Credit Set 3

CREDIT: Set 3
Navoa v. Navoa
E. Zobel v. CA
RCBC v. Arro
Dino v. CA
Willex Plastic v. CA
Ong v. PCIB
IFC v. ITM
Luzon v. Sia
Cochingyan v. R&B Surety
Peoples Bank v. Tambunting
PNB v. Manila Surety
Toh v. Solid Bank
Tupaz v. CA
Garcia v. CA
Govt of the PH v. Tizon
Security Bank v. Cuenca
Colinares v. CA
Ng v. People
December 29, 1995

OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,
vs.
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO
DOMDOMA, respondents.
Bellosillo, J.
SUMMARY: Navoa loaned from Domdoma, for the purpose of
investing the same in the purchase of jewelries. All these loans
were secured by separate checks intended for each amount of
loan obtained and dated 1 month after the contracts of loan were
executed. When these checks were deposited on their due dates,
they were all dishonored by the bank. Domdoma filed a case to
recover the amounts from Navoa. The SC ruled in favor of
Domdoma. The Navoas failed to make good the checks on their
due dates for the payment of their obligations, hence Domdoma
is entitled to the satisfaction of the debt.
DOCTRINE: Security is defined as a means of ensuring the
enforcement of an obligation or of protecting some interest in
property. It may be personal, as when an individual becomes a
surety or a guarantor; or a property security, as when a
mortgage, pledge, charge, lien, or other device is used to have
property held, out of which the person to be made secure can be
compensated for loss. Security is something to answer for as a
promissory note. That is why a secured creditor is one who holds
a security from his debtor for payment of a debt.
(Second to sixth causes of action)

Domdoma granted loans to Navoa in different amounts
on different dates.
All these loans were secured by separate checks
intended for each amount of loan obtained and dated 1
month after the contracts of loan were executed.
When these checks were deposited on their due dates,
they were all dishonored by the bank.
As a consequence, Domdoma prayed that Navoa be
ordered to pay the amounts of the loans granted to them
+ 1% interest monthly from the dates the checks were
dishonored until fully paid.
RTC DISMISSED the case filed by Domdoma for lack

of cause of action.
CA modified; returned the records of this case for trial
on the merits, upon filing of an answer subject to the
provisions of Art 1182 and 1197.
ISSUE: WON private respondents Domdoma can recover the

amounts loaned to petitioners Navoa. (YES)
RATIO:
FACTS:
(First cause of action)
Sometine in Feb 1977: Teresita Domdoma got
acquainted with Olivia Navoa in the jewelry business.
o Domdoma was to sell jewelry for Navoa.
Domdoma sold the jewelry of Navoa to Reycard Duet,
worth about P120,000 in no less than 20 transactions.
Even when Reycard Duet already left, Domdoma and
Navoa continued their association.
o Domdoma sold for Navoa jewelries worth no
less than P20,000 in 10 transactions.
June and July 1977: Navoa asked a loan from

Domdoma, for the purpose of investing the same in the
purchase of jewelries.
o The loan was secured by personal checks of
Navoa.
o In connection with these loans, Navoa
promised Domdoma a participation in an
amount equivalent to of the profit to be
realized.
Aug 15 1977: Navoa got from Domdoma one diamond
ring: 1 and karats, heart shaped, valued at P15,000.
o As a security for the said ring, Navoa issued a
PCIB check.
o The condition of the issuance of the check
was: if the ring was not returned within 15 days
from Aug 15, the ring is considered sold.
After 15 days, Domdoma asked Navoa if she could
deposit the check, and Navoas answer was hold it for
some time, until I tell you to deposit the same,
o The check was held by Domdoma until
November, but when deposited, it was
dishonored for lack of funds.
All the loans granted to petitioners are secured by

corresponding checks dated a month after each loan
was obtained.
In this regard, the term security is defined as a means of
ensuring the enforcement of an obligation or of
protecting some interest in property.
o
It may be personal, as when an individual

becomes a surety or a guarantor; or a property
security, as when a mortgage, pledge, charge,
lien, or other device is used to have property
held, out of which the person to be made
secure can be compensated for loss.
CREDIT: Set 3 | Guaranty & Surety | kb | 1
Security is something to answer for as a

promissory note.
That is why a secured creditor is one who

holds a security from his debtor for payment of
a debt.
From the allegations in the complaint there is

no other fair inference than that the loans were
payable one month after they were contracted
and the checks issued by petitioners were
drawn to answer for their debts to private
respondents.
Petitioners failed to make good the checks on their due

dates for the payment of their obligations.
o
Hence, private respondents filed the action

with the trial court precisely to compel
petitioners to pay their due and demandable
obligations.
Art. 1169 of the Civil Code is explicit those

obliged to deliver or to do something incur in
delay from the time the obligee judicially or
extrajudicially demands from them the
fulfillment of their obligation.
The continuing refusal of petitioners to heed

the demand of private respondents stated in
their complaint unmistakably shows the
existence of a cause of action on the part of
the latter against the former.
Quite obviously, the trial court erred in dismissing the

case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in
remanding the case to the trial court for the filing of an
answer by petitioners and to try the case on the merits.
DISPOSITION: Petition is DENIED.
May 6, 1998
E. ZOBEL, INC. vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL and ELEA R. CLAVERIA
MARTINEZ, J.
Summary: Spouses obtained a loan from SOLIDBANK. It was
subject to the conditions that: 1. Spouses execute a chattel
mortgage and 2. Continuing Guarantee by E. Zobel. Spouses
defaulted. SOLIDBANK filed a complaint for sum of money. E.
Zobel contends that it is no longer liable since its obligations as
guarantor had already been extinguished by the banks failure to
register the chattel mortgage pursuant to Art. 2080. Court held
that despite the contracts title, E. Zobel is actually a surety and
thus, Art. 2080 is not applicable. Even assuming that it is, failure
to register does not excuse E. Zobel from its obligation.
Doctrine: 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.
FACTS:
Spouses, doing business under the name "Agro

Brokers," applied for a loan with Consolidated Bank and
Trust Corporation (now SOLIDBANK) in the amount of
P2, 875,000.00 to finance the purchase of two maritime
barges and one tugboat which would be used in their
molasses business.
The loan was granted subject to the condition that

spouses execute a chattel mortgage over the three
vessels to be acquired and that a continuing guarantee
be executed by E. Zobel, Inc. in favor of SOLIDBANK.
The Spouses agreed to the arrangement. Consequently,
a chattel mortgage and a Continuing Guaranty were
executed.
Spouses defaulted. Hence, SOLIDBANK filed a

complaint for sum of money with a prayer for a writ of
preliminary attachment, against spouses and petitioner.
Petitioner moved to dismiss the complaint on the ground
that its liability as guarantor of the loan was
extinguished pursuant to Art 2080, NCC. 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 contending that Art.2080 is not

applicable because petitioner is not a guarantor but a
surety.
TC: The 'Continuing Guaranty' states as follows:
'For and in consideration of any existing indebtedness to you of
Agro Brokers, a single proprietorship owned by Mr. Raul Claveria
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
other manner, to, or at the request or for the account of the
borrower'
The provisions are plain. Clearly, E. Zobel, Inc. signed

as surety. Even though the title of the document is
'Continuing Guaranty', interpretation is not limited to the
title but to the contents and intention of the parties. The
obligation of the E. Zobel being that of a surety, Art.
2080 will not apply as it is only for those acting as
guarantor. In fact, in a letter by spouses and E. Zobel, it
is requesting that the chattel mortgage on the vessels
and tugboat be waived and/or rescinded by the bank
inasmuch as the said loan is covered by the Continuing
Guaranty by Zobel thus thwarting its claim now that the
chattel mortgage is an essential condition of the
guaranty. In its letter, it said that because of the
Continuing Guaranty the chattel mortgage is rendered
unnecessary and redundant.
With regard to the claim that the failure to register the

chattel mortgage with the proper government agency,
i.e. with the Office of the Collector of Customs or with
the Register of Deeds makes the obligation a guaranty,
the same could not be taken as the basis of the
extinguishment of the obligation of the E. Zobel to the
plaintiff as surety. The chattel mortgage is an additional
security and should not be considered as payment of
the debt in case of failure of payment. The same is true
with the failure to register; extinction of the liability would

not lie.
WON E. Zobel under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety. SURETY.
1.
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.
2. 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.
3. 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.
4. 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.
5. Based on the definitions, it appears that the
contract, 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 spouses. This
can be seen in the following stipulations.
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
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
6. The contract clearly disclosed that E. Zobel assumed
liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor.
It bound itself jointly and severally to the obligation with
the spouses. In fact, SOLIDBANK need not resort to all
other legal remedies or exhaust spouses' properties
before it can hold E. Zobel liable for the obligation. This
can be gleaned from a reading of the stipulations in the
contract, to wit:
'If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business, or become insolvent, or if any funds or
other property of the Borrower, or of the undersigned which may

be or come into your possession or control or that of any third
party acting in your behalf as aforesaid should be attached of
distrained, or should be or become subject to any mandatory
order of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and
payable by the undersigned forthwith without demand of notice
7. 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.
WON Art. 2080 is applicable to the case at bar. NO.
1. Having thus established that petitioner is a surety,
Article 2080 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.
2. But even assuming that Article 2080 is applicable,
SOLIDBANK's failure to register the chattel mortgage
did not release E. Zobel from the obligation. In the
Continuing Guaranty executed in favor of SOLIDBANK,
E. Zobel 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:
the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence,
value or condition of any collateral
No act or omission of any kind on your part in the premises shall
in any event affect or impair this guaranty
DISPOSITIVE: WHEREFORE, the decision of the respondent
Court of Appeals is hereby AFFIRMED. Costs against the
petitioner.
RIZAL COMMERCIAL BANKING CORPORATION petitioner,

vs. HON. JOSE P. ARRO, Judge of the Court of First Instance
of Davao, and RESIDORO CHUA, respondents.
De Castro, J.
NATURE: Petition for review on certiorari under Rule 45
[Originally Special Civil Action but party requested to convert it to
petition for review]
SUMMARY: Residoro Chua and Enrique Go executed a
comprehensive surety agreement to guaranty any existing
indebtedness of Davao Agricultural Industries Corporation,
and/or induce the bank at any time to make loans or advances or
to extend credit to Daicor. The contract provided that the liability
shall not exceed an aggregate of P100,000. A promissory note
was issued to RCBC, signed by Go, without Chua. The note was
not paid so RCBC sued for collection. Chua, in its defense, says
that it cannot bind him since he was not a signatory to the
promissory note. The SC held that Chua should be liable
because the only condition for the surety to be valid was that the
aggregate should not exceed P100,000 and there was no
indication that the continuing surety agreement had already been

terminated.
DOCTRINE:
Article 2053.A guaranty may also be given as security
for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be
secured.
FACTS:
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 (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the
bank at any time or from time to time thereafter, to make
loans or advances or to extend credit in other manner to, or
at the request, or for the account of the Borrower
On April 29, 1977 a promissory note in the amount of

P100,000.00 was issued in favor of RCBC payable on June
13, 1977. Said note was signed by Enrique Go, Sr. in his
personal capacity and in behalf of Daicor. The promissory
note was not fully paid despite repeated demands
RCBC filed a complaint for a sum of money against Daicor,

Enrique Go, Sr. and Residoro Chua. A motion to dismiss
dated September 23, 1978 was filed by respondent Residoro
Chua on the ground that the complaint states no cause of
action as against him.
o Chua: it was only Enrique Go, Sr. who signed the
same in behalf of Daicor and in his own personal
capacity.
RTC: Motion to dismiss granted. Chua not liable

ISSUE # 1: Whether or not Chua is liable despite the fact that he
did not sign the promissory note (YES)
RATIO # 1:
The comprehensive surety agreement was jointly executed
by Residoro Chua and Enrique Go, Sr., President and
General Manager, respectively of Daicor, on October 19,
1976 to cover existing as well as future obligations which
Daicor may incur with the RCBC 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 executed obviously to induce RCBC to

grant any application for a loan Daicor may desire to obtain
from RCBC bank. The guaranty is a continuing one which
shall remain in full force and effect until the bank is notified
of its termination.
The only condition that would make him liable thereunder is

that the Borrower is or may become liable as maker,
endorser, acceptor or otherwise. There is no doubt that
Daicor is liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier signed by Enrique
Go, Sr. and private respondent, is an accessory obligation, it
being dependent upon a principal one which, in this case is
the loan obtained by Daicor as evidenced by a promissory
note. What obviously induced RCBC bank to grant the loan
was the surety agreement whereby Go and Chua bound
themselves solidarity to guaranty the punctual payment of
the loan at maturity. By terms that are unequivocal, it can be
clearly seen that the surety agreement was executed to
guarantee future debts which Daicor may incur with RCBC
o Article 2053.A guaranty may also be given as
security for future debts, the amount of which is not
yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional

obligation may also be secured.
DISPOSITION: Reversed and Set Aside CFI decision.
JACINTO UY DIO and NORBERTO UY, petitioners, vs.HON.
COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents. (1992)
DAVIDE, JR., J
SUMMARY: UTEFS applied for and obtained credit
accommodations Metropolitan Bank and Trust Company in the
sum of P700,000.00. To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Dio executed
separate Continuing Suretyships dated 25 February 1977, 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 1978.
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. The petitioners
argued that they are o longer liable since they are only
guarantors on the 1977 obligation and not on latter ones. SC
ruled that petitioners are liable since what they signed was a
continuing suretyship/guaranty.
DOCTRINE:
A continuing guaranty is one which is not limited to a

single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to
provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable
The limit of the petitioners respective liabilities must be

determined from the suretyship agreement each had
signed. It is undoubtedly true that the law looks upon the
contract of suretyship with a jealous eye, and the rule is
settled that the obligation of the surety cannot be
extended by implication beyond its specified limits.
FACTS:
Uy Tiam Enterprises and Freight Services (hereinafter

referred to as UTEFS), thru its representative Uy Tiam,
applied for and obtained credit accommodations
(letter of credit and trust receipt accommodations) from
the Metropolitan Bank and Trust Company (hereinafter
referred to as METROBANK) in the sum of P700,000.00
To secure the aforementioned credit accommodations

Norberto Uy and Jacinto Uy Dio executed separate
Continuing Suretyships dated 25 February 1977, in
favor of the latter.
o Under the aforesaid agreements, Norberto Uy
agreed to pay METROBANK any indebtedness
of UTEFS up to the aggregate sum of
P300,000.00 while Jacinto Uy Dio agreed to
be bound up to the aggregate sum of
P800,000.00.
Having paid the obligation under the above letter of

credit in 1977, UTEFS, through Uy Tiam, obtained
another credit accommodation from METROBANK
in 1978, which credit accommodation was fully settled
before an irrevocable letter of credit was applied for and

obtained by the abovementioned business entity in 1979
o The Irrevocable Letter of Credit No. SN-Loc309, dated March 30, 1979, in the sum of
P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0
o It was applied for and obtained by UTEFS
without the participation of Norberto Uy and
Jacinto Uy Dio as they did not sign the
document denominated as "Commercial Letter
of Credit and Application."
o Also, they were not asked to execute any
suretyship to guarantee its payment.
o Neither did METROBANK nor UTEFS inform
them that the 1979 Letter of Credit has been
opened and the Continuing Suretyships
separately executed in February, 1977 shall
guarantee its payment
The 1979 letter of credit was negotiated
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK Trust Receipt
dated 4 June 1979, whereby the former acknowledged
receipt in trust from the latter of the aforementioned
goods from Planters Products which amounted to P815,
600.00.
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
Dio, demanding payment of the amount due.
Dio, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him
copies of documents showing the source of his liability.
o In its reply, the bank informed him that the
source of his liability is the Continuing
Suretyship which he executed on February 25,
1977.
o Dio 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 then filed a complaint for collection of
a sum of money with a prayer for the issuance of a writ
of preliminary attachment, against Uy Tiam,
representative of UTEFS and impleaded Dio and Uy as
parties-defendants.
The court issued an order, dated 29 July 1983, granting
the attachment writ, which writ was returned
unserved and unsatisfied as defendant Uy Tiam was
nowhere to be found
1984, Norberto Uy and Jacinto Uy Dio (suretiesdefendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action.
o They maintained that the obligation which they
guaranteed in 1977 has been extinguished
since it has already been paid in the same
year.
o 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. Invoking the terms and conditions embodied in
the comprehensive suretyships separately executed by
sureties-defendants, the bank argued that suretiesmovants bound themselves as solidary obligors of
defendant Uy Tiam to both existing obligations and
future ones.
RTC: dismissed complaint against Dino and Uy and

ordered Metrobakn to pay Dino and Uy
CA: RTC decision reversed

o Held
that
the
Continuing
Suretyship
Agreements separately executed by the
petitioners in 1977 were intended to guarantee
payment of Uy Tiam's outstanding as well as
future obligations
MR filed by petitioners DENIED
Hence, instant petition

ISSUE # 1: W/N the petitioners (Dino and Uy) may be held liable
as sureties for the obligation contracted by Uy Tiam with
METROBANK on 30 May 1979 under and by virtue of the
Continuing Suretyship Agreements signed on 25 February 1977.
(YES)
RATIO # 1:
Under the Civil Code, a guaranty may be given to

secure even future debts, the amount of which may not
known at the time the guaranty isexecuted
A continuing guaranty is one which is not limited to a

single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable
o A continuing guaranty is one which covers all
transactions, including those arising in the
future, which are within the description or
contemplation of the contract, of guaranty, until
the expiration or termination thereof.
o A guaranty shall be construed as continuing
when by the terms thereof it is evident that the
object is to give a standing credit to the
principal debtor to be used from time to time
either indefinitely or until a certain period,
especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract
of guaranty states that the same is to secure
advances to be made "from time to time" the
guaranty will be construed to be a continuing
one
In other jurisdictions, it has been held that the use of

particular words and expressions such as payment of
"any debt," "any indebtedness," "any deficiency," or "any
sum," or the guaranty of "any transaction" or money to
be furnished the principal debtor "at any time," or "on
such time" that the principal debtor may require, have
been construed to indicate a continuing guaranty
In the case at bar, the pertinent portion of paragraph I

of the suretyship agreement executed by petitioner Uy
provides thus:
o
I. For and in consideration of any existing

indebtedness to the BANK of UY TIAM
(hereinafter called the "Borrower"), for the
payment of which the SURETY is now
obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the BANK,
in its 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 security, and/or to
purchase or discount, or to make any loans or
advances evidence or secured by any notes,
bills, receivables, drafts, acceptances, checks,
or other instruments or evidences of
indebtedness
(all
hereinafter
called
"instruments") upon which the Borrower is or
may become liable as maker, endorser,
acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the
punctual payment at maturity to the loans,
advances credits and/or other obligations
hereinbefore referred to, and also any and all
other indebtedness of every kind which is now
or may hereafter become due or owing to the
BANK by the Borrower, together with any and
all expenses which may be incurred by the
BANK in collecting all or any such instruments
or other indebtedness or obligations herein
before referred to, and/or in enforcing any
rights hereunder
o Paragraph I of the Continuing Suretyship
Agreement executed by petitioner Dio
contains identical provisions except with
respect to the guaranteed aggregate principal
amount which is (P800,000.00).
Paragraph IV of both agreements stipulate that:

o VI. This is a continuing guaranty and shall
remain in full force and effect until written
notice shall have been received by the BANK
that it has been revoked by the SURETY, but
any such notice shall not release the SURETY,
from any liability as to any instruments, loans,
advances or other obligations hereby
guaranteed, which may be held by the BANK,
or in which the BANK may have any interest at
the time of the receipt (sic) of such notice. No
act or omission of any kind on the BANK'S part
in the premises shall in any event affect or
impair this guaranty, nor shall same (sic) be
affected by any change which may arise by
reason of the death of the SURETY, or of any
partner(s) of the SURETY, or of the Borrower,
or of the accession to any such partnership of
any one or more new partners.
The foregoing stipulations unequivocally reveal that

the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in
fact, they candidly admitted it. Neither have they denied
the fact that they had not revoked the suretyship
agreements.
ISSUE 2: What is the extent of their liability.
RATIO 2:
Petitioners contend that the public respondent gravely

erred in finding them liable for more than the amount
o
specified in their respective agreements, to wit: (a)

