WEEK 5

DIGESTS
CREDIT TRANSACTION

AUTOCORP and Rodriguez vs. ISAC and BOC

G.R. No. 166662
June 27, 2008
FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary re-export bond from
private respondent Intra Strata Assurance Corporation (ISAC) in favor of public Bureau of Customs (BOC), to
guarantee the re-export of 2 units of car (at 2 different dates) and/or to pay the taxes and duties thereon. Petitioners
executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to act as
surety of the subject bonds
In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the
BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due thereon. In
turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds
Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries or cancel the bonds,
and pay the taxes and duties pertaining to the said items, despite repeated demands made by the BOC, as well as
by ISAC. By reason thereof, the BOC considered the two bonds forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed with the RTC an
action against petitioners to recover a sum of money plus AF. ISAC impleaded the BOC “as a necessary party
plaintiff in order that the reward of money or judgment shall be adjudged unto the said necessary plaintiff.”
Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the face value of
the subject bonds plus AF. Autocorp’s MR was denied. CA affirmed the trial court’s decision. MR was denied.
Hence this Petition for Review on Certiorari
ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture of the bonds, but
merely a recommendation of forfeiture, for no writ of execution has been issued against such bonds, therefore the
case was prematurely filed by ISAC
HELD: PETITION IS WITHOUT MERIT
YES
The Indemnity Agreements give ISAC the right to recover from petitioners the face value of the subject bonds
plus attorney’s fees at the time ISAC becomes liable on the said bonds to the BOC, (specifically to re-export the
imported vehicles within the period of six months from their date of entry) regardless of whether the BOC had
actually forfeited the bonds, demanded payment thereof and/or received such payment. It must be pointed out that
the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC “whether or not
payment has actually been made by the [ISAC]” and ISAC may proceed against petitioners by court action or
otherwise “even prior to making payment to the [BOC] which may hereafter be done by [ISAC].”
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
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(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period
has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of
such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.
NOTES:
A demand is only necessary in order to put an obligor in a due and demandable obligation in delay, which in turn
is for the purpose of making the obligor liable for interests or damages for the period of delay. Thus, unless
stipulated otherwise, an extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for
collection, can be resorted to
Ong vs PCIB
Date: January 15, 2005
Petitioners: Spouses Alfredo and Susana Ong
Respondent: Philippine Commercial International Bank

Ponente: Puno

Facts: - In 1991, Baliwag Mahogany Corp needed additional capital for its business and applied for various
loans, amounting to a total of five million pesos, with the respondent bank. Alfredo (President) and Susana Ong
(Treasurer) acted as sureties for these loans and issued 3 promissory notes for the purpose. It was stipulated in
the notes that the bank may consider 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. Thereafter, BMC filed a petition for rehabilitation and suspension of
payments with SEC after the creditors attached its properties. The bank then sought the collection of the
payment of the debt from the petitioners as sureties.
- On April 20, 1992, PCIB filed a case for collection of a sum of money against petitioners-spouses. On
October 13, 1992, a MOA was executed by BMC, the petitioners, and the consortium of creditor banks of BMC
(including PBIC). Petitioners then moved to dismiss the complaint arguing that the MOA suspended any
pending civil action against BMC. Hence, the benefits of the MOA should also be extended to the petitioners as
sureties. The trial court denied the motion to dismiss. The CA affirmed the trial court’s ruling that a creditor can
proceed against petitioners as surety independently of its right to proceed against BMC.

Issue: WON the suit against the spouses should be dismissed

Held: No

Ratio: - Reliance of petitioners on Articles 2063 and 2081 CC is misplaced as these provisions refer to
contracts of guaranty. They do not apply to suretyship contracts. Petitioners are not guarantors but sureties of
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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 with the bank, the former obligated
themselves to be solidarily bound with BMC for the payment of its debts to the bank. Under Article 1216 CC,
the bank as creditor may proceed against petitioners as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of collection suits against BMC. The bank’s right to collect
payment from the surety exists independently of its right to proceed directly against the principal debtor. In
fact, the bank may go against the surety alone without prior demand for payment on the principal debtor.
- The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of
collection suits by the creditor banks pertain only to the property of BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. Secondly,
there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct
from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the
creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets.
It has no jurisdiction over the properties of BMC’s officers or sureties.

