merely
an accessory or a collateral to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary
and absolute; or equivalent to that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without
possessing a direct or personal interest in the obligations constituted by the latter.
With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. Evidently, the dispositive portion
of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.
WHEREFORE, Petition is GRANTED, and MODIFIED that ITM, is declared a surety and ORDERED to pay International Finance Corporation the same
amounts adjudged against PPIC.
II. Elements of Guaranty

A. Parties
a. Qualifications of Guarantor: (legal capacity is required)
 If proposed by the debtor, the guarantor must possess the following qualifications:
i. He must be capable of contracting obligations
*includes married woman
ii. He must have sufficient property to answer for the debt guaranteed.
*the insolvency of the guarantor entitles the creditor to demand another guarantor, unless the
insolvent guarantor was chosen by the creditor
iii. He must possess integrity (honesty):
Conviction of the guarantor of a crime involving dishonesty has the same effect as insolvency
*Integrity is a matter of opinion and is required only at the time of the perfection of the contract.
Its subsequent disappearance makes it optional in the creditor to demand another guarantor
 If chosen by the creditor, the latter may waive all the requirements other than the legal capacity to contract.
 Consent (of the guarantor) is required
Case: Rule where there is merely an offer of guaranty

TEXAS CO. VS. ALONZO
Facts:
Leonor Bantug was sued for her agency contract with Texas Co. where Texas Co. filed a collection case against her and Alonso. It appears that to
ensure faithful compliance of Bantug’s obligations as agent to Texas.Co , Alonso bound herself solidarily to answer for Bantug’s liability up to P2000 bond
evidenced in a document. Bantug failed in the performance of her obligations and declared in default. Alonso averred that he merely acted as co-security of one
Palanca and that no acceptance was made by Texas, Co of the bond thus not binding on him. It was shown that the execution of the bond was requested by
Texas, Co. by virtue of the Additional Security clause in the agency contract:
Additional Security. — The Agent shall whenever requested by the Company in addition to the guaranty herewith provided, furnish further
guaranty or bond, conditioned upon the Agent's faithful performance of this contract, in such individuals of firms as joint and several sureties as shall
be satisfactory to the Company.
Trial court ordered Bantug and Alonso liable in solidum. CA reversed trial court’s findings holding Alonso absolved of the guaranty undertaking.
Issue:
Whether or not there is acceptance by creditor Texas Co to bind guarantor of the undertaking.
SC Ruling:
No acceptance. Though requested by creditor of the execution of the bond, from the foregoing Additional security clause it is apparent that before a
bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be satisfactory hereto. Hence, must be approved by
creditor Texas. A request for bond is not inference of approval thereto.
Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor
before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is
given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty.
The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. Where, upon the other hand, the
transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the
guaranty, all that is necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary, the reason being
that the contract of guaranty is unilateral. Appealed decision affirmed.
Case: Effect of principal has not paid the premium

PHIL. PRYCE ASSURANCE CORP. VS. CA
Facts:
Phil. Pryce Assurance Corp. (Pryce for brevity) was sued by Gegroco, Inc. for the two surety bonds Pryce executed in behalf of its principal Sagum
General Merchandise. Pryce averred in its defense that the checks ( of Sagum General Mechandise) which were to pay for the premiums bounced and were
dishonored hence there is no contract to speak of. Trial Court rendered judgement in favour of Gegroco and against Pryce.
Issue:
Whether or not the bond accepted by creditor Gegroco is valid and enforceable against the surety, although the premium has not been paid by debtor Sagum to
surety Pryce
SC Ruling:
Irrespective of payment or non-payment of the premium for the bond executed by surety accepted by creditor, such bond is enforceable against such
surety.
The Insurance Code states that:
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . .
B. Subject Matter and Conditions

a. Debts that may be guaranteed:
The principal obligation must be valid as guaranty cannot exist without a valid obligation.
1. So, when the principal obligation was not perfected the guaranty is void.
2. But, voidable, unenforceable or natural obligations may be guaranteed.
*hence, loans to emancipated minors are susceptible of guaranty.
b. Future Debts of unknown amount may be guaranteed; but there can be no action against the guarantor until the
debt is liquidated.
Case: Debts may be guaranteed

MUNICIPALITY OF GASAN VS. MARASIGAN
SC Ruling:
The fishing privilege contract entered into by the plaintiff Municipality and the appellant Marasigan on December 11, 1930, not only was
consummated but was cancelled. This being so, neither Marasigan nor his sureties or the other appellants were bound to comply with the terms of their
respective contracts of fishing privilege and suretyship. This is so, particularly with respect to sureties-appellants, because suretyship cannot exist without a valid
obligation, the obligation arising from a cancelled contract not being a valid obligation.
Case: When debt is considered liquidated

Selegna Management and Development Corporation vs. UCPB
Facts:
Petitioners Selegna Management and Development Corporation and Spouses Edgardo and Zenaida Angeles were granted a credit facility in the
amount of P70 million by United Coconut Planters Bank. As security for this credit facility, petitioners executed real estate mortgages over several parcels of land
and over several condominium units. Petitioners were likewise required to execute a promissory note in favor of respondent every time they availed of the credit
facility. As required in these notes, they paid the interest in monthly amortizations. The parties stipulated in their Credit Agreement dated that failure to pay "any
availment of the accommodation or interest, or any sum due" shall constitute an event of default, which shall consequently allow respondent bank to "declare [as
immediately due and payable] all outstanding availments of the accommodation together with accrued interest and any other sum payable."
In need of further business capital, petitioners obtained from UCPB an increase in their credit facility.For this purpose, they executed a Promissory
Note for P103,909,710.82, which was to mature on March 26, 1999. In the same note, they agreed to an interest rate of 21.75 percent per annum, payable by
monthly amortizations.
Respondent later sent petitioners a formal demand letter, and decided to invoke the acceleration provision in their Credit Agreement. Respondent sent
another letter of demand and a final demand on petitioners "to settle in full past due obligation to [UCPB] within five days from receipt of letter." In response,
petitioners paid respondent the amount of P10,199,473.96 as partial payment of the accrued interests. Apparently unsatisfied, UCPB applied for extrajudicial
foreclosure of petitioners’ mortgaged properties.
When petitioners received the Notice of Extra Judicial Foreclosure Sale on May 18, 1999, they requested UCPB to give them a period of sixty (60)
days to update their accrued interest charges; and to restructure or, in the alternative, to negotiate for a takeout of their account. On May 25, 1999, the Bank
denied petitioners’ request. In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999, petitioners filed a Complaint for "Damages, Annulment
of Interest, Penalty Increase and Accounting with Prayer for Temporary Restraining Order/Preliminary Injunction."
Issue:
Whether or not petitioners were in default, and whether petitioner’s debt were considered liquidated
SC Ruling:
It is a settled rule of law that foreclosure is proper when the debtors are in default of the payment of their obligation. In fact, the parties stipulated in
their credit agreements, mortgage contracts and promissory notes that respondent was authorized to foreclose on the mortgages, in case of a default by
petitioners.
Mora solvendi, or debtor’s default, is defined as a delay in the fulfillment of an obligation, by reason of a cause imputable to the debtor. There are
three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; third, the creditor
judicially or extrajudicially requires the debtor’s performance.
The Promissory Note expressly states that petitioners had an obligation to pay monthly interest on the principal obligation. From respondent’s demand
letter, it is clear and undisputed by petitioners that they failed to meet those monthly payments since May 30, 1998. Their nonpayment is defined as an "event of
default" in the parties’ Credit Agreement. Considering that the contract is the law between the parties, respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable. That clause obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by
respondent. UCPB had every right to apply for extrajudicial foreclosure on the basis of petitioners’ undisputed and continuing default.
Petitioners’ Debt Considered Liquidated Despite the Alleged Lack of Accounting

Petitioners do not even attempt to deny the aforementioned matters. They assert, though, that they have a right to a detailed accounting before they
can be declared in default. As regards the three requisites of default, they say that the first requisite -- liquidated debt -- is absent. Continuing with foreclosure on
the basis of an unliquidated obligation allegedly violates their right to due process. They also maintain that their partial payment of P10 million averted the
maturity of their obligation.
A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of the relevant promissory notes and
related documentation. Failure to furnish a debtor a detailed statement of account does not ipso facto result in an unliquidated obligation.
Petitioners executed a Promissory Note, in which they stated that their principal obligation was in the amount of P103,909,710.82, subject to an interest rate of
21.75 percent per annum. Pursuant to the parties’ Credit Agreement, petitioners likewise know that any delay in the payment of the principal obligation will
subject them to a penalty charge of one percent per month, computed from the due date until the obligation is paid in full.
It is in fact clear from the agreement of the parties that when the payment is accelerated due to an event of default, the penalty charge shall be based on the
total principal amount outstanding, to be computed from the date of acceleration until the obligation is paid in full. Their Credit Agreement even provides for the
application of payments. It appears from the agreements that the amount of total obligation is known or, at the very least, determinable.
Moreover, when they made their partial payment, petitioners did not question the principal, interest or penalties demanded from them. They only
sought additional time to update their interest payments or to negotiate a possible restructuring of their account. Hence, there is no basis for their allegation that
a statement of account was necessary for them to know their obligation.
To be sure, their partial payment did not extinguish the obligation. The Civil Code states that a debt is not paid "unless the thing x x x in which the obligation
consists has been completely delivered x x x." Besides, a late partial payment could not have possibly forestalled a long-expired maturity date. The only possible
legal relevance of the partial payment was to evidence the mortgagee’s amenability to granting the mortgagor a grace period. Because the partial payment would
constitute a waiver of the mortgagee’s vested right to foreclose, the grant of a grace period cannot be casually assumed; the bank’s agreement must be clearly
shown. Without a doubt, no express agreement was entered into by the parties. When creditors receive partial payment, they are not ipso facto deemed to have
abandoned their prior demand for full payment. Article 1235 of the Civil Code provides:
"When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete performance of their obligation, their acceptance must be made under circumstances
that indicate their intention to consider the performance complete and to renounce their claim arising from the defect. There are no circumstances that would
indicate a renunciation of the right of respondent to foreclose the mortgaged properties extrajudicially, on the basis of petitioners’ continuing default. On the
contrary, it asserted its right by filing an application for extrajudicial foreclosure after receiving the partial payment. Clearly, it did not intend to give petitioners
more time to meet their obligation.
Case: Comprehensive Surety Agreement to over existing and future debts