P800,000.00 for petitioner Dio and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be

determined from the suretyship agreement each had
signed. It is undoubtedly true that the law looks upon the
contract of suretyship with a jealous eye, and the rule is
settled that the obligation of the surety cannot be
extended by implication beyond its specified limits. To
the extent, and in the manner, and under the
circumstances pointed out in his obligation, he is bound,
and no farther.
Indeed, the Continuing Suretyship Agreements signed

by petitioner Dio and petitioner Uy fix the aggregate
amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively.
o The law is clear that a guarantor may bond
himself for less, but not for more than the
principal debtor, both as regards the amount
and the onerous nature of the conditions.
In the case at bar, both agreements provide for liability

for interest and expenses
o Thus, by express mandate of the Continuing
Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay
interest, expenses, attorney's fees and costs.
The last two items are pegged at not less than
ten percent (10%) of the amount due.
o Even without such stipulations, the petitioners
would, nevertheless, be liable for the interest
and judicial costs.
o Article 2055 of the Civil Code
o Interest and damages are included in the term
accessories. However, such interest should run
only from the date when the complaint was
filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to
Article 2208 of the Civil Code
DISPOSITION: partly granted
WHEREFORE, the petition is partly GRANTED, but only

insofar as the challenged decision has to be modified
with respect to the extend of petitioners' liability. As
modified, petitioners JACINTO UY DIO and
NORBERTO UY are hereby declared liable for and are
ordered to pay, up to the maximum limit only of their
respective Continuing Suretyship Agreement, the
remaining unpaid balance of the principal obligation of
UY TIAM or UY TIAM ENTERPRISES & FREIGHT
SERVICES under Irrevocable Letter of Credit No. SNLoc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from
the date of the filing of the complaint in Civil Case No.
82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and
costs.
Willex Plastic Industries Corporation v CA
SUMMARY: Inter-Resin Industrial Corporation opened a letter of
credit with with Manilabank. Inter-Resin and IUCP (Now
Interbank) secured the letter of credit by two Continuing Surety
Agreements, where they undertook solidary liability to
Manilabank. In turn, Inter-Resin and Willex Plastic executed a
Continuing Guaranty where for and in consideration of the sum
obtained and/or to be obtained by Inter-Resin from IUCP, they

jointly and severally guaranteed the prompt and punctual
payment upon maturity of the notes. In accordance with the
Continuing Surety Agreement, IUCP paid Manilabank. However,
Inter-Resin and Willex failed to pay Atrium (formerly IUCP, now
Interbank) upon demand, hence this case. 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.
HELD: 1) Willex is solidarily liable to Interbank. Based on the
evidence presented, both lower courts found that the Continuing
Guaranty was executed for purposes of securing payment to
Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank. 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. 2) The Continuing Guaranty
may be given retrospective effect to cover the sums obtained by
Inter-Resin from Manilabank as this is clear from the intention of
the parties. 3) Willex cannot avail of the benefit if excussion since
he expressly renounced this in the contract.
DOCTRINE: 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.
FACTS:
Inter-Resin Industrial Corporation opened a letter of

credit with the Manila Banking Corporation.
To secure payment of the credit accommodation, InterResin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two
Continuing Surety Agreements dated December 1,
1978, whereby they bound themselves solidarily to pay
Manilabank obligations of every kind, on which the InterResin Industrial may now be indebted or hereafter
become indebted to the Manilabank.
Subsequently, 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 guaranteed 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) xxx
In 1981, upon demand, IUCP paid to Manilabank the

sum of P4,334,280.61 representing Inter-Resin
Industrials outstanding obligation.
In turn, Atrium Capital Corp., which had succeeded

IUCP, demanded from Inter-Resin Industrial and Willex
Plastic the payment of what it (IUCP) had paid to
Manilabank.
Neither one of the sureties paid, thus Atrium filed this

case against Inter-Resin Industrial and Willex Plastic.
In 1982, Inter-Resin Industrial paid Interbank (successor
of Atrium), the sum of P687,500.00 representing the
proceeds of its fire insurance policy for the destruction
of its properties in a fire.
In their answers
Inter-Resin Industrial admitted that the Continuing
Guaranty was intended to secure payment to Atrium of
the amount of P4,334,280.61 which the latter had paid
to Manilabank. It claimed, however, that it had already
fully paid its obligation to Atrium Capital.
Willex contended, as an affirmative defense, that it was
only a guarantor of the principal obligor, and thus, its
liability is only secondary to that of the principal;
Trial Court: declared Inter-Resin and Willex Plastic as
solidarily liable to Interbank for P3,646,780.61,
representing their indebtedness to the plaintiff, with
interest until full payment of the said amount, liquidated
damages, attys fees and expenses.
Court of Appeals: Affirmed the RTC decision.
From this decision, Willex appealed.
ISSUE + RATIO:
Whether under the Continuing Guaranty signed on April 2, 1979
petitioner Willex Plastic may be held jointly and severally liable
with Inter-Resin Industrial for the amount paid by Interbank to
Manilabank. YES.
o
o
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.
SC: The contention is untenable. Based on the evidence
presented, both lower courts found that the Continuing
Guaranty was executed for purposes of securing
payment to Interbank (formerly IUCP) of amounts
paid by the latter to Manilabank:
Atrium Capital alleged in its complaint: 5. to secure the
guarantee
made by plaintiff
of the credit
accommodation granted to defendant IRIC [Inter-Resin
Industrial] by Manilabank, the plaintiff required
defendant IRIC [Inter-Resin Industrial] to execute a
chattel mortgage in its favor and a Continuing Guaranty
which was signed by the other defendant WPIC [Willex
Plastic].
Inter-Resin Industrial, in its answer, admitted this
allegation although it claimed that it had already paid its
obligation in its entirety.
During hearing, Willex manifested that the plaintiff in
this case [Interbank] is the guarantor and my client
[Willex Plastic] only signed as a guarantor to the
guarantee.
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.
Willex Plastic cannot now claim that its liability is limited
to any amount which Interbank, as creditor, might give
directly to Inter-Resin Industrial as debtor because, by
failing to object to the parol evidence presented, Willex
Plastic waived the protection of the parol evidence rule.
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.
WON the suretyship or guaranty may be applied retrospectively.

YES, this was the intention of the parties.
Willex Plastic invokes the ruling in El Vencedor v.

Canlas and Dio v. Court of Appeals in support of its
contention that a contract of suretyship or guaranty
should be applied prospectively. These cases cannot
support Willex contention.
In El Vencedor v. Canlas, it was held that a contract of
suretyship is not retrospective and no liability attaches
for defaults occurring before it is entered into unless an
intent to be so liable is indicated.
The Court found nothing in the contract to show that the
parties intended the surety bonds to answer for the
debts contracted previous to the execution of the
bonds.
In contrast, in this case, the parties to the Continuing
Guaranty clearly provided that the guaranty would
cover sums obtained and/or to be obtained by InterResin Industrial from Interbank.
In Dio v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted
after the execution of the continuing surety agreement.
It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. It is
provide security with respect to future transactions.
By no means, however, was it meant in that case that in
all instances a contract of guaranty or suretyship should
be prospective in application.
In the case of Bank of the Philippine Islands v.
Foerster, the Court held that although a contract of
suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as
revealed by the evidence is controlling.
WON Willex Plastic can claim the benefit of excussion. NO.

Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxx
xxx
xxx
In addition, Willex Plastic bound itself solidarily liable

with Inter-Resin Industrial under the same agreement:
xxx I/We hereby jointly and severally and unconditionally gua

assigns the prompt and punctual payment at maturity of the
principal/s, successor/s and assigns favor to the extent of xxx.
DISPOSITION: Affirmed.
SPOUSES
ALFREDO
AND
SUSANA
PETITIONERS, petitioners vs.
PHILIPPINE
COMMERCIAL
INTERNATIONAL
respondents (2005)
ONG,
BANK,
Puno, J
NATURE: Petitions for Review on Certiorari
SUMMARY:
The sps. Ong had obligated themselves as sureties of loans
extended by PCIB to BMC, a corporation where the sps. Ong
occupied the positions of President and Treasurer. Under the
agreement, PCIB could consider BMC in default and demand
payment of the balance upon the levy, attachment, or
garnishment of any of BMCs properties, or upon BMCs
insolvency, or if BMC was declared to be in a state of suspension
of payment. That same year, BMC filed a petition for
rehabilitation and suspension of payments with the SEC after its
properties were attached by creditors. Thus, PCIB considered
BMC in default PCIB then sought to collect the debt from the
sps. Ong, as sureties. PCIB filed an action for the collection of a
sum of money against the sps. While the action was pending,
BMC entered into a MOA with its creditor banks not only had
the SEC declared a suspension of payments, under the MOA,
the creditor-banks agreed to suspend the filing of any civil actions
against BMC. In view of the MOA, the sps. Ong filed a MtD,
arguing that the defenses available to the bank (suspension of
payments; suspension of filing of civil actions) should also be
available to them as sureties; the sps. argued that Arts. 2063 and
2081 (which applied to Guarantors) should also be applicable to
sureties. The TC denied the MtD. The CA affirmed the TCs
ruling. Thus, this petition for review.
The SC dismissed the petition. Citing differences between the
obligations of guarantors and sureties, the SC clarified that Arts.
2063 and 2081 were NA to sureties. Since the right to collect
against sureties was independent from the right to proceed
against the principal debtors, and since the MOA had no
provisions regarding sureties (and their properties) PCIB had a
right of action against the sps. Ong, notwithstanding the MOA.
DOCTRINE:
The pertinent portion of the Continuing Guaranty

executed by Willex Plastic and Inter-Resin Industrial in
favor of IUCP (now Interbank) reads:
Differences in rights and liabilities of a guarantor and a surety:
Guarantor: insures the solvency of a debtor;

o Surety: insurer of the DEBT ITSELF.
Contract of Guaranty: gives rise to a subsidiary

If default be made in the payment of the NOTE/s herein guaranteed obligation
you and/oron
your
directly proceed
against
theprincipal/s
part of themay
guarantor
a creditor
can
Me/Us without first proceeding against and exhausting DEBTOR/s only
properties
hold a guarantor liable for the balance of the debt
constituted My/Our direct and primary obligations.
AFTER he has proceeded against the properties of the
principal debtor and the debt remains unsatisfied.
This stipulation embodies an express renunciation of
(Principle of EXCUSSION)
the right of excussion.
o The principle of excussion is NOT available to
the surety since the surety is principally liable
for the payment of the debt the surety
obligates himself to pay the debt if the principal

debtor will not pay, REGARDLESS of whether
or not the principal debtor is financially capable
of fulfilling is obligation.
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 deemed as an original

promissory and debtor from the
beginning. (A surety is directly,
equally, and absolutely bound with the
principal debtor for the payment of the
debt.)
FACTS:
Antecedents
Baliwag Mahogany Corporation (BMC): domestic corp.;
engaged in manufacture/export of finished wood products.
Sps. Ong, Alfredo and Susana: President and Treasurer of
BMC.
Philippine Commercial International Bank (PCIB; now,
Equitable-Philippine Commercial International Bank [EPCIB]): lender-bank.
BMC needed additional capital in 1991, thus it applied for
various loans totaling P5M with PCIB.
The sps. Ong obliged themselves as sureties and

issued 3 Promissory Notes (PN) to secure BMCs loan;
o Stipulations:
PCIB may consider BMC in default

and demand payment of the balance
upon the levy, attachment, or
garnishent of any of
BMCs
properties; or,
Upon BMCs insolvency; or,
If BMC is declared to be in a state of

suspension of payments.
November of that same year, BMC filed a petition for
rehabilitation and suspension of payments w/ the SEC, after
its properties were attached by creditors.
Thus, PCIB considered BMC in default.

o PCIB sought to collect payment of the loan
from the sps. Ong, as sureties.
The Case
In April 1992, PCIB filed an action for collection of sum of
money against the Sps. Ong seeking to hold the sps. liable
as sureties on the 3 PNs.
October 1992, a Memorandum of Agreement (MOA) was
executed by BMC, the sps. Ong, and the consortium of creditor
banks of BMC (including PCIB) this MOA took effect on 27
November 1992, upon its approval by the SEC.
Afterwards, the sps. Ong moved to dismiss the complaint.
Argument: since the SEC had declared BMC in a state

of suspension of payments; and, since under the MOA
the creditor-banks agreed to temporarily suspend any
pending civil action against the against BMC
o The benefits of the MOA should be
extended to the sps. Ong who acted as
sureties.
Thus, PCIB is bared from pursuing the

collection case against the sps.
The TC DENIED the MtD.

The CA affirmed the TCs ruling.
Thus, this petition for review.
Sps. Ong (reiterated the arguments stated in its MtD,

and stated in addition):
o Art. 2064, NCC: a compromise between the
creditor and the principal debtor benefits the
GUARANTOR and should not prejudice the
latter.
o Art. 2081, NCC: 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
pesonal to the debtor.
Sps. Ong argued that as sureties they should be

allowed to avail of the defense of suspension of
payment of debts and filing of collection suits which
BMC can set up against PCIB.
ISSUE # 1: Does Arts. 2063 and 2081 apply to suretyship
contracts? (NO.)
RATIO # 1: Arts. 2063 and 2081 only refer to contracts of
guaranty they do NOT apply to suretyship contracts.
Differences in rights and liabilities of a guarantor and a surety:
Guarantor: insures the solvency of a debtor;

o Surety: insurer of the DEBT ITSELF.
Contract of Guaranty: gives rise to a subsidiary

obligation on the part of the guarantor a creditor can
only hold a guarantor liable for the balance of the debt
AFTER he has proceeded against the properties of the
principal debtor and the debt remains unsatisfied.
(Principle of EXCUSSION)
o The principle of excussion is NOT available to
the surety since the surety is principally liable
for the payment of the debt the surety
obligates himself to pay the debt if the
principal debtor will not pay, REGARDLESS
of whether or not the principal debtor is
financially capable of fulfilling is obligation.
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 deemed as an original

promissory and debtor from the
beginning. (A surety is directly,
equally, and absolutely bound with the
principal debtor for the payment of the
debt.)
Case at bar: the sps. Ong obliged themselves to be solidarily
bound with BMC for the payment of the P5M loan, under the
suretyship contract.
Under Art. 1216, NCC: PCIB may proceed against the

sps. Ong despite the execution of the MOA.
PCIBs right to collect payment from the surety exists

independently of its right to proceed directly against the
principal debtor.
PCIB can even go against the surety alone,

w/o prior demand for payment on BMC.
Note: MOA
The suspension of payments an non-filing of collection

suits pertain ONLY to the property of BMC.
o In the rehabilitation receivership filed by BMC
only the properties of BMC were mentioned.
o Nothing in the MOA that involves the liabilities
of the sureties whose properties are separate
and distinct from that of BMC.
o MOA was approved by SEC SECs
jurisdiction is limited only corporations and
corporate assets.
SEC has no jurisdiction over the

properties of BMCs officers or
sureties.
DISPOSITION: The petition is DISMISSED for lack of merit. No
pronouncement as to costs.
IFC v. ITM | Kat

November 15, 2005
INTERNATIONAL FINANCE CORPORATION, Petitioner, vs.
IMPERIAL TEXTILE MILLS, INC, Respondent.
PANGANIBAN, J.
SUMMARY: IFC extended a loan agreement to Philippine
Polyamide Industrial Corporation (PPIC) for $7M. A guarantee
agreement was executed by IFC with ITM where the latter
agreed to guarantee PPICs obligation to pay the loan. PPIC
failed to pay the loan and its interests. Due to non-payment, the
mortgages on the real properties were foreclosed. Even after the
foreclosure, a balance of $2.8M remained. IFC demanded
defendant as guarantors of PPIC to pay the outstanding balance.
The balance was not paid. Plaintiff filed a complaint with the RTC
against PPIC and defendant for the payment of the balance.
Held: ITM liable as surety. Although denominated as a
Guarantee Agreement, the Contract was actually a surety.
Notwithstanding the use of the words guarantee and
guarantor, the subject Contract was indeed a surety, because
its terms were clear and left no doubt as to the intention of the
parties.
DOCTRINE (not repeated below): The terms of a contract
govern the rights and obligations of the contracting parties.
When the obligor undertakes to be jointly and severally liable, it
means that the obligation is solidary. If solidary liability was
instituted to guarantee a principal obligation, the law deems the
contract to be one of suretyship.
FACTS:
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 each,
beginning June 1, 1977 to December 1, 1984, with
interest at the rate of 10% per annum on the principal
amount of the loan advanced and outstanding from time
to time. The interest shall be paid in US dollars semiannually on June 1 and December 1 in each year and
interest for any period less than a year shall accrue and
be pro-rated on the basis of a 360-day year of twelve

30-day months.
December 17, 1974: a Guarantee Agreement was
executed with Imperial Textile Mills, Inc. (ITM), Grand
Textile Manufacturing Corporation (Grandtex) and IFC
as parties thereto.
o ITM and Grandtex agreed to guarantee PPICs
obligations under the loan agreement.
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.
April 1, 1985: IFC served a written notice of default to
PPIC demanding the latter to pay the outstanding
principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and
its interests.
By virtue of PPICs failure to pay, IFC, together with
DBP, applied for the extrajudicial foreclosure of
mortgages on the real estate, buildings, machinery,
equipment plant and all improvements owned by PPIC,
located at Calamba, Laguna, with the regional sheriff of
Calamba, Laguna.
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. IFCs bid was for P99,269,100.00 which was
equivalent to US$5,250,000.00 (at the prevailing
exchange rate of P18.9084 = US$1.00).
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.
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.
May 20, 1988: IFC filed a complaint with the RTC of
Manila against PPIC and ITM for the payment of the
outstanding balance plus interests and attorneys
fees.
TC: held PPIC liable for the payment of the outstanding
loan plus interests and attorneys fees. However, the
trial court relieved ITM of its obligation as guarantor.
Hence, the trial court dismissed IFCs complaint against
ITM.
CA reversed the Decision of the trial court, insofar as
the latter exonerated ITM from any obligation to IFC.
(The guarantor ITM together with Grandtex is HELD
secondarily liable to pay the amount herein adjudged
to IFC
o ITM bound itself under the Guarantee
Agreement to pay PPICs obligation upon
default. ITM was not discharged from its
obligation as guarantor when PPIC mortgaged
the latters properties to IFC.
o ITMs liability as a guarantor would arise
only if and when PPIC could not pay. Since
PPICs inability to comply with its obligation
was not sufficiently established, ITM could not
immediately be made to assume the liability.
o MR denied
Hence, this Petition