Tupaz v. CA
G.R. No. 145578 Nov. 18, 2005 J. Carpio
petitioners Jose C. Tupaz IV and Petronila Tupaz
respondents CA, and BPI
summary Jose and Petronila, officers of El Oro, signed trust receipts in behalf of the company,
and in favor of BPI. They were not able to fulfill their obligations under the trust
receipts. BPI filed estafa charges against them. They were acquitted but were held
solidarily liable with El Oro in the payment of the debt to BPI.
Held: Jose and Petronilla are not liable under one trust receipt because they signed it
in their capacities as officers of the corporation. But, Jose is liable for the other trust
receipt because he signed it in his personal capacity. However, his liability is not
solidary with El Oro; he is liable only as guarantor. The solidary guaranty clause
makes guarantors signing the trust receipt solidarily liable with each other; it does
not operate to make them solidarily liable with the company. But, the suit against
Jose still stands because excussion is not a pre-requisite to secure judgment against a
guarantor. In fact, excussion can be waived

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facts of the case
~ Jose and Petronila Tupaz were Vice-President for Operations and Vice-President/Treasurer,
respectively, of El Oro Corporation. El Oro Corporation had a contract with the PH Army to
supply the latter with “survival bolos”
~ To finance the purchases of the raw materials for the bolos, the petitioners (on behalf of El
Oro) applied with BPI for 2 commercial letters of credit. The letters of credit were in favor of El
Oro’s suppliers, Tanchaoco Incorporated and Maresco Corporation. >>> BPI granted the
application and issued the letters of credit for P564,871.05 and P294,000.00 to Tanchaoco
Incorporated and Maresco Corporation respectively.
~ Simultaneous with the issuance of the letters of credit, the petitioners signed trust receipts in
favor of BPI:
a) Jose signed in his personal capacity a trust receipt corresponding for the first letter of
credit, binding himself to sell the goods and to remit the proceeds to BPI, if sold, or to
return the goods, if not sold, on or before 29 December 1981.
b) Both petitioners signed in their capacities as officers of El Oro a trust receipt covering
the second letter of credit to remit proceeds/return goods by 8 December 1981.
~ Tanchauco Incorporated and Maresco Corp. complied with their obligation and delivered the
raw materials to El Oro. BPI then paid the 2 corporations P564, 871.05 and P294,000
accordingly.
~ However, petitioners did not comply with their undertakings under the trust receipts.
>>> BPI made several demands for payment but El Oro made partial payments only. Final
demand letters were then sent but El Oro replied that it could not fully pay its debt because the
AFP had delayed in their payment for the bolos.
~ BPI charged petitioners with estafa under Sec. 13 of the Trust Receipts Law.

RTC: petitioners acquitted based on reasonable doubt. However, they are solidarily liable with
El Oro for the balance of the principal debt under the trust receipts.
CA: affirmed RTC. The trust receipts clearly showed the terms that the petitioners signed the
same as surety for the corporation and that they bound themselves directly and immediately
liable in case of default without need of demand.

issue
What is the nature of liability of petitioners?

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ratio

To the Bank of the Philippine Islands

In consideration of your releasing to ………………………………… under the terms of

this Trust Receipt the goods described herein, I/We, jointly and severally, agree and promise to
pay to you, on demand, whatever sum or sums of money which you may call upon me/us to pay
to you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the
event of default and/or non-fulfillment in any respect of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability in this guarantee shall
be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or
exhaust any legal remedies that you may have against the said
……………………………………………. Before making demand upon me/us. (Underlining
supplied; capitalization in the original)

Jose is personally liable. However, not solidary as lower courts said but only as guarantor.

However, respondent bank’s suit against petitioner Jose Tupaz stands despite the Court’s finding
that he is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment
against a guarantor. The guarantor can still demand deferment of the execution of the judgment
against him until after the assets of the principal debtor shall have been exhausted. Second, the
benefit of excussion may be waived.
Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion when
he agreed that his “liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any
need whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal
remedies xxx.” The clear import of this stipulation is that petitioner Jose Tupaz waived the
benefit of excussion under his guarantee.

