Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 112191

February 7, 1997

FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.

RODRIGUEZA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and FILINVEST CREDIT
CORPORATION, respondents.

DECISION
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed or resold to the general public),
car dealers normally enter into wholesale automotive financing schemes whereby vehicles are
dellivered by the manufacturer or assembler on the strength of trust receipts or drafts executed by
the car dealers, which are backed up by sureties. These trust receipts or drafts are then assigned
and/or discounted by the manufacturer to/with financing companies, which assume payment of
the vehicles but with the corresponding right to collect such payment from the car dealers and/or
the sureties. In this manner, car dealers are able to secure delivery of their stock-in-trade without
having to pay cash therefor; manufacturers get paid without any receivables/collection problems;
and financing companies earn their margins with the assurance of payment not only from the
dealers but also from the sureties. When the vehicles are eventually resold, the car dealers are
supposed to pay the financing companies and the business goes merrily on. However, in the
event the car dealer defaults in paying the financing company, may the surety escape liability on
the legal ground that the obligations were incurred subsequent to the execution of the surety
contract?
This is the principal legal question raised in this petition for review (under Rule 45 of the Rules
of Court) seeking to set aside the Decision 1 of the Court of Appeals (Tenth
Division) 2 promulgated on September 30, 1993 in CA G.R. CV No. 09136 which affirmed in
toto the decision 3 of the Regional Trial Court of Manila Branch 11 4 in Civil Case No. 8321994, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
by ordering the latter to pay, jointly and severally, the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting April 1,
1985 until the said principal amount is fully paid;
2. The amount of P50,000.00 as attorneys fees and another P50,000.00 as liquidated damages;
and
3. That the defendants, although spared from paying exemplary damages, are further ordered to
pay, in solidum, the costs of this suit.
Plaintiff therein was the financing company and the defendants the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza
(Petitioner Rodrigueza) each executed an undated Surety Undertaking 5 whereunder they
absolutely, unconditionally and solidarily guarantee(d) to Respondent Filinvest Credit
Corporation (Respondent Filinvest) and its affiliated and subsidiary companies the full,
faithful and prompt performance, payment and discharge of any and all obligations and
agreements of Fortune Motors (Phils.) Corporation (Petitioner Fortune) under or with
respect to any and all such contracts and any and all other agreements (whether by way of
guaranty or otherwise) of the latter with Filinvest and its affiliated and subsidiary companies
now in force or hereafter made.
The following year or on April 6 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang
Automotive Resources Corporation (CARCO) entered into an Automotive Wholesale
Financing Agreement 7 (Financing Agreement) under which CARCO will deliver motor
vehicles to Fortune for the purpose of resale in the latters ordinary course of business; Fortune,
in turn, will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which
will discount the same together with the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement,
Petitioner Fortune, as trustee of the motor vehicles, was to report and remit proceeds of any sale
for cash or on terms to Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts
covered by demand drafts and deeds of assignment were executed in favor of Respondent
Filinvest. However, when the demand drafts matured, not all the proceeds of the vehicles which
Petitioner Fortune had sold were remitted to Respondent Filinvest. Fortune likewise failed to turn
over to Filinvest several unsold motor vehicles covered by the trust receipts. Thus, Filinvest

through counsel, sent a demand letter 8 dated December 12, 1983 to Fortune for the payment of
its unsettled account in the amount of P1,302,811.00. Filinvest sent similar demand
letters 9 separately to Chua and Rodrigueza as sureties. Despite said demands, the amount was
not paid. Hence, Filinvest filed in the Regional Trial Court of Manila a complaint for a sum of
money with preliminary attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there was no factual issue to
be resolved except for the correct balance of defendants account with Filinvest as agreed upon
by the parties during pre-trial.10 Subsequently, Filinvest presented testimonial and documentary
evidence. Defendants (petitioners herein), instead of presenting their evidence, filed a Motion
for Judgment on Demurrer to Evidence 11 anchored principally on the ground that the Surety
Undertakings were null and void because, at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled the case for reception of
defendants evidence. On two scheduled dates, however, defendants failed to present their
evidence, prompting the court to deem them to have waived their right to present evidence. On
December 17, 1985, the trial court rendered its decision earlier cited ordering Fortune, Chua and
Rodrigueza to pay Filinvest, jointly and severally, the sum of P1,348,033.83 plus interest at the
rate of P922.53 per day from April 1, 1985 until fully paid, P50,000.00 in attorneys fees, another
P50,000.00 in liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals (Tenth Division) which
affirmed in toto the trial courts decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring that surety can exist even if there was no existing
indebtedness at the time of its execution.
2. that the Court of Appeals erred when it declared that there was no novation.
3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the
amount of the claim. 12
Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil Code
refer only to debts existing at the time of the constitution of the guaranty but the amount thereof
is unknown, and that a guaranty being an accessory obligation cannot exist without a principal
obligation. Petitioners claim that the surety undertakings cannot be made to cover the Financing
Agreement executed by Fortune, Filinvest and CARCO since the latter contract was not yet in
existence when said surety contracts were entered into.