ISSUE: W/N ITM is a surety, and thus solidarily liable with PPIC
for the payment of the loan? YES
RATIO:
Liability of ITM Under the Guarantee Agreement
The present controversy arose from the following

Contracts:
o (1) the Loan Agreement dated December 17,
1974, between IFC and PPIC; and
o (2) the Guarantee Agreement dated December
17, 1974, between ITM and Grandtex, on the
one hand, and IFC on the other.
IFC claims that, under the Guarantee Agreement, ITM

bound itself as a surety to PPICs obligations
proceeding from the Loan Agreement.
ITM asserts that, by the terms of the Guarantee

Agreement, it was merely a guarantor and not a surety.
Moreover, any ambiguity in the Agreement should be
construed against IFC -- the party that drafted it.
Language of the Contract
The premise of the Guarantee Agreement is found in its

preambular clause, which reads:
o Whereas,
o (A) By an Agreement of even date herewith
between IFC and PHILIPPINE POLYAMIDE
INDUSTRIAL CORPORATION (herein called
the Company), which agreement is herein
called the Loan Agreement, IFC agrees to
extend to the Company a loan (herein called
the Loan) of seven million dollars ($7,000,000)
on the terms therein set forth, including a
provision that all or part of the Loan may be
disbursed in a currency other than dollars, but
only on condition that the Guarantors agree to
guarantee the obligations of the Company in
respect of the Loan as hereinafter provided.
o (B) The Guarantors, in order to induce IFC
to enter into the Loan Agreement, and in
consideration of IFC entering into said
Agreement, have agreed so to guarantee such
obligations of the Company.
The obligations of the guarantors are meticulously
expressed in the following provision:
o Section 2.01. The Guarantors jointly and
severally,
irrevocably,
absolutely
and
unconditionally
guarantee,
as primary
obligors and not as sureties merely, the due
and punctual payment of the principal of, and
interest and commitment charge on, the Loan,
and the principal of, and interest on, the Notes,
whether at stated maturity or upon
prematuring, all as set forth in the Loan
Agreement and in the Notes.
The Agreement uses guarantee and guarantors,
prompting ITM to base its argument on those words.
This Court is not convinced that the use of the two
words limits the Contract to a mere guaranty. The
specific stipulations in the Contract show otherwise.
Solidary Liability Agreed to by ITM
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.
Indubitably therefore, ITM bound itself to be
solidarily liable with PPIC for the latters obligations
under the Loan Agreement with IFC. ITM thereby
brought itself to the level of PPIC and could not be
deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement
between PPIC and IFC.
ITMs liability commenced only when it guaranteed
PPICs obligation. It became a surety when it bound
itself solidarily with the principal obligor.
Thus, the applicable law is as follows:
o Article 2047. By guaranty, a person, called
the guarantor binds himself to the creditor to
fulfill the obligation of the principal in case the
latter should fail to do so.
o 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 shall be
called suretyship.
The aforementioned provisions refer to Articles 1207 to
1222 of the Civil Code on Joint and Solidary
Obligations. Relevant to this case is Article 1216,
which states:
o The creditor may proceed against any one of
the solidary debtors or some or all of them
simultaneously. The demand made against
one of them shall not be an obstacle to those
which may subsequently be directed against
the others, so long as the debt has not been
fully collected.
Pursuant to this provision, petitioner (as creditor) was
justified in taking action directly against respondent.
No Ambiguity in the Undertaking
The Court does not find any ambiguity in the provisions

of the Guarantee Agreement.
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.
o Those words emphasize the nature of their
liability, which the law characterizes as a
suretyship.
The use of the word guarantee does not ipso

facto make the contract one of guaranty.
o This Court has recognized that the word is
frequently employed in business transactions
to describe the intention to be bound by a
primary or an independent obligation.
The very terms of a contract govern the obligations

of the parties or the extent of the obligors liability.
Thus, this Court has ruled in favor of suretyship, even

though contracts were denominated as a Guarantors
Undertaking or a Continuing Guaranty.
Contracts have the force of law between the
parties, who are free to stipulate any matter not contrary
to law, morals, good customs, public order or public
policy.
o None of these circumstances are present,
much less alleged by ITM.
o Hence, this Court cannot give a different
meaning to the plain language of the
Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the
premise provided in the Whereas clause of the
Guarantee Agreement.
o The execution of the Agreement was a
condition precedent for the approval of PPICs
loan from IFC.
o Consistent with the position of IFC as creditor
was its requirement of a higher degree of
liability from ITM in case PPIC committed a
breach.
o ITM agreed with the stipulation in Section 2.01
and is now estopped from feigning ignorance
of its solidary liability.
o The literal meaning of the stipulations control
when the terms of the contract are clear and
there is no doubt as to the intention of the
parties.
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. The appellate court opined that
ITMs undertaking was collateral to and distinct from the
Loan Agreement.
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.
ITMs Liability as Surety
With the present finding that ITM is a surety, it is clear

that the CA erred in declaring the former secondarily
liable.
A surety is considered in law to be on the same

footing as the principal debtor in relation to
whatever is adjudged against the latter.
Evidently, the dispositive portion of the assailed

Decision should be modified to require ITM to pay the
amount adjudged in favor of IFC.
DISPOSITIVE: Petition GRANTED. The assailed Decision and
Resolution MODIFIED in the sense that TM is declared a surety
to PPIC. ITM is ORDERED to pay IFC the same amounts
adjudged against PPIC in the assailed Decision.
15 May 1969
LUZON STEEL CORPORATION, represented by Tomas Aquino
Cu vs. JOSE SIA, defendant, TIMES SURETY & INSURANCE
CO., surety-appellee
Acting CJ, J.B.L. Reyes
NATURE:
Direct appeal from to CFI Orders (19 May and 5 June 1965)
quashing a Writ of Execution against Times Surety and
cancelling the undertaking of said surety company
SUMMARY:
Luzon Steel Corp. (LSC) sued Metal Manufacturing of the
Philippines (MMP) and Respondent Jose Sia, as manager, for
breach of contract and damages. LSC obtained a Writ of
Preliminary Attachment, which was later lifted upon the filing of a
P 25 000 counter-bond by Sia and Respondent Times Surety
and Insurance Co. (TSIC). The parties later entered into a
compromise agreement, without the intervention of TSIC. Sia
failed to comply with the compromise agreement so LSC moved
for and obtained a Writ of Execution against the counter-bond.
TSIC moved to quash said Writ. The CFI granted the Motion and
cancelled the counter-bond. LSCs MR was denied; hence, the
instant appeal to the SC.
DOCTRINE:
Since the counter-bond merely stands in the place of such
property, there is no reason why the judgment should not be
made effective against the counter-bond regardless of the
manner how the judgment was obtained.
The liability of the sureties was fixed and conditioned on the
finality of the judgment rendered regardless of whether the
decision was based on the consent of the parties or on the
merits. A judgment entered on a stipulation is nonetheless a
judgment of the court because consented to by the parties.
Under NCC 2059(2), excussion (previous exhaustion of
debtors property) shall not take place if [the guarantor] has
bound himself solidarily with the debtor.
Even if the surety's undertaking were not solidary with that of
the principal debtor, still he may not demand exhaustion of
the property of the latter, unless he can point out sufficient
leviable property of the debtor within Philippine territory.
FACTS:
Petitioner Luzon Steel Corporation (LSC) sued Metal

Manufacturing of the Philippines (MMP) and Respondent
Jose Sia, as manager, for breach of contract and damages.
o LSC obtained a Writ of Preliminary Attachment of
MMPs properties, but the attachment was lifted
upon a P 25 000 counter-bond1 executed by Sia, as
principal, and Respondent Times Surety and
Insurance Co., Inc. (TSIC), as solidary guarantor.
After issues were joined, LSC and MMP entered into a

compromise agreement, without TSICs intervention,
whereby Sia agreed to settle LSCs claim:
o 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
1 WHEREFORE, we JOSE O. SIA, as principal, and the TIMES SURETY &
INSURANCE CO., INC., as Surety, in consideration of the dissolution of attachment,
hereby jointly and severally bind ourselves in the sum of Twenty Five Thousand
Pesos (P25, 000.00), Philippine Currency, to answer for the payment to the plaintiff
of any judgment it may recover in the action in accordance with Section 12, Rule 59,
of the Rules of Court.
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.
o The compromise was approved by CFI.
Sia failed to comply with the compromise agreement so LSC
moved for and obtained a Writ of Execution against the
counter-bond.
o TSIC moved to quash the Writ of Execution,
averring that 1) it was not a party to the
compromise, and 2) the writ was issued without
giving the surety notice and hearing.
The CFI set aside the Writ of Execution

and later cancelled the counter-bond.
CFI denied LSCs MR; hence, the instant appeal to the SC.
ISSUES:
1. Whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counter-bond
(NO)
2. Whether the writ of execution could be issued against the
surety without previous exhaustion of the debtor's properties
(YES)
RATIO:
Both questions can be solved by bearing in mind that we are

dealing with a counter-bond filed to discharge a levy on
attachment.
Rule 57, Sec. 12: 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 counter-bond, or
the person appearing on his behalf, the deposit or
counterbond aforesaid standing in place of the property so
released". (emphasis supplied by the SC)
o The SC held that [w]hether the judgment be
rendered after trial on the merits or upon
compromise, such judgment undoubtedly 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.
TSIC alleges that the compromise could be the result of a

collusion between the parties to injure the surety.
o In Anzures v. Alto Surety & Insurance, Co.: Under
section 12, Rule 59, of the Rules of Court, the bond
filed, as in this case, for the discharge of an
attachment is 'to secure the payment to the plaintiff
of any judgment he may recover in the action,' and
stands 'in place of the property so released'. It
follows that the order of cancellation issued by the
respondent judge is erroneous. Indeed, judgment
had already been rendered by the Court of First
Instance of Manila in civil case No. 11748,
sentencing Benjamin Aguilar to pay the sum of P3,
500.00 to the petitioner; and it is not pretended that
said judgment is a nullity. There is no point in the
contention of the respondent Surety Company that
the compromise was entered into without its

knowledge and consent, thus becoming as to it
essentially fraudulent. The Surety is not a party
to civil case No. 11748 and, therefore, need not
be served with notice of the petition for
judgment. As against the conjecture of said
respondent that the parties may easily connive by
means of a compromise to prejudice it, there is also
the likelihood that the same end may be attained by
parties acting in bad faith through a simulated trial.
At any rate, it is within the power of the Surety
Company to protect itself against a risk of the kind.
In the case at bar, the SC found that the CFI and TSIC
appear to have relied on SC doctrines 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.
o This confusion is hardly excusable considering that
this Court has already called attention to the
difference between these kinds of bonds in Cajefe
v. Judge Fernandez: 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.
The SC held that CFI erred in cancelling TSICs surety bond
on the theory that the parties compromise discharged the
obligation of the surety.
o Mercado v. Macapayag: [T]he liability of the
sureties was fixed and conditioned on the
finality of the judgment rendered regardless of
whether the decision was based on the consent
of the parties or on the merits. A judgment
entered on a stipulation is nonetheless a
judgment of the court because consented to by
the parties.
As regards TSICs contention that the execution issued
against it was invalid because the writ issued against Sia
had not been returned unsatisfied as contemplated by Rule
57, Sec. 172, the SC held that the counterbond contemplated in the rule is evidently an ordinary
guaranty where the sureties assume a subsidiary liability.
In the case at bar, TSIC was solidarily liable with SIA.
o Under NCC 2059(2), excussion (previous
exhaustion of debtors property) shall not take
2 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 counter-bond, 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 same action.
place if [the guarantor] has bound himself

solidarily with the debtor.
o 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.
Moreover, even if the surety's undertaking were not
solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless
he can point out sufficient leviable property of the
debtor within Philippine territory.
o The SC found no record that TSIC has done so.
o NCC 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.
Finally, under the rule and TSICs own terms, the counterbond is only conditioned upon the rendition of the
judgment.
o Payment under the bond is not made to depend
upon the redelivery or availability of the property
previously attached, as it was under Sec. 440 of the
old Code of Civil Procedure.
o Anzures: 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.
o While it is true that under Sec. 17 of Rule 57
recovery from the surety or sureties should be after
notice and summary hearing in the same action,
the SC found that this requirement has been
substantially complied with from the time the
surety was allowed to move for the quashal of
the writ of execution and for the cancellation of
their obligation.
DISPOSITIVE:
Petition granted.
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA,
petitioners, vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent
(1987)
FELICIANO, J.:
NATURE: petition for review on certiorari under Rule 45
SUMMARY: In 1963, PAGRICO obtained a P400,000 increase in
its credit line from PNB. The increased amount was secured by a
surety bond executed by R&B. In turn, Cochingyan, Villanueva,
and Liu, in both their personal and business capacities, executed
separate Indemnity Agreements to answer for R&Bs obligation
should it become liable under the surety bond. PAGRICO
defaulted and R&B made partial payments to PNB as
PAGRICOs surety. R&B then demanded indemnification from
Cochingyan and Villanueva. When its demand went unheeded,
R&B sued the two indemnitors. In 1965, Cochingyan entered into
a trust agreement with a PNB official, where PNB agreed inter

alia to refrain from suing PAGRICOs sureties. The CFI rendered
a decision holding Cochingyan and Villanueva liable to R&B for
the P400,000 plus the stipulated payments under the indemnity
agreement. Cochingyan and Villanueva appealed the decision,
claiming that: the Trust Agreement novated the original surety
agreement; the Trust Agreement was entered into without
Villanuevas consent and that the agreement to refrain from
enforcing the bond was an extension under NCC 2079, thus
such an extension should have released Villanueva from his
obligation; and that the case was premature. SC dismissed all 3
arguments as untenable, holding that: the requisites of novation
were not met; that NCC 2079 does not apply because Villanueva
and Cochingyan did not become sureties and the agreement for
non-enforcement was not an extension since the principal
obligation had long matured; and that the suit was not premature
since it was a contract for indemnity against liability, thus the
obligation arose once R&B became liable.
DOCTRINE:
The theory behind Article 2079 is that an extension of
time given to the principal debtor by the creditor without
the surety's consent would deprive 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.
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 cosurety.
Where 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.
While in a contract of indemnity against loss an
indemnitor will not be liable until the person to be
indemnified makes payment or sustains loss, in a
contract of indemnity against liability, as in this case, the
indemnitor's liability arises as soon as the liability of the
person to be indemnified has arisen without regard to
whether or not he has suffered actual loss
FACTS:
November 1963 Pacific Agricultural Suppliers, Inc.
(PAGRICO) was granted a P400,000 increase in its credit
line with the Philippine National Bank (PNB). This increased
its total credit line to P800,000.
To secure the increased amount, PAGRICO submitted a
surety bond issued by R&B Surety and Insurance Co., Inc.,
for P400,000 in favor of PNB.
o Under the surety bond, PAGRICO and R&B bound
themselves jointly and solidarily to comply with the
terms and conditions of the credit line established
by PNB.
o PNB was also granted the right to proceed directly
against R&B without prior extinguishment of
PAGRICOs assets.
The Surety Bond also provided that R&B will be

liable not only for the principal amount but also for
the accrued interest plus all expenses, charges, or
legal costs incident to the collection of the
obligation.
Dec. 23 & 24, 1963 - In consideration for the issuance of the
surety bond, two identical Indemnity Agreements were
entered into with R&B by Catholic Church Mart (CCM) and
its president, Joseph COCHINGYAN, Jr.; and by PAGRICO,
Pacific Copra Export, Inc. (PACOCO), Jose VILLANUEVA,
and LIU Tua Beh,
o Cochingyan, Villanueva, and Liu signed the
agreement in both their professional and personal
capacities (as president and/or manager).
o Under the two indemnity agreements, the
indemnitors bound themselves jointly and severally
to R&B to pay an annual premium of P5,103.05 and
to faithfully comply with the terms and conditions of
the surety bond until such is cancelled and/or
discharged; including the obligation to indemnify
R&B for any loss or damage it may sustain as a
consequence of its execution of the surety bond.
PAGRICO defaulted in the payment of the credit line.
R&B thus made a series of payments to PNB, totaling
P70,000.
R&B in turn sent formal demand letters to Cochingyan,
Villanueva, and Liu for reimbursement of the payments it
made to PNB. The 3 indemnitors did not heed the demand.
R&B thus sued the 3 indemnitors before the Manila CFI
Dec. 28, 1965 Cochingyan and PNB entered into a trust

agreement.
o TRUSTOR - Jose Sr. and Susana Cochingyan,
doing business as CCM, represented by Joseph
Cochingyan
o TRUSTEE - Tomas BESA (a PNB official)
o BENEFICIARY PNB
o Under the agreement, Cochingyan appointed Besa
as trustee for the purpose of paying the obligations
of R&B and another surety (Consolacion Ins. &
Surety Co.) to the PNB resulting from the default of
PAGRICO in the principal obligation, i.e., the credit
line.
o The agreement also provided that PNB would hold
in abeyance any claims against the two surety
companies, and to reinstate them to the PNBs list
of accredited surety companies.
o In one of its whereas clauses, Cochingyan as
trustor admitted his obligation under the indemnity
agreements.
CFI DECISION Cochingyan & Villanueva to pay the

amount of the unpaid premiums, plus the amount of the
credit line increase (P400,000) and interest. Complaint
against Liu was dismissed for failure to serve summons.
Cochingyan and Villanueva appealed to the CA, which

certified the case to the SC on pure questions of law.
ISSUE # 1: W/N the trust agreement extinguished R&Bs
obligations under the Surety Bond, thus in turn extinguishing the
obligations of Cochingyan and Villanueva (CV) under the
Indemnity Agreements (NO)
RATIO # 1:
It is not disputed that the principal obligation has not yet
been fully paid. Thus the surety bond (and consequently
the indemnity agreements) subsists, unless it has been
extinguished by some other means.
o
CV: The Surety Bond and the Indemnity Agreements

were novated by the Trust Agreement
SC: Novation is the extinguishment of an obligation by

the substitution or change of the obligation by a
subsequent one which terminates it, either by changing
its object or principal conditions, or by substituting a new
debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Novation through a
change of the object or principal conditions of an
existing obligation is referred to as objective (or real)
novation. Novation by the change of either the person of
the debtor or of the creditor is described as subjective
(or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In
both objective and subjective novation, a dual purpose
is achieved an obligation is extinguished and a new one
is created in lieu thereof.
Novation may either be objective (a new obligation

expressly or impliedly, by incompatibility, extinguishing
an older obligation) or subjective (by a change in the
parties to the obligation, such that one or both parties to
the original obligation are discharged).
CASE AT BAR: The trust agreement did not expressly

terminate R&Bs obligation under the Surety Bond. En
contrario, the trust agreement expressly stated it did not
in any manner release R&B from its obligation under the
surety bond. There can be no implied novation because
the trust agreement expressly recognized the
subsistence of the obligation under the surety bond.
What the trust agreement did was to bring in another
party to assume R&Bs obligation under the surety
bond. It is usual business practice for a person to come
in and assume obligations under a contract to which he
is a stranger. Classic example is surety.
Magdalena Estate v. Rodrigues: "[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."
Cochingyan was already liable to R&B under the