The solidary guaranty clause makes guarantors signing the trust receipt solidarily liable with
each other; it does not operate to make them solidarily liable with the company.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s principal debt and other
accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust
receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981)
provided for payment of attorney’s fees equivalent to 10% of the total amount due and an

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“interest at the rate of 7% per annum, or at such other rate as the bank may fix, from the date due
until paid xxx.”
E Zobel, Inc. vs. CA

Facts:

Respondent spouses Raul and Elea Claveria applied for a loan with respondent SOLIDBANK. The
loan was granted subject to the condition that spouses execute a chattel mortgage over the 3
vessels to be acquired by them and that a continuing guarantee be executed by petitioner EZ, Inc.
in favor of Solid Bank. The spouses defaulted in payment of the entire obligation uponmaturity.
SolidBank filed a complaint for the sum of money against EZ Zobel. Petitioner moved to dismiss
the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to
Article 2080.

Issue:
WON, Art. 2080 is applicable to petitioner;
WON, petitioner’s obligation to SOLIDBANK under the continuing guaranty is that of a surety;

Held:

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.[7] 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.

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…”

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,[12] 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.

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LUZON STEEL CORPORATION v. SIA 1969

FACTS:
 Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O.
Sia (manager), for breach of contract and damages.
 It obtained a writ of preliminary attachment of the properties of the defendants, but the
attachment was lifted upon a P25,000.00 counterbond executed by the defendant Sia,
as principal, and the Times Surety & Insurance Co., Inc. (surety), as solidary
guarantor
 Plaintiff and defendant (without intervention of the surety) entered into a compromise
whereby defendant Sia agreed to settle the plaintiff's claim in the following manner:
1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE
THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED
(P500.00) PESOS, monthly for the first six (6) months to be paid at the end of every
month and to commence in January, 1965, and within one month after paying the last
installment of P500.00, the balance of P22,000.00 shall be paid in lump sum, without
interest. It is understood that failure of the Defendant to pay one or any installment will
make the whole obligation immediately due and demandable and that a writ of execution
will be issued immediately against Defendants bond.lawphi1.ñet
 The compromise was submitted to the court and the latter approved it, rendered judgment
in conformity therewith, and directed the parties to comply with the same (Record on
Appeal, page 22)
 Sia having failed to comply, plaintiff moved for and obtained a writ of execution against
defendant and the joint and several counterbond. The surety, however, moved to quash
the writ of execution against it, averring that it was not a party to the compromise, and
that the writ was issued without giving the surety notice and hearing. The court,
overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled
the counterbond, and denied the motion for reconsideration. Hence this appeal.

ISSUES/HELD:
(1) WON compromise discharged surety. NO
(2) WON excussion necessary to make surety liable NO

RATIO:
 Both questions can be solved by bearing in mind that we are dealing with
a counterbond filed to discharge a levy on attachment. Rule 57, section 12, specifies
that an attachment may be discharged upon the making of a cash deposit or filing a
counterbond "in an amount equal to the value of the property attached as determined by
the judge"; that upon the filing of the counterbond "the property attached ... shall be
delivered to the party making the deposit or giving the counterbond, or the person
appearing on his behalf, the deposit or counterbond aforesaid standing in place of the
property so released"
 The italicized expressions constitute the key to the entire problem. Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment undoubtedly

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 may be made effective upon the property released; and since the counterbond merely
stands in the place of such property, there is no reason why the judgment should not be
made effective against the counterbond regardless of the manner how the judgment was
obtained
 The lower court and the appellee herein appear to have relied on doctrines of this Court
concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs
of attachment, without discriminating between such bonds and those filed by a
defendant for the lifting of writs of attachment already issued and levied. This
confusion is hardly excusable considering that this Court has already called attention to
the difference between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et
al., L-15709, 19 October 1960, this Court pointed out that —
The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the
lifting of a writ of attachment is due to these bonds being security for the payment of any
judgment that the attaching party may obtain; they are thus mere replacements of the
property formerly attached, and just as the latter may be levied upon after final judgment
in the case in order to realize the amount adjudged, so is the liability of the
countersureties ascertainable after the judgment has become final. This situation does not
obtain in the case of injunction counterbonds, since the sureties in the latter case merely
undertake "to pay all damages that the plaintiff may suffer by reason of the continuance
... of the acts complained of" (Rule 60, section 6) and not to secure payment of the
judgment recovered.1
 It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties' compromise discharged the obligation of the
surety.
 But the surety in the present case insists (and the court below so ruled) that the execution
issued against it was invalid because the writ issued against its principal, Jose O. Sia, et
al., defendants below, had not been returned unsatisfied; and the surety invoked in its
favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59),

