G.R. No.

89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set off this present
controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No.
17724 1 which reversed the 2December 1987 Decision of Branch 45 of the Regional
Trial Court (RTC) of Manila in a collection suit entitled"Metropolitan Bank and Trust
Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES
& FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil
Case No. 82-9303. They likewise challenge public respondent's Resolution of 21
August 1989 2 denying their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, 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 (Original Records, p. 333). To secure
the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio
executed separate Continuing Suretyships (Exhibits "E" and "F" respectively),
dated 25 February 1977, in favor of the latter. 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 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, 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." It was applied for and obtain 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." Also,

they were not asked to execute any suretyship to guarantee its payment. Neither
did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has
been opened and the Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid
Planters Products the amount of P815,600.00 which payment was covered by a
Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records,
p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt (Exh. "D"), 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. Being the entrusted,
the former agreed to deliver to METROBANK the entrusted goods in the event of
non-sale or, if sold, the proceeds of the sale thereof, on or before September 2,
1979.
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. Informed of the amount due, UTEFS made partial payments to the
Bank which were accepted by the latter.
Answering one of the demand letters, 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. In its reply, the bank informed him
that the source of his liability is the Continuing Suretyship which he executed on
February 25, 1977.
As a rejoinder, 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.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of
a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest,
commission penalty and bank charges) 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 at his given address and his commercial enterprise was
already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein)
filed a motion to dismiss the complaint on the ground of lack of cause of action.
They maintained that the obligation which they guaranteed in 1977 has been
extinguished since it has already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be availed of to secure Uy
Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without
a valid obligation. It was further argued that they can not be held liable for the
obligation contracted in 1979 because they are not privies thereto as it was
contracted without their participation (Records, pp. 42-46).
On April 24, 1984, 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. It relied on Article 2053 of the new Civil
Code which provides: "A guaranty may also be given as security for future debts,
the amount of which is not yet known; . . . ." It was further asserted that the
agreement was in full force and effect at the time the letter of credit was obtained
in 1979 as sureties-defendants did not exercise their right to revoke it by giving
notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in
abeyance pending the introduction of evidence by the parties as per order dated
February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated
March 7, 1986 within which to file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the arguments in their motion to
dismiss and maintained that they are entitled to the benefit of excussion (Original
Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against
defendant Uy Tiam on the ground that it has no information as to the heirs or
legal representatives of the latter who died sometime in December, 1986, which
motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion
of which reads:

The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the
obligation contracted by Uy Tiam under the Letter of Credit (Exh. B) issued
on March 30, 1987 by virtue of the Continuing Suretyships they executed
on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and
F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the
amount of P700,000.00 and this was the obligation which both
obligation which both defendants guaranteed to pay. Uy Tiam paid this
1977 obligation and such payment extinguished the obligation they
assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of
Credit which covered the 1977 account of Uy Tiam. Thus, the obligation
under either is apart and distinct from the obligation created in the other
as evidenced by the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be
answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it
extended to Credit at least to inform them that the continuing
suretyships they executed on February 25, 1977 will be considered by the
plaintiff to secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully
informed of the import of the Continuing Suretyships when they affixed
their signatures thereon that they are thereby securing all future
obligations which Uy Tiam may contract the plaintiff. On the contrary, Dio
and Uy categorically testified that they signed the blank forms in the office
of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the
instruction of Uy Tiam, their former employer. They denied having gone to
the office of the plaintiff to subscribe to the documents (October 1, 1987,
tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;

b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees
and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336) 4

From the said Decision, the private respondent appealed to the Court of Appeals. The
case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the
following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND
HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT
FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER
OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25,
1977.

SO ORDERED. 6

In ruling for the herein private respondent (hereinafter METROBANK), public

respondent 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; each suretyship arrangement was intended to remain in
full force and effect until METROBANK would have been notified of its revocation.
Since no such notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by METROBANK
in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the
public respondent's construction of the suretyship agreements and its ruling with
respect to the extent of their liability thereunder. They argued the even if the
agreements were in full force and effect when METROBANK granted Uy Tiam's
application for a letter of credit in 1979, the public respondent nonetheless seriously
erred in holding them liable for an amount over and above their respective face
values.
In its Resolution of 21 August 1989, public respondent denied the motion:

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFAPPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO
UY DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES
OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the

dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED
AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to appellant METROBANK the amount of P2,397,883.68 which
represents the amount due as of July 17, 1987 inclusive of principal, interest and
charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, appellant METROBANK the accruing interest, fees and charges thereon
from July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.