indemnity agreement. What the trust agreement did was
to make him directl liable to the PNB as well. This had
the effect of increasing the number of solidary debtors to
three (PAGRICO, R&B, and Cochingyan). PNB could
thus proceed against any of them, in any order.
PNB did not intend to release R&B from its obligation;

thus R&B could not have intended to release its own
indemnitor simply because the indemnitor also became
directly liable to PNB.
ISSUE # 2: W/N the trust agreement extended the term of the
surety bond so as to release Villanueva from his obligation as
indemnitor as he did not consent to the execution of the trust
agreement (NO)
RATIO # 2:
Villanueva: His obligation under the indemnity
agreement was extinguished when PNB, in the trust
agreement, agreed to hold in abeyance any action to
enforce its claims against R&B
SC: Untenable, for two reasons:
FIRST REASON: While the indemnity agreements
provided that the indemnitors shall become co-sureties
of R&B with respect to PNB, there is no proof in the
record that Cochingyan and Villanueva actually became
co-sureties of R&B vis-a-vis PNB. They remained bound

only to R&B as its indemnitors and PNB could not have
demanded payment directly from them. NCC 2079 is
thus inapplicable to this case.
o Villanueva remained a second-tier party as far
as PNB was concerned; and any extension of
time granted to the first-tier parties (PAGRICO,
R&B, and Cochingyan) could not prejudice
him.
SECOND REASON: PNBs undertaking under the trust
agreement to refrain from enforcing its claim against
R&B did not extend the maturity of R&Bs surety
obligation. The principal obligation (and likewise the
surety bond) had already matured when the trust
agreement was made.
o The obligation of Villanueva as indemnitor had
also matured from the time R&B became liable
to pay any sum under the surety bond, whether
such sums was actually paid or not. The
situation is the one contemplated in NCC 2079:
"[t]he 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."
o The theory behind this provision is that an
extension of time to pay given without the
suretys consent would deprive the surety of his
right to pay the creditor and become
subrogated in the latters rights. The provision
protects the surety against the possibility of the
debtor or the indemnitors becoming insolvent
during the extended period. This rationale is
not present in the case at bar.
o BPI v. Albaladejo y Cia.: [M]ere 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.
o There was nothing to prevent Cochingyan and
Villanueva from tendering payment to PNB and
become subrogated to such remedies R&B
may have against PAGRICO.
The undertaking of the PNB to "hold in abeyance any

action to enforce its claim" against R & B did not amount
to an "extension granted to the debtor" without
Villanueva's consent so as to release CV from their
undertaking as indemnitors of R & B Surety under the
Indemnity Agreements;
ISSUE # 3: W/N the filing of the complaint was premature since
PNB had not yet sued R&B for the forfeiture of the surety bond.
(NO)
RATIO # 3:
The indemnity agreements allow R&B to recover from

the indemnitors even before R&B shall have paid PNB.
SC has held such indemnity clauses to be enforceable
and not contrary to public policy.
CV forget that indemnity agreements indemnify not only

against loss but against liability as well. In such a
contract for indemnity against liability, the indemnitors
liability arises as soon as the liability of the person to be
indemnified arises, regardless of whether the

indemnitee has suffered actual loss.
CASE AT BAR: R&B was entitled to proceed against
Cochingyan and Villanueva not only for the partial
payments already made but for the full amount owed by
PAGRICO to PNB. The present suit is not premature
despite the fact that PNB has not instituted any action
against R&B for the enforcement of the surety bond.
DISPOSITION: Denied
October 29 1971
PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,
vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and
FRANCISCO D. SANTANA, defendants. FRANCISCO D.
SANTANA, defendant-appellant.
Fernando J.
SUMMARY: PBTC extended an overdraft line to the Sps
Tambuntings for P200,000, with 135 shares of stock of Intl Stock
& Devt Corp as collateral. Santana bound himself jointly and
severally as guarantor. The Tambuntings asked for several
extensions, and these were granted. The shares of stock were
also eventually released back to them. However, they failed to
pay for their obligation and defaulted. PBTC filed a complaint to
collect from the Sps. Tambunting and Santana as guarantor.
Santana contends that he has been released from his obligation
as guarantor because the extensions and release of stocks were
done without his consent, thus novating the contract. The SC
ruled against him, saying that The contract of absolute guaranty
expressly authorized the plaintiff bank to extend the time of
payment and to release or surrender any security or part thereof
held by it without notice to, the consent of, Santana. He had
consented in advance the release of the guaranty which the bank
might make, Santana cannot now complain that the release of
the pledge was without his consent, and that it deprived him of
the right to be subrogated to the rights of the creditor.
DOCTRINE: The law does not prohibit the debtor-guarantor from
agreeing in advance and without notice to the release of any
security which had been given to assure payment of the
obligation. The waiver is not contrary to public policy, because
the right is purely personal, and does not affect public interest nor
does it violate any public policy. Neither does the return of the
shares of stocks novate the original contract for the obligation
remains the same; and if it is a novation, it is a novation made
with the consent of Santana. Moreover, the pledge is merely an
accessory obligation, and its release does not vary the terms of
the principal obligation.
FACTS:
Sept 9 1968: Peoples Bank and Trust Co (PBTC) and

Sps. Tambuntings executed a contract, denominated
Overdraft Agreement and Pledge.
o PBTC granted to the Sps Tambunting an
overdraft from time to time on their current
account, not to exceed P200,000, 9% p.a.
o The proceeds were to be used by the
Tambuntings in their logging operations.
Defendant Francisco Santana, as guarantor, and the
Sps Tambunting conveyed to the bank shares of capital
stock of International Stock Devt Corp as collateral
security for the payment of any and all indebtedness
incurred or arising from the overdraft + extensions,

renewals, amendments or applications thereof.
On the same day, Santana executed a document
(Absolute Guaranty) in which in consideration of the
Overdraft Agreement and Pledge, he bound himself
jointly and severally with the Tambunting spouses for
the full & prompt payment of all indebtedness incurred
on the overdraft line.
July 24 1964: Jose Tambunting wrote to PBTC
requesting for a renewal of the overdraft agreement.
PBTC granted the extension for 6 months from Sept 10
1964, BUT reducing the overdraft line to P185,000, with
the understanding that the other terms & conditions
would be in full force & effect.
Before the expiration of the 6 months period (or on Mar
5 1965), Jose Tambunting asked for another renewal of
the overdraft line for another year.
This was granted again by PBTC.
o The extension was approved for another year
or until March 10, 1966, but with the interest
rate of 10% p.a.
o The Board of PBTC also approved the release
of the pledge of 135 shares of stocks of the Intl
Sports Devt Corp.
Sps. Tambunting failed to pay the indebtedness on the
date due.
Demand for payment was made upon Tambuntings and
Santana. (Evidenced by 3 letters).
o The total amount due as of December 1966
was P219,165.
The Tambuntings failed to answer the complaint and
was declared in default.
Santana, meanwhile, does not dispute the indebtedness
but contends that he had been released from the
guaranty for the ff. reasons:
o The extension of the time of payment by the
Tambuntings was without his consent.
o Also without his consent was the release of the
135 shares of stock of ISDC to the
Tambuntings.
o ART 2080 (Civil Code): 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.
ISSUE: WON Santana was released from his obligation as

guaranty. (NO)
RATIO:
(From the RTC decision) The contract of absolute

guaranty expressly authorized the plaintiff bank to
extend the time of payment and to release or surrender
any security or part thereof held by it without notice to,
the consent of, Santana.
o He had consented in advance the release of
the guaranty which the bank might make,
Santana cannot now complain that the release
of the pledge was without his consent, and that
it deprived him of the right to be subrogated to
the rights of the creditor.
o The waiver is not contrary to law, nor is it
contrary to public policy.
o The law does not prohibit the debtor-guarantor
from agreeing in advance and without notice to
the release of any security which had been

given to assure payment of the obligation.
o The waiver is not contrary to public policy,
because the right is purely personal, and does
not affect public interest nor does it violate any
public policy.
o Neither does the return of the shares of
stocks novate the original contract for the
obligation remains the same; and if it is a
novation, it is a novation made with the
consent of Santana.
o Moreover, the pledge is merely an
accessory obligation, and its release does
not vary the terms of the principal
obligation.
It is thus obvious that the contract of absolute guaranty
executed by appellant Santana is the measure of rights
and duties. As it is with him, so it is with the plaintiff
bank.
o What was therein stipulated had to be
complied with by both parties. Nor could
appellant have any valid cause for complaint.
He had given his word; he must live up to it.
Once the validity of its terms is conceded, he
cannot be indulged in his unilateral
determination to disregard his commitment.
o So the Civil Code explicitly requires:
"Obligations arising from contracts have the
force of law between the contracting parties
and should be complied with in good faith."
It could have been different if there were no such
contract of absolute guaranty to which appellant was a
party under the aforesaid Article 2080. He would have
been freed from the obligation as a result of plaintiff
releasing to the Tambuntings without his consent the
135 shares of the International Sports Development
Corporation pledged to plaintiff bank to secure the
overdraft line. For thereby subrogation became
meaningless.
o Such a provision is intended for the benefit of a
surety.
o That was a right he could avail of.
He is not precluded however from waiving it.
o That was what appellant did precisely when he
agreed to the contract of absolute guaranty.
o A right may be waived unless it would be
contrary to law, public order, public policy,
morals or good customs.
o There is no occasion here for the exceptions
coming into play.
It has been traditional in the Philippine
for parents to extend all available aid
and assistance to their children. That
is a custom of long standing.
Nor is there anything offensive to
morals by an assumption of
contingent liability as thus worded.
The law has not been thwarted. Neither is public order
nor public policy disregarded.
July 30, 1965

PHILIPPINE NATIONAL BANK vs. MANILA SURETY and
FIDELITY CO., INC. and THE COURT OF APPEALS
REYES, J.B.L., J.:

Summary: ATACO constituted PNB as its assignee and attorneyin-fact to receive and collect from the Bureau of Public Works the
amount to pay for the asphalt delivered to it under a trust receipt
guaranteed by Manila Surety. PNB was able to regularly collect.
However, due to unexplained reasons, PNB was not able to
collect until the investigators found out that more money were
payable to ATACO from BPW. The latter allowed another creditor
to collect funds due to ATACO under the same purchase order.
Court ruled that PNB was negligent in having stopped collecting
from BPW before ATACOs debt is fully collected, thereby
allowing funds to be taken by other creditors to the prejudice of
the surety.
Doctrine: Extinguishment of liability of surety: ART. 2080. The
guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be
subrogated to the rights, mortgages and preferences of the latter.
FACTS:
PNB had opened a letter of credit and advanced thereon
$120,000.00 to Edgington Oil Refinery for 8,000 tons of hot
asphalt. Of this amount, 2,000 tons worth P279,000.00 were
released and delivered to Adams & Taguba Corporation (known
as ATACO) under a trust receipt guaranteed by Manila Surety &
Fidelity Co. u
To pay for the asphalt, ATACO constituted the Bank its

assignee and attorney-in-fact to receive and collect from
the Bureau of Public Works (Bureau) the amount out of
funds payable to the assignor under Purchase Order
No. 71947. The conditions of this assignment are as
follows:
1. The same shall remain irrevocable until the said
credit accommodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby
appointed as our Attorney-in-Fact for us and in our
name, place and stead, to collect and to receive the
payments to be made by virtue of the aforesaid
Purchase Order, with full power and authority to
execute and deliver on our behalf, receipt for all
payments made to it; to endorse for deposit or
encashment checks, money order and treasury
warrants which said Bank may receive, and to
apply said payments to the settlement of said credit
accommodation.
3. This power of attorney shall also remain irrevocable
until our total indebtedness to the said Bank have
been fully liquidated.
ATACO delivered to the Bureau, and the latter accepted,

asphalt to the total value of P431,466.52. Of this amount
the Bank regularly collected. Thereafter, for unexplained
reasons, the Bank ceased to collect, until its
investigators found that more moneys were payable to
ATACO from the Public Works office, because the latter
had allowed mother creditor to collect funds due to
ATACO under the same purchase order. Its demands on
the principal debtor and the Surety having been refused,
the Bank sued both to recover the balance plus interests
and costs.
TC: Ordered Manila Surety to pay PNB the balance.

Manila Surety appealed.
CA: The Bank to have been negligent in having stopped

collecting from the Bureau the moneys falling due in
favor of the principal debtor, ATACO, before the debt
was fully collected, thereby allowing such funds to be
taken and exhausted by other creditors to the prejudice
of the surety, and held that the Bank's negligence

resulted in exoneration of Manila Surety
Bank contends the power of attorney obtained from

ATACO was merely in additional security in its favor, and
that it was the duty of the surety, and not that of the
creditor, to see to it that the obligor fulfills his obligation,
and that the creditor owed the surety no duty of active
diligence to collect any, sum from the principal debtor.
WON Manila Suretys obligation as surety has already been
extinguished pursuant to Art. 2080. YES.
CA did not hold the Bank answerable for negligence in

failing to collect from the principal debtor but for its
neglect in collecting the sums due to the debtor from the
Bureau, contrary to its duty as holder of an exclusive
and irrevocable power of attorney to make such
collections, since an agent is required to act with the
care of a good father of a family and becomes liable for
the damages which the principal may suffer through his
non-performance
Certainly, the Bank could not expect that the Bank

would diligently perform its duty under its power of
attorney, but because they could not have collected
from the Bureau even if they had attempted to do so. It
must not be forgotten that the Bank's power to collect
was expressly made irrevocable, so that the Bureau
could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the
surety.
Even if the assignment with power of attorney from the

principal debtor were considered as mere additional
security still, by allowing the assigned funds to be
exhausted without notifying the surety, the Bank
deprived the former of any possibility of recoursing
against that security. The Bank thereby exonerated the
surety, pursuant to Article 2080.
The appellant points out to its letter of demand

addressed to the Bureau and its letter to ATACO
informing the debtor of its outstanding balance. SUch
has no bearing on the issue whether the Bank has
exercised due diligence in collecting from the Bureau
since the letter was addressed to ATACO, and the funds
were to come from elsewhere.
As to the letter of demand on the Public Works office, it

does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the
surety were ever apprised that payment was not being
made. The fact remains that because of the Bank's
inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to Bank was only
P158,563.18. The finding of negligence is thus not only
conclusive on us but fully supported by the evidence.
Even if the CA erred on the second reason it advanced

in support of the decision now under appeal, because
the rules on application of payments, giving preference
to secured obligations are only operative in cases where
there are several distinct debts, and not where there is
only one that is partially secured, the error is of no
importance, since the principal reason based on the
Bank's negligence furnishes adequate support to the
decision of the CA that the surety was thereby released.
DISPOSITIVE: WHEREFORE, the appealed decision is affirmed,
with costs against appellant Philippine National Bank.
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs.

SOLID BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG LI,
respondents
Bellosillo J.
NATURE: Petition for review on certiorari under Rule 45
[Originally Special Civil Action but party requested to convert it to
petition for review]
SUMMARY: Spouses Toh executed a continuing guaranty in
favor of Solid Bank for the credit facility with certain conditions
granted by the bank to First Business Paper Corporation.
Spouses Li, who are also with the spouses Toh under the
guaranty, ran away without paying the loan of FBPC. Solid Bank
then tried to proceed against Toh. Toh said that they were only
signing in capacity as stockholders and did not intend to
guaranty after being removed as Chairman of the Board(Luis)
and Vice President (Vicky). Also, they alleged that they were just
asked to sign blank pieces of paper. The lower court found that
spouses Toh should not be held liable but CA reversed and found
them to have voluntarily entered into the guaranty. The SC
upheld the finding of CA but absolved the spouses because of
the acts of Solid Bank in extending the credit beyond the
conditions set forth in the original contract. According to them, to
hold Tohs liable would be injustice since Solid Bank clearly
extended the credit line without even exercising diligence and
following the terms of the contract.
DOCTRINE:
Any doubt on the terms and conditions of the surety
agreement should be resolved in favor of the surety.
Art 2055 The liability of a surety is measured by the terms of
his contract, and while he is liable to the full extent thereof,
his accountability is strictly limited to that assumed by its
terms.
Art 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty.
If the suretyship contract was made upon the condition that
the principal shall furnish the creditor additional security, and
the security being furnished under these conditions is
afterwards released by the creditor, the surety is wholly
discharged, without regard to the value of the securities
released, for such a transaction amounts to an alteration of
the main contract.
FACTS:
RESPONDENT SOLID BANK CORPORATION AGREED TO