1) SOLIDARY
The surety's contention is untenable. The counterbond contemplated in the rule is evidently
an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here,
because the surety in the present case bound itself "jointly and severally" (in solidum) with the
defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the
Philippines that excusion (previous exhaustion of the property of the debtor) shall not take
place "if he (the guarantor) has bound himself solidarily with the debtor". The rule heretofore
quoted cannot be construed as requiring that an execution against the debtor be first returned
unsatisfied even if the bond were a solidary one; for a procedural rule may not amend the
substantive law expressed in the Civil Code, and further would nullify the express stipulation of
the parties that the surety's obligation should be solidary with that of the defendant.

2) SURETY cannot demand excussion unless he can point out sufficient property
A second reason against the stand of the surety and of the court below is that even if the
surety's undertaking were not solidary with that of the principal debtor, still he may not demand

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 exhaustion of the property of the latter, unless he can point out sufficient leviable property of the
debtor within Philippine territory. There is no record that the appellee surety has done so. Says
Article 2060 of the Civil Code of the Philippines:
ART. 2060. In order that the guarantor may make use of the benefit of excussion,
he must set it up against the creditor upon the latter's demand for payment from him, and
point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.

3) Payment not made to depend to the delivery/availability of property previously attached.

A third reason against the thesis of appellee is that, under the rule and its own terms, the
counter-bond is only conditioned upon the rendition of the judgment. Payment under the bond is
not made to depend upon the delivery or availability of the property previously attached, as it
was under Section 440 of the old Code of Civil Procedure. Where under the rule and the bond
the undertaking is to pay the judgment, the liability of the surety or sureties attaches upon the
rendition of the judgment, and the issue of an execution and its return nulla bona is not, and
should not be, a condition to the right to resort to the bond.

The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust
Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to
PAGRICO and R & B Surety.

Cochingyan, Jr. v. R&B Surety and Insurance Co., Inc.

June 30, 1987

Feliciano, J.
Petition: for review on certiorari of a decision of the Court of Appeals involving questions of law

Parties:
Joseph Cochingyan, Jr. and Jose Villanueva – petitioners
R&B Surety and Insurance Company, Inc. - respondent

Facts: (Who are the actors? What is the contract? Cause of Action? Injury? Damage? Lower Court Ruling?)

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in its line of credit
from P400,000.00 to P800,000.00 (the “Principal Obligation”), with the Philippine National Bank (PNB).
PAGRICO submitted Surety Bond No. 4765, issued by respondent R&B Surety and Insurance Co., (R&B
Surety) in the amount of P400,000.00 in favor of the PNB. In consideration of R & B Surety's issuance of the
Surety Bond, two identical indemnity agreements were entered into with R & B Surety executed by the Catholic
Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, and (b) another agreement dated 24 December
1963 was executed by PAGRICO.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to
pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in
said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED."

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When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from
R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a
series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and
receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva
for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under
the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph
Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben.
The lower court rendered a decision in favor of R & B Surety, ordering the Cochingyan and Villanueva to pay
the plaintiff, jointly and severally, the total amount of their liability on Surety Bond No. 4765, at the interest
rate of 6% per annum.

Issue: Whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to
the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the
Indemnity Agreements

Ruling:
NO.

It is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety
under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing
subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R &
B Surety from its obligation under the Surety Bond.

Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the
new obligation (and nothing else) would sustain a finding of novation by implication. But where, as in this
case, the parties to the new obligation expressly recognize the continuing existence and validity of the old
one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no
novation. The issue of implied novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to
assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual
in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee
is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee,
and not the extinguishment of the liability of the first debtor. Thus, in Magdalena Estates vs. Rodriguez, we
held that:
“[t]he mere fact that the 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.”

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously
bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became

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directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where
there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB:
PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order
or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B
Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own
indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also
directly liable to the PNB.

Notes:
If objective novation is to take place, it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one.
Novation is never presumed: it must be established either by the discharge of the old debt by the express
terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible.

Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is essential that
the old debtor be released from the obligation, and the third person or new debtor take his place in the new
relation. If the old debtor is not released, no novation occurs and the third person who has assumed the
obligation of the debtor becomes merely a co-debtor or surety or a co-surety.

ROSALINA CARODAN, Petitioner, v.

CHINA BANKING CORPORATION, Respondent.
G.R. No. 210542, February 24, 2016
Sereno, C.J.
Solidary Obligation
Facts
China Bank claimed that Barbara and Rebecca executed and delivered a Promissory Note
to respondent bank under which they promised therein to jointly and severally pay the amount of
P2.8 million. As security for the payment of the loan, Barbara, Rebecca and Rosalina also executed
a Real Estate Mortgage over a property registered in the name of Rosalina. Respondent alleged
that a Surety Agreement in favor of China Bank as creditor was also executed by Barbara and
Rebecca as principals and Rosalina and her niece Madeline as sureties.
Barbara and Rebecca failed to pay their loan despite repeated demands from China Bank.
The bank instituted extrajudicial foreclosure proceedings on the mortgage property. From the
extrajudicial sale, it realized only PI.5 million and would still leave a deficiency of P365,345.77.
The bank prayed that the court order the payment of the deficiency amount. China Bank clarified
that it was suing Barbara and Rebecca as debtors under the Promissory Note and as principals in
the Surety Agreement, as well as Rosalina and Madeline as sureties in the Surety Agreement.
Rosalina averred that when Barbara and Rebecca paid half of the loan under the Promissory
Note, the properties of Barbara covered by the mortgage were released by the bank from liability.
The cancellation of the mortgage lien was effected by an instrument. This cancellation, according

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to Rosalina, illegally caused her property to absorb the singular risk of foreclosure. The result,
according to her, was the extinguishment of the indivisible obligation contained in the mortgage
pursuant to Article 121632 of the Civil Code.
China Bank alleged that the issue of whether Rosalina obtained material benefit from the
loan was not material, since she had voluntarily and willingly encumbered her property; that the
indivisibility of mortgage does not apply to the case at bar, since Article 208938 of the Civil Code
presupposes several heirs, a condition that is not present in this case; that nothing short of payment
of the debt or an express release would operate to discharge a mortgage; and that, as surety,
Rosalina was equally liable as principal debtor to pay the deficiency obligation.
Issue
Whether or not petitioner Rosalina is liable jointly and severally with Barbara and Rebecca for
the payment of respondent China Bank's claims.

Ruling
We find that Rosalina is liable as an accommodation mortgagor.
In Belo v. PNB, we had the occasion to declare:
An accommodation mortgage is not necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed
under Article 2085 of the New Civil Code which provides that third persons who are not parties to
the principal obligation may secure the latter by pledging or mortgaging their own property. An
accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would
be contrary to his designation as such.
Apart from being an accommodation mortgagor, Rosalina is also a surety, defined under Article
2047 of the Civil Code in this wise:
Art. 2047. By guaranty a person, called a guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter
3, Title 1 of this Book shall be observed. In such case the contract is called a suretyship.
xxx
In Inciong, Jr. v. CA, we elucidated further in this wise:
While a guarantor may bind himself solidarity with the principal debtor, the liability of a guarantor
is different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of the

12
liability he assumes to pay the debt before the property of the principal debtor has been exhausted,
retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while
a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title
I, Book IV of the Civil Code.
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same
obligation, the presumption is that the obligation is joint so that each of the debtors is liable only
for a proportionate part of the debt. There is a solidarity liability only when the obligation expressly
so states, when the law so provides or when the nature of the obligation so requires. (Citations
omitted)
xxx
The creditor, respondent China Bank in this Petition, is therefore not precluded, from recovering
any unpaid balance on the principal obligation if the extrajudicial foreclosure sale of the property,
subject of the Real Estate Mortgage, would result in a deficiency.
Rosalina protests her liability for the deficiency. She claims that China Bank cancelled the
mortgage lien and released the principal borrowers from liability. She contends that this act
violated Article 2089 of the Civil Code on the indivisibility of mortgage and ultimately discharged
her from liability as a surety.
We disagree.
xxx
We therefore find no merit in Rosalina's protestations in this petition. As provided by the quoted
clause in the contract, she not only waived the rights to demand payment and to receive notice of
nonpayment and protest, but she also expressly agreed that the time for payment may be extended.
More significantly, she agreed that the securities may be "substituted, withdrawn or surrendered
at any time" without her consent or without notice to her. That China Bank indeed surrendered the
properties of the principal debtors was precisely within the ambit of this provision in the contract.
Rosalina cannot now contest that act in light of her express agreement to that stipulation.