RCBC VS. ARRO
Facts:
In October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreement to guaranty among others, any existing
indebtedness of Davao Agricultural Industries Corporation (DAICOR), and/or to induce the bank at anytime or from time to time thereafter, to make loans or
advances, or to extend credit in any other matter to, or at the request, or for the account of DAICOR, provided that the liability shall not exceed at any one time
the aggregate principal sum of P100,000.00.
On May 29, 1977 a promissory note in the amount of P100,000.00 was issued in favor of petitioner bank payable on June 13, 1977. Said note was
signed by Enrique Go, Sr. in his personal capacity and in behalf of DIACOR. The promissory note was not fully paid despite repeated demands. Hence, petitioner
bank filed a complaint for a sum of money against DIACOR, Enrique Go, Sr. and Residoro Chua. A motion to dismiss was filed by Chua on the ground that the
complaint states no cause of action against him as he cannot be held liable under the promissory note because he did not sign the same.
The respondent court rendered decision granting Chua’s motion to dismiss. Petitioner bank filed a motion for reconsideration which respondent court
denied.
Issue:
Whether or not private respondent Chua is liable to pay the obligation evidenced by the promissory note which he did not sign.
SC Ruling:
The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., president and general manager, respectively of
DIACOR to cover existing as well as future obligations which DIACOR may incur with the petitioner bank, subject only to the proviso that their liability shall not
exceed at any one time the aggregate principal sum of P100,000.00.
The agreement was obviously executed to induce petitioner to grant any application for a loan DIACOR may desire to obtain from petitioner bank.
The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination. At the time the loan of P100,000.00 was
obtained from petitioner bank by DIACOR, the comprehensive surety agreement was admittedly in full force and effect. The loan was therefore covered by the
said agreement, and private respondent Chua, even if he did not sign the promissory note is liable by virtue of the surety agreement. By the terms of the
agreement, it can be clearly seen that the surety agreement was executed to guarantee future debts which DIACOR may incur with the petitioner bank, as is
legally allowed under the Civil Code.
Wherefore, the decision dismissing the complaint is reversed and set aside. The case is remanded to the court of origin.
Case: When guaranty is construed as continuing

DIñO VS. CA
Facts:
In 1977, Uy Tiam Enterprises and Freight Services, thru its representative Uy Tiam, applied for and obtained credit accommodations from
METROBANK in the sum of P700,000.00 To secure the aforementioned credit accommodations, Norberto Uy and Jacinto Uy Diño executed separate Continuing
Suretyships in favor of the latter. Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1979. It was applied for and obtained by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did
not sign the document denominated as 'Commercial Letter of Credit and Application.' Also, they were not asked to execute any suretyship to guarantee its
payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and that the Continuing Suretyships separately
executed in February, 1977 shall guarantee its payment.
The 1979 letter of credit was negotiated. UTEFS executed and delivered to METROBANK a Trust Receipt. However, UTEFS did not acquiesce to the
obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy
Diño, demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank which were accepted by the latter.
Diño, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents showing the source of
his liability. The bank informed him that the source of his liability is the Continuing Suretyship which he in 1977. As a rejoinder, Diño maintained that he cannot
be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation
which he guaranteed has been fully paid.
METROBANK filed a complaint for collection of a sum of money and impleaded Diño and Uy as parties-defendants. Norberto Uy and Jacinto Uy Diño
filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been
extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's
Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held liable for the
obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation.
METROBANK filed its opposition to the motion to dismiss. It relied on Article 2053 of the Civil Code which provides: 'A guaranty may also be given as
security for future debts, the amount of which is not yet known; . . . .' It was further asserted that the agreement was in full force and effect at the time the
letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to the bank.
Issue:
Whether or not defendants Jacinto Uy Diño and Norberto Uy are liable for the obligation contracted by Uy Tiam under the Letter of Credit issued in 1979 by
virtue of the Continuing Suretyships they executed in 1977?
SC Ruling:
When Uy and Diño executed the continuing suretyships in 1977, Uy Tiam was obligated to the Metrobank in the amount of P700,000.00 — and this
was the obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation — and such payment extinguished the obligation they assumed
as guarantors/sureties.
The 1979 Letter of Credit is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation under either is
apart and distinct from the obligation created in the other, as evidenced by the fact that Uy Tiam had to apply anew for the 1979 transaction. And Diño and Uy,
being strangers thereto, cannot be answerable thereunder.
Metrobank did not serve notice to Diño and Uy when it extended to Uy Tiam the 1979 Letter of Credit at least to inform them that the continuing
suretyships they executed in 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam.
There is no sufficient and credible showing that Diño and Uy were fully informed of the import of the Continuing Suretyships when they affixed their
signatures thereon; that they are thereby securing all future obligations which Uy Tiam may contract with the plaintiff. On the contrary, Diño and Uy categorically
testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their
former employer. They denied having gone to the office of the plaintiff to subscribe to the documents.
Case: Retrospective Application of Guaranty

WILLEX PLASTIC INDUSTRIES CORP. VS. CA
Facts:
Sometime in 1978, Inter-Resin Industrial Corporation (IRIC)opened a letter of credit with the Manila Banking Corporation. To secure payment of the
credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two "Continuing Surety
Agreement" whereby they bound themselves solidarily to pay Manilabank "obligations of every kind. In 1979, IRIC and Willex executed a "Continuing Guaranty"
in favor of IUCP.
Subsequently, IUCP paid to Manilabank the sum owed by Inter-Resin Industrial. Atrium Capital Corp., which succeeded IUCP and, later on succeeded
by respondent, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it had paid to Manilabank.
Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure the payment which the IUCP had paid to Manilabank. It
claimed, however, that it had already fully paid its obligation to Atrium Capital.
In denying liability to Interbank for the amount, Willex argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin
Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial.
The case then proceeded to trial. The trial court declared Inter-Resin Industrial to have waived the right to present evidence for its failure to appear
at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any evidence. The trial court rendered judgment, ordering
Inter-Resin Industrial and Willex Plastic jointly and severally to Interbank.
On appeal, the Court of Appeals rendered a decision affirming the ruling of the trial court. Willex filed a motion for reconsideration praying that it be
allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied.
Issue:
Whether or not under the "Continuing Guaranty" signed by Willex, it may be held jointly and severally liable with Inter-Resin Industrial for the amount by
Interbank to Manilabank.
SC Ruling:
The contention is untenable. What Willex has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was
actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was executed.
Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made by it to Manilabank and
not of any sums given by it as loan to Inter-Resin Industrial. Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC by Manilabank, that the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex.
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by Interbank it required Willex to sign a
Continuing Guaranty." Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. It
can reasonably be assumed that Inter-Resin Industrial and Willex intended to indemnify Interbank for amounts which it may have paid Manilabank on behalf of
Inter-Resin Industrial.
Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot legally exist because of the absence of a valid principal
obligation. Its contention is based on the fact that it is not a party either to the "Continuing Surety Agreement" or to the loan agreement between Manilabank
and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties
thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal."
Willex Plastic contends that the "Continuing Guaranty" cannot be retroactively applied so as to secure the payments made by Interbank under the two
"Continuing Surety Agreements." Willex Plastic conteds that a contract of suretyship or guaranty should be applied prospectively.
C. Form
a. Guaranty is governed by the Statute of Frauds
Case: Written undertaking to guarantee payment of another person’s obligation

Macondray & Co., Inc. vs. Pinon 2 SCRA 1109 August 31, 1961
Facts:
On 11 May 1955 the plaintiff Macondray & Co. filed a complaint aginst defendant Pinon, et. Al. in the CFI of Manila alleging that upon representation
and undertaking made by Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the plaintiff dated 30 January 1954, that he would
guarantee payment of his vo-defendants obligations, should they fail to pay on the due date, on February 2 and 9, 1954, the plaintiff sold on credit and delivered
to the defendants Perfecto Pinon and Conrado Piring, known in the theater and entertainment business as Tugak and Pugak, respectively and transacting
business under a common name known as “All Stars Productions” 127 rolls of cinematographic films, for the total sum of P6,985 payable on or before May 9,
1954, 12% interest thereon from the date of maturity and 20% thereof for attorney’s fees in case of suit for collection.
SC Ruling:
Appellant Kangleon’s very letter constitutes his undertaking of guaranty. “Contracts shall be obligatory in whatever form they may have been entered
into, provided all the essential elements for their validity is present”. A contract of guaranty is not a formal contract and shall be valid in whatever form it may be,
provided that it complies with the Statute of Frauds.
Kangleon states that assuming that the letter constitutes a contract of guaranty, the films actually sold to the principal debtors were 127 rolls of F.G,
release positive type825B, 35mm. x 1,000 ft at P 55 a roll, payable May 9, 1954, while what he undertook to guarantee payment was 10 rolls negative at 157
each and 100 rolls positive at 55 each, payable within three months ending April 1954. Citing Art. 2055 of the Civil Code that a guarantee cannot extend to more
than what is stipulated therein, the appellant contends that he cannot be held liable for the contract in view of the variation in his undertaking. The total cost of
what was actually sold to and bought by the principal debtors is P6,985, which is less that the total cost of what was originally intended to be bought by them
amounting to P7,070. The variation was merely in kind and not in subject matter-cinematographic films – which did not render the appellants obligation more
burdensome. Instead his obligation was rendered less onerous by the reduction in the original price of P7,070 to P6, 985.
b. Guaranty and Suretyship must be expressed and not presumed.
Wise & Co., Inc. vs. Tanglao 63 PHIL. 372 August 29, 1936
Facts:
Plaintiff WCI obtained a preliminary attachment of Cornelio David’s property. To avoid execution of said attachment, Cornelio David obtained a special
power of attorney from his lawyer Dionisio Tanglao, authorizing him to sign for his lawyer as guarantor for himself in his indebtedness to plaintiff and to
mortgage his lawyer’s lot to guarantee said obligation to plaintiff. Cornelio David confessed judgement for P640 payable monthly and secured by a pledge to
plaintiff of a house, apartment and a parcel of land recorded in the name of Dionisio Tanglao. David made only partial payment of said judgment debt. Plaintiff
brought an action to recover the balance.
SC Ruling:
Under the power of attorney, tanglao empowered David to enter into a contract of suretyship and a contract of mortgage of the property described in
the document. David, however, used said power of attorney only to mortgage the property and did not enter into a contract of suretyship.
Nothing is stated in the compromise agreement to the effect that Tanglao became David’s surety for the payment of the judgment debt. Neither is
this inferable from any of the clauses thereof, even if this inference might be made , it would be insufficient to create an obligation of suretyship which under the
law must be expressed and cannot be presumed.
c. Guaranty is presumed prospective not retrospective.
Case: The terms of the contract of suretyship determine the surety’s liability and cannot extend to more than what is
stipulated therein.
Solon vs. Solon 64 Phil. 729 September 9, 1937
SC Ruling:
When Eugenio Solon bound himself as surety to Andres Montalban for the payment of Macleod and Company of the amount of P5,oo which
Montalban owed to the latter, he limited himself to giving as security, by way of mortgage, the land and no other, belonging to him and described as lot No. 892
of the Banilad Friar Lands Estate in case No. 5988 of the Court of Land Registration and in the transfer Certificate of Title No. 2499 of the registry of property of
the Province of Cebu. It is not possible that Macleod Company could have ever contemplated bringing an action against Eugenio Solon to obtain possession not
only of the land expressly mortgage to it, which has been said, is lot No. 892 described in the Certificate of title above-mentioned, which is distinct from lot No.
903, but also of any other land belonging to him or of lot No. 903 itself, for the purpose of collecting its credit against Andres Montalban, because it would not
have failed to know, better than anyone else that the contract of suretyship in its favor does not admit of the interpretation that it could make Eugenio Solon
liable for the amount greater than P5,000 and that it could require him to pay Montalban’s indebtedness, should the latter fail to do, with land other than that he
had mortgage.
This is so because the clauses of a contract of suretyship determine the extent of the liability of the surety because said liability should not be
extended farther than the clear terms of the contract of guarantee by mere implications; and because the surety is liable only in the manner and to the extent,
and under the circumstances pointed out in the contract of surety or which may be clearly deduced therefrom.
CHAPTER 2
EFFECTS OF GUARANTY
Section 1 – Effects of Guaranty between the Guarantor and the Creditor
Articles 2058 – 2065
I. Effect of guaranty between creditor and guarantor