EXTEND an omnibus line credit facility worth P10 million in
favor of respondent First Business Paper Corporation
(FBPC). The terms and conditions of the agreement as well
as the checklist of documents necessary to open the credit
line were stipulated in a letter-advise
o One of the requirements was a continuing guaranty
signed by spouses Li [President and GM] and Toh
[Chairman and VP]
It is not disputed that the credit facility as well as its terms

and conditions was not cancelled or terminated, and that
there was no prior notice of such fact as required in the
letter-advise if any was done.
A continuing guaranty was signed 30 days after the letter

advise
o The terms of the instrument defined the contract
arising therefrom as a surety agreement and
provided for the solidary liability of the signatories
thereto for and in consideration of loans or
advances and credit in any other manner to, or

at the request or for the account of FBPC.
o The Continuing Guaranty set forth no maximum
limit on the indebtedness that respondent FBPC
may incur and for which the sureties may be liable,
stating that the credit facility covers any and all
existing indebtedness of, and such other loans and
credit facilities which may hereafter be granted to
FIRST BUSINESS PAPER CORPORATION.
o The surety also contained a de facto acceleration
clause if default be made in the payment of any of
the instruments, indebtedness, or other obligation
guaranteed by petitioners and respondents.
o So as to strengthen this security, the Continuing
Guaranty waived rights of the sureties against delay
or absence of notice or demand on the part of
respondent Bank, and gave future consent to the
Banks action to extend or change the time
payment, and/or the manner, place or terms of
payment,
The effectivity of the Continuing Guaranty was not
contingent upon any event or cause other than the written
revocation thereof with notice to the Bank that may be
executed by the sureties.
FBPC opened thirteen (13) letters of credit and obtained
loans totaling P15,227,510.00. As the letters of credit were
secured, FBPC through its officers Kenneth Ng Li, Ma.
Victoria Ng Li and Redentor Padilla as signatories executed
a series of trust receipts over the goods allegedly purchased
from the proceeds.
6 months after (Jan 1994), bank received information that
Spouses Li had fraudulently departed from their conjugal
home. The bank then served a demand letter upon FBPC
and spouses Toh invoking the acceleration clause and
demanded to be paid within 24 hours
On 17 January 1994 respondent Bank filed a complaint for
sum of money with ex parte application for a writ of
preliminary attachment against FBPC, spouses Kennet Ng Li
and Ma. Victoria Ng Li, and spouses Luis Toh and Vicky Tan
Toh
Meanwhile, with the implementation of the writ of preliminary
attachment resulting in the impounding of purported
properties of FBPC, the trial court was deluged with thirdparty claims contesting the propriety of the attachment. In
the end, the Bank relinquished possession of all the attached
properties to the third-party claimants except for 2
insignificant items as it could barely cope with the yearly
premiums on the attachment bonds.
Tohs allegations
o They were part of incorporation and Luis Toh had
been one of the signatories for checking account
with Solid Bank.
o They were asked to sign papers in blank and the
continuing guaranty could have been one of them
o It was impossible for them to have freely and
consciously executed the surety in May when they
have already divested their shares in March 1993.
Also, Luis was removed as authorized 2 days after
the surety.
o They also resigned in June of that year and
obtained from Li their exclusion from several surety
agreements with various banks (supported by
evidence)
Trial Court: FBPC liable but spouses Toh not liable because
they did not voluntarily execute the surety
CA: Liable because there is not showing that they did not
voluntarily and freely executed the surety.
o The Court of Appeals ratiocinated that the
provisions of the surety agreement did not indicate
that Spouses Luis and Vicky Toh x x x signed the
instrument in their capacities as Chairman of the
Board and Vice-President, respectively, of FBPC
only. Hence, the court a quo deduced, [a]bsent
any such indication, it was error for the trial court to
have presumed that the appellees indeed signed
the same not in their personal capacities.
o There was also no written revocation so the
Guaranty remained in full force and effect
ISSUE # 1: Whether or not Spouses Toh were bound by the
surety (Court said that it should have been yes, but later on
decided NO)
RATIO # 1:
This Court holds that the Continuing Guaranty is a valid and

binding contract of petitioner-spouses as it is a public
document that enjoys the presumption of authenticity and
due execution.
We are bound by the consistent finding of the courts a quo

that petitioner- spouses Luis Toh and Vicky Tan Toh
voluntarily affixed their signature[s] on the surety
agreement and were thus at some given point in time willing
to be liable under those forms
Similarly, there is no basis for petitioners to limit their

responsibility thereon so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to such
condition or eventuality.
Verily, if petitioners intended not to be charged as sureties

after their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required notice of
revocation upon the bank as expressly allowed therein.
But as we bind the spouses Luis Toh and Vicky Tan Toh to
the surety agreement they signed so must we also hold
respondent Bank to its representations in the letter- advise
of 16 May 1993. Particularly, as to the extension of the
due dates of the letters of credit, we cannot exclude from the
Continuing Guaranty the preconditions of the Bank that were
plainly stipulated in the letter-advise.
o Fairness and justice dictate our doing so, for the
bank itself liberally applies the provisions of
cognate agreements whenever convenient to
enforce its contractual rights, such as, when it
harnessed a provision in the trust receipts executed
by respondent FBPC to declare its entire
indebtedness as due and demandable and
thereafter to exact payment thereof from petitioners
as sureties
o We cannot disregard the provisions of the letter
advise in sizing up the panoply of commercial
obligations between the parties.
The stipulations violated:

o Domestic letters of credit be supported by fifteen
percent (15%) marginal deposit extendible three (3)
times for a period of thirty (30) days for each
extension, subject to twenty-five percent (25%)
partial payment per extension.
An extension of the period for enforcing the indebtedness

does not by itself bring about the discharge of the sureties
unless the extra time is not permitted within the terms of the
waiver
Under Art. 2055 of the Civil Code, the liability of a

surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by
its terms.
It is admitted in the Complaint of respondent Bank before the
trial court that several letters of credit were irrevocably
extended for ninety (90) days with alarmingly flawed and
inadequate considerationthe indispensable marginal deposit
of fifteen percent (15%) and the twenty- five percent (25%)
prerequisite for each extension of thirty (30) days. It bears
stressing that the requisite marginal deposit and security for
every thirty (30)-day extension specified in the letter-advise
were not set aside or abrogated nor was there any prior
notice of such fact, if any was done.
o These irregular extensions were candidly admitted
by Victor Ruben L. Tuazon, an account officer and
manager of respondent Bank
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver
stipulated in the Continuing Guaranty. Evidently, they
constitute illicit extensions prohibited under Art. 2079
o An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes
the guaranty
This act of the Bank is not mere failure or delay on its part to
demand payment after the debt has become due, as was the
case in unpaid five (5) letters of credit which the Bank did not
extend, defer or put off, but comprises conscious, separate
and binding agreements to extend the due date, as was
admitted by the Bank itself
As a result of these illicit extensions, petitioner-spouses Luis
Toh and Vicky Tan Toh are relieved of their obligations as
sureties of respondent FBPC under Art. 2079 of the Civil
Code.
Further, we note several suspicious circumstances that
militate against the enforcement of the Continuing Guaranty
against the accommodation sureties. Firstly, the guaranty
was executed more than thirty (30) days from the original
acceptance
period
as
required
in
the
letteradvise.Thereafter, barely two (2) days after the Continuing
Guaranty was signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments in the
corporate structure of FBPC ensued in the month of June
1993, which the Bank did not investigate although such were
made known to it.
By the same token, there is no explanation on record for the
utter worthlessness of the trust receipts in favor of the Bank
when these documents ought to have added more security
to the indebtedness of FBPC.
o Bank security officer saw 2 delivery vans coming
out of the compound which took the last supplies.
The consequence of these omissions is to

discharge the surety, petitioners herein,
under Art. 2080 of the Civil Code, or at the
very least, mitigate the liability of the
surety up to the value of the property or
lien released
If the creditor x x x has acquired

a lien upon the property of a
principal, the creditor at once
becomes charged with the duty of
retaining
such
security, or
maintaining such lien in the
o
interest of the surety, and any

release or impairment of this
security as a primary resource for
the payment of a debt, will
discharge the surety to the extent
of the value of the property or lien
released x x x x [for] there
immediately arises a trust relation
between the parties, and the
creditor as trustee is bound to
account to the surety for the
value of the security in his hands
For the same reason, the grace period granted by

respondent Bank represents unceremonious abandonment
and forfeiture of the fifteen percent (15%) marginal deposit
and the twenty-five percent (25%) partial payment as fixed in
the letter-advise. These payments are unmistakably
additional securities intended to protect both respondent
Bank and the sureties in the event that the principal debtor
FBPC becomes insolvent during the extension period.
o For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its
unauthorized extensions to pay granted to FBPC,
petitioner-spouses Luis Toh and Vicky Tan Toh are
discharged as sureties under the Continuing
Guaranty.
Finally, the foregoing omission or negligence of respondent

Bank in failing to safe-keep the security provided by the
marginal deposit and the twenty-five percent (25%)
requirement results in the material alteration of the principal
contract, i.e., the letter-advise, and consequently releases
the surety
o As has been said, if the suretyship contract was
made upon the condition that the principal shall
furnish the creditor additional security, and the
security being furnished under these conditions is
afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of
the securities released, for such a transaction
amounts to an alteration of the main contract.
DISPOSITION: Reversed and Set Aside CA decision. Reinstated
Trial Court decision.
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, petitioners, vs.

THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS, respondents. (2005)
CARPIO, J
NATURE: PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
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.
SC held that 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.
DOCTRINE:
A corporate representative signing as a solidary

guarantee as corporate representative did not undertake
to guarantee personally the payment of the
corporations debts
Debts incurred by directors, officers and employees

acting as such corporate agents are not theirs but the
direct liability of the corporation they represent if they so
contractually agree or stipulate
Excussion is not a prerequisite to secure judgment

against a guarantor; The benefit of excussion may be
waived.
FACTS:
Petitioner Jose Tupaz IV (VP for Operations) and

Petronila Tupaz (VP/Treasurer) of El Oro Engraver
Corp.
El Oro had a contract with Phil Army to supply the latter

with survival bolos
To finance the purchase of the raw materials for the

bolos, petitionerss on behalf of El Oro, applied with
respondent BPI for 2 COMMERCIAL Letters of Credit
(LOC)
o LOCs were in favor of El Oros suppliers
Tanchaoco Inc and Mareso Corp (rubber corp)
o Bank GRANTED the LOCs
564,871 to Tanchaoco and 294000 to

Maresco
Simultaneous with the issuance of LOCs, petitioners

signed trust receipts in favor of BPI
o Jose Tupaz signed, in his personal capacity, a
trust receipt corresponding to Tanchaocos
LOC binding himself to sell the goods and to
remit proceeds, OR return the goods
o Also, both petitioners bound themselves, by
signing in their capacities as officers of El Oro
the trust receipt pertaining to Maresos LOC, to
sell and remit proceeds, or return goods if
unsold.
The 2 suppliers delivered the raw materials to El Oro

where BPI paid the corporations the amount stated in
the LOC
BUT petitionerss did not comply with their undertaking

under the trust receipts despite demands from the resp
BPI only partial payments were made
o El Oro in its answer said that it could not pay
since AFP had delayed paying for the survival
bolos
BPI charged petitioners with estafa under sec 13 of

Trust Receipts Law (PD 115)
RTC: acquitted petitionerss of estafa on reasonable

doubt BUT found them solidarily liable with El Oro for
the balance of its principal debt under the trust receipts
o That civil liability is distinct from criminal liability
CA: affirmed TC
o Vintola v. Insular Bank of Asia and America:
acquittal in the estafa case under PD 115 is no
bar to the institution of a civil action for
collection
o But petitioners argued that they cant be
solidarily liable with their corporation for they
signed the trust receipts only in their capacity
as corporate officers
Petitioners contention is however contradicted

by the evidence on record that the trust receipt
agreement provided that they are surety for the
corporation in case of default
Hence, this petition
o
ISSUE 1:WON Pets bound themselves personally liable for El

Oros debts under the trust receipts. Jose Tupaz only
RATIO 1:
Jose Tupaz is liable as GUARANTOR of El Oro while

Petronila Tupaz just signed in his capacity as officer
o ONLY JOSE TUPAZ MAY BE HELD
PERSONALLY LIABLE
A corporation may act only thru its directors and officers
In the trust receipt for Marescos LOC, both petitioners

signed as officers = not personally liable
o Debts incurred by these individuals are not
theirs but are the direct liability of the
corporation they represent
o An exception to this tho is when these officers
contractually agree or stipulate such
BUT for the trust receipt for Tanchaocos LOC, the

dorsal portion of which Jose Tupaz signed alone, it
was not indicated that he was signing as El Oros
representative.
o Hence, he bound himself personally liable for
the debts
o That he is solidarily liable because it is
provided in the dorsal portion that I.We, jointly
and severally, agree and promise I/We
further agree that the my/our liability in this
guarantee shall be direct and immediate
o So the lower courts interpreted this to mean
that he is solidarily liable
o Not being a party to this trust receipt, Petronila
is not liable under such trust receipt
ISSUE 2: WON Jose Tupaz should be solidarily liable. NO.
Guaranty
RATIO 2:
Prudential Bank v. IAC: Involved a substantially identical

clause in the trust receipt where the officer who signed
the trust receipt binding himself solidarily liable was said
to be a guarantor only (not a solidary guaranty
clause bec. only one)
o Bolstered by the last sentence which speaks of
excussion
In the case at bar, Court found him to be a guarantor

only BUT the banks suit must stand
o First, excussion is not a pre-requisite to secure
judgment against a guarantor. Guarantor can
still demand deferment of the execution of the
judgment against him until after the assets of
principal debtor shall have been exhausted.
o Second, the benefit of excussion can be
waived
And under the trust receipt signed personally by

Jose Tupaz, he waived excussion when he agreed
that his liability in the guaranty shall be direct and
immediate, without any need on the part of bank to
take any steps or exhaust any legal remedies.
As guarantor, he is liable for the principal debt and other

accessory liabilities as stipulated in the trust receipt or
as provided by law
o
o
o
Attys fees = to 10% of total amount due

Interest at the rate of 7% per annum
Drafts under the LOC subject to interest
rate of 18% per annum (this was considered
and not the above 7% since the drafts are
the bases of the trust receipts)
ISSUE 3:WON Tupazs acquittal in Estafa extinguished the civil

liability. NO
RATIO 3:
General rule: civil action impliedly instituted with

criminal action but with 3 exceptions (WRI) AND IS NOT
EXTINGUISHED BY ACQUITTAL
His liability did not arise from the criminal act but from
the trust receipt contract
Here, BPI chose not to file a separate civil action to

recover payment under the trust receipts
DISPOSITION: Petition granted in party
Garcia v CA
SUMMARY: Antonio Garcia and Ernest Kahn entered into a
Surety Agreement binding themselves solidarily for the payment
of the loan of P2,500,000.00 contracted by Western Minolco
Corporation with PISO. Garcia, upon demand by PISO, failed to
comply with his undertaking as surety. He moved to dismiss the
complaint filed by PISO claiming that he had not received any
consideration from PISO, further invoking his limited liability as a
corporate officer; and that the principal obligation had been
novated. RTC granted his petition but the CA reversed. The SC
affirmed the CA
HELD: Garcia is liable under the surety agreement. 1) His
contention that there was a lack of consideration is without merit.
The surety becomes liable for the debt or duty of another
although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom. A surety
agreement is regarded as valid despite the absence of any direct
consideration received by the surety either from the principal
obligor or from the creditor. 2) He cannot invoke limited liability of
corporations because he signed the surety agreement in his
personal capacity and not as a corporate officer. 3) Contract was
not novated. Garcia failed to establish the validity of the new
contract, an essential requisite for the novation of a previous
valid obligation.
DOCTRINE: A contract of surety, like any other contract, must
generally be supported by a sufficient consideration. However,
the consideration necessary to support a surety obligation need
not pass directly to the surety; a consideration moving to the
principal alone will suffice. It has been held that if the delivery of
the original contract is contemporaneous with the delivery of the
suretys obligation, each contract becomes completed at the
same time, and the consideration which supports the principal
contract likewise supports the subsidiary one.
FACTS:
The Western Minolco Corporation obtained from the

Philippine Investments Systems Organization two loans
for P2.5 M and for P1 M respectively and for which it
issued promissory notes.
Antonio Garcia and Ernest Kahn executed a surety

agreement binding themselves jointly and severally for
the payment of the loan of P2,500,000.00 on due date.
Upon failure of WMC to pay, demand was made on
Garcia pursuant to the surety agreement. Garcia also
failed to pay. Hence, on April 5, 1983, Lasal
Development Corporation (assignee of PISO) filed a
case.
Garcia moved to dismiss on the grounds that:
(a) the complaint stated no cause of action;
(b) the suit would result in unjust enrichment of the
plaintiff because he had not received any
consideration from PISO;
(c) the surety agreement violated the doctrine of the
limited liability of corporations; and
(d) the principal obligation had been novated.
RTC: granted the motion and dismissed the complaint
on the ground that the surety agreement was invalid for
absence of consideration.
Court of Appeals: Reversed.
ISSUE + RATIO
WON the surety agreement was invalid for lack of consideration.
NO.
o
o
However, the consideration necessary to support a

surety obligation need not pass directly to the surety; a
consideration moving to the principal alone will suffice.
It has been held that if the delivery of the original
contract is contemporaneous with the delivery of the
suretys obligation, each contract becomes completed at
the same time, and the consideration which supports
the principal contract likewise supports the subsidiary
one.
This is the kind of surety contract to which the rule of
strict construction applies as opposed to a compensated
surety contract undertaken by surety corporations which
are organized for the purpose of conducting an
indemnity business at established rates and
compensation unlike an ordinary surety agreement
where the surety binds his name through motives of
friendship and accommodation.
It follows from the above principles that Lasal would not
be unjustly enriched if the petitioner were to be held
liable for the obligation contracted by WMC. The creditor
would only be recovering the amount of its loan plus its
increments.
The petitioner, for his part, can still go against WMC for
the amount he may have to pay Lasal as assignee of
the PISO credit.
Petitioner cites the following articles:
WON petitioner may be liable only as a corporate officer of WMC.

NO.himself
He is personally
liable.to fulfill the obligation of the principal
Art. 2047. By guaranty a person, called the guarantor, binds
to the creditor
The
surety
agreement
shows that he signed the same
debtor in case the latter should fail to do so.
not in representation of WMC or as its president but in
his personal
capacity.
He is 3,
therefore
bound.
If a person binds himself solidarily with the principal debtor, the provisions
of Section
4, Chapter
Title I ofpersonally
this Book shall
be
There
is
no
law
that
prohibits
a
corporate
officer
from
observed. In such case the contract is called a suretyship.
binding himself personally to answer for a corporate
debt. While
the limited
liability
doctrinefrom
is intended
to
Art. 1222. A solidary debtor may, in action filed by the creditor, avail himself
of all defenses
which
are derived
the nature
protect
stockholder
by toimmunizing
him from
of the obligation and of those which are personal to him, or pertain to
his ownthe
share.
With respect
those which personally
personal
liability
forwhich
the the
corporate
he may
belong to the others, he may avail himself thereof only as regards that
part of the
debt for
latter aredebts,
responsible.
nevertheless divest himself of this protection by
voluntarily binding himself to the payment of the
SC: The point is not well taken in view of the nature and
corporate debts. The petitioner cannot therefore take
purpose of a surety agreement.
refuge in this doctrine that he has by his own acts
Suretyship is a contractual relation resulting from an
effectively waived.
agreement whereby one person, the surety, engages to
be answerable for the debt, default or miscarriage of
WON the contract has been novated. NO.
another, known as the principal.
Petitioner argues had the effect of releasing him from

The suretys obligation is not an original and direct one
the surety agreement, to wit:
for the performance of his own act, but merely
accessory or collateral to the obligation contracted by
IV.Release of JSS
the principal.
Nevertheless, although the contract of a surety is in
The CREDITORS expressly agree to release and hereby relea
essence secondary only to a valid principal obligation,
officers from any liability whatsoever on the obligations which
his liability to the creditor or promisee of the principal is
therefore against all the aforesaid signatories are waived in view
said to be direct, primary and absolute; in other words,
and unconditionally guaranteed by the Philippine Government, in
he is directly and equally bound with the principal.
The surety therefore becomes liable for the debt or duty
of another although he possesses no direct or personal
interest over the obligations nor does he receive any
benefit therefrom.
The peculiar nature of a surety agreement is that it is
regarded as valid despite the absence of any direct
consideration received by the surety either from the
principal obligor or from the creditor.
A contract of surety, like any other contract, must
generally be supported by a sufficient consideration.
VI.
The CREDITORS who have filed cases in court against
to dismiss the case with prejudice, accepting the repayment
procedure for collecting their credits.
However, the agreement (Annex 5) was signed only by