Palmares vs. CA (288 SCRA 422)

Facts: 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. 1 On four occasions after the execution of the
promissory note and even after the loan matured, petitioner and the Azarraga spouses were able
to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991. 2

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Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint 3 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: WON Palmares is liable

Held: If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
shall control. 13 In the case at bar, petitioner expressly bound herself to be jointly and severally
or solidarily liable with the principal maker of the note. The terms of the contract are clear,
explicit and unequivocal that petitioner's liability is that of a surety.

G.R. No. 138544 October 3, 2000

SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs.
RODOLFO M. CUENCA, respondent.
PANGANIBAN, J.:

petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount
or beyond the period stipulated in the original agreement, absent any clear stipulation showing
that the latter waived his right to be notified thereof, or to give consent thereto.

FACTS:
Defendant-appellant Sta. Ines Melale (‘Sta. Ines’/SIMC) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR

On 10 November 1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line in
the amount of (P8,000,000.00) effective til November 30, 1981 to assist the latter in meeting the
additional capitalization requirements of its logging operations.

To secure payment, it executed a chattel mortgage over some of its machineries and equipments.
And as an additional security, its President and Chairman of the Board of Directors Rodolfo
Cuenca, executed an Indemnity agreement in favor of Security Bank whereby he bound himself
jointly and severally with Sta. Ines.

Specific stipulations:

 The bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower.
 As additional security for the payment of the loan, Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 solidary binding himself:
 ‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the
client (SIMC) in favor of the bank for the payment, upon demand and without the benefit
of excussion of whatever amount x x x the client may be indebted to the bank x x x by
virtue of aforesaid credit accommodation(s) including the substitutions, renewals,

14
 extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) x x x .’

1985: Cuenca resigned as President and Chairman of the Board of Directors of defendant-
appellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a public
auction to Adolfo Angala. Before and after this, Sta Ines availed of its credit line.

Sta Ines encountered difficulty in making the amortization payments on its loans and requested
SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC’s request
and signified its approval in a letter dated 18 February 1988 wherein SBTC and Sta. Ines,
without notice to or the prior consent of ] Cuenca, agreed to restructure the past due obligations
of defendant-appellant Sta. Ines. To formalize their agreement to restructure the loan obligations
of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement dated 31 October 1989 ‘

Sta Ines made payments up to (P1,757,000.00) The defaulted in the payment of its restructured
loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA,

SBTC filed a complaint for collection of sum of resulting after trial on the merits in a decision by
the court a quo, from which Cuenca appealed

CA: Released Cuenca from liability because 1989 Loan Agreement novated the 1980 credit
accommodation which extinguished the Indemnity Agreement for which Cuenca was liable
solidarily. No notice/consent to restructure. Since with expiration date, liable only up to that date
and up to that amount (8M). Amounted to extension.of time with no notice to suret therefore
released from liability.

ISSUES:
(a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s
liability under the Indemnity Agreement YES
(b) whether Cuenca waived his right to be notified of and to give consent to any substitution,
renewal, extension, increase, amendment, conversion or revival of the said credit
accommodation. NO

HELD: Petition of Bank no merit.CA affirmed.

RATIO:

A. Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
Novation of a contract is never presumed. Indeed, the following requisites must be established:
(1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the
old contract is extinguished; and (4) there is a valid new contract.16

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989
Loan Agreement extinguished the obligation18 obtained under the 1980 credit accomodation.

15
This is evident from its explicit provision to "liquidate" the principal and the interest of the
earlier indebtedness, as the following shows:

"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrower’s present total outstanding Indebtedness to the Lender (the "Indebtedness") while the
Second Loan shall be applied to liquidatethe past due interest and penalty portion of the
Indebtedness.

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement

1) NOT mere renewal/ Extension

1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989
Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his
obligation as a surety should be deemed extinguished, "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty. x x x."