Petitioners further aver that the Financing Agreement would effect a novation of the surety
contracts since it changed the principal terms of the surety contracts and imposed additional and
onerous obligations upon the sureties.
Lastly, petitioners claim that no accounting of the payments made by Petitioner Fortune to
Respondent Filinvest was done by the latter. Hence, there could be no way by which the sureties
can ascertain the correct amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes estoppel (by pleadings or by judicial
admission) upon petitioners when in their Motion to Discharge Attachment, they admitted
their liability as sureties thus:
Defendants Chua and Rodrigueza could not have perpetrated fraud because they are only sureties
of defendant Fortune Motors . . .;
. . . The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts
agreements since they are ONLY sureties.
. . . 13
In rejecting the arguments of petitioners and in holding that they (Fortune and the sureties) were
jointly and solidarily liable to Filinvest, the trial court declared:
As to the alleged non-existence of a principal obligation when the surety agreement was signed,
it is enough (sic) to state that a guaranty may also be given as security for future debts, the
amount of which is not known (Art. 2053, New Civil Code). In the case of NARIC vs. Fojas, L11517, promulgated April 10, 1958, it was ruled that a bond posted to secure additional credit
that the principal debtor had applied for, is not void just because the said bond was signed and
filed before the additional credit was extended by the creditor. The obligation of the sureties on
future obligations of Fortune is apparent from a proviso under the Surety Undertakings marked
Exhs. B and C that the sureties agree with the plaintiff as follows:
In consideration of your entering into an arrangement with the party (Fortune) named above, . . .
by which you may purchase or otherwise require from, and or enter into with obligor . . . trust
receipt . . . arising out of wholesale and/or retail transactions by or with obligor, the
undersigned . . . absolutely, unconditionally, and solidarily guarantee to you . . . the full, faithful
and prompt performance, payment and discharge of any and all obligations . . . of obligor under
and with respect to any and all such contracts and any and all agreements (whether by way of
guaranty or otherwise) of obligor with you . . . now in force or hereafter made. (Emphasis
supplied).

On the matter of novation, this has already been ruled upon when this Court denied defendants
Motion to dismiss on the argument that what happened was really an assignment of credit, and
not a novation of contract, which does not require the consent of the debtors. The fact of
knowledge is enough. Besides, as explained by the plaintiff, the mother or the principal contract
was the Financing Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds of
assignment were only collaterals or accidental modifications which do not extinguish the original
contract by way of novation. This proposition holds true even if the subsequent agreement would
provide for more onerous terms for, at any rate, it is the principal or mother contract that is to be
followed. When the changes refer to secondary agreements and not to the object or principal
conditions of the contract, there is no novation; such changes will produce modifications of
incidental facts, but will not extinguish the original obligation (Tolentino, Commentaries on
Jurisprudence of the Civil Code of the Philippines, 1973 Edition, Vol. IV, page 367; cited in
plaintiffs Memorandum of September 6, 1985, p. 3).
On the evidence adduced by the plaintiff to show the status of defendants accounts, which took
into consideration payments by defendants made after the filing of the case, it is enough to state
that a statement was carefully prepared showing a balance of the principal obligation plus
interest totalling P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been
traversed nor contradicted by defendants although they had the opportunity to do so. Likewise,
there was absolute silence on the part of defendants as to the correctness of the previous
statement of account made as of December 16, 1983 (referring to Exh. I), but more important,
however, is that defendants received demand letters from the plaintiff stating that, as of
December 1983 (Exhs. J, K and L), this total amount of obligation was P1,302,811,00, and yet
defendants were not heard to have responded to said demand letters, let alone have taken any
exception thereto. There is such a thing as evidence by silence (Sec. 23, Rule 130, Revised Rules
of Court). 14
The Court of Appeals, affirming the above decision of the trial court, further explained:
. . . In the case at bar, the surety undertakings in question unequivocally state that Chua and
Rodrigueza absolutely, unconditionally and solidarily guarantee to Filinvest the full, faithful
and prompt performance, payment and discharge of any and all obligations and agreements of
Fortune under or with respect to any and all such contracts and any and all other agreements
(whether by way of guaranty or otherwise) of the latter with Filinvest in force at the time of the
execution of the Surety Undertakings or made thereafter. Indeed, if Chua and Rodrigueza did
not intend to guarantee all of Fortunes future obligation with Filinvest, then they should have
expressly stated in their respective surety undertakings exactly what said surety agreements
guaranteed or to which obligations of Fortune the same were intended to apply. For another, if
Chua and Rodrigueza truly believed that the surety undertakings they executed should not cover
Fortunes obligations under the AWFA, then why did they not inform Filinvest of such fact when
the latter sent them the aforementioned demand letters (Exhs. K and L) urging them to pay