Don M. Ferry as chairman of the board of directors of
WMC and does not carry the signature of any of the
creditors. Hence, it has no binding force whatsoever on
such creditors.
and consequently, the Government was constrained to purchase

the equipment from the 2nd lowest bidder resulting in a loss of
The petitioner invokes Article 2079 of the Civil Code
and Capital
pay the amount
Tizon
Art. 2079. An extension granted to the debtor by the creditorP2,975.
withoutTizon
the consent
of the refused
guarantortoextinguishes
the guaranty.
contended
thatdebt
he was
liabledue
while
Capital
it had
The mere failure on the part of the creditor to demand payment
after the
hasNOT
become
does
not ofstated
itself that
constitute
been advised by Tizon not to pay in view of Tizons non-liability.
any extension of time referred to herein.
The Government filed a complaint for the collection of the stated
sum of money with the City Court of Manila. The City Court
However, Paragraph 5 of the surety agreement clearly

decided in favor of the Government ONLY Tizon filed an
stipulated as follows:
appeal, Capital (the surety) did NOT. Nonetheless, both Tizon
andand
Capital
manifestationsand
withprotest,
the CFI
The sureties expressly waive all rights to demand payment
noticefiled
of non-payment
andstating
agreethat
that they
the
were
the Answersindorsees
that theyorhad
filed with
the City
securities of every kind, that now or may hereafter be left with
thereproducing
lender, its successors,
assigns,
as collateral,
The aGovernment
asking
that Capitals
for the said loan, or any evidence of debt or obligations, or Court.
upon which
lien may existfiled
mayabemotion
withdrawn
or surrendered
at
Answer
betostricken
out and
thatsureties,
at least and
as regards
Capital,
the
any time, and the time of payment thereof extended, without
notice
or consent
by the
the liability
on this
case
should beupon
remanded
to the by
Citythe
Court
for the
of
suretyship shall be solidary, direct and immediate and not
contingent
any pursuit
lender,
its execution
successors,
the
Judgment.
The
CFI
granted
the
motion.
Thus,
this
appeal.
indorsees or assigns, of whatever remedies the lender may have against the principal or the securities or liens it may
The SC set aside the portion of the order remanding the case for
possess.
execution of the judgment of the city court. The SC held that the
nature of the Suretys undertaking was such that it did NOT incur
Since in the surety contract, the petitioner not only

liability UNLESS and UNTIL the principal debtor was held liable.
consented to an extension in the payment of the
Thus, at that juncture, execution of the Judgment of the City was
obligation but even waived his right to be notified of
premature.
such extension, he cannot now claim that he has been
DOCTRINE:
released from his undertaking because of the extension
There are instances where a reversal of a judgment against a
granted to the principal.
principal debtor and its surety would inure to the benefit of the
Furthermore, petitioner failed to establish the validity of

surety, notwithstanding the fact that only the principal debtor filed
the new contract, an essential requisite for the novation
an appeal. The suretys liability must be consequent upon the
of a previous valid obligation.
liability of the principal debtor, or so dependent on that of the
Petitioner insists that the various communications made

principal debtor that the surety is considered in law as being the
by WMC with DBP, together with the memorandum of
same party as the principal debtor in relation to whatever is
agreement, are sufficient to establish the new
adjudged, touching the obligation of the latter; or, the liabilities of
undertaking made by WMC with all its creditors,
the surety and the principal debtor are so interwoven and
including DBP. He is mistaken.
dependent as to be inseparable.
Since the parties involved here are corporations, it must

FACTS:
first be proved that the contracts, assuming they were
Antecedents
made, were executed by the persons possessing the
proper authority to bind their respective principals.
The Bureau of Supply Coordination of the Department of General
Annexes 1-4 are a mere exchange of correspondence

Services conducted a bidding for the supply of:
between the officers of WMC and DBP. Although they
1 Baylift portable heavy-duty truck and autolift fully air

contain the provisions and proposals which cannot be
considered per se sufficient to give rise to a valid new
operated, 500-lb. capacity; and,
obligation.
2 Baylift ramps, U.S. manufacture.
The argument of subrogation cannot be considered at

Tizon Engineering (solely owned by Marcelino Tizon) won
this stage as it is being invoked only now.
the bid, with the lowest bid of P4k.
As for the alleged substitution of debtors, nowhere in the
To guarantee faithful performance of the conditions of

record is there evidence to prove the same.
the bid, the Bureau required Tizon Engineering to
give a bond (P10k).
DISPOSITION: Petition denied.
o Capital Insurnace & Surety Co., Inc (Capital)
issued the (surety) bond in favor of the
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES,
Republic.
REPRESENTED
BY
THE
BUREAU
OF
SUPPLY
COORDINATION, plaintiff-appellee vs.
Tizon Engineering FAILED to comply with the conditions of
MARCELINO TIZON, ET AL., defendants. CAPITAL
the bid (as alleged by the government in its complaint) the
INSURANCE & SURETY CO., INC., defendant-appellant (1967)
company failed to deliver the equipment called for, thus, the
Bureau was constrained to purchase the equipment from Fema
Angeles, J
Trading (the 2nd lowest bidder), resulting in a loss of P2,975 to the
Government.
NATURE: Appeal
Both Marcelino Tizon and Capital REFUSED to pay the
amount.
SUMMARY:
The Case
To secure the performance of Tizons winning bid for the

provision of specified equipment to the government, Capital
issued a surety bond in favor of the Republic. (See the last part
for the pertinent provisions of the agreement.) The Government
alleged that Tizon failed to comply with the conditions of the bid
The Government filed a complaint to recover the sum (w/

legal interests, attorneys fees, an costs) from hereindefendants.
Tizons Answer: the bidding was conducted in utter disregard of
the Bureaus own Rules and regulations; there was no binding
contract since the buyers order (assuming arguendo that one

had been prepared) was not delivered to and received by Tizon;
the governement failed to inform Tizon that he had won the bid;
and, that the bond issued by Capital answered only for contracts
legally entered into not such contracts/bids which are of
doubtful legality.
Capitals Answer:
Admitted having executed the bond in favor of the

government for the purposes therein stated;
Denied that it failed and refused to pay the demand of

the government.
o Tizon had put Capital on notice NOT to
settle the claim because he (Tizon) was
NOT in anyway liable to the government.
Capitals cross-claim against Tizon: Capital asserted that if it was
made liable on the bond, that Tizon should be ordered to make
the corresponding reimbursement, w/ 12% interest plus
attorneys fees.
City Court of Manilas judgment: in favor of the government.
Tizon and Capital were ordered to pay jointly and

severally the sum of P2,972, w/ legal interests plus
costs.
Cross-claim: Tizon was ordered to reimburse Capital

whatever amount Capital might have paid to the
government, pus P100 as attorneys fees.
Tizon (alone) filed an appeal with the CFI of Manila.
Both Tizon and Capital filed manifestations that they

were reproducing their respective answers filed in the
City Court.
The government filed a motion praying that: (i) the answer
filed by Capital reproducing its Answer in the City Court be
stricken out; (ii) the case be remanded to the City Court, as
concerns Capital, for execution of the judgment rendered in
the City Court.
Capital opposed the motion:

o Although it did not appeal, the appeal
interposed by Tizon inured to its benefit the
obligation sued on is so dependent on that of
that 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;
o The appeal of the principal debtor should be
considered in law as to include the defendant
Surety, in view of the latters cross-claim
against the former.
The CFI overruled the opposition.
Thus this appeal.

ISSUE # 1: Does an appeal filed by the principal debtor inure to
the benefit of the surety, in view of their status as solidary
debtors? (Given the circumstances, YES.)
RATIO # 1: Capitals liability (as surety) is contingent upon the
liability of Tizon (principal debtor) at this junction, execution of
the City Courts judgment against Capital would be premature,
considering that Tizons appeal is still pending.
Municipality of Orion v. Concha: the effect of the appeal by one
judgment debtor (solidary) upon the co-debtors depends on the
particular facts and conditions in each case.
Sample situation: the contractor appealed from the

judgment of the lower court upon the ground that he had
either completed his contract within time OR that the
(other party) had suffered no damages whatsoever. (In
short, no liability on the part of the principal in the
execution of the contract.)
o If the SC reversed the judgment of the lower
court on the appeal of the contractor, such
would have the effect of RELIEVING the
bondsmen from any liability whatever, for the
reason that their liability was consequent upon
the liability of the contractor.
Since the SC declared that the

contractor had NO liability for
damages, the bondsmen in turn have
no liability their liability being
dependent upon the liability of the
principal.
o Restatement: [i] f the judgment can only be
sustained upon the liability of the one who
appeals and the liability of the other cojudgment debtors depends solely upon the
question whether or not the appellant is liable,
and the judgment is revoked as to that
appellant, then the result of his appeal will
inure to the benefit of all.
General rule: a reversal as to the parties appealing
DOES NOT necessitate a reversal as to the parties NOT
appealing the judgment ay be affirmed or left
undisturbed as to them.
o EXCEPTION: where a judgment CANNOT be
reversed as to the party appealing without
affecting the rights of his co-debtor (or, their
rights and liabilities and those of the parties
appealing are so interwoven and dependant
as to be INSEPARABLE in which case a
reversal as to one operates as a reversal as to
all).
Citing Brashear v. Carlin, Curator a judgment was
rendered in the lower court against the PRINCIPAL
DEBTOR and his SURETY to pay damages; the
principal debtor ALONE appealed and the judgment was
reversed;
o The [surety] can not remain bound, after
the [principal debtor] had been released;
although the surety had not joined in the
appeal, the judgment rendered in this court
enured to his benefit.
o The obligation of a surety is so dependent on
that of the principal debtor, that he is
considered in law as being the same party as
the debtor in relation to whatever is adjudged,
touching the obligation of the latter; provided it
be not on grounds personal to such principal
debtor; it is for this reason, that a judgment in
favor of the principal debtor can be invoked as
res judicata by the surety.
Citing Schoenberger v. White: a joint judgment was
rendered against husband and wife for a sum of money
in an action ex contractu; the wife appealed;
o [The general rule applies], but the husband
might complain of [the judgment], were [the
court] to modify it by reducing the amount
which it requires his wife to pay, and thus
reducing the amount of the contribution which
he might be able to call upon her to make in

case he paid all that it requires of him.
should turn out to be favorable to the answering

defendant. (Castro v. Pena)
Philippines International Co., Inc. v. Commissioner of Customs:

(through CJ Concepcion) impliedly sanctioned the view that
under a given set of facts, the appeal of the principal debtor
if successful may inure to the benefit of the surety. (Note:
in that case, the principal debtors appeal failed; but the SC
stated that a favorable decision on appeal may have inured to the
benefit of the surety.)
Ishar Singh v. Liberty Insurance Corp. and Leonardo Anne, et al.

(relied upon by the government): NOT APPLICABLE to the facts
in the case at bar.
Liberty Insurance Corp. was the only defendant the

decision was against said defendant alone; the 3rd party
defendants were impleaded as such upon the 3 rd party
complaint filed against them by Liberty Insurance Corp.
the record does not disclose whether the 3rd party
defendants filed an answer to the 3rd party complaint or
not.
Moreover, the liability of the 3rd party defendants to the

3rd party plaintiff stemmed from the indemnity agreement
executed by them in favor of Liberty Insurance Corp.;
o The 3rd party defendants did not have privity to
contract w/ Ishar Singh.
Art. 1222, NCC: "A solidary debtor may, in actions filed by the
creditor, avail himself of all defenses which are derived from the
nature of the obligation and of those which are personal to him,
or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only
as regards that part of the debt for which the latter are
responsible."
According to the terms of the surety bond, Capital bound itself
solidarily with the principal debtor (Tizon) to pay the
Republic any loss or damage that the Republic may suffer,
not exceeding P10k in case of delay and/or default in the
execution of the contract. (See the last part for pertinent parts of
the surety bond.)
However, the liability of Capital would arise ONLY if

Tizon should fail to comply with the contract.
o The liability of Capital is consequent upon the
liability of Tizon, or so dependent on that of
the principal debtor that Capital is considered
in law as being the same party as the debtor in
relation to whatever is adjudged, touching the
obligation of the latter; or, the liabilities of
Capital and Tizon are so interwoven and
dependent as to be inseparable. (Note: citing
Concha.)
o The nature of the Suretys undertaking is
such that it does NOT incur liability
UNLESS and UNTIL the principal debtor is
held liable.
Failure to file an appeal: Capital lost its personality to appear in
the CFI or to file an Answer therein BUT, at this point it is still
uncertain that Capitals liability to the Government has
attached.
Tizon had asserted on appeal that he has NO LIABILITY

WHATSOEVER to the government if proven and
sustained, the reversal of the judgment of the City
Court would operate as a reversal on Capital, in
view of the dependency of its obligation upon the
liability of Tizon.
THUS, it is PREMATURE at this point to EXECUTE

the City Courts judgment against Capital.
The SC likened Capitals situation to that of a defaulting
defendant under Sec. 4, Rule 18, RoC: "Judgment When Some
Defendants Answer and Others make Default. - When a
complaint states a common cause of action against several
defendants, some of whom answer, and the others fail to do so,
the court shall try the case against all upon the answer thus filed
and render judgment upon the evidence presented. The same
procedure applies when a common cause of action is pleaded in
a counterclaim, crossclaim and third-party claim."
Capital can rely on the answer of its co-defendant and

derive benefit therefrom if the judgment on appeal
OTHER ISSUES/NOTES (Pertinent Parts of the Surety Bond)

"That we, Tizon Engineering, as principal, and the Capital
Insurance & Surety Co., Inc., as surety, x x x are held and firmly
bound unto the Republic of the Philippines, in the penal sum of
P10,000.00, for the payment of which sum, well and truly to be
made, we bind ourselves, Jointly and Severally, by these
presents.
"Whereas, the principal agrees to comply with all the terms and
conditions of the proposal with the Bureau of Supply;
"NOW THEREFORE, the conditions of this obligations are such
that if the above bounden principal shall, in case he becomes the
successful bidder in any of the proposal of the Bureau of Supply (a) accept a contract with the Republic of the Philippines,
represented by the Bureau of Supply; (b) faithfully and truly
performs in good faith the contract; (c) to pay to the Republic of
the Philippines, in case of delay and/or default in the execution of
the contract, any loss or damage which the latter may suffer by
reason thereof, not to exceed the sum of P10,000.00, Philippine
currency, then this obligation shall be void, otherwise it shall
remain in full force and effect."
DISPOSITION: that portion of the appealed order remanding the
record of the case to the City Court of Manila for execution of the
decision of said court is hereby set aside, without costs.
Security Bank and Trust Company Inc v. Cuenca | Kat

October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
vs. RODOLFO M. CUENCA, respondent.
PANGANIBAN, J.
SUMMARY: Sta. Ines is a corporation engaged in logging
operations. In 1980 it was granted, by Security Bank, a credit line
in the amount of P8M. To secure payment, it executed a chattel
mortgage over some of its machineries and equipment. 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. Four days before the expiration of the
period of effectivity of the P8M loan facility, appellant drew
P6.1M. Cuenca resigned in 1985. Soon after, Sta. Ines requested
Security Bank to restructure their loan agreement without prior
notice to Cuenca. Held: Cuenca not liable for restructured loan.
The submission that only the borrower, not the surety, is entitled
to be notified of any modification in the original loan
accommodation is untenable-such theory is contrary to the to the

principle that a surety cannot assume an obligation more onerous
than that of the principal. That the Indemnity Agreement is a
continuing surety does not authorize the lender to extend the
scope of the principal obligation inordinately. The bank cannot
hold Cuenca liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent
any clear stipulation showing that the latter waived his right to be
notified thereof, or to give consent thereto. This is especially true
where, as in this case, Cuenca was no longer the principal officer
or major stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to
bind himself anew to the subsequent obligations.
DOCTRINE: An essential alteration in the terms of a Loan

Agreement without the consent of the surety extinguishes the
latters obligation.
A continuing guaranty is one which covers all transaction,
including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the
expiration or termination thereof.
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in
favor of the solidary debtor. The fundamental rules of fair play
require the creditor to obtain the consent of the surety to any
material alteration in the principal loan agreement, or at least to
notify it thereof.
FACTS:
Sta. Ines Melale is a corporation engaged in logging

operations. It was a holder of a Timber License
Agreement issued by the DENR.
10 November 1980: Security Bank and Trust Co.

granted appellant Sta. Ines Melale Corporation [SIMC] a
credit line in the amount of P8M to assist the latter in
meeting the additional capitalization requirements of its
logging operations.
The Credit Approval Memorandum expressly stated that

the P8M Credit Loan Facility shall be effective until 30
November 1981:
o JOINT CONDITIONS:
o 1. Against Chattel Mortgage on logging trucks
and/or inventories (except logs) valued at
200% of the lines plus JSS of Rodolfo M.
Cuenca.
o 2. Submission of an appropriate Board
Resolution
authorizing
the
borrowings,
indicating therein the companys duly
authorized signatory/ies;
o 3. Reasonable/compensating
deposit
balances in current account shall be
maintained at all times; in this connection, a
Makati account shall be opened prior to
availment on lines;
o 4. Lines shall expire on November 30, 1981;
and
o 5. The bank reserves the right to amend any
of the aforementioned terms and conditions
upon written notice to the Borrower.
To secure the payment of the amounts drawn by
appellant SIMC from the credit line, SIMC executed a
Chattel Mortgage dated 23 December 1980 over some
of its machinery and equipment in favor of SBTC.
As additional security for the payment of the loan,

Rodolfo M. Cuenca executed an Indemnity Agreement
dated 17 December 1980 in favor of SBTC whereby he
solidarily bound himself with SIMC as follows:
o
Rodolfo M. Cuenca x x x hereby binds himself
x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment,
upon demand and without the benefit of
excussion of whatever amount x x x the client
may be indebted to the bank x x x by virtue of
aforesaid credit accommodation(s) including
the substitutions, renewals, extensions,
increases, amendments, conversions and
revivals
of
the
aforesaid
credit
accommodation(s)
26 November 1981: 4 days prior to the expiration of the
period of effectivity of the P8M-Credit Loan Facility,
SIMC made a first drawdown from its credit line with
SBTC in the amount of P6,100,000. To cover said
drawdown, SIMC duly executed a promissory Note for
said amount
1985: Cuenca resigned as President and Chairman of
the Board of Directors of Sta. Ines. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a
public auction. Said shares were bought by Adolfo
Angala who was the highest bidder during the public
auction.
SIMC repeatedly availed of its credit line and obtained 6
other loan[s] from SBTC in the aggregate amount of
[P6,369,019.50. Accordingly,
SIMC
executed
Promissory Notes to cover the amounts of the additional
loans against the credit line.
SIMC, however, encountered difficulty in making the
amortization payments on its loans and requested
SBTC for a complete restructuring of its
indebtedness.
SBTC accommodated SIMCs request and signified its
approval in a letter dated 18 February 1988 wherein
SBTC and Sta. Ines, without notice to or the prior
consent of Cuenca, agreed to restructure the past due
obligations of Sta. Ines.
Security Bank agreed to extend to defendant-appellant
Sta. Ines the following loans:
o a. Term loan in the amount of P8,800,000, to
be applied to liquidate the principal portion of
Sta. Ines total outstanding indebtedness to
Security Bank and
o b. Term loan in the amount P3,400,000, to be
applied to liquidate the past due interest and
penalty portion of the indebtedness Sta. Ines to
Security Bank
In restructuring Sta. Ines obligations to] Security Bank,
a Promissory Note in the amount of P6,100,000, which
was the only loan incurred prior to the expiration of the
P8M-Credit Loan Facility on 30 November 1981 and the
only one covered by the Indemnity Agreement dated 19
December 1980, was not segregated from, but was
instead lumped together with, the other loans obtained
by Sta. Ines which were not secured by said Indemnity
Agreement.
Pursuant to the agreement to restructure its past due
obligations to Security Bank, Sta. Ines thus executed
the following promissory notes, both dated 09 March
1988 in favor of Security Bank.
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.
Section 1.01 of the said Loan Agreement dated 31
October 1989 provides:
o 1.01 Amount - The Lender agrees to grant
loan to the Borrower in the aggregate amount
of P12,200,000, (the Loan). The loan shall be
released in two (2) tranches of P8,800,000.00
for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the
Second Loan) to be applied in the manner
and for the purpose stipulated hereinbelow.
o 1.02. Purpose - The First Loan shall be
applied to liquidate the principal portion of the
Borrowers
present
total
outstanding
indebtedness
to
the
Lender
(the
indebtedness) while the Second Loan shall be
applied to liquidate the past due interest and
penalty portion of the Indebtedness.
From 08 April 1988 to 02 December 1988: Sta. Ines
made further payments to Security Bank in the amount
of P1,757,000
SIMC defaulted in the payment of its restructured loan
obligations to SBTC despite demands made upon
appellant SIMC and CUENCA, the last of which were
made through separate letters dated 5 June 1991 (and
27 June 1991, respectively.
Appellants individually and collectively refused to pay
the [SBTC.
Thus, SBTC filed a complaint for collection of sum of
money on 14 June 1993, resulting after trial on the
merits in a decision by the court a quo, from which
Cuenca appealed.
RTC: Sta. Ines to pay jointly and severally SBTC
(P39M)
CA: RTC modified. Cuenca is released from liability
o The 1989 Loan Agreement had novated the
1980 credit accommodation earlier granted by
the bank to Sta. Ines. Accordingly, such
novation
extinguished
the
Indemnity
Agreement, by which Cuenca, who was then
the Board chairman and president of Sta. Ines,
had bound himself solidarily liable for the
payment of the loans secured by that credit
accommodation. The 1989 Loan Agreement
had been executed without notice to, much
less consent from, Cuenca who at the time was
no longer a stockholder of the corporation.
o The Credit Approval Memorandum had
specified that the credit accommodation was
for a total amount of P8 million, and that its
expiry date was November 30, 1981. Hence,
Cuenca was liable only for loans obtained prior
to November 30, 1981, and only for an amount
not exceeding P8 million.
o The restructuring of Sta. Ines obligation under
the 1989 Loan Agreement was tantamount to a
grant of an extension of time to the debtor
without the consent of the surety. Under Article
2079 of the Civil Code, such extension
extinguished the surety.
o The surety was entitled to notice, in case the
bank and Sta. Ines decided to materially alter
or modify the principal obligation after the