A. Obligation of the Creditor
 To pay the guarantor the compensation stipulated.
B. Obligation of the Guarantor

 To pay or perform the obligation (in money or in species) if the debtor fails to do so.
a. What is to be paid
 The guarantor can bind himself for less but not bind himself to more, than the debtor. If he does it shall be
reduced to the limits of the debtors obligation (Art. 2054)
 The guarantor binds himself to more than the debtor in the following cases:
 If he guarantees a larger amount.
 If he agrees to pay earlier.
 If he agrees to pay at the place more favorable to the creditor.
 If he changes the principal obligation.
Case: Extent of liability when the bond is penal in nature
General Insurance and Surety Corp. vs. Republic 7 SCRA 4 January 31, 1963
Facts:
By the terms of the bond the surety guaranteed to the government “compliance by the Central Luzon Educational Foundation with all obligations,
including the payment of the salaries of its teachers and employees, past, present and future and the payment of all other obligations incurred by, or in behalf of
said school in the sum of P 10,000.00.
SC Ruling:
There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in nature. Art. 1226 of the Code states that in
obligations with a penal clause, the penalty shall substitute for the indemnity for damages and the payment of interest in case of noncompliance, it there is no
stipulation to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulate without need of proving damages because one
of the primary purposes of penalty clause is to avoid such necessity.
The surety contends that it cannot be made to answer for more than the unpaid salaries of H.B. Arandia, which it claimed amounted to P 720.00 only,
because of Art. 2054.
What we said about the penal nature of the bond would suffice to dispose of this claim. For whatever may be the amount of salaries due to the
teachers, the fact remains that the condition of the bond was violated and so the surety became liable for the penalty provided therein.
Case: When surety is liable for interest.
PNB vs. Luzon Surety Co., Inc. 68 SCRA 207
Facts:
Defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling Company Inc. applied for a crop loan with the plaimtiff,
Philippine National Bank, which application was approved on March 6, 1952 in the amount of P 32,400. Villarosa executed a chattel mortgage on standing crop to
guarantee the crop loan.
As of September 27, 1953 as shown in the accounts, there was a balance of P 63,222.78 but as of the date when the complaint was filed on June 8,
1960, because of the interest accrued, it had reached much higher sum. Due to its non-payment, plaintiff filed this complaint which sought relief not only against
the planter but also against the three bondsmen, Luzon Surety, Central Surety and Associated Surety.
SC Ruling:
The question to be taken up is the liability of Luzon Surety Co. for interest which it contends would increase its liability to more than 10, 000 which is
the maximum of its bond. We cannot agree to this reasoning, it was held that, “if a surety upon demand fails to pay, he can be held liable for the interest, even if
in thus paying, the liability becomes more than that in the principal obligation. The increased liability is not because of the contract but because of the default
and the necessity of judicial collection. It should be noted, however, that the interest runs from the time the debt becomes due and demandable.
oOo
COMMONWEALTH INSURANCE CORPORATION vs. CA
Facts:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export loan lines, one, for P2,500,000.00 to Jigs Manufacturing
Corporation (JIGS) and, the other, for P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations both drew from their respective
credit lines, the former in the amount of P2,499,992.00 and the latter for P998,033.37 plus P478,985.05 from the case-to-case basis and trust receipts. These
loans were evidenced by promissory notes (Exhibits ‘A’ to ‘L’, inclusive – JIGS; Exhibits ‘V’ to ‘BB’, inclusive – ELBA) and secured by surety bonds (Exhibits ‘M’ to
‘Q’ inclusive – JIGS; Exhibits ‘CC’ to ‘FF’, inclusive – ELBA) executed by defendant-appellee Commonwealth Insurance Company (CIC).
JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984, appellant RCBC made a written demand (Exhibit ‘N’) on
appellee CIC to pay JIG’s account to the full extend (sic) of the suretyship. A similar demand (Exhibit ‘O’) was made on December 17, 1984 for appellee CIC to
pay ELBA’s account to the full extend (sic) of the suretyship. In response to those demands, appellee CIC made several payments from February 25, 1985 to
February 10, 1988 in the total amount of P2,000,000.00. There having been a substantial balance unpaid, appellant RCBC made a final demand for payment
(Exhibit ‘P’) on July 7, 1988 upon appellee CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of Money on September 19, 1988
against appellee CIC.
Issue:
Whether or not petitioner should be held liable to pay legal interest over and above its principal obligation under the surety bonds issued by it.
SC Ruling:
Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its liability shall
in no case exceed the amount of the said bonds.
We are not persuaded. Petitioner’s argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in Plaridel Surety & Insurance Co., Inc. vs.
P.L. Galang Machinero., Inc. and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the principle
that if a surety upon demand fails to pay, he 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 ]
Petitioner’s liability under the suretyship contract is different from its liability under the law. There is no question that as a surety, petitioner should not be
made to pay more than its assumed obligation under the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the
payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement.
The issue of petitioner’s payment of interest is a matter that is totally different from its obligation to pay the principal amount covered by the surety bonds
it issued. Petitioner offered no valid excuse for not paying the balance of its principal obligation when demanded by RCBC. Its failure to pay is, therefore,
unreasonable. Thus, we find no error in the appellate court’s ruling that petitioner is liable to pay interest.
b. When
 If the guarantor pays before the date, he cannot proceed against the debtor until that date arrives unless the
debtor ratified the payment.
c. Duty to notify of the payment, otherwise:

 The debtor may set up against the guarantor all defenses available against the creditor.
 If the debtor pays, not knowing that the guarantor paid already, the guarantor must recover from the
creditor.
 This is an exception to the rule of solution indebiti.
 If the guaranty is gratuitous and notice to the debtor is prevented by fortuitous event, the debtor must
reimburse the guarantor, if the creditor is insolvent.
C. Privileges of the Guarantor
a. Benefit of exhaustion- to demand that all the properties of the debtor be exhausted.
Case: how inability to pay is proved.
Machetti vs. Hospicio de San Jose 43 Phil. 297 April 10, 1922
Facts:
Machetti by a written agreement undertook to construct a building for Hospicio de San Jose. One of the conditions of the agreement was that the
contractor should obtain the guarantee of Fidelity and Surety Co. to the amount of P12, 000. The following endorsement in the English language appears on the
contract; “for value received, we hereby guarantee compliance with the terms and conditions as outlined in the above contract”. Machetti constructed the
building until a little over P 4, 000 remain unpaid of the entire contract price.
It was subsequently found that the work had not been carried in accordance with the specifications. Hospicio de San Jose refused to pay the balance
of the contract price. Machetti brought an action to recover said amount. Hospicio de San Jose presented a counterclaim for damages resulting from the partial
non-compliance. On petition of his creditors, Machetti was declared insolvent. Upon motion of Hospicio de San Jose, Fidelity & Surety Co. was made cross-
defendant and proceedings continued as to it, to the exclusion of Machetti.
SC Ruling:
The contract of guarantee is given in English, and the terms employed must be given the significance which, ordinarily attaches to them in the
language used. In English, the term “guarantor” implies an undertaking of guaranty as distinguished from suretyship. It is 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 rest 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
While a surety undertakes to pay if the principal does not pay, a guarantor only binds himself to pay if the principal cannot pay. A surety is insurer of
the debt; the guarantor is the insurer of the solvency of the debtor. The latter liability is what Fidelity & Surety Co. assumed in the present case. Fidelity & Surety
Co. having bound itself to pay only in the event it’s 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 to pay may be proven by the return of a writ of execution unsatisfied or by other means, but it is not sufficiently established by the
mere fact that Machetti has been declared insolvent in an insolvency proceeding in which the extent of the insolvent’s liability to pay is not determined until the
final liquidation of his estate.
Case: Effect of writ of execution against surety who was not impleaded
Towers Assurance Corporation vs. Ororama Supermart 80 SCRA 262 November 9, 1977
Facts:
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernosto Ong and Conching Ong in
the CFI of Misamis Oriental for the collection of P 58,400 plus litigation expenses and attorneys fees.
See Hong ask for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the
properties of the Ong spouses and Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers assurance Corporation bound
themselves to pay solidarily to See Hong the sum of P 58, 400.
SC Ruling:
We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an opportunity
to be heard as required in Rule 57 of the Rules of Court which provides:
Sec.17. when execution returned unsatisfied, recovery had upon bond.- if the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond and
bond to pay the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.
Under Sec. 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that the execution be first
issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made demand upon the surety for
the satisfaction of the judgment and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his
counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the fulfillment
of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor.
But certainly the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal.
Notice and hearing constitute the essence of procedural due process.
Wherefore, the order and the writ of execution insofar as they concern Towers Assurance Corporation, are set aside. The lower court is directed to
conduct a summary hearing on the surety’s liability on its counterbond.
Case: Where surety was impleaded but declared in default.
Finman General Assurance Corp. vs. Salik 188 SCRA 740 August 20, 1990
Facts:
Abdulgani Salik, et.al private respondents allegedly applied with Pan Pacific Overseas Recruiting Services, Inc. on April 22, 1987 and were assured
employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totaling P30,000.00. but despite numerous assurances of
employment abroad given by Celia Arandia and Mrs. Egil, they were not employed.
Accordingly they filed a joint complaint with the Philippine Overseas Employment Administration against Pan Pacific for violation of Articles 32 and 34
of the Labor Code, as amended with claim or refund of a total amount of P30,000.00.
The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corp. in the latter’s capacity as Pan Pacific’s
bonding company.
On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being deemed in default or failing to answer, both
Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus ex-parte proceeding ensued.
SC Ruling:
The nature of Finman’s obligation under the Suretyship agreement makes it privy to the proceeding against the principal. As such Finman is bound, in
the absence of collusion, by a judgment against the principal even though it was not a party to the proceedings. In some cases the court ruled that were the
surety bound itself solidarily with the principal obligor, the former is so dependent on the principal debtor “that the surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter”. Applying the foregoing principles to the case at bar, it can be very
well said that even if herein Finman was not impleaded in the instant case, still it can be held jointly and severally liable for all claims arising from the recruitment
violation of Pan Pacific. Moreover as correctly stated by the Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer for the
placement and processing fees they paid, so much so that in order to provide a complete relief to private respondents, petitioner have to be impleaded in the
case.
1. When Benefit is Available