Fortunes liability under the AWFA. Instead, quite uncharacteristic of persons who have just been
asked to pay an obligation to which they believe they are not liable, Chua and Rodrigueza
elected or chose not to answer said demand letters. Then, too, considering that appellant Chua is
the corporate president of Fortune and a signatory to the AWFA, he should have simply had it
stated in the AWFA or in a separate document that the Surety Undertakings do not cover
Fortunes obligations in the aforementioned AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the AWFA only after two (2)
years from the date of the Surety undertakings because Chua and Rodrigueza were thereby
made to wait for said number of years just to know what kind of obligation they had to
guarantee.
The argument cannot hold water. In the first place, the Surety Undertakings did not provide
that after a period of time the same will lose its force and effect. In the second place, if Chua and
Rodrigueza did not want to guarantee the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply terminate the Surety Undertakings by serving
ten (10) days written notice to Filinvest as expressly allowed in said surety agreements. It is
highly plausible that the reason why the Surety Undertakings were not terminated was because
the execution of the same was part of the consideration why Filinvest and CARCO agreed to
enter into the AWFA with Fortune. 15
The Courts Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals 16 which
reiterated our rulings in National Rice and Corn Corporation (NARIC) vs. Court of
Appeals 17 and Rizal Commercial Banking Corporation vs. Arro. 18 In Atok Finance, Sanyu
Chemical as principal, and Sanyu Trading along with individual private stockholders of Sanyu
Chemical, namely, spouses Daniel and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo, as
sureties, executed a continuing suretyship agreement in favor of Atok Finance as creditor. Under
the agreement, Sanyu Trading and the individual private stockholders and officers of Sanyu
Chemical jointly and severally unconditionally guarantee(d) to Atok Finance Corporation
(hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . to the Creditor. Subsequently, Sanyu Chemical assigned
its trade receivables outstanding with a total face value of P125,871.00 to Atok Finance in
consideration of receipt of the amount of P105,000.00. Later, additional trade receivables with a
total face value of P100,378.45 were also assigned. Due to nonpayment upon maturity, Atok

Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili to
collect the sum of P120,240.00 plus penalty charges due and payable. The individual private
respondents contended that the continuing suretyship agreement, being an accessory contract,
was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing
obligation due to Atok Finance. The trial court rendered a decision in favor of Atok Finance and
ordered defendants to pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and dismissed the
complaint on the ground that there was no proof that when the suretyship agreement was
entered into, there was a pre-existing obligation which served as the principal obligation between
the parties. Furthermore, the future debts alluded to in Article 2053 refer to debts already
existing at the time of the constitution of the agreement but the amount thereof is unknown,
unlike in the case at bar where the obligation was acquired two years after the agreement.
We ruled then that the appellate court was in serious error. The distinction which said court
sought to make with respect to Article 2053 (that future debts referred to therein relate to
debts already existing at the time of the constitution of the agreement but the amount [of which]
is unknown and not to debts not yet incurred and existing at that time) has previously been
rejected, citing the RCBC and NARIC cases. We further said:
. . . Of course, a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation intended to
be secured thereby is born, any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day
financial and commercial practice. A bank or financing company which anticipates entering into
a series of credit transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need to execute
a separate surety contract or bond for each financing or credit accommodation extended to the
principal debtor.
In Dino vs. Court of Appeals, 19 we again had occasion to discourse on continuing
guaranty/suretyship thus:
. . . A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an