expiry date of the credit accommodation.
Hence, this recourse to this Court
ISSUES:
(1) W/N the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity
Agreement? YES
(2) W/N 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
RATIO: (you can skip 1 and go to 2)
(1) ORIGINAL OBLIGATION EXTINGUISHED BY NOVATION
An obligation may be extinguished by novation,

pursuant to Article 1292 of the Civil Code, which reads
as follows:
o ART. 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other.
Novation of a contract is never presumed. It has been
held that [i]n the absence of an express agreement,
novation takes place only when the old and the new
obligations are incompatible on every point.
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.
Petitioner contends that there was no absolute
incompatibility between the old and the new obligations,
and that the latter did not extinguish the earlier one. It
further argues that the 1989 Agreement did not change
the original loan in respect to the parties involved or the
obligations incurred. It adds that the terms of the 1989
Contract were not more onerous. Since the original
credit accomodation was not extinguished, it concludes
that Cuenca is still liable under the Indemnity
Agreement.
We reject these contentions.
Clearly, the requisites of novation are present in this
case.
The 1989 Loan Agreement extinguished the
obligation obtained
under
the
1980
credit
accommodation.
This is evident from its explicit provision to liquidate
the principal and the interest of the earlier indebtedness,
as the following shows:
o 1.02. Purpose. The First Loan shall be applied
to liquidate the principal portion of the
Borrowers
present
total
outstanding
Indebtedness
to
the
Lender
(the
Indebtedness) while the Second Loan shall
be applied to liquidate the past due interest
and penalty portion of the Indebtedness.
The testimony of an officer of the bank that the
proceeds of the 1989 Loan Agreement were used to
pay-off the original indebtedness serves to strengthen
this ruling.
Several incompatibilities between the 1989 Agreement
and the 1980 original obligation demonstrate that the
two
cannot
coexist. While
the
1980
credit
accommodation had stipulated that the amount of loan
was not to exceed P8 million, the 1989 Agreement

provided that the loan was P12.2 million. The periods for
payment were also different.
Likewise, the later contract contained conditions,
positive covenants and negative covenants not found
in the earlier obligation. As an example of a positive
covenant, Sta. Ines undertook from time to time and
upon request by the Lender, [to] perform such further
acts and/or execute and deliver such additional
documents and writings as may be necessary or proper
to effectively carry out the provisions and purposes of
this Loan Agreement. Likewise, SIMC agreed that it
would not create any mortgage or encumbrance on any
asset owned or hereafter acquired, nor would it
participate in any merger or consolidation.
Since the 1989 Loan Agreement had extinguished the
original
credit
accommodation,
the
Indemnity
Agreement, an accessory obligation, was necessarily
extinguished also, pursuant to Article 1296 of the Civil
Code, which provides:
o ART. 1296. When the principal obligation is
extinguished in consequence of a novation,
accessory obligations may subsist only insofar
as they may benefit third persons who did not
give their consent.
ALLEGED EXTENSION
The 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, pursuant to Article 2079 of the Civil Code,
which specifically states that [a]n extension granted to
the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. x x x.
The theory behind Article 2079 is that an extension

of time given to the principal debtor by the creditor
without the suretys consent would deprive the
surety of his right to pay the creditor and to be
immediately subrogated to the creditors remedies
against the principal debtor upon the 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.
BINDING
NATURE
OF
THE
CREDIT
APPROVAL
MEMORANDUM
As noted earlier, the appellate court relied on the

provisions of the Credit Approval Memorandum in
holding that the credit accommodation was only for P8
million, and that it was for a period of one year ending
on November 30, 1981.
Petitioner objects to the appellate courts 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.
We disagree.
It was petitioner itself which presented the said

document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof evidencing
the accommodation. Moreover, in its Petition before this
Court, it alluded to the Credit Approval Memorandum in
this wise:
4.1 On 10 November 1980, Sta. Ines Melale

Corporation (SIMC) was granted by the Bank
a credit line in the aggregate amount of Eight
Million Pesos (P8,000,000.00) to assist SIMC
in meeting the additional capitalization
requirements for its logging operations. For
this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November
1980.
Respondent is estopped from denying the terms and
conditions of the P8 million credit accommodation as
contained in the very document it presented to the
courts. 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.
(2) ALLEGED WAIVER OF CONSENT
Pursuing another course, petitioner contends that

Respondent Cuenca impliedly gave his consent to any
modification of the credit accommodation or otherwise
waived his right to be notified of, or to give consent to,
the same. Respondents consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he
held himself liable for the credit accommodation
including
[its]
substitutions, renewals,
extensions, increases, amendments, conversions and
revival. It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely
its renewal, which connotes cessation of an old
contract and birth of another one x x x.
An essential alteration in the terms of the Loan

Agreement without the consent of the surety
extinguishes the latters obligation.
National Bank v. Veraguth,: it is fundamental in the law

of suretyship that any agreement between the creditor
and the principal debtor which essentially varies the
terms of the principal contract, without the consent of
the surety, will release the surety from liability.
In this case, SBTCs assertion - that Cuenca consented

to the alterations in the credit accommodation -- finds no
support in the text of 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.
Taking the banks submission to the extreme,

respondent (or his successors) would be liable for loans
even amounting to, say, P100 billion obtained 100 years
after the expiration of the credit accommodation, on the
ground that he consented to all alterations and
extensions thereof.
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.
If there is any doubt on the terms and conditions of

the surety agreement, the doubt should be resolved
in favor of the surety. Ambiguous contracts are
construed against the party who caused the
ambiguity.
o
In 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 petitioners view that there was such
a waiver.
The Credit Approval Memorandum clearly shows that

the bank did not have absolute authority to unilaterally
change the terms of the loan accommodation. Indeed, it
may do so only upon notice to the borrower, pursuant to
this condition:
o 5. The Bank reserves the right to amend any
of the aforementioned terms and conditions
upon written notice to the Borrower.
We reject petitioners submission that only Sta. Ines as

the borrower, not respondent, was entitled to be notified
of any modification in the original loan accommodation
Following the banks reasoning, such modification would

not be valid as to Sta. Ines if no notice were given; but
would still be valid as to respondent to whom no notice
need be given. The latters liability would thus be more
burdensome than that of the former. Such untenable
theory is contrary to the principle that a surety cannot
assume an obligation more onerous than that of the
principal.
The present controversy must be distinguished

from Philamgen v. Mutuc, in which the Court sustained a
stipulation whereby the surety consented to be bound
not only for the specified period, but to any extension
thereafter made, an extension x x x that could be had
without his having to be notified.
o In that case, the surety agreement contained
this unequivocal stipulation: It is hereby further
agreed that in case of any extension of renewal
of the bond, we equally bind ourselves to the
Company under the same terms and
conditions as herein provided without the
necessity of executing another indemnity
agreement for the purpose and that we hereby
equally waive our right to be notified of any
renewal or extension of the bond which may
be granted under this indemnity agreement.
In the present case, there is no such express

stipulation.
At most, the alleged basis of respondents waiver is

vague and uncertain. It 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.
CONTINUING SURETY
Contending that the Indemnity Agreement was in the

nature of a continuing surety, petitioner maintains that
there was no need for respondent to execute another
surety contract to secure the 1989 Loan Agreement.
This argument is incorrect.
That the Indemnity Agreement is a continuing surety

does not authorize the bank to extend the scope of the
principal obligation inordinately.
Dino v. CA: a continuing guaranty is one which

covers all transactions, including those arising in
the future, which are within the description or
contemplation of the contract of guaranty, until the
expiration or termination thereof.
To repeat, in the present case, the Indemnity Agreement

was subject to the two limitations of the credit
accommodation:
o (1) that the obligation should not exceed P8
million, and
o (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.
Accordingly, the surety of Cuenca secured only the first

loan of P6.1 million obtained on November 26, 1991. It
did not secure the subsequent loans, purportedly under
the 1980 credit accommodation, that were obtained
in 1986. Certainly, he could not have guaranteed the
1989 Loan Agreement, which was executed after
November 30, 1981 and which exceeded the stipulated
P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the

Court found the surety liable for the loan
obtained after the payment of the original one, which
was covered by a continuing surety agreement.
In Dino, the surety Agreement specifically provided that

each suretyship is a continuing one which shall remain
in full force and effect until this bank is notified of its
revocation.
Since the bank had not been notified of such revocation,

the surety was held liable even for the subsequent
obligations of the principal borrower.
No similar provision is found in the present case.
Cuencas liability was confined to the 1980 credit

accommodation, the amount and the expiry date of
which were set down in the Credit Approval
Memorandum.
SPECIAL NATURE OF 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.

o First, in case of default, the creditors recourse,
which is normally limited to the corporate
properties under the veil of separate corporate
personality,
o 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.
Indeed, the stipulation in the 1989 Loan Agreement

providing for the surety of respondent, without even
informing him, smacks of negligence on the part of the
bank and bad faith on that of the principal debtor. Since
that Loan Agreement constituted a new indebtedness,
the old loan having been already liquidated, the spirit of
fair play should have impelled Sta. Ines to ask
somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled

the bank to insist on the JSS of one who was in a
position to ensure the payment of the loan. Even a
perfunctory attempt at credit investigation would have
revealed that respondent was no longer connected with
the corporation at the time. As it is, the bank is now
relying on an unclear Indemnity Agreement in order to
collect an obligation that could have been secured by a
fairly obtained surety. For its defeat in this litigation, the
bank has only itself to blame.
DISPOSITIVE: Petition DENIED. CA AFFIRMED.
5 September 2000
MELVIN COLINARES and LORDINO VELOSO vs. CA and
PEOPLE OF THE PHILIPPINES
C.J. Davide
NATURE:
Appeal to the SC
SUMMARY:
Melvin Colinares and Lordino Veloso were contracted by the
Carmelite Sisters of Cagayan de Oro City to renovate the latters
convent. On 30 October 1979, Petitioners obtained several
materials from CM Builders Centre for the construction project.
The following day, Petitioners applied for a commercial letter of
credit with the Philippine Banking Corp. (PBC), CDO City branch
(PBC) in favor of CMBC. PBC approved the letter of credit for P
22 389.80 to cover the full invoice value of the goods. Petitioners
signed a pro-forma trust receipt as security. On 7 May 1980 (after
the due date of the loan on 29 January 1980), PBC wrote to
Petitioners demanding payment within seven days from notice.
Petitioners alleged that they lost a substantial amount in the
project and asked for a grace period. However, Petitioners still
failed to pay so PBC sent a new demand letter on 16 October
1980. Petitioners proposed modification of the terms of payment,
which was approved. However, Petitioners failed to fully settle
their debt. On 14 January 1983, Petitioners were charged with
violation of PD 115 (Trust Receipts Law) in relation to RPC 315.
The RTC, considering the transaction to be a trust receipt
agreement, convicted Petitioners of estafa. On appeal, the CA
increased the penalty. Petitioners Motion for New
Trial/Reconsideration was denied; hence, the instant Petition to
the SC. The SC held that the transaction involved in the case at
bar was not a trust receipt agreement but an ordinary loan.
DOCTRINES:
In trust receipts, the ownership of the merchandise
continues to be vested in the person who had advanced
payment until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale should be
turned over to him by the importer or by his representative or
successor in interest.
o In a certain manner, trust receipts partake of the
nature of a conditional sale where the importer
becomes absolute owner of the imported

merchandise as soon as he has paid its price.
The antecedent acts in a trust receipt transaction consist of
the application and approval of the letter of credit, the
making of the marginal deposit and the effective importation
of goods through the efforts of the importer.
The Trust Receipts Law does not seek to enforce payment
of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the
owner.
FACTS:
In 1979, Petitioners Melvin Colinares and Lordino Veloso

were contracted by the Carmelite Sisters of Cagayan de Oro
City to renovate the latters convent at Camaman-an, CDO
City, for P 40 000.
On 30 October 1979, Petitioners obtained 5,376 SF

Solatone acoustical board 2x4x, 300 SF tanguile wood
tiles 12x12, 260 SF Marcelo economy tiles and 2 gallons
UMYLIN cement adhesive from CM Builders Centre for the
construction project.
On 31 October 1979, Petitioners applied for a commercial

letter of credit with the Philippine Banking Corp., CDO City
branch (PBC) in favor of CMBC.
o PBC approved the letter of credit for P 22 389.80 to
cover the full invoice value of the goods.
The loan was due on 29 January 1980.
Petitioners signed a pro-forma trust receipt

as security.
On 31 October 1979, PBC debited P 6 720 from Petitioners

marginal deposit as partial payment of the loan.
On 7 May 1980, PBC wrote to Petitioners demanding

payment within seven days from notice.
o Instead of paying, Petitioners confessed that they
lost P 19 195.83 in the Carmelite Monastery Project
and requested for a grace period of until 15 June
1980 to settle the account.
On 16 October 1980, PBC sent a new demand letter and

informed Petitioners that their outstanding balance as of 17
November 1979 was P 20 824.40 (exclusive of attorneys
fees of 25%).
On 2 December 1980, Petitioners proposed modification of

the terms of payment: P 2 000 on or before 3 December
1980, and P 1 000 per month starting 31 January 1980 until
the account is fully paid.
o Pending approval of the proposal, Petitioners paid
P 1 000 to PBC on 4 December 1980, and
thereafter P 500 on 11 February 1981, 16 March
1981, and 20 April 1981.
o Concurrently with the separate demand for
attorneys fees by PBCs legal counsel, PBC
continued to demand payment of the balance.
On 14 January 1983, Petitioners were charged with violation

of PD 115 (Trust Receipts Law) in relation to RPC 315 in an
information filed with RTC CDO City.
Veloso argued that: 1) the transaction was a clean loan

according to the verbal guarantee of Cayo Tuiza, PBCs
former manager; 2) he and Colinares signed the documents
without reading the fine print, only learning of the trust
receipt implication much later; and 3) when he brought this
to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality.
On 7 July 1986, RTC convicted Petitioners of estafa and

sentencing each of them to suffer imprisonment of two years
and one day of prision correccional as minimum to six years
and one day of prision mayor as maximum, and to solidarily
indemnify PBC the amount of P 20 824.44, with legal interest
from 29 January 1980, 12% penalty charge per annum, 25%
of the sums due as attorneys fees, and costs.
o RTC
considered the transaction
between
Petitioners and PBC a trust receipt transaction
under Sec. 4 of PD 115.
RTC considered Petitioners use of the

goods in their Carmelite monastery project
an act of disposing as contemplated
under Sec. 13 of said law.
RTC also treated the charge invoice for

goods issued by CM Builders Centre as a
document within the meaning of Sec. 3
thereof.
Petitioners appealed to the CA.
o They argued that, at most, they can only be made
civilly liable for payment of the loan.
On 6 March 1989, the CA modified the RTC decision court
by increasing the penalty to six years and one day of prision
mayor as minimum to fourteen years eight months and one
day of reclusion temporal as maximum.
o The CA 1) held that the documentary evidence of
the prosecution prevails over Velosos testimony, 2)
discredited Petitioners claim that the documents
they signed were in blank, and 3) disbelieved that
they were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New
Trial/Reconsideration.
o They alleged that the Disclosure Statement on
Loan/Credit Transaction (Disclosure Statement)
signed by them and Tuiza was suppressed by PBC
during the trial.
That document would have proved that the

transaction was indeed a loan as it bears a
14% interest as opposed to the trust
receipt which does not at all bear any
interest.
o When PBC allowed them to pay in installment, the
agreement was novated and a creditor-debtor
relationship was created.
On 16 October 1989, the CA denied Petitioners Motion
because the alleged newly discovered evidence was actually
forgotten evidence already in existence during the trial, and
would not alter the result of the case.
o Petitioners thus filed the instant Petition to the SC
Not that important
In its 22 January 1990 Comment, the OSG urged the SC to

deny the Petition for lack of merit.
On 28 February 1990, Petitioners filed an MTD on the

ground that: 1) they had already fully paid PBC on 2
February 1990 the amount of P 70 000 for the balance of the
loan, including interest and other charges, as evidenced by
the different receipts issued by PBC; and 2) PBC executed
an Affidavit of desistance.
The SC required the OSG to comment on the MTD.

o In its 30 July 1990 Comment, the OSG opined that
payment of the loan was akin to a voluntary
surrender or plea of guilty which merely serves to
mitigate Petitioners culpability, but does not in any

way extinguish their criminal liability.
On 13 August 1990, the SC gave due course to the Petition.
It was only on 18 May 1999 when this case was assigned to
the ponente.
o The SC required the parties to move in the
premises and for Petitioners to manifest if they are
still interested in the further prosecution of this case
and inform us of their present whereabouts and
whether their bail bonds are still valid.
The
Petitioners
submitted
their
Compliance.
ISSUE 1: Whether or not CA erred in denying the Motion for New

Trial (NO)
RATIO 1:
Rules and doctrines on New Trial
Rule 121, Sec. 2: New trial may be granted if: (1) errors of
law or irregularities have been committed during the trial
prejudicial to the substantial rights of the accused; or (2) new
and material evidence has been discovered which the
accused could not with reasonable diligence have
discovered and produced at the trial, and which, if introduced
and admitted, would probably change the judgment.
o The grant or denial of a motion for new trial rests
upon the discretion of the judge.
People v. Excija: For newly discovered evidence to be a

ground for new trial, such evidence must be (1) discovered
after trial; (2) could not have been discovered and produced
at the trial even with the exercise of reasonable diligence;
and (3) material, not merely cumulative, corroborative, or
impeaching, and of such weight that, if admitted, would
probably change the judgment.
Tumang v. CA: It is essential that the offering party exercised

reasonable diligence in seeking to locate the evidence
before or during trial but nonetheless failed to secure it.
Case at bar
The SC found no indication in the pleadings that the