2) Binding Nature of the Credit Approval Memorandum

Bank objects to the appellate court’s reliance on that document, contending that it was not a
binding agreement because it was not signed by the parties. It adds that it was merely for its
internal use. Indeed, it cannot take advantage of that document by agreeing to be bound only by
those portions that are favorable to it, while denying those that are disadvantageous.

B. NO Waiver of Consent

In the Indemnity Agreement, while respondent held himself liable for the credit accommodation
or any modification thereof, such clause should be understood in the context of the P8 million
limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify
the nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable.

A contract of surety "cannot extend to more than what is stipulated. It is strictly construed
against the creditor, every doubt being resolved against enlarging the liability of the
surety."31 Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor
of the surety x x x. Ambiguous contracts are construed against the party who caused the
ambiguity.32In the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we cannot sustain
petitioner’s view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank
did not have absolute authority to unilaterally change the terms of the loan
accommodation. At most, the alleged basis of respondent’s waiver is vague and uncertain. It

16
confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation
without the consent of the surety or notice thereto.

1) NOT Continuing Surety

That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.

NO PROVISION: ”each suretyship is a continuing one which shall remain in full force and
effect until this bank is notified of its revocation.

2) Special Nature of the JSS

It is a common banking practice to require the JSS ("joint and solidary signature") of a major
stockholder or corporate officer, as an additional security for loans granted to corporations.
There are at least two reasons for this. First, in case of default, the creditor’s recourse, which is
normally limited to the corporate properties under the veil of separate corporate personality,
would extend to the personal assets of the surety. Second, such surety would be compelled to
ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the
corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the
JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that
time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not
in a position then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.

Escaño v. Ortigas, Jr.

526 SCRA 26 (June 29, 2007)

Facts:
On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into a
loan agreement with Falcon Minerals, Inc. (Falcon) amounting to $320,000.00 subject to terms
and conditions. [“Nagpautang ang PDCP sa Falcon ng $320K]

17
On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George A. Scholey, and George
T. Scholey executed an Assumption of Solidary Liability “to assume in [their] individual
capacity, solidary liability with [Falcon] for due and punctual payment” of the loan contracted by
Falcon with PDCP.

Two (2) separate guaranties were executed to guarantee payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities. One
guaranty was executed by Escaño, Silos, Silverio, Inductivo and Rodriguez.

Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Matti.
Contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and
Matti. An Undertaking dated June 11, 1982 was executed by the concerned parties, namely: with
Escaño, Silos and Matti as “SURETIES” and Ortigas, Inductivo and Scholeys as “OBLIGORS”

Falcon eventually availed of the sum of $178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its personal properties to further secure the
loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the
chattel mortgage, there remained a subsisting deficiency of Php 5,031,004.07 which falcon did
not satisfy despite demand.

Issue: Whether the obligation to repay is solidary, as contended by respondent and the lower
courts, or merely joint as argued by petitioners.

Held/Ruling:
In case, there is a concurrence of two or more creditors or of two or more debtors in one
and the same obligation, Article 1207 of the Civil Code states that among them, “[t]here is a
solidary liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.” Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply indivisibility.” These Civil Code
provisions establish that in case of concurrence of two or more creditors or of two or more debtors
in one and the same obligation, and in the absence of express and indubitable terms characterizing
the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes
incumbent upon the party alleging that the obligation is indeed solidary in character to prove such
fact with a preponderance of evidence.

18
 Note that Article 2047 itself specifically calls for the application of the provisions on joint
and solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into
play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of
suretyship) in favor of the one who paid (i.e., the surety).[However, a significant distinction still
lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies
that the creditor can compel any one of the joint and several debtors or the surety alone to answer
for the entirety of the principal debt. The difference lies in the respective faculties of the joint and
several debtor and the surety to seek reimbursement for the sums they paid out to the creditor. In
the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected
the payment to the creditor “may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made.” Such solidary debtor will not be able to
recover from the co-debtors the full amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other co-debtors, and not as to the particular
proportional share of the solidary debtor who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has
the right to recover the full amount paid, and not just any proportional share, from the principal
debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

*Petitioners and Matti are jointly liable to Ortigas, Jr. in the amt. of P1.3M; Legal interest
of 12% per annum on P 1.3M computed from March 14, 1994. Assailed rulings are affirmed.
Costs against petitioners

19