 When available: to avail of it, if the guarantor must:
 Interpose it as soon as the creditor makes a demand upon the guarantor for payment.
 But the creditor may sue the debtor and the guarantor jointly when there is no guarantor right
to exhaustion. Otherwise the creditor shall ask the court to notify the guarantor.
 The interposition of the benefit of exhaustion must be made before the judgment is rendered
against the guarantor.
 The benefit of exhaustion cannot be claimed for the first time on appeal.
 Point out to the creditor available property of the debtor within the Philippines sufficient to cover the
debt.
Case: Effect when the debtor invokes non-exhaustion of the guarantor.
JN DEVELOPMENT CORPORATION vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION
Facts:
On 13 December 1979, petitioner JN Development Corporation (“JN”) and Traders Royal Bank (TRB) entered into an agreement whereby TRB would
extend to JN an Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by several securities, including a real estate mortgage [2]
and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee Corporation (“PhilGuarantee”), now Trade and Investment Development
Corporation of the Philippines, covering seventy percent (70%) of the credit line. [3] With PhilGuarantee issuing a guarantee in favor of TRB, [4] JN, petitioner
spouses Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested PhilGuarantee to make good its guarantee. [8]
PhilGuarantee informed JN about the call made by TRB, and inquired about the action of JN to settle the loan. [9] Having received no response from JN, on 10
March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10]
Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the
obligation “by way of development and sale” of the mortgaged property. [11] PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein petitioners.
Issue:
Whether or not PhilGuarantee is entitled to reimbursement.
SC Ruling:
PhilGuarantee maintains that the date of default, not the actual date of payment, determines the liability of the guarantor and that having paid TRB
when the loan became due, it should be indemnified by petitioners. [30] It argues that, contrary to petitioners’ claim, there could be no waiver of its right to
excussion more explicit than its act of payment to TRB very directly. [31] Besides, the right to excussion is for the benefit of the guarantor and is not a defense for
the debtor to raise and use to evade liability. [32] Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of Cruz’s signature
on the Undertaking, which is a notarized document and as such must be accorded the presumption of regularity. [33]
The Court finds for PhilGuarantee.
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. [35] However, the guarantor cannot be compelled to pay the creditor unless
[34]
the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. [36] This is what is otherwise known as the benefit
of excussion.
It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor
must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, “for obviously the ‘exhaustion of the principal’s
property’ cannot even begin to take place before judgment has been obtained.” [37] The law imposes conditions precedent for the invocation of the defense. Thus,
in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out
to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. [38]
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. PhilGuarantee’s 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. [39]
Petitioners’ claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable. The
guarantee, dated17 December 1979, states:
In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its obligation arising under the aforesaid guarantee
PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid…
....
This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon payment by JNDC of the guarantee fee at the same rate of
1.5% per annum.[40]
The guarantee was only up to 17 December 1980. JN’s 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.
The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the
guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However,
PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in
the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the
guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-seeking desire to
be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee.
2. Effect of Benefit
 No exhaustion may be enforced against the guarantor until the writ against the debtor is returned
unsatisfied.
 The creditor who is negligent in exhausting the property designated is liable for its value, if the debtor
becomes insolvent and cannot pay as a result of such negligence.
Case: No execution until writ is returned unsatisfied
Machetti vs. Hospicio de San Jose 43 Phil. 297 April 10, 1922
Facts:
Machetti by a written agreement undertook to construct a building for Hospicio de San Jose. One of the conditions of the agreement was that the
contractor should obtain the guarantee of Fidelity and Surety Co. to the amount of P12, 000. The following endorsement in the English language appears on the
contract; “for value received, we hereby guarantee compliance with the terms and conditions as outlined in the above contract”. Machetti constructed the
building until a little over P 4, 000 remain unpaid of the entire contract price.
It was subsequently found that the work had not been carried in accordance with the specifications. Hospicio de San Jose refused to pay the balance
of the contract price. Machetti brought an action to recover said amount. Hospicio de San Jose presented a counterclaim for damages resulting from the partial
non-compliance. On petition of his creditors, Machetti was declared insolvent. Upon motion of Hospicio de San Jose, Fidelity & Surety Co. was made cross-
defendant and proceedings continued as to it, to the exclusion of Machetti.
SC Ruling:
The contract of guarantee is given in English, and the terms employed must be given the significance which, ordinarily attaches to them in the
language used. In English, the term “guarantor” implies an undertaking of guaranty as distinguished from suretyship. It is 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 rest 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
While a surety undertakes to pay if the principal does not pay, a guarantor only binds himself to pay if the principal cannot pay. A surety is insurer of
the debt; the guarantor is the insurer of the solvency of the debtor. The latter liability is what Fidelity & Surety Co. assumed in the present case. Fidelity & Surety
Co. having bound itself to pay only in the event it’s 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 to pay may be proven by the return of a writ of execution unsatisfied or by other means, but it is not sufficiently established by the
mere fact that Machetti has been declared insolvent in an insolvency proceeding in which the extent of the insolvent’s liability to pay is not determined until the
final liquidation of his estate.
3. When Benefit of Exhaustion not Available

 When the guarantor expressly waived it.
 When the guarantor is solidarily bound.
 When the debtor is judicially declared insolvent.
 When the debtor cannot be sued in the Philippines or absconds.
 Where the guaranty is in the form of a mortgage of the guarantor’s property.
 If it may be presumed that the benefit of exhaustion would not result in satisfaction.
 When the guarantor upon the creditors demand for payment from him fails to set up such benefit against
the creditor and to point out to the latter available property to cover the debt.
b. Benefit of Division
a. General rule: when there are several guarantors for one and the same debtor and debt, the obligation to
answer for the same is divided among all of them. The creditor may only claim from each debtor his
corresponding share, unless solidarity has been expressly stipulated.
Case: Effect if one of the two guarantors paid half of judgment debt.
De Guzman vs. Santos 63 Phil. 371 June 30, 1939

Facts:
A mercantile partnership, Phil-Am Constructions Co., with Toole, Abad and Santos as co-partners, was formed with P10,000 of its capital secured by
way of a loan from Paulino Candelaria. The partnership and the co-partnership bound themselves solidarily to pay said indebtedness. Having violated the
conditions of the contract, Candelaria filed an action against PACC and the co-partners for the recovery of the loan. Candelaria obtained a writ of attachment
against the co-partners by virtue of which the sheriif attached the co-partnership properties. No property of the PACC was attached. To discharge the
attachment, PACC as principal and Santiago Lucero and Meliton Carlos as guarantors executed a bond in favor of Candelaria. Defendant Santos neither
intervened nor signed individually in the bond. Attachment was discharged and attached properties were returned to their owners.
Trial court rendered judgment ordering the co-partners to pay the judgment creditor the amount of the loan. Writ of execution having been returned
unsatisfied, said writ was issued against the guarantors upon the motion of Candelaria. Lucero and Carlos, as guarantors, paid P5,000 plus. Plaintiff de Guzman
as, in her capacity as judicial administrator of the estate of the deceased Lucero, sought to recover from Santos what the estate had paid to Candelaria from
defendant. Trial court decided for plaintiff. Defendant Santos appealed contending that he is not liable because he neither applied for nor intervened in the bond
any capacity.
Issue:
W-O-N Santos is legally bound to pay what the plaintiff had advanced to Candelaria even if it was given without his knowledge.
SC Ruling:
Under Article 1822 of the Civil Code, by guaranty one person binds himself to pay or perform for a third person in case the latter should failed
to do so, and Article 1838 of the Civil Code provides that any guarantor who pays for the debtor shall be indemnified by the latter even if the guaranty
have been undertaken without the debtor’s knowledge. Applying the citedprovisions, it is obvious that Santos is legally bound to pay the plaintiff what he has
advanced to Candelaria upon judgment, notwithstanding the fact that the bond was given without his knowledge.
Defendant’s obligation to pay what the plaintiff had advanced is further sanctioned by the general provisions of the Civil Code regarding obligations.
Article 1158 of the Civil Code provides that the payment made by any person whether he has an interest in the performance of the obligation or not, and whether
the payment is known and approved by the debtor or whether he is unaware of it, may be recovered from said debtor.
Any person who makes a payment for the account of another may recover from the debtor the amount payment, unless it was made against the
express will of the latter. In the latter case, he can only recover from the debtor in so far as the payment has been beneficial to the latter. According to this legal
provision, it is evident that the defendant is bound to pay to the plaintiff what the latter had advanced to Candelaria, and this is more so because it appears that
although Lucero executed the bond without his, knowledge, nevertheless he did not object thereto or repudiate the same at any time.
And it cannot be logically deduced that the defendant did not have knowledge of the bond, firstly, because his properties were attached and attachment
could not have been levied without his knowledge, and secondly, because said properties were returned to him and in receiving them he was necessarily
apprised of the fact that a bond had been filed to discharge the attachment. Judgment affirmed.
b. When division is not available

 the benefit of division ceases in the same cases and for the same causes as that of exhaustion.
c. Time to invoke benefit

 same as for the benefit of exhaustion.
d. Rule if each and all guarantors secure the entire debt

 Division applies if each and all guarantors secure the entire debt; but not if each guarantors answers
for a separate portion.
Mira Hermanos vs. Manila Tobacconists
Facts:
By virtue of a written contract entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver to the latter
merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month the
invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which
was executed by the Provident Insurance Co., on September 2, 1939, to secure the fulfillment of the obligation of the Tobacconists under the contract up to the
sum of P3,000.
In the month of October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise received by it on
consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with
that requirement the defendant Manila Compañia de Seguros, on October 16, 1940, executed a bond of P2,000 with the same terms and conditions (except as
to the amount) as the bond of the Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists, as a result of which
there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon
Mira Hermanos made a demand upon the two surety companies for the payment of said sum.
The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira Hermanos, alleging
that the remaining 40% should be paid by the other surety, Manila Compañia de Seguros, in accordance with article 1837 of the Civil Code. The Manila Compañia
de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not exceed P3,000, it was not bound to pay anything
because its bond referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000.
Issue:
Whether or not Provident Insurance Co is entitled to the "benefit of division" provided in article 1837 of the Civil Code
SC Ruling:
The "benefit of division" provided in article 1837 of the Civil Code reads as follows:
Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor
can claim from each surety only his proportional part unless liability in solidum has been expressly stipulated.
The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the same reason as that to an
exhaustion of property against the principal debtor.
The statement of the trial court to the effect that the bond of P3,000 responded for the obligation of the Tobacconists up to the sum of P3,000 and
the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might exceed P3,000 and up to P5,000, is a finding of fact based upon the
undisputed testimony of the witnesses called by the defendant Manila Compañia de Seguros in support of its special defense hereinbefore quoted. While on its
face the bond given by the Manila Compañia de Seguros contains the same terms and conditions (except as to the amount) as those of the bond given by the
Provident Insurance Co., nevertheless it was pleaded by the Manila Compañia de Seguros and found proven by the trial court .
The evidence upon which that finding is based is not only undisputed but perfectly reasonable and convincing. For, as the trial court observed, there
would have been no need for the additional bond of P2,000 if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident
Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000 but the first P2,000 of
the obligation of the principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation of
the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event against which Mira
Hermanos wanted to protect itself by demanding the additional bond of P2,000. When the Provident gave its bond and fixed the premiums thereon it assumed an
obligation of P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with any other surety. The additional bond of P2,000 was,
more than a year later, required by the creditor of the principal debtor for the protection of said creditor and certainly not for the benefit of the original surety,
which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of the parties with regard to the bond of
P2,000 given by the Manila Compañia de Seguros, destroys at the same time the theory of the appellant regarding the applicability of article 1837 of the Civil
Code.
That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the two bonds on their face appear to guarantee
the same debt co-extensively up to P2,000 — that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and
conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co. guarantees only the first
P3,000 and the Manila Compañia de Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.
D. Defenses of the Guarantor

a. Defenses which pertain to the debtor:
 The guarantor may set up against the creditor all defenses which pertains to the principal debtor and
are inherent in the debt; but not those purely personal to the debtor.
 The surety may invoke fraud, violence, prior payment, res judicata, prescription and others of
the same class.
 Defenses purely personal; minority, incapacity and other vices of consent which the principal
debtor may waive; unless the guarantor was ignorant of the vice as he could not the waive
the defect.
b. Defenses peculiar to guaranty:

 Merger, novation, extension of time, etc., which invalidates the contract between the creditor and the
surety.
Section 2 – Effects of Guaranty between the Debtor and the Guarantor
I. Effects of guaranty between the guarantor and debtor

A. Before the payment by the guarantor
a. To receive the compensation agreed upon
b. To demand relief from the guaranty against the action of the creditor or security against the danger of the debtor’s
insolvency, in the following instances:
i. When the guarantor is sued for payment (specially where there is no benefit of exhaustion).
ii. In case of bankruptcy (judicial insolvency) or insolvency of the debtor (since reimbursement is
endangered).
iii. When the debt has become demandable, because the period for its payment has been expired (or has
been lost under Article 1198).
iv. When the debtor bound himself to relieve him from the guaranty within a specified period and the period
has expired.
v. After 10 years, if the obligation has no fixed term of maturity unless it cannot be extinguished before the
lapse of ten years.
vi. If there are reasonable grounds to fear that the debtor intends to abscond.
vii. If the principal debtor is in imminent danger of becoming insolvent.
c. Prejudice to the creditor’s rights
d. Object of action for relief
B. Rights of the guarantor after payment

a. Personal Action for reimbursement
The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
 The total amount of the debt;
 The legal interests thereon from the time the payment was made known to the debtor, even though it did
not earn interest for the creditor;
 The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;
 Damages, if they are due.
b. Action in subrogation of the creditor

The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has
really paid.
Subrogation transfers to the person subrogated, the credit with all rights thereto appertaining, either against
the debtor or third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional
agreement.
This result by operation of law from the act of payment and there is no necessity for the guarantor to ask the
creditor to expressly assign his rights of action.
Case: Right of Surety to invoke provisions of Article 2071
MANILA SURETY AND FIDELITY, INC. vs. BATU CONSTRUCTION AND COMPANY
Facts:
The plaintiff, a domestic corporation engaged in the bonding business, hereafter called the company, alleges that the Batu Construction & Company,
a partnership, the members of which are the other three defendants, requested it to post, as it did, 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 Ilocos Norte, undertaken by the partnership.
On 30 May 1951 because of the unsatisfactory progress of the work on 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 Company that the Government would hold it (the
Company) liable for any amount incurred by the Government for the completion of the bridge, in excess of the contract price.
On 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons brought an action in the Justice of the Peace Court of Laoag,
Ilocos Norte, against the partnership, the individual partners and the herein plaintiff Company for the collection of unpaid wages amounting to P5,960.10, lawful
interests thereon and costs.
The defendants are in imminent danger of becoming insolvent, and are removing and disposing, or about to remove and dispose, of their properties
with intent to defraud their creditors, particularly the plaintiff Company; and that the latter has no other sufficient security to protect its rights against the
defendants.
Upon these allegations, the plaintiff prays that, upon the approval of a bond and on the strength of the allegations of the verified complaint, a writ
attachment be issued and levied upon the properties of the defendants; and that after hearing, judgment be rendered " ordering the defendants to deliver to the
plaintiff such sufficient security as shall protect plaintiff from the any proceedings by the creditors on the Surety Bond aforementioned and from the danger of
insolvency of the defendants; and to allow costs to the herein plaintiff," and " for such other measures of relief as may be proper and just in the premises."
Issue:
Whether the last paragraph of article 2071 of the New Civil Code Code may be availed of by a surety.
SC Ruling:
A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if the principal is unable
to pay; a surety undertakes to pay if the principal does not pay.
The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of the new Civil Code
would be the fact that guaranty like commodatum is gratuitous. But guaranty could also be for a price or consideration as provided for in article 2048. So, even if
there should be a consideration or price paid to a guarantor for him to insure the performance of an obligation by the principal debtor, the provisions of article
2071 would still be available to the guarantor.
In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for he (the surety)
maybe sued independently. So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous
than that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. The reference in article 2047
to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a
solidary obligation is withdrawn from the applicable provisions governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the new Civil Code, because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of lack of progress in the construction of the bridge is no proof of such insolvency. It does not fall
under paragraph 3, because the defendants have not bound themselves to relieve the plaintiff from the guaranty within a specified period which already has
expired, because the surety bond does not fix any period of time and the indemnity agreement stipulates one year extendible or renewable until the bond be
completely cancelled by the person or entity in whose behalf the bond was executed or by a Court of competent jurisdiction. It does not come under paragraph
4, because the debt has not become demandable by reason of the expiration of the period for payment. It does not come under paragraph 5 because of the
lapse of 10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not yet elapsed. It does not fall under paragraph 6, because
there is no proof that "there are reasonable grounds to fear that the principal debtor intends to abscond." It does not come under paragraph 7, because the
defendants, as principal debtors, are not in imminent danger of becoming insolvent, there being no proof to that effect.
But the plaintiff's 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 Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is in connection
with the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction & Company, and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the guarantor, even before having paid, may
proceed against the principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or
from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor be sued by the creditor for the
payment of the debt. It simply provides that the guarantor of surety be sued for the payment of an amount for which the surety bond was put up to secure the
fulfillment of the obligation undertaken by the principal debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of
Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge,
Project PR-72(3), is a suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation
undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines.
C. Guaranty given without consent or against the will of the debtor

 If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which
he could have set up against the creditor at the time the payment was made.
Reason: The liability of the guarantor being merely subsidiary, he should really wait till after the debtor has tried to
comply. The guarantor should not, thru his own fault or negligence, be allowed to jeopardize the rights of the
debtor. By paying guarantor deprives the debtor of the opportunity to set up defenses against the creditor.
 If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in
case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the
payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid.
Example:
A owes B P100, 000 with C as guarantor. C paid the debt to B when it fell due but C did this without notifying A. Not
being aware of the payment by C, A repeated the payment.
Q: Can C recover from A?

A: No. C cannot recover from A. C has no remedy whatever against A, the debtor. C’s only remedy is to recover from
B, the creditor.
Q: Supposing the guaranty was gratuitous, and supposed the only reason C was not able to notify A was because of
a fortuitous event, what are C’s rights?
A: C must still recover from B. But if B, the creditor is insolvent, then A, the debtor shall reimburse C for the amount
paid.
 If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement.
Section 3 – Effects of Guaranty as Between Co-Guarantors

I. Effects between Co-Guarantors
A. Contribution
When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is proportionally owing from him.
Provided, the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent.
Example:
A, B and C are D’s guarantors. D was insolvent and A had to pay the whole debt. Later, A can demand from B and C 1/3
of the debt from each. This is so because A’s share is supposed to be also 1/3. Of course, each of them can demand
proportional reimbursement from the principal debtor.
B. In case of insolvency of one co-guarantor

If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same
proportion.
Example:
A, B and C are D’s guarantors of a debt of P300, 000 in favor of E. Since D was insolvent, A paid P300, 000 to E.
Q: What if B is insolvent, how much can A demand from C?
A: P150, 000. A cannot demand the extra P100,000 (share of B) from C because in that way, C would have a greater
burden. The law provides that the insolvent guarantor’s share must be borne by the others (including the payer A)
proportionally.
C. Defenses of co-guarantors
The co-guarantors may set up against the one who paid, the same defenses which would have pertained to the principal
debtor against the creditor, and which are not purely personal to the debtor.
CHAPTER 3
Extinguishment of Guaranty
I. Extinction of Guaranty
A. Negligence of the Creditor
The creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said
property, for the insolvency of the debtor resulting from such negligence.
The guarantors, even though they be solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and preference of the latter.
Case: Effect if there is impossibility of Subrogation
E. ZOBEL, INC. vs. CA
Facts:
Respondent spouses Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated Bank and Trust
Corporation (now SOLIDBANK) in the amount of P2, 875,000.00 to finance the purchase of two (2) maritime barges and one tugboat which would be used in
their molasses business. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The
respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were executed.
However, respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31,1991, SOLIDBANK filed a
complaint for sum of money with a prayer for a writ of preliminary attachment, against respondents spouses and petitioner.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the
Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
Issues:
1. Whether petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety;
2. Whether Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter," is not applicable to
petitioner;
3. Whether the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
SC Ruling:
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay
the debt.
Strictly speaking, guaranty and surety are nearly related but under our civil law, they may be distinguished thus:
A surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal
is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing
Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as " surety" to induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with business address x x x (hereinafter called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any other manner to, or at the request or for the account of the Borrower,
either with or without purchase or discount, or to make any loans or advances evidenced or secured by any notes, bills receivable, drafts,
acceptances, checks or other instruments or evidences of indebtedness x x upon which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or other obligations
herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become
due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights hereunder, and also to make or
cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement (g), express or
implied, which has (have) been or may hereafter be made or entered into by the Borrower in reference thereto, regardless of any law,
regulation or decree, now or hereafter in effect which might in any manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; x x x " (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word "guarantee" is
frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation. As
aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no application to the case at bar. In
Bicol Savings and Loan Association vs. Guinhawa , we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It
even released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of the contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective of the
existence, value or condition of any collateral, and notwithstanding any such change, exchange, settlement, compromise, surrender,
release, sale, application, renewal or extension, and notwithstanding also that all obligations of the Borrower to you outstanding and
unpaid at any time (s) may exceed the aggregate principal sum herein above prescribed.
'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been received by you that it has
been revoked by the undersigned, but any such notice shall not be released the undersigned from any liability as to any instruments,
loans, advances or other obligations hereby guaranteed, which may be held by you, or in which you may have any interest, at the time of
the receipt of such notice. No act or omission of any kind on your part in the premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change which may arise by reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such partnership of any one or more new partners." (Italics supplied)
B. Extension of Payment
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
a. Requisites
 Debt has become due
 Creditor grants an extension of time to the debtor
 The extension is without the consent of guarantor
Note:
 The extension must be an express stipulation. The extension of the term must be based on some new
agreement between the creditor and the principal debtor by virtue of which the creditor deprives himself of his
claim.
 But if automatic extension is expressly provided in the contract, the discharge by extension is not applicable.
b. Who must grant extension