indefinite time or until revoked. It is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. 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. 20
We have no reason to depart from our uniform ruling in the above-cited cases. The facts of the
instant case bring us to no other conclusion than that the surety undertakings executed by Chua
and Rodrigueza were continuing guaranties or suretyships covering all future obligations of
Fortune Motors (Phils.) Corporation with Filinvest Credit Corporation. This is evident from the
written contract itself which contained the words absolutely, unconditionally and solidarily
guarantee(d) to Respondent Filinvest and its affiliated and subsidiary companies the full,
faithful and prompt performance, payment and discharge of any and all obligations and
agreements of Petitioner Fortune under or with respect to any and all such contracts and any
and all other agreements (whether by way of guaranty or otherwise) of the latter with Filinvest
and its affiliated and subsidiary companies now in force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the time
they executed their respective surety undertakings in favor of Fortune. As stated in the petition:
Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were required
to sign blank surety agreements, without informing them how much amount they would be liable
as sureties. However, because of the desire of petitioners, Chua and Rodrigueza to have the cars
delivered to petitioner. Fortune, they signed the blank promissory notes. 21 (emphasis supplied)
It is obvious from the foregoing that Rodrigueza and Chua were fully aware of the business of
Fortune, an automobile dealer; Chua being the corporate president of Fortune and even a
signatory to the Financial Agreement with Filinvest. 22 Both sureties knew the purpose of the
surety undertaking which they signed and they must have had an estimate of the amount
involved at that time. Their undertaking by way of the surety contracts was critical in enabling

Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the
business of Fortune. Respondent Filinvest, for its part, relied on the surety contracts when it
agreed to be the assignee of CARCO with respect to the liabilities of Fortune with CARCO.
After benefiting therefrom, petitioners cannot now impugn the validity of the surety contracts on
the ground that there was no preexisting obligation to be guaranteed at the time said surety
contracts were executed. They cannot resort to equity to escape liability for their voluntary acts,
and to heap injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe
that it can collect from Chua and/or Rodrigueza in case of Fortunes default. Filinvest relied upon
the surety contracts when it demanded payment from the sureties of the unsettled liabilities of
Fortune. A refusal to enforce said surety contracts would virtually sanction the perpetration of
fraud or injustice. 23

Second Issue: No Novation

Neither do we find merit in the averment of petitioners that the Financing Agreement contained
onerous obligations not contemplated in the surety undertakings, thus changing the principal
terms thereof and effecting a novation.
We have ruled previously that there are only two ways to effect novation and thereby extinguish
an obligation. First, novation must be explicitly stated and declared in unequivocal terms.
Novation is never presumed. Second, the old and new obligations must be incompatible on every
point. The test of incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter obligation
novates the first. 24 Novation must be established either by the express terms of the new
agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new one. The will to novate, whether
totally or partially, must appear by express agreement of the parties, or by their acts which are
too clear and unequivocal to be mistaken. 25
Under the surety undertakings however, the obligation of the sureties referred to absolutely,
unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment
and discharge of all obligations of Petitioner Fortune with respect to any and all contracts and
other agreements with Respondent Filinvest in force at that time or thereafter made. There were
to qualifications, conditions or reservations stated therein as to the extent of the suretyship. The
Financing Agreement, on the other hand, merely detailed the obligations of Fortune to CARCO
(succeeded by Filinvest as assignee). The allegation of novation by petitioners is, therefore,

misplaced. There is no incompatibility of obligations to speak of in the two contracts. They can
stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their
agreement or intention to novate their contract. Neither did the sureties object to the Financing
Agreement nor try to avoid liability thereunder at the time of its execution. As aptly discussed by
the Court of Appeals:
. . . For another, if Chua and Rodrigueza truly believed that the surety undertakings they
executed should not cover Fortunes obligations under the AWFA (Financing Agreement), then
why did they not inform Filinvest of such fact when the latter sent them the aforementioned
demand letters (Exhs. K and L) urging them to pay Fortunes liability under the AWFA.
Instead, quite uncharacteristic of persons who have just been asked to pay an obligation to which
they are not liable, Chua and Rodrigueza elected or chose not to answer said demand letters.
Then, too, considering that appellant Chua is the corporate president of Fortune and a signatory
to the AWFA, he should have simply had it stated in the AWFA or in a separate document that the
Surety Undertakings do not cover Fortunes obligations in the aforementioned AWFA, trust
receipts or demand drafts.26
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of petitioners is a purely factual issue. It is an
oft repeated maxim that the jurisdiction of this Court in cases brought before it from the Court of
Appeals under Rule 45 of the Rules of Court is limited to reviewing or revising errors of law. It
is not the function of this Court to analyze or weigh evidence all over again unless there is a
showing that the findings of the lower court are totally devoid of support or are glaringly
erroneous as to constitute serious abuse of discretion. Factual findings of the Court of Appeals
are conclusive on the parties and carry even more weight when said court affirms the factual
findings of the trial court. 27
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the
assigned error are based on substantial evidence which were not refuted with contrary proof by
petitioners. Hence, there is no necessity to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the
Court of Appeals concurring with the decision of the trial court is hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.
Melo and Francisco, JJ., concur.

