INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION,

petitioners,
vs.
REPUBLIC OF THE PHILIPPINES represented by the BUREAU OF CUSTOMS, respondent.

[G.R. No. 156571. July 09, 2008]

FACTS:

Grand textile is a local manufacturing corporation importing various articles such as dyestuffs, spare
parts for warehouse machinery and filaments. Subsequent to importation, the articles were
transferred to Bureau of Customs (BoC) where it required payment of tariffs and other charges. Inter-
Strata and PhilHome issued warehousing bonds in favor of BoC which provided that that the goods
shall be withdrawn from the bonded warehouse “on payment of the legal customs duties, internal
revenue, and other charges to which they shall then be subject.” Without payment of the taxes,
customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew
the imported goods from storage. The Bureau of Customs demanded payment of the amounts due
from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay.
The government responded by filing a collection suit against the parties with the RTC of Manila. The
RTC ruled in favor of the BoC which was later affirmed by the Court of Appeals.

ISSUES:
Whether or not the withdrawal of the stored goods, wares and merchandise – without notice to them
as sureties – released them from any liability for the duties, taxes, and charges they committed to pay
under the bonds they issued.

RULINGS:
Civil Law
(1) No. The surety does not, by reason of the surety agreement, earn the right to intervene in the
principal creditor-debtor relationship; its role becomes alive only upon the debtor’s default,
at which time it can be directly held liable by the creditor for payment as a solidary obligor.
A surety contract is made principally for the benefit of the creditor-obligee and this is ensured
by the solidary nature of the sureties’ undertaking. Under these terms, the surety is not entitled
as a rule to a separate notice of default,nor to the benefit of excussion, and may be sued
separately or together with the principal debtor.
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF SUPPLY
COORDINATION vs. MARCELINO TIZON, ET AL.
[G.R. No. L-22108. August 30, 1967]

Facts:
Abidding was conducted by the Bureau of Supply Coordination of the Department of General
Services, for the supply of "one (1) Baylift portable heavy-duty truck and two (2) Baylift Ramps, U.S.
Manufacture". Marcelino Tizon won the bid, having offered the lowest bid. To guarantee faithful
performance of the conditions of the bid, the Bureau of Supply Coordination required Tizon
Engineering to give a bond in the sum of P10,000.00.
The Surety issued its bond for the said amount in favor of the Republic of the Philippines. Tizon
Engineering failed to deliver the equipment called for constraining the Bureau to purchase the
equipment from Fema Trading, the second lowest bidder. Notwithstanding demands made by the
Bureau of Supply on defendants Marcelino Tizon and the Surety to pay said amount, they failed and
refused. Hence, complaint was filed to recover said sums with interests.
Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the Bureau
of Supply is in utter disregard and wanton violation of the Rules and Regulations of the said office
hence not liable since the bond-issued by the Surety "answers only (for) those contracts legally
entered into by the herein defendants with the Bureau of Supply and certainly not those contracts
and/or bids which are of doubtful legality, as in the present case."
The defendant Surety, in answer to the complaint, admitted having executed a bond in favor
of the Republic of the Philippines for the purpose as therein stated, but denied "that it failed and
refused to pay the demand (of the plaintiff), the truth of the matter being that its co-defendant,
Marcelino Tizon, doing business under the name of Tizon Engineering, has put it on notice not to settle
the claim because he is not in any way whatsoever liable to plaintiff." As cross-claim against
defendant Tizon, the Surety asserted that if it is made liable to the plaintiff on its bond, Marcelino Tizon
should be ordered to make the corresponding reimbursement, with interest of 12%, plus attorney's
fees.
After trial, judgment was rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally.
Only defendant Tizon appealed. The plaintiff then filed a motion praying among others to
remand the case to the City Court, as concerns the Surety, for execution of the judgment rendered
in said court.
The Surety opposed the motion on two grounds: (a) that although it did not appeal from the
decision of the inferior court, the appeal interposed by its co-defendant inured to its benefit,
because the obligation sued on "is so dependent on that of the principal debtor, that the Surety is
considered in law as being the same party in relation to whatever is adjudged, touching the
obligation of its co-defendant"; and (b) the appeal of its co-defendant, the principal debtor, "should
be considered in law as to include the defendant Surety, in view of the latter's cross-claim against the
former." The opposition was over-ruled in the order appealed from.
Issue:
WON an appeal by one of the parties sentenced to pay solidarily a sum of money, inures to
the benefit of the other who did not appeal.
Held:
Supreme Court said that if the principal debtor and the surety are held liable, their liability to
pay the creditor would be solidary but the nature of the surety’s undertaking is such that it does not
incur liability unless and until the principal debtor is held liable.
NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee, vs. CARIDAD J. TORRENTO and
MUTUAL SECURITY INSURANCE CORPORATION, defendants-appellants.