. . . considering that the issues raised were substantially the same

grounds utilized by the lower court in rendering judgment for
defendants-appellees which We upon appeal found and resolved to
be untenable, thereby reversing and setting aside said judgment
and rendering another in favor of plaintiff, and no new or fresh
issues have been posited to justify reversal of Our decision herein, .
...7
Hence, the instant petition which hinges on the issue of whether or not the petitioners
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.
Petitioners vehemently deny such liability on the ground that the Continuing
Suretyship Agreements were automatically extinguished upon payment of the
principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in
1977. They further claim that they were not advised by either METROBANK or Uy
Tiam that the Continuing Suretyship Agreements would stand as security for the 1979
obligation. Moreover, it is posited that to extend the application of such agreements to
the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which
expressly provides that a guaranty cannot exist without a valid obligation. Petitioners
further argue that even granting, for the sake of argument, that the Continuing
Suretyship Agreements still subsisted and thereby also secured the 1979 obligations

incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed
to pay because it s axiomatic that the obligations of a surety cannot extend beyond
what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after
considering the allegations, issues and arguments adduced therein, the Comment
thereon by the private respondent and the Reply thereto by the petitioners; the parties
were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam
to METROBANK by virtue of the Continuing Suretyship Agreements they
separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said
1979 obligations.
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 is
executed. 8 This is the basis for contracts denominated as continuing guaranty or
suretyship. 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. 9 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. 10 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. 11
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. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement
executed by petitioner Uy provides thus:

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,
and the SURETY also agrees that the BANK may make or cause any and all
such payments to be made strictly in accordance with the terms and provisions of
any agreement(s) express or implied, which has (have) been or may hereafter be
made or entered into by the Borrow in reference thereto, regardless of any law,
regulation or decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any manner affect any of the
terms or provisions of any such agreement(s) or the Bank's rights with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration
in the time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness; provided, however, that the liability of
the SURETY hereunder shall not exceed at any one time the aggregate principal
sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00)
(irrespective of the currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK as
referred to above. 13
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 EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
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. 15
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. Accordingly, as correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to
induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its
terms, each suretyship is a continuing one which shall remain in full force and
effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from
appellant bank, for the purpose of obtaining goods (covered by a trust receipt)
from Planters Products, the continuing suretyships were in full force and effect.
Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit
and Application, they are still liable as the credit accommodation (letter of
credit/trust receipt) was covered by the said suretyships. What makes them liable
thereunder is the condition which provides that the Borrower "is or may become
liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic)
was liable as principal obligor for having failed to fulfill the obligatory stipulations
in the trust receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be
made applicable to the 1979 obligation because the latter was not yet in existence
when the agreements were executed in 1977; under Article 2052 of the Civil Code, a
guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the
succeeding article provides that "[a] guaranty may also be given as security for future
debts, the amount of which is not yet known." Secondly, Article 2052 speaks about
a valid obligation, as distinguished from a void obligation, and not an existing or
current obligation. This distinction is made clearer in the second paragraph of Article
2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements,

petitioners contend that the public respondent gravely erred in finding them liable for
more than the amount 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. 17
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. 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. 18 In the case at bar, both
agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK
referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the
SURETY further agrees to pay the BANK a reasonable compensation for and
as attorney's fees and costs of collection, which shall not in any event be less
than ten per cent (10%) of the amount due (the same to be due and payable
irrespective of whether the case is settled judicially or extrajudicially). 20
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.
Even without such stipulations, the petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal

obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required
to pay.
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. Thus, in Plaridel Surety & Insurance Co.,
Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1)
they were not mentioned in the bond; and (2) the surety would become liable
for more than the amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this
Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a
suretyship bond may recover from the surety as part of their damages, interest
at the legal rate even if the surety would thereby become liable to pay more
than the total amount stipulated in the bond. The theory is that interest is
allowed only by way of damages for delay upon the part of the sureties in
making payment after they should have done so. In some states, the interest
has been charged from the date of the interest has been charged from the date
of the judgment of the appellate court. In this jurisdiction, we rather prefer to
follow the general practice, which is to order that interest begin to run from the
date when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with
Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract,
but by reason of its failure to pay when demanded and for having compelled
the plaintiff to resort to the courts to obtain payment. It should be observed that
interest does not run from the time the obligation became due, but from
the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful
litigants could not recover attorney's fees as part of the damages they suffered
by reason of the litigation. Even if the party paid thousands of pesos to his

lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26
Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven
cases enumerated in Article 2208, among them, "where the court deems it just
and equitable that attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This
gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal
obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and
the complaint filed in Civil Case No. 82-9303, the public respondent mentions the
amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission
penalty and bank charges."23 This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17
July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of
UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17,
1987) P651,092.82 representing the principal amount, P825,133.54, for
past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty
charges at 12% per annum (5-31-82 to 7-17-87) as shown in the
Statement of Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the
outstanding principal obligation of Uy Tiam, secured by the petitioners'
Continuing Suretyship Agreements, was less than P613,339.32. Such amount
may be fully covered by the Continuing Suretyship Agreement executed by
petitioner Dio which stipulates an aggregate principal sum of not exceeding
P800,000.00, and partly covered by that of petitioner Uy which pegs his
maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to
conform to the foregoing exposition, to which extent the instant petition is impressed
with partial merit.
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. SN-Loc-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.
All other dispositions in the dispositive portion of the challenged decision not
inconsistent with the above are affirmed.
SO ORDERED.

SALVADOR P. ESCAO
and MARIO M. SILOS,
Petitioners,

G. R. No. 151953

- versus RAFAEL ORTIGAS, JR.,

Respondent.
Promulgated:
June 29, 2007
x---------------------------------------------------------------------------------x
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under
obligation to reimburse respondent, a claim that can be easily debunked. The more
perplexing question is whether this obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP)[1] entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby
PDCP agreed to make available and lend to Falcon the amount of US$320,000.00,
for specific purposes and subject to certain terms and conditions. [2] On the same day,
three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr.
(Ortigas), George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment of the loan
contracted by Falcon with PDCP.[3] In the meantime, two separate guaranties were
executed to guarantee the payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and individual capacities. One
Guaranty[4] was executed by petitioner Salvador Escao (Escao), while the
other[5] by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L.
Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escao,

Silos and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escao, Silos and Matti. [6] Part of
the consideration that induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with PDCP. Thus, an
Undertaking dated 11 June 1982 was executed by the concerned parties,
[7]
namely: with Escao, Silos and Matti identified in the document as SURETIES,
on one hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the other.
The Undertaking reads in part:
3.

That whether or not SURETIES are able to immediately

cause PDCP and PAIC to release OBLIGORS from their said
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs said guarantees
[sic] to PDCP and PAIC under the following terms and
conditions:

remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy

despite demand.[9]
On 28 April 1989, in order to recover the indebtedness, PDCP filed a
complaint for sum of money with the Regional Trial Court of Makati (RTC) against
Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. The case was docketed as
Civil Case No. 89-5128. For his part, Ortigas filed together with his answer a crossclaim against his co-defendants Falcon, Escao and Silos, and also manifested his
intent to file a third-party complaint against the Scholeys and Matti. [10] The cross-claim
lodged against Escao and Silos was predicated on the 1982 Undertaking, wherein
they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The
first to come to terms with PDCP was Escao, who in December of 1993, entered into
a compromise agreement whereby he agreed to pay the bank P1,000,000.00. In
exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the case. [11] The
compromise agreement was approved by the RTC in a Judgment [12] dated 6 January
1994.

a. Upon receipt by any of [the] OBLIGORS

of any demand from PDCP and/or PAIC for the
payment of FALCONs obligations with it, any of
[the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can timely
take appropriate measures;

Then on 24 February 1994, Ortigas entered into his own compromise

agreement[13] with PDCP, allegedly without the knowledge of Escao, Matti and Silos.
Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as full satisfaction of the
PDCPs claim against Ortigas,[14] in exchange for PDCPs release of Ortigas from any
liability or claim arising from the Falcon loan agreement, and a renunciation of its
claims against Ortigas.

b. Should suit be impleaded by PDCP and/or

PAIC against any and/or all of OBLIGORS for
collection of said loans and/or credit facilities,
SURETIES agree to defend OBLIGORS at their
own expense, without prejudice to any and/or all
of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief
in respect to any of the claims of PDCP and/or
PAIC; and

In 1995, Silos and PDCP entered into a Partial Compromise Agreement

whereby he agreed to pay P500,000.00 in exchange for PDCPs waiver of its claims
against him.[15]

c.
In the event that any of [the]
OBLIGORS is for any reason made to pay any
amount to PDCP and/or PAIC, SURETIES shall
reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any
and all fees which may be due from FALCON arising out of, or in
connection with, their said guarantees[sic].[8]
Falcon eventually availed of the sum of US$178,655.59 from the credit line
extended by PDCP. It would also execute a Deed of Chattel Mortgage over its
personal properties to further secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there