Narvasa, C.J. and Davide, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 89561

September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M.

CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C. JALBUENA
and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS
MANUFACTURING CO., INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

DECISION
REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in
CA-GR CV No. 15412, entitled Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery
Parts Manufacturing Co., Inc., et al., 1 the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as
it is hereby REVERSED. In lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;

2) Ordering plaintiffs-appellees to vacate the subject properties; and

3) Ordering plaintiffs-appellees to pay upon defendants counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the
subject parcels of land of which they were deprived in the sum of P26,000.00 and (ii) attorneys
fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and
(ii) attorneys fees of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners
included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts),
Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M.
Rivera (Rivera). A Second Amended Complaint was filed, this time impleading Santiago M.
Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate
of Felipe Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon
(per Exhibit A) which intestate proceedings was instituted by Mauricia Meer Vda. de Castillo,
the previous administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2)
which case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered
by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T
32227 and Tax Dec. No. 14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax
Dec. No. 14135, with assessed value of P6,150.00; and TCT No. T-42103 with Tax Dec. No.
14133, with assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were the subject of the Deed of ExtraJudicial Partition executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof
the titles thereto has (sic) been cancelled and in lieu thereof, new titles in the name of Mauricia
Meer Vda. de Castillo and of her children, namely: Buenaflor, Bertilla, Victoria, Marietta and
Leovina, all surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as guaranty in the Agreement of CounterGuaranty with Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance
Corporation of the Philippines and Slobec Realty Corporation represented by Santiago Rivera
(Exhibit 1);

e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor
of Insurance Corporation of the Philippines it was able to transfer to itself the titles over the lots
in question, namely: TCT No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T23707 (Exhibit 0) and TCT No. T 23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the
immovables in question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in dispute, namely: per TCT No. T-24846 (Exhibit
Q ), per TCT No. T-24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit
T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo sent her letter to Modesto N. Cervantes
stating that she and her children refused to comply with his demands (Exhibit V-2);
h) That from at least the months of October, November and December 1970 and January 1971,
Modesto N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and
also he is one of the Board of Directors of PM Parts; on the other hand, Atty. Martin M. De
Guzman was the legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and
who also is the legal counsel of Insurance Corporation of the Philippines and PM Parts; that
Modesto N. Cervantes served later on as President of PM Parts, and that Atty. de Guzman was
retained by Insurance Corporation of the Philippines specifically for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development,
Inc., represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial
No. 281114 evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an
Agreement with Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty &
Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria
Castillo, Marietta Castillo and Leovina Castillo, as mortgagors in favor of ICP which document
was executed and ratified before notary public Alberto R. Navoa of the City of Manila on
October 24, 1970;
k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and
covered by TCT Nos. T-13114, T13115, T-13116 and T-13117 of the Register of Deeds of
Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was
delivered to Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes
of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the
assignment of Mr. Petronilo Roque as caretaker of the subject property;
n) That plaintiff and other heirs are to harvest fruits of the property (daranghita) which is worth
no less than P1,000.00 per harvest.