Facts:

On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & Steel
Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars,
3/8" deformed or plain, at P430.00 per ton, for a 120-day period. A contract of purchase and sale
was executed on January 13, 1959, but was subsequently amended when plaintiff exhausted its
stock of 3/8" plain steel bars. As amended, the quantity of steel bars stated to be 60 metric tons in the
original contract was changed to 59.31 metric tons; the price was changed from P430.00 to P435.00
per metric ton; and the specification of the steel bars was also changed from "plain, round or
corrugated" to "deformed." Pursuant to the stipulation in the contract that the value of steel bars sold
to defendant Torrento should be secured by a surety bond issued by a reputable bonding company,
defendant Torrento as principal and Mutual Security Insurance Corporation, as surety executed in
favor of plaintiff a surety bond on January 23, 1960. When it was noted that the undertaking under
the bond was only P25,000.00, whereas the contract called for the payment of P25,800.00,
defendant surety executed a supplemental bond increasing the amount of P25,800.00. On February
6, 1959, when NASSCO could no longer supply the steel bars called for in the contract of purchase
and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the plaintiff and
defendant Torrento executed a supplemental agreement. Pursuant to the contract of purchase and
sale and the supplemental contract, NASSCO delivered to defendant Torrento steel bars in the total
value of P25,794.09. The 120-day period for payment lapsed. Demand letters were sent, but
defendant surety made no reply. Defendant Torrento did not question her liability, but only asked for
a 3-month extension to settle her account. Action was brought to recover the unpaid contract price
from defendant Torrento and her surety. On October 18, 1960, the lower court rendered judgment:
"ordering the defendants, jointly and severally, to pay the plaintiff the sum of P25,794.09, with interest
thereon at the rate of 12% per annum, from August 29, 1959 until full payment, and the costs of suit.
On the cross-claim, judgment is hereby rendered, ordering the cross-defendant Caridad J. Torrento
to pay the cross-plaintiff Mutual Security Insurance Corporation whatever sums the latter would pay
the plaintiff by virtue of this judgment, with interest thereon at the rate of 12% per annum, from the
date of payment to plaintiff, until full payment, and the costs of this suit. Appellant Torrento maintains
that plaintiff has no cause of action against her for the reason that inasmuch as she had paid the
corresponding premium on the surety bond, the right of action, in case of her default, is exclusively
against her surety. Further, with respect to the cross-claim of the Surety, Torrento claims that it was
error for the lower court to take cognizance of the same even before payment by said surety to
NASSCO had been made. In other words, Torrento argues that the cause of action alleged in the
cross-claim does not arise until after payment has been made by the surety to the plaintiff.

Issue: WON the change in the principal would release the guarantor or the surety?

Ruling:

No. Supreme Court said that the guarantor or surety will not be released by a change in the principal
contract where such change does not have the effect of making its obligationmore onerous. There
must be change which imposes new obligation or added burden on the party promising or which
takes away some obligation already imposed, changing the legal effect of the original contract and
not merely the form thereof. Moreover, A change in the technical specifications of the items to be
purchased (diameter of the steel bars), but their amount, length and quality remained unchanged,
and, the period for payment and the amount of liability of the principal debtor and the surety were
also untouched, is not material.
FINMAN GENERAL ASSURANCE CORPORATION vs. SALIK