In the meantime, after having settled with PDCP, Ortigas pursued his claims
against Escao, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a
third-party complaint against Matti and Silos, [16] while he maintained his cross-claim
against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor
against Escao, Silos and Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the
amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.[17] The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking,
and that the mere denials of defendants with respect to non-compliance of Ortigas of
the terms and conditions of the Undertaking, unaccompanied by any substantial fact
which would be admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary judgment, even if
such facts were raised in the pleadings.[18] In an Order dated 7 March 1996, the trial
court denied the motion for reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from 28 February 1994.[19]
From the Summary Judgment, recourse was had by way of appeal to the
Court of Appeals. Escao and Silos appealed jointly while Matti appealed by his
lonesome. In a Decision[20] dated 23 January 2002, the Court of Appeals dismissed
the appeals and affirmed the Summary Judgment. The appellate court found that the

RTC did not err in rendering the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The special defenses that
were raised, payment and excussion, were characterized by the Court of Appeals as
appear[ing] to be merely sham in the light of the pleadings and supporting
documents and affidavits.[21] Thus, it was concluded that there was no genuine issue
that would still require the rigors of trial, and that the appealed judgment was decided
on the bases of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos.[22] Two main
issues are raised. First, petitioners dispute that they are liable to Ortigas on the basis
of the 1982 Undertaking, a document which they do not disavow and have in fact
annexed to their petition. Second, on the assumption that they are liable to Ortigas
under the 1982 Undertaking, petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners also submit that they are
not liable for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a
relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil
Procedure, summary judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law. Petitioner have not attempted to demonstrate before
us that there existed a genuine issue as to any material fact that would preclude
summary judgment. Thus, we affirm with ease the common rulings of the lower
courts that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly
held liable to Ortigas on the basis of the 1982 Undertaking in this Summary
Judgment. An examination of the document reveals several clauses that make it clear
that the agreement was brought forth by the desire of Ortigas, Inductivo and the
Scholeys to be released from their liability under the loan agreement which release
was, in turn, part of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with PDCP, and that amongst the
consideration for OBLIGORS and/or their principals aforesaid selling is SURETIES
relieving OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON.[23] Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP x x x under the following terms and
conditions.[24]
At the same time, it is clear that the assumption by petitioners of Ortigass
guarantees [sic] to PDCP is governed by stipulated terms and conditions as set forth
in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by any of
OBLIGORS of any demand from PDCP for the payment of Falcons obligations with
it, any of OBLIGORS was to immediately inform SURETIES thereof so that the
latter can timely take appropriate measures. Second, should any and/or all of
OBLIGORS be impleaded by PDCP in a suit for collection of its loan, SURETIES
agree[d] to defend OBLIGORS at their own expense, without prejudice to any and/or
all of OBLIGORS impleading SURETIES therein for contribution, indemnity,
subrogation or other relief[25] in respect to any of the claims of PDCP. Third, if any of

the OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days
from such payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas
was not made to pay PDCP the amount now sought to be reimbursed, as Ortigas
voluntarily paid PDCP the amount of P1.3 Million as an amicable settlement of the
claims posed by the bank against him. However, the subject clause in paragraph 3(c)
actually reads [i]n the event that any of OBLIGORS is for any reason made to
pay any amount to PDCP x x x[27] As pointed out by Ortigas, the phrase for any
reason reasonably includes any extra-judicial settlement of obligation such as what
Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment adverted to therein
unlimited and unqualified.
The interpretation posed by petitioners would have held water had the
Undertaking made clear that the right of Ortigas to seek reimbursement accrued only
after he had delivered payment to PDCP as a consequence of a final and executory
judgment. On the contrary, the clear intent of the Undertaking was for petitioners and
Matti to relieve the burden on Ortigas and his fellow OBLIGORS as soon as
possible, and not only after Ortigas had been subjected to a final and executory
adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to
cause PDCP x x x to within a reasonable time release all the OBLIGORS x x x from
their guarantees [sic] to PDCP x x x[28] In the event that Ortigas and his fellow
OBLIGORS could not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to pledge or assign
such payments to Ortigas, et al., as security for whatever amounts the latter may be
held liable under their guaranties. In addition, paragraph 1 also makes clear that
nothing in the Undertaking shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said guarantees
[sic].[29]
There is no argument to support petitioners position on the import of the
phrase made to pay in the Undertaking, other than an unduly literalist reading that is
clearly inconsistent with the thrust of the document. Under the Civil Code, the various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.[30] Likewise applicable is the
provision
that
if
some
stipulation
of
any
contract
should admit of several meanings, it shall be understood as bearing that import
which is most adequate to render it effectual.[31] As a means to effect the general
intent of the document to relieve Ortigas from liability to PDCP, it is his interpretation,
not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other
conditions set in paragraph 3, as they claim. Following the general assertion in the
petition that Ortigas violated the terms of the Undertaking, petitioners add that Ortigas
paid PDCP BANK the amount of P1.3 million without petitioners ESCANO and
SILOSs knowledge and consent.[32]Paragraph 3(a) of the Undertaking does impose a
requirement that any of the OBLIGORS shall immediately inform SURETIES if