The creditor
c. Guarantor’s consent
Case: Effect of extension of one installment

Villa vs Garcia Bosque, 49 Phil 126
If the debts are several, or consist of separate installments, the extension of one does not release the guaranty for the others, unless default in the extended one
automatically makes all the rest due and payable.
Facts:
Bosque is indebted to Villa. For the amount payable, Bosque executed a promissory note payable in three installments, with France and Goulette as
sureties. The first installment was paid on time. The second installment was paid partially, and promissory notes were executed for the remaining balance. France
and Goulette contended that they are released from liability as sureties because of the extension of time of the second installment due.
SC Ruling:
The execution of these new promissory notes undoubtedly constituted and extension of time as to the obligation included therein, such as would release a
surety, even though of the solidary type, under article 1851 of the Civil Code. Nevertheless it is to be borne in mind that said extension and novation related only
to the second installment of the original obligation and interest accrued up to that time. Furthermore, the total amount of these notes was afterwards paid in full,
and they are not now the subject of controversy. It results that the extension thus effected could not discharge the sureties from their liability as to other
installments upon which alone they have been sued in this action. The rule that an extension of time granted to the debtor by the creditor, without the consent of
the sureties, extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it is well settled in English and American
jurisprudence that where a surety is liable for different payments, such as installments of rent, or upon a series of promissory notes, an extension of time as to
one or more will not affect the liability of the surety for the others.
Case: Effect of Acceleration Clause

Radio Corp. vs Roa, 52 Phil 926
An extension of time given by the creditor to the debtor to make payment without the consent of the guarantor extinguishes the guaranty.
Facts:
Defendant Roa owed Philippine Theatrical Enterprise the sum of P28,400. PTE assigned all its rights and interest in the contract to plaintiff RCPI
subject to the condition that in case the mortgagor defendant fails to make any of the installments, the whole amount remaining unpaid shall immediately
become due and demandable and the mortgaged property may be foreclosed. Defendant requested an extension for the payment of one installment, which was
granted.
In an action to recover the unpaid loan, the court ordered defendant and the guarantors to pay plaintiff solidarily the sum of P10,000. Defendant
guarantors appealed contending that the court erred in not finding that the extension of time given to the defendant served as a release of defendant guarantors
from liability on all subsequent installments.
SC Ruling:
The stipulation in the contract under consideration, is to the effect that upon failure to pay any installment when due the other installments ipso facto
become due and payable.
In view ofthe fact that under the express provision of the contract, the whole unpaid balance automatically becomes due and payable upon failure to
pay one installment, the act of the plaintiff in extending the payment of the installment, without the consent of the guarantors, constituted in fact an extension of
the payment of the whole amount of the indebtedness, as by that extension the plaintiff could not have filed an action for the collection of the whole amount
until after the expiration of the period of extension.
Therefore appellants' contention that after default of the payment of one installment the act of the herein creditor in extending the
time of payment discharges them as guarantors in conformity with articles 1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without the consent of the surety, extends the time of
payment, he thereby discharges the surety. . . . The time of payment may be quite as important a consideration to the surety as the amount he has promised
conditionally to pay. . . .Again, a surety has the right, on payment of the debt, to be subrogated to all the rights of the creditor, and to proceed at once to collect
it from the principal; but if the creditor has tied own hands from proceeding promptly, by extending the time of collection, the hands of the surety will equally be
bound; and before they are loosed, by the expiration of the extended credit, the principal debtor may have become insolvent and the right of subrogation
rendered worthless. It should be observed, however, that it is really unimportant whether the extension given has actually proved prejudicial to the surety or not.
The rule stated is quite independent of the event, and the fact that the principal is insolvent or that the extension granted promised to be beneficial to the surety
would give no right to the creditor to change the terms of the contract without the knowledge or consent of the surety. Nor does it matter for how short a period
the time of payment may be extended. The principle is the same whether the time is long or short. The creditor must be in such a situation that when the surety
comes to be substituted in his place by paying the debt, he may have an immediate right of action against the principal. The suspension of the right to sue for a
month, or even a day, is as effectual to release the surety as a year or two years.
Judgment reversed as to defendant guarantors.
Case: Effect of Extension of Time of Payment

Phil. Gen Insurance Co., vs Mutuc, 61 SCRA 22
Facts:
In a surety bond, the sureties bound themselves to be liable in case of extension or renewal of the bond, without the necessity of executing another
indemnity agreement for the purpose and without the necessity of their being notified of such extension or renewal. Is this agreement valid?
SC Ruling:
Yes, the agreement is valid; there is nothing in it that militates against the law, good customs, good morals, public order, or public policy. (personal
note salva: ni militate rani siya sa sentido common hehehe)
There was no other valid conclusion that could be reached by the lower court. Even appellant must have seen that so it ought to be. That would
account for the contention in his brief that the stipulation as to "any extension" without the need for his being notified was "null and void being contrary to law,
morals, good customs, public order or public policy." That is a pretty tall order. There is more than just a hint of hyperbole in such a sweeping allegation.
Appellant though ought to have realized that assertion is not the equivalent of proof. A little more objectivity on his part should bring the realization that no
offense to law or morals could be imputed to such a contractual provision. As to good customs, that category requires something to substantiate it. A mere
denunciatory characterization certainly cannot suffice. That leaves public order or public policy. It is difficult to follow appellant's train of reasoning. He would
premise it on the indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He was free to act either way. He had a choice. It
may be more offensive to public policy, let alone morals or good customs, if thereafter he would be allowed to go back on his word. Besides the policy underlying
such a stipulation in this litigation is clear. What was guaranteed was the faithful performance of defendant Mutuc of his employment as a member of the crew of
a vessel plying overseas. What was more logical considering the difficulty of contacting him then for the party concerned, here appellant, to agree in advance to
any extension without the need for notification. So the parties agreed. There could be thus nothing that did offend public policy or public order when such an
arrangement was explicitly provided for. Appellant, clearly, has not made out a case for reversal.
d. Effect on Accommodation Party

Prudencio vs CA, 143 SCRA 7, July 14, 1986
Where the creditor bank is the payee of a note and assignee of a deed of assignment, its extension of the period of payment would release the accommodation
party.
Facts:
Appellants Prudencio, et al. are accommodation parties who signed on December 23, 1955 the “Amendment of Real Estate Mortgage.” Mortgaging
their property to the PNB to guaranty the loan of P10,000 extended to the Concepcion Construction Company.
On the same date Jose Toribio, in the same capacity as attorney-in-fact of the Company, executed also the “Deed of Assignment” assigning all
payments to be made by the Bureau of Public Works to the Concepcion Construction Company on account of the contract for the construction of the Puerto
Princesa building in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the Bureau, with approval, of the PNB made three payments to the Company on account of the
contract price totaling P11,234.40.
On November 14, 1958, appellants Prudencio wrote the PNB contending that since the PNB authorized payments to the Company instead of to PNB
on account of the loan guaranteed by the mortgage, there was a change in the conditions of the contract without the knowledge of appellants, which entitled the
latter to a cancellation of their mortgage contract.
Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB, the latter’s attorney in
fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage.
SC Ruling:
The Deed of Assignment notwithstanding, PNB approved the Bureau’s release of three payments directly to the Company instead of paying the same
to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the
promissory note falls due without the same having been paid because of the PNB, in effect, waived payments of the first three releases.
The third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an
act which is clearly detrimental to the petitioner’s sureties.
The PNB, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the
note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due
course or who do not derive their right from the same, including PNB.
True, if the Bank had not been the assignee, then the petitioners would be obliged to pay the Bank as their creditor on the promissory note,
irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the same-the Bank
itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as
creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property.
The petitioners who are the accommodation parties/sureties are absolved from liability on the promissory note and under the mortgage contract. The
PNB is ordered to release the real estate mortgage constituted on the property of the petitioners.
e. Mere Failure to Demand

Shannon vs Phil. Lumber & Trans Co., 61 Phil 872
However, the mere failure on the part of the creditor to demand payment after the debt has become due does not itself discharge the guaranty.
Facts:
Defendant PLTC obtained a loan from plaintiff JWS and executed a note promising to pay said loan. Said obligation was secured solidarily by Walter
Jones and E. Elser. Upon non-payment of the principal obligation on due date, plaintiff recovered part of the obligation from Jones’ estate. Plaintiff then brought
suit against defendant and Elser for the remaining unpaid debt with interest.
PLTC was declared in default and ordered to pay P12,000 to the plaintiff, and Elser was likewise required to pay to the plaintiff one-half of all
aforesaid sum which PLTC should fail to pay. Elser appeared contending that the court erred in not holding that plaintiff was guilty of unreasonable delay in
bringing his action thereby causing him damages.
SC Ruling:
The plaintiff let pass some years from the maturity of the note before bringing the action for the recovery of its amount, but the delay does not
constitute laches in the sense that it had the effect of releasing both the principal debtor and its sureties from their obligations, nor did it occasion loss of rights
and privileges of such moment as to give rise to the discharge of the obligation contracted by Elser.
It is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the
enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not
enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety, unless the contract expressly requires
diligence and promptness on the part of the creditor.
The mere circumstance that the creditor does not demand the compliance with the obligation immediately upon the same becoming due, and that he
more or less delays his action, does not mean or reveal an intention to grant an extension to the debtor. Deferring the filing of the action does not imply a
change in the efficacy of the contract or liability of any kind on the part of the debtor. It is merely, without demonstration or proof to the contrary, respite,
waiting, courtesy, leniency, passivity, inaction. It does not constitute novation, because this must be express. It does not engender liability, because on the part
of the creditor such can not arise except from delay.
Judgment affirmed.
f. Undertaking to hold in abeyance any action
Cochingyan Jr. vs R&B Surety and Ins. Co., Inc., 151 SCRA 339
The creditors undertaking to “hold in abeyance any action to enforce its claims” against the principal obligor did not constitute extension of time that will
discharge the guaranty.
SC Ruling:
PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity
of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust
Agreement was entered into.
Thus, the situation was that precisely envisaged in Article 2079: “the mere failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of the referred to herein.”
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the
creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled
to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.
The underlying rationale is not present in the instant case. As this Court has held, “mere delay or negligence in proceeding against the principal will
not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the
surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security.”
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation
on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO.
C. Payment of the Principal Debt by the Debtor

Note:
 Dacion en pago – when payment of a sum money, is paid by giving a thing, you cannot anymore go after the
guarantor, because there was an extinguishment of principal obligation, it does not revive even if the thing is
subsequently lost by eviction unless the obligation is facultative (refer to Art. 2077)
 In case of consignation, the guarantor is released by the consent of the creditor to the withdrawal of the
consignation (refer to Art.1261)
Hong Kong Shanghai Banking Corp. vs Aldanese, 48 Phil 990
The principal debtor having paid an amount on account of the debt, the surety is under obligation to pay the balance up to the amount secured by
the bond executed by him.
Where in a bond the debtor and surety have bound themselves solidarily, but limiting the liability of the surety to a lesser amount than that due from
the principal debtor, any such payment as the latter may have made on account of such obligation must be applied first to the unsecured portion of the debt, for,
as regards the principal debtor, the obligation is more onerous as to the amount not secured.
D. Accidental Loss of the Thing Due before Default