FACTS:
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. They allegedly paid fees
of over 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 POEA
against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims
for refund of a total amount of P30, 000.00. The POEA motu proprio impleaded and summoned
herein petitioner surety, in the latter's capacity as Pan Pacific's bonding company. Summonses were
served upon both Pan Pacific and Finman, but they failed to answer. On October 9, 1987, during the
hearing only the private respondents appeared. Despite being deemed in default for failing to
answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to
appear. Thus, ex-parte proceedings ensued. During the hearing, herein private respondents
reiterated the allegations in their complaint that they first paid P20, 000.00 thru Hadji Usop Kabagani
for which a receipt was issued signed by Engineer Arandia and countersigned by Mrs. Egil and a
certain Imelda who are allegedly employed by Pan Pacific; that they paid another P10, 000.00 to
Engr. Arandia who did not issue any receipt therefor; that the total payment of P30, 000.00 allegedly
represents payments for herein private respondents in the amount of P5,000.00 each, and
Abdulnasser Ali, who did not file any complaint against Pan Pacific. Herein private respondents
presented as their witness, Hadji Usop Kabagani who they identified as the one who actually
financed their application and who corroborated their testimonies on all material points including the
non-issuance of a receipt for P10, 000.00 by Engr. Arandia. Herein petitioner, alleged that herein
private respondents do not have a valid cause of action against it; that petitioner is not privy to any
transaction undertaken by Pan Pacific with herein private respondents; that herein private
respondents claims are barred by the statute of frauds and by the fact that they executed a waiver;
that the receipts presented by herein private respondents are mere scraps of paper; that it is not
liable for the acts of Mrs. Egil that Finman has a cash bond of P75,000.00 only which is less than the
required amount of P100,000.00; and that herein private respondents should proceed directly against
the cash bond of Pan Pacific or against Mrs. Egil . On March 18, 1988, the Secretary of Labor ruled in
favor of herein respondents. Petitioner filed a motion for reconsideration, but was denied.

ISSUES:
Whether or not petitioner has obligations to, and is liable to the respondents, as with the surety
agreement between petitioners Pan Pacific?

RULING:

Yes, herein petitioner and Pan Pacific entered into a surety ship agreement, with the former agreeing
that the bond is conditioned upon the true and faithful performance and observance of the bonded
principal (Pan Pacific) of its duties and obligations. It was also understood that under the surety ship
agreement, herein petitioner undertook itself to be jointly and severally liable for all claims arising
from recruitment violation of Pan Pacific. The nature of Finman's obligation under the surety ship
agreement makes it privy to the proceedings against its principal (Pan Pacific). As such Finman is
bound, in the absence of collusion, by a judgment against its principal even though it was not a
party to the proceedings. In the case at bar, it can be very well said that even if herein petitioner was
not impleaded in the instant case, still it can be held jointly and severally liable for all claims arising
from 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 had to be impleaded in the case.
TOWERS ASSURANCE CORPORATION vs. ORORAMA SUPERMART
Case: liability of a surety in a counterbond for the lifting of a writ of preliminary attachment

FACTS:
See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto
Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum
of P58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930). He asked for a writ of
preliminary attachment and the lower court issued an order of attachment. The deputy sheriff
attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To
lift the attachment, the Ong spouses filed a counterbond in the amount of P58,400 with 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 P58,400. Ong Spouses failed
to appearduring pre-trial, they were declared in default. The lower court ordered the spouse and the
surety to pay solidarily See Hong the sum of P58,400 plus P10,000 as litigation expenses and attorney's
fees. Ernesto Ong manifested that he did not want to appeal. Ororama Supermart filed a motion for
execution. It was granted by the lower court. The writ of execution was issued against the judgment
debtors and their surety. The, Towers Assurance Corporation filed the instant petition for certiorari
where it assails the decision and writ of execution.

ISSUE:
WON surety is liable absence of showing that it was given opportunity to be heard.

HELD:
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, recovers 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 bound to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after notice and summary
hearing in the action."
Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that 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 a 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 satisfaction of the judgment. A surety is not entitled to the
exhaustion of the properties of the principal debtor (Art. 2959) 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. The writ of is set aside. The lower court is directed to conduct a summary hearing on the
surety's liability on its counterbond. No costs.
Magdalena Estates, Inc. v. Antonio Rodriguez and Herminia Rodriguez

Nature: Appeal from CFI decision

Facts:
The Rodriguez spouses bought a parcel of land in Quezon City from Magdalena Estates. They
executed a promissory note in view of an unpaid balance of P5k. On the same day, Rodriguez
spouses and Luzon Surety executed a bond in favor of Magdalena.
• Undertaking: P5k within a 60 days from January 7, 1957. Luzon Surety to be notified in writing within
10 days from moment of default otherwise the undertaking is automatically NAV
June 20, 1958 – when obligation became due and demandable (DAD) Luzon Surety paid P5k to
Magdalena. Magdalena demanded from Rodriguez spouses P655.89, the alleged accumulated
interests on the P5k principal. Due to refusal to pay, Magdalena filed suit in the Municipal Court of
Manila to enforce collection. Court rendered judgment in favor of Magdalena. Rodriguez spouses to
pay jointly and severally P655.89 with legal interest from Nov 10, 1958 (date of filing of the complaint)
Rodriguez spouses appealed to CFI. CFI also ordered Rodriguez spouses to pay jointly and severally
P655.89 + legal interest + AF.