they received any demand for payment of FALCONs obligations to PDCP, but that
requirement is reasoned so that the [SURETIES] can timely take appropriate
measures[33] presumably to settle the obligation without having to burden the
OBLIGORS. This notice requirement in paragraph 3(a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been impleaded as a
defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas
are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place.
They note that Ortigas had, in his answer, denied any liability to PDCP and had
alleged that he signed the Assumption of Solidary Liability not in his personal
capacity, but as an officer of Falcon. However, such position, according to petitioners,
could not be justified since Ortigas later voluntarily paid PDCP the amount of P1.3
Million. Such circumstances, according to petitioners, amounted to estoppel on the
part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous.
The Partial Compromise Agreement between PDCP and Ortigas expressly stipulated
that Ortigass offer to pay PDCP was conditioned without [Ortigass] admitting liability
to plaintiff PDCP Banks complaint, and to terminate and dismiss the said case as
against Ortigas solely.[34] Petitioners profess it is unthinkable for Ortigas to have
voluntarily paid PDCP without admitting his liability,[35] yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he
had already assigned his obligation to petitioners through the 1982 Undertaking. Yet
the fact is PDCP did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his
distress through a settlement with the creditor bank. Indeed, paragraph 1 of the
Undertaking expressly states that nothing herein shall prevent OBLIGORS, or any
one of them, from themselves negotiating with PDCP x x x for the release of their said
guarantees [sic].[36] Simply put, the Undertaking did not bar Ortigas from pursuing his
own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering
from petitioners whatever amount he may have paid PDCP through his own
settlement. The stipulation that if Ortigas was for any reason made to pay any
amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment[37] makes it clear that petitioners
remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative,
that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to
Ortigas, claiming that the Undertaking did not provide for express solidarity. They cite
Article 1207 of the New Civil Code, which states in part that [t]here is a solidary

liability only when the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the agreement clearly
shows that it is a surety agreement [38] between the obligors (Ortigas group) and the
sureties (Escao group). Ortigas points out that the Undertaking uses the word
SURETIES although the document, in describing the parties. It is further contended
that the principal objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable because the total loan obligation can
not be paid or settled to free or release the OBLIGORS if one or any of the
SURETIES default from their obligation in the Undertaking.[39]
In case, there is a concurrence of two or more creditors or of two or more
debtors in one and the same obligation, Article 1207 of the Civil Code states that
among them, [t]here is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity. Article 1210
supplies further caution against the broad interpretation of solidarity by providing:
The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.
These Civil Code provisions establish that in case of concurrence of two or
more creditors or of two or more debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing the obligation as solidary,
the presumption is that the obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary in character to prove such fact
with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners
agreed to bind themselves jointly and severally in their obligations to the Ortigas
group, or any such terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti
identified themselves in the Undertaking as SURETIES, a term repeated no less
than thirteen (13) times in the document. Ortigas claims that such manner of
identification sufficiently establishes that the obligation of petitioners to him was joint
and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article 2047
provides the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship. [Emphasis supplied][40]

As provided in Article 2047 in a surety agreement the surety undertakes to

be bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears that
Ortigass argument rests solely on the solidary nature of the obligation of the surety
under Article 2047. In tandem with the nomenclature SURETIES accorded to
petitioners
and
Matti
in
the
Undertaking,
however,
this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in
the first place. That clearly is not the case here, notwithstanding the use of the
nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor
to whom the surety is solidarily bound by way of an ancillary obligation of segregate
identity from the obligation between the principal debtor and the creditor. The
suretyship does bind the surety to the creditor, inasmuch as the latter is vested with
the right to proceed against the former to collect the credit in lieu of proceeding
against the principal debtor for the same obligation. [41] At the same time, there is also
a legal tie created between the surety and the principal debtor to which the creditor is
not privy or party to. The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished.[42] At the
same time, the surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact become subrogated to all the rights and
remedies of the creditor.[43]
Note that Article 2047 itself specifically calls for the application of the
provisions on joint and solidary obligations to suretyship contracts.[44] Article 1217 of
the Civil Code thus comes into play, recognizing the right of reimbursement from a codebtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e.,
the surety).[45] However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt. The difference lies in the respective faculties of the
joint and several debtor and the surety to seek reimbursement for the sums they paid
out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a
surety:
A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he assumes
to pay the debt before the property of the principal debtor has
been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed
upon him in Section 4, Chapter 3, Title I, Book IV of the Civil
Code.