As between plaintiffs and defendant Bormaheco, Inc

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec
Realty & Development Corporation executed in favor of Bormaheco, Inc., represented by its
Vice-President Modesto N. Cervantes a Chattel Mortgage concerning one unit model CAT D7
Caterpillar Crawler Tractor as described therein as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was superseded by
another chattel mortgage dated January 23, 1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its VicePresident Modesto Cervantes and Slobec Realty Corporation represented by Santiago Rivera
executed the sales agreement concerning the sale of one (1) unit Model CAT D7 Caterpillar
Crawler Tractor as described therein for the amount of P230,000.00 (per Exhibit J) which
document was superseded by the Sales Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the document entitled Sales Agreement (per Exhibit J)
that it was executed on 18 December 1970, it appears in the notarial register of the notary public
who notarized them that those two documents were executed on 11 December 1970. The
certified xerox copy of the notarial register of Notary Public Guillermo Aragones issued by the
Bureau of Records Management is hereto submitted as Exhibit BB That said chattel mortgage
was superseded by another document dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago
Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice
No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits
10 and 10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation
of the Philippines purchased at public auction for said corporation the four (4) parcels of land
subject of this case (per Exhibit L), and which document was presented to the Register of Deeds
on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of
the Philippines in favor of PM Parts on 10 April 1975, Modesto N. Cervantes, formerly VicePresident and now President of Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia
Meer Vda. de Castillo (Exhibit V), demanding that she and her children should vacate the
premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty
Development Corporation was actually reconditioned and repainted. 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo
family are the owners of a parcel of land located in Lucena City which was given as security for

a loan from the Development Bank of the Philippines. For their failure to pay the amortization,
foreclosure of the said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of
land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by
the Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U p. 127,
Record) was executed by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the
agreement and to pay the additional amount of P400,000.00 after the property has been
converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from
Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed
on December 28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by
its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor
D-7 with Serial No. 281114, as evidenced by the contract marked Exhibit 16. As shown by the
contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and
the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record)
over the said equipment as security for the payment of the aforesaid balance of P180,000.00. As
further security of the aforementioned unpaid balance, Slobec obtained from Insurance
Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety
and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit 8 (p. 111, Record). The
aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with Real
Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and
Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria
Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them the properties in question, namely, four parcels of
land covered by TCTs in the name of the aforementioned mortgagors, namely TCT Nos. 13114,
13115, 13116 and 13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit 16,
Slobec, represented by Rivera received from Bormaheco the subject matter of the said Sales
Agreement, namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice
No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted one
[Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh.
1), the properties of the Castillos were foreclosed by ICP As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and
Transfer Certificates of Title over the subject parcels of land were issued by the Register of
Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-

23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the
registration of the certificate of sale, that is, until October 1, 1974, to redeem the property, but
they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of
land through the requisite affidavit of consolidation of ownership dated October 29, 1974, as
shown in Exh. 22(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the
subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM
Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now
covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August
9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to
vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to
comply with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M.
Castillo Umali as the appointed administratrix of the properties in question filed an action for
annulment of title before the then Court of First Instance of Quezon and docketed thereat as Civil
Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444,
Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading
Santiago M. Rivera as a party plaintiff (p. 706, Record). They contended that all the
aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale
(Annexes J, K, L and M) are void for being entered into in fraud and without the consent and
approval of the Court of First Instance of Quezon, (Branch IX) before whom the administration
proceedings has been pending. Plaintiffs pray that the four (4) parcels of land subject hereof be
declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of
Title Nos. 13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and
24849 as well as those appearing as encumbrances at the back of the certificates of title
mentioned be declared as a nullity and defendants to pay damages and attorneys fees (pp. 71071
1, Record).
In their amended answer, the defendants controverted the complaint and alleged, by way of
affirmative and special defenses that the complaint did not state facts sufficient to state a cause of
action against defendants; that plaintiffs are not entitled to the reliefs demanded; that plaintiffs
are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs are
guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an
innocent purchaser for value and relied on the face of the title before it bought the subject
property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants,
declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970
(Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in
favor of Insurance Corporation of the Philippines (Exhibit L);
null and void for being fictitious, spurious and without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P)
issued in the name of Insurance Corporation of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the Philippines in favor of defendant Philippine Machinery
Parts Manufacturing Co., Inc., over the four (4) parcels of land and Transfer Certificates of Title
Nos. T 24846, T-24847, T-24848 and T-24849 subsequently issued by virtue of said sale in the
name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and
void, and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof,
transfer certificates of title in the names of the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of
P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation expenses in the
sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomeys fees. With costs against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted decision of the trial court and
rendered the judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes
are all fair and regular and therefore binding between the parties thereto;