Issue:
WON CFI erred in its judgment / WoN there was a novation

Held:
No, there was no novation. Magdalena did not waive or condone the interests due because it is very
clear in the promissory note that Luzon Surety will only pay the balance of the purchase price of P5k.
The liability of Luzon Surety is not extended beyond the terms of his contract. There was no
novation/modification of the obligation just because Magdalena accepted without reservation the
subsequent agreement in the surety bond despite its failure to provide that is also guaranteed
payment of accruing interest.
• Novation by presumption is never favored. To be sustained, it needs to be established that the
old and new contracts are incompatible in all points, or that the will to novate appears by express
agreement of the parties
• An obligation to pay a sum of money is not novated in a new instrument wherein the old one is
ratified by changing only the terms of payment and adding other obligations not incompatible with
the old one, or wherein the old contract is merely supplemented by the old one
• Just because a creditor receives a guaranty or accepts payments from a third person who has
agreed to assume the obligation, when there is no agreement that the first debtor shall be released
from responsibility does not constitute a novation, and the creditor can still enforce the obligation
against the original debtor

Judgment appealed from is affirmed

Pacific Tobacco Corp. vs. Lorenzana
Facts:
The Pacific Tobacco Corp. is engaged in the business of manufacturing and distributing cigarettes
cigars and other tobacco products. Lorenzana and PTC entered into an agreement whereby
Lorenzana will act as Distributor of PTC. Lorenzana put up a bond in the amount of 3K with Visayan
Surety & Insurance Corporation, as surety, to guarantee the faithful fulfillment of Lorenzana’s part in
the contract to sell and distribute PTC’s cigarettes.

Issue: WON the delivery of merchandise to Lorenzana at a place other than that appearing in the
contract constitutes a material alteration of the same that would release Lorenzana from liability?

Held: No. The mention of Manila and Rizal in said agreement was designed more as a declaration or
identification of the places wherein Lorenzana was expressly authorized and assigned to sell PTC’s
products which is no obstacle to his acceptance of additional territories in order to fulfill his
obligation. A departure from the terms of contract will not have the effect of discharging a
compensated surety unless it appears that such departure has resulted in injury, loss or prejudice to
the surety.
WILLEX PLASTIC INDUSTRIES, CORPORATION, vs. CA and INTERNATIONAL CORPORATE BANK

Facts:
Inter-Resin Industrial Corporation 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 documents, both entitled
"Continuing Surety Agreement", whereby they bound themselves solidarily to pay Manilabank.
Thereafter, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing
Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained and/or to
be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic
jointly and severally guarantee "the prompt and punctual payment at maturity of the NOTE/S issued
by the DEBTOR/S to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00)
Philippine Currency and such interests, charges and penalties as hereafter may be specified."
Following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin
Industrial's outstanding obligation. Atrium Capital Corp., which in the meantime had succeeded
IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid
to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against
Inter-Resin Industrial and Willex Plastic.
Inter-Resin Industrial paid some of the amounts due. Willex Plastic denied the material allegations of
the complaint. It 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.
As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium Capital,
to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In
denying liability to Interbank for the amount, Willex Plastic 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.

Issue
Whether under the "Continuing Guaranty" signed on April 2, 1979, Willex Plastic may be held jointly
and severally liable with Inter-Resin Industrial for the amount by Interbank to Manilabank.

Held
Yes. Willex Plastic 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. No liability attaches under a
contract of suretyship for defaults occurring before it is entered into unless an intent to be liable is
indicated. Although a contract of guaranty or suretyship is ordinarily not to be construed as
retrospective, the rule must yield to the intention of the contracting parties as revealed by the
evidence.
Diño vs. Court of Appeals (1992)
Facts:
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru itsrepresentative Uy Tiam,
applied for and obtained credit accommodations fromMetrobank in the sum of Php700,000.
This was secured by ContinuingSuretyships separately executed by petitioners Norberto Uy (who
agreed to payPhp300,000) and Jacinto Diño (who bound himself liable up to Php800,000). UyTiam
paid the obligation under this letter of credit in 1977. UTEFS obtainedanother credit
accommodation in 1978, which was likewise settled before heapplied and obtained another
in 1979 in the sum of Php815,600. This sumcovered UTEFS’ purchase of fertilizers from Planters
Producst. Uy and Diño didnot sign the application for this credit and were not asked to execute
suretyshipor guarantee. UTEFS executed a trust receipt whereby it agreed to deliver toMetrobank the
goods in the event of non-sale, and if sold, the proceeds will bedelivered to Metrobank. However,
UTEFS did not comply with its obligation. As aresult, Metrobank demanded payment from UTEFS and
the sureties, Uy & Diño.The sureties refused to pay on the ground that the obligation for which
theyexecuted the continuing suretyship agreement has been paid. RTC ruled in favorof the
petitioners, CA affirmed.