The second paragraph of [Article 2047] is practically

equivalent to the contract of suretyship. The civil law suretyship is,
accordingly, nearly synonymous with the common law guaranty;
and the civil law relationship existing between the co-debtors
liable in solidum is similar to the common law suretyship.[46]
In the case of joint and several debtors, Article 1217 makes plain that the
solidary debtor who effected the payment to the creditor may claim from his codebtors only the share which corresponds to each, with the interest for the
payment already made. Such solidary debtor will not be able to recover from the codebtors the full amount already paid to the creditor, because the right to recovery
extends only to the proportional share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who already paid. In contrast, even
as the surety is solidarily bound with the principal debtor to the creditor, the surety
who does pay the creditor has the right to recover the full amount paid, and not just
any proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to the
surety by reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find
the right under Article 2066 of the Civil Code, which assures that [t]he guarantor who
pays for a debtor must be indemnified by the latter, such indemnity comprising of,
among others, the total amount of the debt.[47] Further, Article 2067 of the Civil Code
likewise establishes that [t]he guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.[48]
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue
that the provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr. Tolentinos observation that
[t]he reference in the second paragraph of [Article 2047] to the provisions of Section
4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not
mean that suretyship is withdrawn from the applicable provisions governing
guaranty.[49] For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors,
for both classes of obligors would be governed by exactly the same rules and
limitations.
Accordingly, the rights to indemnification and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. These rights granted to the surety who pays materially
differ from those granted under Article 1217 to the solidary debtor who pays, since the
indemnification that pertains to the latter extends only [to] the share which
corresponds to each [co-debtor]. It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as SURETIES,
they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the
general presumption favoring joint liability, the Court would have to be satisfied that
among the petitioners and Matti, there is one or some of them who stand as the
principal debtor to Ortigas and another as surety who has the right to full

reimbursement from the principal debtor or debtors. No suggestion is made by the

parties that such is the case, and certainly the Undertaking is not revelatory of such
intention. If the Court were to give full fruition to the use of the term SURETIES as
conclusive indication of the existence of a surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the SURETIES which
petitioners and Matti did not clearly intend.

act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest.

It is not impossible that as between Escao, Silos and Matti, there was an
agreement whereby in the event that Ortigas were to seek reimbursement from them
per the terms of the Undertaking, one of them was to act as surety and to pay Ortigas
in full, subject to his right to full reimbursement from the other two obligors. In such
case, there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not
appear on the record. More consequentially, no such intention is reflected in the
Undertaking itself, the very document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term SURETIES could not work to such effect, especially as it does
not appear who exactly is the principal debtor whose obligation is assured or
guaranteed by the surety.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals [51] set
forth the rules with respect to the manner of computing legal interest:

Ortigas further argues that the nature of the Undertaking requires solidary
obligation of the Sureties, since the Undertaking expressly seeks to reliev[e] obligors
of any and all liability arising from their said joint and several undertaking with
[F]alcon, and for the sureties to irrevocably agree and undertake to assume all of
obligors said guarantees to PDCP.[50]We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the facilitation of these goals,
yet the Undertaking itself contains no stipulation or clause that establishes petitioners
obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity. Even if the
liability of petitioners and Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would still be
accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the
Undertaking contained no such stipulation for attorneys fees, and that the situation
did not fall under the instances under Article 2208 of the Civil Code where attorneys
fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners
led to his being impleaded in the suit filed by PDCP. The Undertaking was precisely
executed as a means to obtain the release of Ortigas and the Scholeys from their
previous obligations as sureties of Falcon, especially considering that they were
already divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas from his surety
agreements with Falcon. Specific provisions likewise mandate the immediate
repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty
agreements from which he was ostensibly to be released through the efforts of
petitioners. None of these provisions were complied with by petitioners, and Article
2208(2) precisely allows for the recovery of attorneys fees [w]hen the defendants

Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they are
liable, that the rate of interest should not be 12% per annum, as adjudged by the
RTC.