Review 1262-1269
E. Remission of Debt
Review 1270-1274
Note:
 If there is a condonation of a joint obligation, the guaranty discharged is only up to that specific condoned
obligation
 If in favor of the debtor, it releases the guarantor
 If in favor of one co-guarantor, without the consent of the others, it benefits the latter to the extent of the share
of the one released. If they consent, they are not released.
F. Merger
Review 1275-1277
a. Between creditor and debtor – extinguishes accessory obligation of guaranty because the principal obligation is
extinguished
b. Between creditor and guarantor – does not extinguish principal obligation, but the guaranty is extinguished
c. Between debtor and guarantor – the guaranty is extinguished, because the debtor cannot be his own guarantor
-but the sub-guarantor if any, is not released
-other securities, pledges, mortgages are not affected
G. Compensation
Review 1278-1290
Note: Takes place when two persons, in their own right, are creditors and debtors of each other. Legal compensation
takes place by operation of law. (No need to go to court?)
H. Novation
Review1291-1304
a. When the principal obligation is extinguished – The original obligation is extinguished, so the guaranty will be
extinguished.
b. When the principal obligation is modified – If less burdensome, the guaranty subsists. If more burdensome, the
guaranty is extinguished, if the guarantor did not consent. If the debt is merely increased, the guarantor is liable for the
original debt only.
I. Death
a. Of the guarantor – does not extinguish the guaranty
b. Of the debtor – does not extinguish the guaranty
Stronghold Insurance Company Inc. vs Republic-Asahi Glass Corporation, GR147561, June 22, 2006
A surety company’s liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule, extinguish the obligation and
the solidary nature of that liability.
Facts:
Republic Asahi contracted with JDS for construction of roads in its compound, with Stronghold Insurance as surety. JDS failed to perform its
obligation, so there was a claim for damages and to forfeit the performance bond. Stronghold refused to pay. Stronghold’s main defense is that the principal
debtor JDS died, so the accessory obligation of surety is also extinguished.
SC Ruling:
The Supreme Court said, WTF STRONGHOLD? Wa ka nalifong? Wala ba ka nasayod nga as a general rule, the death of either the creditor or the
debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the
parties, or the nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. In the present
case, 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.
The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.
Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of the solidary nature of
their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the
death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under
the performance bond.
J. Failure to send notice of default

General Insurance and Surety Corp vs Republic GR 13873 January 31, 1963
A stipulation in the bond expressly states that
"When the bond expires on a certain date, it will be cancelled TEN DAYS after the expiration, unless the surety is notified
of any existing obligation thereunder, or unless the surety renews or extends it in writing for another term." and We held
that giving notice of existing obligation was a condition precedent to further liability of the surety and that in default of
such notice, liability on the bond automatically ceased. (care of jesabalahadia)
CHAPTER 4
Legal and Judicial Bonds
Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications
prescribed in Article 2056 and in special laws.
Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.
Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.
I. Judicial Guaranty
Note:
-Judicial bondsman cannot invoke benefit of exhaustion of the property of the principal debtor
-The judicial guarantor must have capacity, integrity, and sufficient property.
-Pledge or mortgage is admissible in lieu of personal guaranty
-There is no benefit of exhaustion, either for guarantors or sub-guarantors (Art.2084)
-The claim against the Sureties must be proved in the same action as against the Principal and included in the final Judgment
(see Rules of Court)
-Where payment on the bond was premised upon the non-compliance of the contract by the principal debtor, the liability of
the guarantor is subsidiary and not solidary; nor can he be held responsible if the complaint against the debtor is dismissed.
TITLE XVI – PLEDGE, MORTGAGE AND ANTICHRESIS

CHAPTER 5
Provisions Common to Pledge and Mortgage

I. Common Characteristics
A. they must be constituted to secure fulfillment of a principal obligation (accessories) Art. 2085
a. they may secure all kinds of obligations pure or conditional (Art. 2091)
b. the principal obligation may be future but the security obligation does not come into existence until the principal
does.
c. the principal obligation may be natural. Voidable or unenforceable provided the fact is known to the pledgor or
mortgagor.
Case: Mortgage Given to Secure Future Advancements

DIONISIO MOJICA vs. CA, and RURAL BANK OF YAWIT, INC.,
Facts:
Plaintiff Leonardo Mojica (deceased) contracted a loan of P20,000.00 from defendant Rural Bank of Kawit, Inc. (now respondent). This l oan was
secured by a real estate mortgage executed on the same date by the plaintiffs spouses Leonardo Mojica and Marina Rufido
The real estate mortgage contract states among others:
... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already obtained or still to be
obtained by the mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the obligation above stated according to the terms thereof then this
mortgage shall become null and void.
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid. A new loan in the amount of P18,000.00 was obtained by plaintiffs
spouses from the defendant Rural Bank which loan matured.
No formal deed of real mortgage was constituted over any property of the borrowers, although the top of the promissory note dated March 5, 1974, contained
the following notation. “This promissory note is secured by a Real Estate Mortgage executed before the Notary Public of the Municipality of Kawit, Mrs. Felisa
Senti”
The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already paid loan of P20,000.00 granted on February
spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity. Which prompt the bank to extrajudicially foreclosed the real estate
mortgage on the justification that it was adopted as a mortgage for the new loan of P18,000.00. The proceeds from the sale of the piece of land of plaintiffs
spouses were applied to their outstanding obligation with defendant bank
Meanwhile, the son of petitioners-spouses, attempted to pay the debt of P18,000.00 which the defendant rural bank received and accepted with the
issuance of the defendant's official receipt.
Upon inquiry by Dionisio Mojica on the unpaid balance of the loan, the respondent rural bank issued a 'Computation Slip" indicating therein, that as of
August 14, 1981, the outstanding balance plus interest computed from March 5, 1975 was P21,272.50 ( Ibid.).
However, the bank executed an affidavit of consolidation of ownership, which it subsequently filed with the Register of Deeds of Cavite. As a result, a
TCT was issued in its favor by the Register of Deeds. The bank then refused to allow Dionisio Mojica to pay the unpaid balance of the loan which resulted in the
filing of a complaint.
Issue:
Whether or not the foreclosure sale had for its basis, a valid and subsisting mortgage contract. Otherwise stated, there is a need to ascertain the intention of the
parties as to the coverage of the mortgage in question with respect to future advancements.
SC Ruling:
It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal contracts; that the
amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered.
A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until
the full amount of the advancements are paid (Lim Julian v. Lutero, 49 Phil. 704-705 [1926]). In fact, it has also been held that where the annotation on the back
of a certificate of title about a first mortgage states "that the mortgage secured the payment of a certain amount of money plus interest plus other obligations
arising there under' there was no necessity for any notation of the later loans on the mortgagors' title. It was incumbent upon any subsequent mortgagee or
encumbrances of the property in question to e e the books and records of the bank, as first mortgagee, regarding the credit standing of the debtors.
The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were accepted by the bank on July 19 and August 11, 1980 as deposits
for conventional redemption after the property covered by real estate mortgage became the acquired asset of the bank and priced at P85,000.00 and after
petitioner had lost all rights of legal redemption because more than one year had already elapsed from June 29, 1979, the date the certificate of sale was
registered in the office of the Registry of Deeds of Cavite. Indeed, the conventional redemption was subject to be exercised up to March 3, 1982 and was
extended up to April 19, 1982 for a fixed amount of P85,000.00. The respondent bank even favored the petitioner by giving them the first preference to
repurchase the property but they failed to avail of this opportunity, although the bank "is certainly disposed to release at anytime" the deposits.
The evidence on record also shows that the mortgage property was auctioned on June 27, 1979. The only bidder was the respondent bank which bid
for P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its title over the property. As aptly stated by respondent Court:
B. these contracts can be constituted only by the absolute owner of the thing pledged or mortgaged.
a. but the pledgor or mortgagor need not be a party to the principal obligation.
b. a mortgage of property not owned by the mortgagor is void. Even when such mortgagor is registered and the creditor buys the
mortgaged property upon its foreclosure, the creditor cannot be deemed to acquire a valid title as a bona fide purchaser, since the
creditor could not acquire no better right as purchaser than those it had as mortgagee.
B. Constituted only by the absolute owner of the thing pledged or mortgaged
Case: Mortgage constituted only before issuance of patent to the mortgagor:

VDA. DE BAUTISTA vs. BRIGIDA MARCOS, ET AL
Facts:
Defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof
conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered parcel of land
Subsequently, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana an application for the issuance of a free patent
over the land in question.
As a result,ma Free Patent was issued to the applicants and was registered in their names. Defendant Brigida Marcos' indebtedness of P2,000 to
plaintiff having remained unpaid
Plaintiff filed the present action against Brigida and her husband for the payment or in default of the debtors to pay, for the foreclosure of her
mortgage on the land give as security.
Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent and could not, therefore, under the Public
Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the patentees contracted prior to the expiration of said five-
year period;
Issue:
Whether or not a mortgagee may foreclose a mortgage on a piece of land covered by a free patent where the mortgage was executed before the patent was
issued and is sought to be foreclosed within five years from its issuance.
SC Ruling:
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she could take said land within
the prohibitive period of five years from the issuance of defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of
mortgage is at all valid and enforceable, since the land mortgaged was apparently still part of the public domain when the deed of mortgage was constituted.
As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the
mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could
not, for that reason, encumber the same to the plaintiff-appellee.
Thus, a mortgage executed before the issuance of a patent to the mortgagor is void and ineffective.
Case: Mortgage by Surviving Spouse of Conjugal Property
PNB vs CA June 15 1980
Facts:
The property in question originally belonged to the spouses Iñigo Bitanga and Rosa Ver as their conjugal property.
Before the issuance of the Original Certificate of Title however, Iñigo Bitanga died leaving Rosa Ver and his children. Rosa then afterwards mortgaged the entire
property in favor of PNB for 500 pesos.
SC Ruling:
The subject lots belonged to the conjugal partnership of the spouses, when Iñigo Bitanga died, his one-half share in said lot was transmitted to his heirs and a
co-ownership was established between them. Hence, Rosa Ver alone, could not have validly mortgaged the whole lot to PNB.
Under Art. 2085 one of the essential requisites to a contract of pledge and mortgage is that the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged. Each co-owner shall have the full ownership of his part of the fruits and benefits pertaining thereto, and he may therefore, alienate,
assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved.
Thus, PNB had only acquired ½ of the entire property for this was all she had in her power to convey. The other half being as it still is, the willful
share of the plaintiffs inheritance from their father.
Case: Property not owned by mortgagor at time of mortgage
DBP vs. CA
Facts:
DBP granted a loan to Sps. Olidiana secured by several real estate mortgage. At the time of the mortgage, the properties were still the subject of a
free patent application. Subsequently, Sps. Olidiana filed with Bureau of Lands to relinquish and waive all their rights and interests over the properties in favor of
Jesusa Chupuico and Mylo Quinto.
DBP also granted additional loan to the spouses with the same collateral.
For failure of the spouses to comply with the terms and conditions of their promissory note and mortgage contract, DBP extrajudicially foreclosed all
the mortgaged properties. However when DBP tried to register the sale, it fiscovered that the lots were in the names of Chupuico and Quinto.
DBP then filed a quieting of title but the court ruled against DBP and was affirmed by the CA.
Issue:
Was the mortgage contract valid?
SC Ruling:
No, Art. 2085 par.2 specifically requires that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Thus, since the
disputed property was not owned by the Spouses when they mortgaged it with DBP the contract of mortgage and all the subsequent legal consequences as
regards the lots are null and void. For, the law explicitly requires as imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is
mortgaged.
C. the one constituting the pledge or mortgage should have free disposal of the property, or should be legally authorized for the purpose.
D. the thing pledged or mortgaged may be alienated at the instance of the creditor, for payment if the principal obligation.
a. A mortgagor is not entitled to the exhaustion of the property of the principal debtor. The benefit applies only to personal guaranty and
not to real guaranty.
C. Free disposal or legal authority of person constituting the pledge or mortgage
D. Things pledged or mortgaged may be alienated at the instance of the creditor