Issue:
WON petitioners are liable for payment of the 1979 transaction under thecontinuing suretyship
agreement they executed in 1977. Assuming that they are,what is the extent of their liability?

Held:
The Supreme Court held that Uy & Diño are liable. The agreement they executedin 1977 is a
continuing suretyship, one which is not limited to a single transactionbut which contemplates a
succession of liabilities, for which, as they accrue, theguarantor becomes liable. The agreement
that petitioners signed expresslyprovided that it is a continuing guaranty and shall be in full force
and effect untilwritten notice to the bank that it has been revoked by the surety. As to
the2nd issue, petitioners are only liable up to the maximum limit fixed in thecontinuing
suretyship agreements (Php800,000 for Diño and Php300,000 for Uy).The law is clear that a guarantor
may bind himself for less, but not for more thanthe principal debtor, both as regards the amount and
the onerous nature of theconditions (Art. 2054). CA decision ordering petitioners to pay
P2,397,883.68which represents the amount due inclusive of interest and charges, is modified
Tupaz vs CA

FACTS:

Petitioners received a copy of the RTC and then they filed their respective motion for reconsideration
14days later. The motion was denied, instead, of filling the petition for review with the court of
appealswith the remainder of the 15 day reglementary period , that is, a day after they received the
order,petitioner filed the said petition 14 days after. The petition was denied by the Court of Appeals
ongrounds of tardiness.Petitioner filed a motion for reconsideration. They allege that they should not
be prejudiced by themistakes of their counsel because they are laymen and not familiar with the
intricacies of the law.

DECISION:
The motion was denied with finality by the Court.The Court found that the petitioners have not shown
that their counsel was exceptionally inept ormotivated by bad faith or excusably misled by the facts.
There is no reason why we should not apply therule that clients should be bound by the acts of their
counsel, including his mistakes
The Court stated, Now petitioner wants us to nullify all of the antecedent proceedings and
recognizehis earlier claims to the disputed property on the justification that his counsel was grossly
inept. Therewould be no end to litigation if this were allowed as every shortcoming of counsel could
be the subjectof challenge by his client through another counsel who, if he is also found wanting,
would likewise bedisowned by the same client through another counsel, and so on
.”
Pacionaria Baylon vs Court of Appeals and Leonila Tomacruz

August 17, 1999

Facts:

Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is the co-manager of her husband in
PLDT. Baylon invited Leonila to lend Rosita money for her business as contractor and in return pay the amount
and a monthly interest rate of 5%.

Persuaded by Baylon’s assurances that the business was stable and the high interest rate Leonila lent Rosita P
150,000. Rosita on the other hand issued and signed a promissory note acknowledging the receipt of P 150,000
payable on August 22, 1987. Baylon signed the promissory note as “guarantor”.

Later on, Rosita failed to pay the said amount forcing Leonila to file a case for collection of sum of money
against Rosita and Baylon. However summons were never served to Rosita.

Baylon denied having guaranteed the payment of the promissory note and claims that the money given to
Rosita was not a loan but an investment and that assuming that the loan was guaranteed Leonila has not
exhausted the property of Rosita nor resorted to all legal remedies against Rosita as required by law.

Trial court ruled in favor of Leonila making Baylon liable for the said amount. This decision was affirmed by the
C.A.

Issue: WON Baylon should be held liable for the amount of the promissory note.

Ruling: No.

Rationale:

Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that —

The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property
of the debtor, and has resorted to all the legal remedies against the debtor.

It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal debtor must
first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after
judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the
'exhaustion of the principal's property' — the benefit of which the guarantor claims — cannot even begin to
take place before judgment has been obtained." This rule is embodied in article 2062 of the Civil Code which
provides that the action brought by the creditor must be filed against the principal debtor alone, except in
some instances when the action may be brought against both the debtor and the principal debtor.

Under the circumstances availing in the present case, the court held that it is premature to even determine
whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such,
like the benefit of excussion, since the most basic prerequisite is wanting — that is, no judgment was first
obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor
has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal
debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served
upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. The court held that
private respondent must first obtain a judgment against the principal debtor before assuming to run after the
alleged guarantor.