I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on Damages of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated
claims or damages except when or until the
demand can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty
cannot be so reasonably established at the
time the demand is made, the interest shall
begin to run only from the date the judgment

of the court is made (at which time

quantification of damages may be deemed to
have been reasonably ascertained). The
actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
JOSE C. TUPAZ IV and
PETRONILA C. TUPAZ,
Petitioners,
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such
finality until its satisfaction, this interim period
being deemed to be by then an equivalent to
a forbearance of credit.[52]
Since what was the constituted in the Undertaking consisted of a payment in
a sum of money, the rate of interest thereon shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand. The interest rate imposed by
the RTC is thus proper. However, the computation should be reckoned from judicial or
extrajudicial demand. Per records, there is no indication that Ortigas made any
extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March
1994, Ortigas made a judicial demand when he filed a Third-Party Complaint praying
that petitioners and Matti be made to reimburse him for the payments made to PDCP.
It is the filing of this Third Party Complaint on 14 March 1994 that should be
considered as the date of judicial demand from which the computation of interest
should be reckoned.[53] Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the
Regional Trial Court dated 5 October 1995 is MODIFIED by declaring that petitioners
and Joseph M. Matti are only jointly liable, not jointly and severally, to respondent
Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the Regional Trial
Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per annum
on the amount of P1,300,000.00 is to be computed from 14 March 1994, the date of
judicial demand, and not from 28 February 1994 as directed in the Order of the lower
court. The assailed rulings are affirmed in all other respects. Costs against petitioners.
SO ORDERED.

G.R. No. 145578

- versus -

THE COURT OF APPEALS and

BANK OF THE PHILIPPINE
ISLANDS,
Respondents.

Promulgated:
November 18, 2005

x ---------------------------------- --------------- x
DECISION
CARPIO, J.:
The Case
This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000. The
7 September
2000 Decision affirmed the ruling of the Regional Trial Court, Makati, Branch 144 in a
case for estafa under Section 13, Presidential Decree No. 115. The Court of Appeals
Resolution of 18 October 2000 denied petitioners motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were VicePresident for Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation (El Oro Corporation). El Oro Corporation had a contract with
the Philippine Army to supply the latter with survival bolos.
To finance the purchase of the raw materials for the survival bolos, petitioners,
on behalf of El Oro Corporation, applied with respondent Bank of the Philippine
Islands (respondent bank) for two commercial letters of credit. The letters of credit
were in favor of El Oro Corporations suppliers, Tanchaoco Manufacturing
Incorporated[3] (Tanchaoco Incorporated) and Maresco Rubber and Retreading
Corporation[4] (Maresco Corporation). Respondent bank granted petitioners

application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco
Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco
Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed
trust receipts in favor of respondent bank. On 30 September 1981, petitioner Jose C.
Tupaz IV (petitioner Jose Tupaz) signed, in his personal capacity, a trust receipt
corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose
Tupaz bound himself to sell the goods covered by the letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before
29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El
Oro Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5
(for P294,000). Petitioners bound themselves to sell the goods covered by that letter
of credit and to remit the proceeds to respondent bank, if sold, or to return the goods,
if not sold, on or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw
materials to El Oro Corporation, respondent bank paid the former P564,871.05
and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust receipts.
Respondent bank made several demands for payments but El Oro Corporation made
partial payments only. On 27 June 1983 and 28 June 1983, respondent banks
counsel[5] and its representative[6] respectively sent final demand letters to El Oro
Corporation. El Oro Corporation replied that it could not fully pay its debt because the
Armed Forces of the Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13,
Presidential Decree No. 115 (Section 13) [7] or Trust Receipts Law (PD 115). After
preliminary investigation, the then Makati Fiscals Office found probable cause to
indict petitioners. The Makati Fiscals Office filed the corresponding Informations
(docketed as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court,
Makati, on 17 January 1984 and the cases were raffled to Branch 144 (trial court) on
20 January 1984. Petitioners pleaded not guilty to the charges and trial ensued.
During the trial, respondent bank presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of
estafa on reasonable doubt. However, the trial court found petitioners solidarily liable
with El Oro Corporation for the balance of El Oro Corporations principal debt under
the trust receipts. The dispositive portion of the trial courts Decision provides:
WHEREFORE,
judgment
is
hereby
rendered
ACQUITTING both accused Jose C. Tupaz, IV and Petronila Tupaz
based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV

and Petronila Tupaz, are hereby ordered, jointly and solidarily, to
pay the Bank of the Philippine Islands the outstanding principal
obligation ofP624,129.19 (as of January 23, 1992) with the
stipulated interest at the rate of 18% per annum; plus 10% of the
total amount due as attorneys fees; P5,000.00 as expenses of
litigation; and costs of the suit.[8]