2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts,
erroneous presumptions not supported by the evidence on record but also, holding valid and
binding the supposed payment by ICP of its obligation to Bormaheco, despite the fact that the
surety bond issued it had already expired when it opted to foreclose extrajudically the mortgage
executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate
existence; and
4. In reversing the decision of the lower court of affirming the same 5
I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of
Slobec Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of
Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of CounterGuaranty with Chattel/Real Estate Mortgage, 8are all fraudulent and simulated and should,
therefore, be declared null and void. Such allegation is premised primarily on the fact that
contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made
any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was
received by Rivera only on January 23, 1971 and not in 1970 as stated in the Chattel Mortgage
(Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety
bond, the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the
fact that it was Bormaheco, and not Rivera, which paid the premium for the surety bond issued
by ICP.
At the outset, it will be noted that petitioners submission under the first assigned error hinges
purely on questions of fact. Respondent Court of Appeals made several findings to the effect that
the questioned documents are valid and binding upon the parties, that there was no fraud
employed by private respondents in the execution thereof, and that, contrary to petitioners
allegation, the evidence on record reveals that petitioners had every intention to be bound by
their undertakings in the various transactions had with private respondents. It is a general rule in
this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus,
binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former
acted with grave abuse of discretion. Under the circumstances, we find no compelling reason to
deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales
Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the guilty
party to justify and support an action for the declaration of nullity of the contract. Equity and fair
play dictates that one who commits a breach of his contract may not seek refuge under the
protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of
petitioners contention that the contracts entered into by the parties are either absolutely
simulated or downright fraudulent.

There is absolute simulation, which renders the contract null and void, when the parties do not
intend to be bound at all by the same. 9 The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired or intended to either produce
legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera
in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel
Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant
with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be bound by these contracts.
The occurrence of these series of transactions between petitioners and private respondents is a
strong indication that the parties actually intended, or at least expected, to exact fulfillment of
their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that they
were induced to enter into a contract through the insidious words and machinations of private
respondents without which the former would not have executed such contract. To set aside a
document solemnly executed and voluntarily delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does
not per se affect the validity of the bond. Petitioners themselves admit in their present petition
that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco
and agreed that a part of the proceeds thereof shall be used to pay the premium for the bond. 11 In
effect, Bormaheco accepted the payment of the premium as an agent of ICP The execution of the
deed of sale with a right of repurchase in favor of Bormaheco under such circumstances
sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP. Such
payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from
questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist,
the legal fiction that a corporation is an entity with a juridical personality separate and distinct
from its members or stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or stockholders of the corporation will
be considered as the corporation, that is, liability will attach directly to the officers and
stockholders. 12 The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a shield to
confuse the legitimate issues 14 or where a corporation is the mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. 15
In the case at bar, petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and
PM Parts, alleging that these corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners. While we do not discount the
possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to
apply the doctrine invoked by petitioners in granting the relief sought. It is our considered
opinion that piercing the veil of corporate entity is not the proper remedy in order that the

foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal
case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers
and stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners
do not seek to impose a claim against the individual members of the three corporations involved;
on the contrary, it is these corporations which desire to enforce an alleged right against
petitioners. Assuming that petitioners were indeed defrauded by private respondents in the
foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient
to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers
and/or members of respondent corporations personally liable therefor. Petitioners are merely
seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to respondent corporations.
Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with petitioners, with
the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personalities, 16 absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged
properties by ICP Petitioners argue that the foreclosure proceedings should be declared null and
void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent the
failure of Slobec in paying its obligation with the former, plus the fact that no receipt was
presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the
foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was
in the exercise of a legal right, We agree with the appellants that the foreclosure proceedings
instituted by the ICP was in the exercise of a legal right. First, ICP has in its favor the legal
presumption that it had indemnified Bormaheco by reason of Slobecs default in the payment of
its obligation under the Sales Agreement, especially because Bormaheco consented to ICPs
foreclosure of the mortgage. This presumption is in consonance with pars. R and Q Section 5,
Rule 5, * New Rules of Court which provides that it is disputably presumed that private
transactions have been fair and regular. likewise, it is disputably presumed that the ordinary
course of business has been followed: Second, ICP had the right to proceed at once to the
foreclosure of the mortgage as mandated by the provisions of Art. 2071 Civil Code for these
further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobecs obligation
becomes demandable by reason of the expiration of the period of payment; and its authorization
to foreclose the mortgage upon Slobecs default, which resulted in the accrual of ICPS liability to
Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1)
expressly grants to ICP the right to foreclose the real estate mortgage in the event of non-