a. Benefit of Exhaustion
Case: Exhaustion applies only to personal guaranty

Southern Motors, inc. Barbosa
Facts:
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate mortgage, constituted by the latter in favor of the
former, as security for the payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in accordance
with the terms and conditions of the corresponding deed of mortgage.
Defendant argues that he has executed the deed of mortgage for the only purpose of guaranteeing — as surety and/or guarantor — the payment of
the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.
And that the Plaintiff has no right action against the herein Defendant on the ground that said Plaintiff, without motive whatsoever, did not intent or
intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did
not resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo
Brillantes is solvent and has many properties within the Province of Iloilo.”
Thereafter, the Judge rendered the decision, from which the Defendant has appealed.
Issue:
Whether the mortgage in question could be foreclosed although Plaintiff had not exhausted, and did not intend to exhaust, the properties of his principal debtor,
Alfredo Brillantes.
SC Ruling:
The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, exists only when
a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any such pledge or
mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code, in which the following provisions,
among others, are found.
It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the principal debtor.
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.
b. Pactum Commisorium
Case: Stipulation of Automatic Transfer of Ownership

A. Francisco and Development Corp. vs. CA
Facts:
Francisco Realty granted a loan of 7.5 million to respondents, sps. Rumolo Erlinda Javillonar, in consideration of which the latter executed a
promissory note, a deed of mortgage an an undated deed of sale of the mortgage property. The promissory note provided that “ upon failure of the mortgagor to
pay the interest without prior agreement with the mortgagee, full possession of the property will be transmitted and the deed of sale will be registered.
When private respondents failed to pay the interest petitioner registered the sale. Private respondents refused to vacate when the petitioner
demanded possession claiming that the undated deed of sale was merely an additional security for the payment of the loan.
The trial court ruled in favor of Francisco Realty. The CA reversed the decision and ruled that the sale was void being a pactum commissorium
Issue:
Was the agreement a pactum commissorium?
SC Ruling:
The stipulation in the promissory notes providing that, upon failure of respondent spouse to pay interest, ownership of the property would be
automatically transferred to petitioner Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum commisarium . they
embody the two elements of pactum commisarium. 1. that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security
for the payment of the principal obligation 2. That there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged
in the event of non-payment of the principal obligation within the stipulated period.
The subject transaction being void, the registration of the deed of sale by virtue of which petitioner Francisco Realty was able to obtain a TCT must
also be declared void.
E. Pledge and mortgage are indivisible
Case: Rule where debt is divisible or debtors are not solidarily liable
Dayrit vs. CA
Facts:
The issue in the case is whether or not respondents Court of First Instance and the CA erred in refusing to allow the alleged proposed deposit of a
sum equivalent to 1/3 of the loan agreed upon and in refusing to release forever the collaterals owned by Dayrit, although the other 2/3 portion of the loan
obligation had been satisfied due to insolvency of the other co-defendants.
SC Ruling:
While it is true that the obligation is merely joint and each of the defendants is obliged to pay only his/her 1/3 share of the joint obligation, the
undisputed fact remains that the intent and purpose of the loan and mortgage agreement was t o secure the entire loan of 150,000 that the respondent mobil
extended to the defendants. The court found that the defendants had violated the loan and mortgage agreement, they having paid but only one installment.
As a rule, a mortgage is directly and immediately subject to the property upon which it is imposed, the same being indivisible even though the debt may be
divided, and such indivisibility is unaffected by the fact that the debtors are not solidarily liable.
“When several things are mortgaged or pledged, each thing for a determinate portion of a debt, the pledges or mortgages are considered separate
from each other. But when several things are given to secure the same debt it is entirely, all of them are liable for the debt, and the creditor does not have to
divide his actions by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are
still liable for such balance. Hence, a mortgage voluntarily constituted by the debtor on two or more parcels of land is one and indivisible, and the mortgagee has
the right to have either or both parcels, jointly or singly, sold to satisfy his claim. In case the mortgaged properties are a house and lot, it cannot be claimed that
the lot and the house should be sold separately and not together”
Case: Separate Foreclosure of Mortgaged Properties

Yu vs. PCI bank
Facts:
Under a Real Estate Mortgage spouses Vicente Yu and Demetria Lee-Yu mortgaged their title, interest, and participation over several parcels of land
in favor of the Philippine Commercial International Bank (respondent) as security for the payment of a loan in the amount of P9,000,000.00.
As the petitioners failed to pay the loan, the interest, and the penalties due thereon, the bank Extra-Judicially Foreclosed the Real Estate Mortgage. At
the auction sale respondent emerged as the highest bidder. the sale was registered with the Registry of Deeds
About two months before the expiration of the redemption period, respondent filed an Ex-Parte Petition for Writ of Possession before the Regional Trial Court of
Dagupan City,
Petitioners filed a Motion to Dismiss stating that the Certificate of Sale is void because respondent violated Article 2089 of the Civil Code on the
indivisibility of the mortgaged by conducting two separate foreclosure proceedings on the mortgage properties in Dagupan City and Quezon City and indicating in
the two notices of extra-judicial sale
RTC denied petitioners’ Motion to Dismiss, ruling that the filing of a motion to dismiss is not allowed in petitions for issuance of writ of possession
under Section 7 of Act No. 3135.
On June 1, 2000, petitioners filed a Petition for Certiorari with the CA. but was dismissed Hence, the present Petition for Review on Certiorari.
Issue: Whether or not a real estate mortgage over several properties located in different locality can be separately foreclosed in different places.
SC Ruling:
The Court finds that petitioners have a mistaken notion that the indivisibility of a real estate mortgage relates to the venue of extra-judicial
foreclosure proceedings. The rule on indivisibility of a real estate mortgage is provided for in Article 2089 of the Civil Code, which provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is
not completely satisfied. Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other
heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially
answerable is satisfied.
This rule presupposes several heirs of the debtor or creditor and therefore not applicable to the present case. the debtor cannot ask for
the release of any portion of the mortgaged property or of one or some of the several lots mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask
for the proportionate extinguishment of the mortgage as long as the debt is not completely satisfied.
In essence, indivisibility means that the mortgage obligation cannot be divided among the different lots, that is, each and every
parcel under mortgage answers for the totality of the debt.
The indivisibility of the real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged properties located in
different provinces as long as each parcel of land is answerable for the entire debt. Considering the indivisibility of a real estate mortgage, the mortgaged
properties in Dagupan City and Quezon City are made to answer for the entire debt of P10,437,015.29.
the Court holds that the rule on indivisibility of the real estate mortgage cannot be equated with the venue of foreclosure proceedings on
mortgaged properties located in different provinces since these are two unrelated concepts.
a. Effect of Partial Payment

 partial payment does not entitle the debtor to partial discharge.
- EXCEPT when the pledge or mortgage covers several things, each guaranteeing only a determinate
portion of the credit
 the security is indivisible even if the several debtors are not solidarily bound. The creditor may enforce the
obligation of each debtor against the whole security.
F. Promise to constitute pledge or mortgage gives rise to personal action only (Article 2092)

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CREDIT TRANSACTIONS REVIEWER 1

I. Basis and Rationale

II. Kinds of Security Contracts

Characteristics of Guaranty and Suretyship:

Celia Regala have been fully paid.

Case: Nature of “Continuing Guaranty” obligating as surety

Case: Guaranty as actually suretyship; distinction between the two

2. Real Estate Mortgage

Case: Liability where company president signed as guarantor

Solidary Guarantor vs. Solidary Debtor

Solidary Guarantor Solidary Debtor

LIMITED- excluding accessory obligation

DE GUZMAN VS. SANTOS

C. By the person guaranteed

D. By the liability of the guarantor

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER, Vice-President.

PNB VS. LUZON SURETY Co., INC.

ONG vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK

Spouses Ong’s Contention:

INTERNATIONAL FINANCE CORPORATION VS. IMPERIAL TEXTILE MILLS, INC.

II. Elements of Guaranty

Case: Rule where there is merely an offer of guaranty

Case: Effect of principal has not paid the premium

B. Subject Matter and Conditions

Case: Debts may be guaranteed

Case: When debt is considered liquidated

Petitioners’ Debt Considered Liquidated Despite the Alleged Lack of Accounting

Case: Comprehensive Surety Agreement to over existing and future debts

Case: When guaranty is construed as continuing

Case: Retrospective Application of Guaranty

Case: Written undertaking to guarantee payment of another person’s obligation

b. Guaranty and Suretyship must be expressed and not presumed.

c. Guaranty is presumed prospective not retrospective.

Solon vs. Solon 64 Phil. 729 September 9, 1937

Section 1 – Effects of Guaranty between the Guarantor and the Creditor

Articles 2058 – 2065

I. Effect of guaranty between creditor and guarantor

B. Obligation of the Guarantor

Case: Extent of liability when the bond is penal in nature

Case: When surety is liable for interest.

PNB vs. Luzon Surety Co., Inc. 68 SCRA 207

COMMONWEALTH INSURANCE CORPORATION vs. CA

c. Duty to notify of the payment, otherwise:

Case: how inability to pay is proved.

Case: Where surety was impleaded but declared in default.

1. When Benefit is Available

Case: Effect when the debtor invokes non-exhaustion of the guarantor.

Case: No execution until writ is returned unsatisfied

3. When Benefit of Exhaustion not Available

De Guzman vs. Santos 63 Phil. 371 June 30, 1939

b. When division is not available

c. Time to invoke benefit

d. Rule if each and all guarantors secure the entire debt

Mira Hermanos vs. Manila Tobacconists

D. Defenses of the Guarantor

b. Defenses peculiar to guaranty:

Section 2 – Effects of Guaranty between the Debtor and the Guarantor

Articles 2066 – 2072

I. Effects of guaranty between the guarantor and debtor

B. Rights of the guarantor after payment

b. Action in subrogation of the creditor

Case: Right of Surety to invoke provisions of Article 2071