Disclosure Statement is a newly discovered evidence.
Petitioners could not have been unaware that the two-page

document exists.
o The Disclosure Statement itself states, NOTICE
TO BORROWER: YOU ARE ENTITLED TO A
COPY OF THIS PAPER WHICH YOU SHALL
SIGN.
Assuming Petitioners copy was then unavailable, they could

have compelled its production in court, which they never did.
Moreover, Petitioners themselves admitted that they

searched again their voluminous records, meticulously and
patiently, until they discovered this new and material
evidence only upon learning of the [CAs] decision and after
they were shocked by the penalty imposed.
o Clearly, the alleged newly discovered evidence is
mere forgotten evidence that jurisprudence
excludes as a ground for new trial. (People v.
Hernando)
RELEVANT PORTION
ISSUE 2: Whether the contract between Petitioners and PBC
was a trust receipt agreement or an ordinary loan (ORDINARY
LOAN)
RATIO 2:
Trust receipts in general
PD 115, Sec. 4 defines a trust receipt transaction as any

transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee,
whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt
wherein the entrustee binds himself to hold the designated
goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the
trust receipt.
People v. Cuevo: There are two possible situations in a trust
receipt transaction. The first is covered by the provision
which refers to money received under the obligation
involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to
return it (devolvera) to the owner.
Failure of the entrustee to turn over the proceeds of the sale
of the goods, covered by the trust receipt to the entruster or
to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be
punishable as estafa under Article 315 (1) of the Revised
Penal Code (PD 115, Sec. 13), without need of proving
intent to defraud.
Nature of the transaction shows that it was an ordinary loan
The SC found that the transaction intended by the parties

was a simple loan [ordinary loan], not a trust receipt
agreement.
o Petitioners received the merchandise from CM
Builders Centre on 30 October 1979.
On that day, ownership over the

merchandise was already transferred to
Petitioners who were to use the
materials for their construction project.
It was only a day later, 31 October 1979

that they went to the bank to apply for a
loan to pay for the merchandise.
The SC held that such a situation belies what normally
obtains in a pure trust receipt transaction where goods are
owned by the bank and only released to the importer in
trust subsequent to the grant of the loan.
What really happens in trust receipts:
o Vintola v. IBAA: The bank acquires a security
interest in the goods as holder of a security title for
the advances it had made to the entrustee.
o Prudential Bank v. CA: The ownership of the
merchandise continues to be vested in the person
who had advanced payment until he has been
paid in full, or if the merchandise has already been
sold, the proceeds of the sale should be turned
over to him by the importer or by his
representative or successor in interest.
o People v. Yu Chai Ho: To secure that the bank shall
be paid, it takes full title to the goods at the very
beginning and continues to hold that title as his
indispensable security until the goods are sold and
the vendee is called upon to pay for them; hence,
the importer has never owned the goods and is not

able to deliver possession.
o Prudential Bank v. NLRC: In a certain manner,
trust receipts partake of the nature of a
conditional sale where the importer becomes
absolute owner of the imported merchandise as
soon as he has paid its price.
Samo v. People: Trust receipt transactions are intended to
aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.
Sia v. People: The antecedent acts in a trust receipt
transaction consist of the application and approval of the
letter of credit, the making of the marginal deposit and the
effective importation of goods through the efforts of the
importer.
Pieces of evidence that bolster the SCs finding that the

transaction was an ordinary loan
The SC found that PBC attempted to cover up the true

delivery date of the merchandise.
o The SC notes that the RTC took notice but failed to
attach any significance to such fact.
o The SC disagreed with the CAs finding that the
goods were delivered previous to the execution of
the letter of credit and trust receipt.
The records of the case support SCs

finding.
According to the records, Grego Mutia, PBCs credit

investigator, admitted during testimony that:
o The charge invoice evidencing Petitioners
receipt of the goods subject of the letter of
credit is dated 31 October 1979.
o The trust receipt transaction was actually a
loan.
The SC held that such statements are akin to admissions

against interest binding upon PBC.
Moreover, Velosos claim that they were made to believe that

the transaction was a loan was also not denied by PBC.
o During testimony, Veloso said, I dont think that
would be a trust receipt because we were made to
understand by the manager who encouraged us
to avail of their facilities that they will be
granting us a loan.
The SC notes that PBC could have presented its former

manager, Tuiza, to refute Velosos testimony but it only
presented credit investigator Mutia.
o Nowhere from Mutias testimony can it be gleaned
that PBC represented to Petitioners that the
transaction they were entering into was not a pure
loan but had trust receipt implications.
Petitioners should be acquitted
People v. Nitafan: The Trust Receipts Law does not seek to

enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless
of whether the latter is the owner.
In the case at bar, it is clear that Petitioners were neither

dishonest nor did they commit abuse of confidence in the
handling of money to the prejudice of PBC.
Petitioners continually endeavored to meet their

obligations, as shown by several receipts issued by
PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud
and misappropriating the money for their personal use.
o The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not
proved to be present in Petitioners situation.
Moreover, it must be noted that Petitioners are not importers
acquiring the goods for re-sale, contrary to the express
provision embodied in the trust receipt.
o They are contractors who obtained the fungible
goods for their construction project.
o At no time did title over the construction materials
pass to the bank, but directly to the Petitioners from
CM Builders Centre.
This impresses upon the trust receipt in

question vagueness and ambiguity, which
should not be the basis for criminal
prosecution in the event of violation of its
provisions. (Sia v. People)
The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them under
the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable, if not reprehensible.
Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually,
PBC showed its true colors and admitted that it was only
after collection of the money, as manifested by its Affidavit of
Desistance.
o
DISPOSITIVE:
Petition granted.
ANTHONY L. NG, petitioner, vs. PEOPLE OF
PHILIPPINES, respondent (2010)
VELASCO, JR., J
NATURE: petition for review on certiorari under Rule 45
THE
SUMMARY: Ng took out a 3 million-peso credit line from

Asiatrust to finance purchases of chemicals and steel plates to
be used in his steel tower fabrication business. Asiatrust required
him to submit his project lists and receivables, and to sign 2 Trust
Receipts, the maturity dates of which were left in blank. The
money was released to him and he obtained the chemicals and
steel plates, but Ng could not collect from his client Islacom
because of an ownership dispute. Ng was unable to pay the
loan. After failed negotiations, Asiatrust filed a complaint for
Estafa against Ng. The RTC and the CA found Ng guilty, holding
that he violated the Trust Receipts Law when he failed to pay for
the goods allegedly held by him in trust for the bank. Ng
appealed his conviction to the SC, which acquitted him. SC held
that there was no trust receipt transaction because the goods
were not for sale but for use. Ng could not have misappropriated
or converted the goods because his liability, if there is any, under
the trust receipts was contingent upon payment to him by his
clients. But since he was unable to collect from Islacom, the
liability did not arise. Also, Asiatrust knew full well that Ng was
not going to sell the goods, so there was no abuse of confidence.
DOCTRINE:
The true nature of a trust receipt transaction can be

found in the "whereas" clause of PD 115 which states
that a trust receipt is to be utilized "as a convenient
business device to assist importers and merchants
solve their financing problems." The State, in enacting
the law, sought to find a way to assist importers and
merchants in their financing in order to encourage
commerce in the Philippines.
Sec. 13 of PD 115 provides that an entrustee is only
liable for Estafa when he fails "to turn over the proceeds
of the sale of the goods covered by a trust receipt to the
extent of the amount owing to the entruster or as
appears in the trust receipt in accordance with the terms
of the trust receipt.".
FACTS:
Anthony NG was engaged in the business of fabricating

telecommunication towers.
Early 1997 Ng applied for a credit line of 3 million pesos

with ASIATRUST Development Bank.
o In support of his application, Ng submitted the
contracts he had with telecom providers Islacom,
Smart, and Infocom, as well as a list of projects
commissioned to him by the 3 companies; and the
collectible amounts he had with said companies.
May 30, 1997 Asiatrust approved Ngs application. Among

the documents he was required to sign were 2 Trust Receipt
Agreements whose maturity dates were left blank by
Asiatrust. On the other hand, the Promissory Notes signed
by Ng had a maturity date of Sep. 18, 1997.
o Ng used the money to buy chemicals and metal
plates which were used in the construction of
communication towers in Leyte and Davao.
However, Ng was unable to pay the amounts release to him

because of difficulties he encountered in collecting from
Islacom, which Ng claims was due to a dispute over the
ownership of the company.
Asiatrust then sent an appraiser to Ngs business premises

to conduct a surprise ocular inspection. The appraiser
reported that 97% of the goods covered by the trust receipts
were sold out. Asiatrust then endorsed Ngs account to its
Account Management Division for possible restructuring of
his loan.
Settlement talks between Ng and Asiatrust failed.
Mar. 16, 1999 Asiatrust Remedial Account Officer Ma.

Girlie BERNARDEZ filed a complaint against Ng for estafa in
relation to the Trust Receipts Law.
Sep. 12, 1999 An information for Estafa under RPC

3151(b) in relation to 3 of PD 115 was filed against Ng. Ng
pleaded not guilty.
o NGS DEFENSES
the trust receipt agreements were merely

preconditions for his loan
the trust receipt agreements were

contracts of adhesion
Ngs receivables were more than enough

to pay his debts, but he could not collect
from Islacom as there was a dispute over
the companys ownership
there was no fraud on bad faith on his part

since he was diligently paying installments
prior to the Islacom problem
there was an attempt at a compromise
he had paid 1.8 million out of the 2.7

million pesos he owed
During the pendency of the case, Asiatrust and Ng tried to

implement a Compromise Agreement. By virtue of this
agreement, Ng deposited 2 or 3 checks in favor of Asiatrust
which were made good. The remaining checks were not
deposited because the Agreement did not push through.
RTC: Ng found guilty, sentenced to 6 yrs., 8 mos. & 1 day of
prision mayor as minimum, up to 20 yrs. reclusion temporal
as maximum, and to pay 2.97 million pesos plus interest.
o Ng was presumed to have read and understood the
contracts he had entered into with Asiatrust.
o Asiatrust did not violate the Truth in Lending Act
since Ng was furnished with a Statement of
Account with enumeration of his precise
indebtedness
o Ng, being the entrustee in the Trust Receipts issued
by Asiatrust, has an obligation to hold the goods in
trust for Asiatrust and to dispose of them strictly in
accordance with the terms of the Trust Receipts or
to return them. Failing this, Ng violated the Trust
Receipts Law.
CA: Affirmed RTC.
o Ng cannot feign ignorance that Asiatrust is the real
offended party (although it was Asiatrust employee
Bernardez who filed the complaint). The change in
the name of the complainant will not prejudice Ng
or alter the fact that he was charged with estafa.
o Mere query as to the whereabouts of the goods or
money constitutes sufficient demand.
Hence, this petition.
ISSUE # 1: W/N Ng is guilty of Estafa under RPC 3151(b) in
relation to 3 of PD 115 (NO)
RATIO # 1:
Factual findings of the trial court are entitled to great
weight and respect even more so when affirmed by the
appellate court.
EXCEPTIONS (Cosep v. People):
(1) when the conclusion is a finding grounded entirely on
speculations, surmises, and conjectures
(2) the inferences made are manifestly mistaken;
(3) there is grave abuse of discretion;
(4) the judgment is based on misapprehension of facts or
premised on the absence of evidence on record
In criminal cases, the reviewing court must be satisfied

that the guilt of the accused was proven beyond
reasonable doubt.
ELEMENTS OF ESTAFA:
(1) money, goods or other personal property is received by the
offender in trust or on commission, or for administration, or under
any obligation involving the duty to make delivery of or to return it
(2) misappropriation or conversion of such money or property by
the offender, or denial on his part of such receipt
(3) such misappropriation or conversion or denial is to the
prejudice of another
(4) demand by the offended party to the offender.
Estafa can also be committed in a trust receipt

transaction, as provided in the Penalty Clause of the
Trust Receipts Law.
[A] trust receipt transaction is one where the entrustee

has the obligation to deliver to the entruster the price of
the sale, or if the merchandise is not sold, to return the
merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers
to money received under the obligation involving the
duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the

merchandise received under the obligation to "return" it
(devolvera) to the owner.
CASE AT BAR: The transaction between Ng and

Asiatrust is not a trust receipt a transaction but a
simple loan.
PD 115 DOES NOT APPLY WHEN THE GOODS ARE NOT FOR
SALE
PD 115 does not apply, as the goods in question were

not to be sold but were to be used in construction of
steel towers which is Ngs business.
The true nature of a trust receipt transaction is that of a

business device to assist importers and merchants in
solving their financing problems (PD 115, whereas
clause).
o Samo v. People: a trust receipt is considered a
security transaction intended to aid in financing
importers and retail dealers who do not have
sufficient funds or resources to finance the
importation or purchase of merchandise, and
who may not be able to acquire credit except
through utilization, as collateral, of the
merchandise imported or purchased.
o AmJur: trust receipt transactions always refer
to a method of "financing importations or
financing sales.
o It is important to note that the transactions
discussed in relation to trust receipts
mainly involved sales.
o State Investment House v. CA: the entruster is
entitled "only to the proceeds derived from the
sale of goods released under a trust receipt to
the entrustee."
Trial court erred in applying PD 115 based only on the

representation of Asiatrusts appraiser that the goods
had been sold. It turns out that the appraiser only
presumed that the goods had been sold. The appraiser
had no personal knowledge about the status of the
goods.
Ng did not receive the goods in trust, administration, or

under any obligation to deliver it or to return it. They
were not intended for sale but for use in the construction
of communication towers. Thus, the element of receipt
in trust or under obligation to deliver or return was not
met.
NO MISAPPROPRIATION OF GOODS OR PROCEEDS
The very essence of estafa is the misappropriation or

conversion of such money or property by the offender.
Conversion and misappropriation connote an act of

using or disposing of anothers property as if it were
ones own, or devoting a purpose or use different from
that agreed upon. It includes every attempt to dispose of
the property of another without a right.
Ng: There was no misappropriation or conversion

because the liability for the amount of the goods subject
to the trust receipts arises only upon receipt of the
proceeds of the sale and not prior to the receipt of the
full price of the goods.
SC: Ng is correct. He is not liable for estafa because

PD11513 provides that an entrustee is liable only when
he fails "to turn over the proceeds of the sale of the
goods covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust
receipt in accordance with the terms of the trust receipt.
The trust receipt between Ng and Asiatrust states that

the proceeds must be turned over as soon as received.
Thus, Ngs obligation had yet to arise because he was
unable to collect the payments for the towers he
constructed. Despite this, Ng tried and actually paid
P1.5 million for the period Sep. 1997 to Jul. 1998.
As there was no proof that Ng has been paid for the
construction of the towers, his obligation to Asiatrust
never arose.
Furthermore, the Trust Receipts had no maturity dates,
as these were left blank by Asiatrust.
o In fact, Asiatrust deliberately left the spaces for
the maturity dates blank. It would mean that
the only way for the obligation to mature was
demand by Asiatrust, which never happened.
o Asiatrust knew that Ngs ability to pay hinged
upon the collection of his receivables from the
3 telcos.
o The act of leaving the maturity dates blank can
be considered as highly irregular, considering
that it left such a sensitive bank instrument with
a void circumstance on an elementary but vital
feature of each and every loan transaction, that
is, the maturity dates. Without stating the
maturity dates, it was impossible for petitioner
to determine when the loan will be due.
There was no abuse of confidence as Asiatrust knew

from the start that the goods were not intended for sale.
Ng was also transparent about his reliance on the
receivables from the 3 telcos.
SC also took judicial notice of the fact that Ng has
already paid the obligation in full. Asiatrust could no
longer claim any damage or prejudice since the loan
has already been paid. It even filed an affidavit of
desistance.
Thus the criminal liability of Ng has not been proven
beyond reasonable doubt; although Ng himself admits
his civil liability to Asiatrust.
Colinares v. CA: The practice of banks of making
borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal
prosecution should they be unable to pay it may be
unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and
hapless borrowers at the mercy of banks, and is prone
to misinterpretation.
DISPOSITION: Petition granted, Ng acquitted.

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CREDIT: Set 3

December 29, 1995

(Second to sixth causes of action)

RTC DISMISSED the case filed by Domdoma for lack

ISSUE: WON private respondents Domdoma can recover the

June and July 1977: Navoa asked a loan from

All the loans granted to petitioners are secured by

It may be personal, as when an individual

CREDIT: Set 3 | Guaranty & Surety | kb | 1

Security is something to answer for as a

That is why a secured creditor is one who

From the allegations in the complaint there is

Petitioners failed to make good the checks on their due

Hence, private respondents filed the action

Art. 1169 of the Civil Code is explicit those

The continuing refusal of petitioners to heed

Quite obviously, the trial court erred in dismissing the

DISPOSITION: Petition is DENIED.

Spouses, doing business under the name "Agro

The loan was granted subject to the condition that

Spouses defaulted. Hence, SOLIDBANK filed a

SOLIDBANK opposed contending that Art.2080 is not

The provisions are plain. Clearly, E. Zobel, Inc. signed

With regard to the claim that the failure to register the

with the failure to register; extinction of the liability would

A contract of surety is an accessory promise by which a

other property of the Borrower, or of the undersigned which may

RIZAL COMMERCIAL BANKING CORPORATION petitioner,

indication that the continuing surety agreement had already been

October 19, 1976 Residoro Chua and Enrique Go, Sr.

On April 29, 1977 a promissory note in the amount of

RCBC filed a complaint for a sum of money against Daicor,

RTC: Motion to dismiss granted. Chua not liable

The agreement was executed obviously to induce RCBC to

The only condition that would make him liable thereunder is

guarantor until the debt is liquidated. A conditional

A continuing guaranty is one which is not limited to a

The limit of the petitioners respective liabilities must be

Uy Tiam Enterprises and Freight Services (hereinafter

To secure the aforementioned credit accommodations

Having paid the obligation under the above letter of

before an irrevocable letter of credit was applied for and

It was further argued that they can not be held

METROBANK filed its opposition to the motion to

RTC: dismissed complaint against Dino and Uy and

CA: RTC decision reversed

MR filed by petitioners DENIED

Hence, instant petition

Under the Civil Code, a guaranty may be given to

A continuing guaranty is one which is not limited to a

In other jurisdictions, it has been held that the use of

In the case at bar, the pertinent portion of paragraph I

I. For and in consideration of any existing

Paragraph IV of both agreements stipulate that:

The foregoing stipulations unequivocally reveal that

Petitioners contend that the public respondent gravely

specified in their respective agreements, to wit: (a)

The limit of the petitioners respective liabilities must be

Indeed, the Continuing Suretyship Agreements signed

In the case at bar, both agreements provide for liability

WHEREFORE, the petition is partly GRANTED, but only

obtained and/or to be obtained by Inter-Resin from IUCP, they

Inter-Resin Industrial Corporation opened a letter of

Subsequently, Inter-Resin Industrial, together with Willex