payment or non-liquidation of the entire indebtedness or fraction thereof upon maturity as

stipulated in the contract. This is a valid and binding stipulation in the absence of showing that it
is contrary to law, morals, good customs, public order or public policy. (Art. 1306, New Civil
Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which
would have entitled Bormaheco to demand payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and
Slobec undertook to guarantee the payment of the balance of P180,000.00 payable in eighteen
(18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently
provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND
will expire Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and
understood that the INSURANCE CORPORATION OF THE PHILIPPINES will not be liable
for any claim not presented in writing to the Corporation within THIRTY (30) DAYS from the
expiration of this BOND, and that the obligee hereby waives his right to bring claim or file any
action against Surety and after the termination of one (1) year from the time his cause of action
accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof
states: NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22,
1971. 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of
P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory Note
executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall
be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment of any of
the installments when due shall make the entire obligation immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the
obligation expressly assumed therein. We have repeatedly held that the extent of a suretys
liability is determined only by the clause of the contract of suretyship as well as the conditions
stated in the bond. It cannot be extended by implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the contract, a
demand or notice of default is not required to fix the suretys liability. 23 Hence, where the
contract of suretyship stipulates that notice of the principals default be given to the surety,
generally the failure to comply with the condition will prevent recovery from the surety. There
are certain instances, however, when failure to comply with the condition will not extinguish the
suretys liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or
provision in the suretyship contract exempting the surety for liability therefor, or where the
surety already has knowledge or is chargeable with knowledge of the default. 24

In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any
claim not filed in writing within thirty (30) days from the expiration of the bond. In its decision
dated May 25 1987, the court a quo categorically stated that (n)o evidence was presented to
show that Bormaheco demanded payment from ICP nor was there any action taken by
Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. There is
nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure
of the plaintiffs to pay their obligation. 25 The failure, therefore, of Bormaheco to notify ICP in
writing about Slobecs supposed default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in
its favor since it never incurred any liability under the surety bond. It cannot claim exemption
from the required written notice since its case does not fall under any of the exceptions
hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any
documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of
evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove
the fact of payment, the disputable presumption that private transactions have been fair and
regular, as erroneously relied upon by respondent Court of Appeals, finds no application to the
case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the
full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While
ordinarily the termination of a suretys liability is governed by the provisions of the contract of
suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a
specified time, his obligation cannot be enlarged by an unauthorized extension thereof.27 This is
an exception to the general rule that the obligation of the surety continues for the same period as
that of the principal debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal obligation, as
where the principal debtor is required to make payment by installments. 29 In the case at bar, the
surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its
effectivity date, whereas Slobecs installment payment was to end on July 23, 1972. Therefore,
while ICP guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was
valid only for and within twelve (1 2) months from the date of effectivity of the surety bond, or
until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of
Slobec became an unsecured obligation. The default of Slobec during this period cannot be a
valid basis for the exercise of the right to foreclose by ICP since its surety contract had already
been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a
written claim against it within thirty (30) days from the expiration of the surety bond.
Consequently, the foreclosure of the mortgage, after the expiration of the surety bond under
which ICP as surety has not incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as collateral
surety for his personal indemnity, to which he may resort only after payment by himself, until he
has paid something as such guarantor neither he nor the creditor can resort to such collaterals. 30

The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being
issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company
under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development
Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP Considering that the fact of
payment by ICP has never been established, it follows, pursuant to the doctrine above adverted
to, that ICP cannot foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a
valid title over the subject properties. The submission is without merit and the conclusion is
specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable
in this case. However, its inapplicability has no bearing on the good faith or bad faith of private
respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of
Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM
Parts had no knowledge of the aforesaid several transactions executed between Bormaheco and
petitioners. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of
Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were admitted without
qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the
defense of good faith may not be resorted to by private respondent PM Parts which is charged
with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners.
Accordingly, the transfer certificates of title issued in its name, as well as the certificate of sale,
must be declared null and void since they cannot be considered altogether free of the taint of bad
faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET
ASIDE, and judgment is hereby rendered declaring the following as null and void: (1)
Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in
favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of the
Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine
Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid
certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and
T24849 subsequently issued by virtue of said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title
Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts
Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title
in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as may
be available to respondent Bormaheco, Inc. against herein petitioners.