In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is
deemed impliedly instituted with the criminal action, as in fact the
prosecution thereof was actively handled by the private prosecutor,
the Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily
should be held civilly liable to the Bank of the Philippine Islands.
The mere fact that they were unable to collect in full from the AFP
and/or the Department of National Defense the proceeds of the
sale of the delivered survival bolos manufactured from the raw
materials covered by the trust receipt agreements is no valid
defense to the civil claim of the said complainant and surely could
not wipe out their civil obligation. After all, they are free to institute
an action to collect the same.[9]
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1)
their acquittal operates to extinguish [their] civil liability and (2) at any rate, they are
not personally liable for El Oro Corporations debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial
courts ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising
from the violation of the trust receipt agreement is distinct from the
criminal liability imposed therein. In the case of Vintola vs. Insular
Bank of Asia and America, our Supreme Court held that acquittal in
the estafa case (P.D. 115) is no bar to the institution of a civil action
for collection. This is because in such cases, the civil liability of the
accused does not arise ex delicto but rather based ex
contractu and as such is distinct and independent from any criminal
proceedings and may proceed regardless of the result of the latter.
Thus, an independent civil action to enforce the civil liability may be
filed against the corporation aside from the criminal action against
the responsible officers or employees.
xxx

[W]e hereby hold that the acquittal of the accusedappellants from the criminal charge of estafa did not operate to
extinguish their civil liability under the letter of credit-trust receipt
arrangement with plaintiff-appellee, with which they dealt both in
their personal capacity and as officers of El Oro Engraver
Corporation, the letter of credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable
with their corporation, El Oro Engraver Corporation, alleging that
they executed the subject documents including the trust receipt
agreements only in their capacity as such corporate officers. They
said that these instruments are mere pro-forma and that they
executed these instruments on the strength of a board resolution of
said corporation authorizing them to apply for the opening of a letter
of credit in favor of their suppliers as well as to execute the other
documents necessary to accomplish the same.

Such contention, however, is contradicted by the evidence

on record. The trust receipt agreement indicated in clear and
unmistakable terms that the accused signed the same as surety for
the corporation and that they bound themselves directly and
immediately liable in the event of default with respect to the
obligation under the letters of credit which were made part of the
said agreement, without need of demand. Even in the application
for the letter of credit, it is likewise clear that the undertaking of the
accused is that of a surety as indicated [in] the following words: In
consideration of your establishing the commercial letter of credit
herein applied for substantially in accordance with the foregoing,
the undersigned Applicant and Surety hereby agree, jointly and
severally, to each and all stipulations, provisions and conditions on
the reverse side hereof.
xxx
Having contractually agreed to hold themselves solidarily
liable with El Oro Engraver Corporation under the subject trust
receipt agreements with appellee Bank of the Philippine Islands,
herein accused-appellants may not, therefore, invoke the separate
legal personality of the said corporation to evade their civil liability
under the letter of credit-trust receipt arrangement with said
appellee, notwithstanding their acquittal in the criminal cases filed
against them. The trial court thus did not err in holding the
appellants solidarily liable with El Oro Engraver Corporation for the
outstanding principal obligation of P624,129.19 (as of January 23,
1992) with the stipulated interest at the rate of 18% per annum,
plus 10% of the total amount due as attorneys fees, P5,000.00 as
expenses of litigation and costs of suit.[10]
Hence, this petition. Petitioners contend that:

1.

A JUDGMENT OF ACQUITTAL OPERATE[S] TO

EXTINGUISH THE CIVIL LIABILITY OF PETITIONERS[;]

2.

GRANTING WITHOUT ADMITTING THAT THE

QUESTIONED OBLIGATION WAS INCURRED BY THE
CORPORATION, THE SAME IS NOT YET DUE AND
PAYABLE;

3.

GRANTING THAT THE QUESTIONED OBLIGATION

WAS ALREADY DUE AND PAYABLE, xxx PETITIONERS
ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT
BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT
AS SURETY AS OFFICERS OF EL ORO, AND
THEREFORE, AN EXCLUSIVE LIABILITY OF EL ORO;
[AND]

4.

IN
THE
ALTERNATIVE,
THE
QUESTIONED
TRANSACTIONS ARE SIMULATED AND VOID.[11]

The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro
Corporations debts under the trust receipts;
(2) If so
(a)
whether petitioners liability is solidary with El Oro Corporation;
and
(b)
whether petitioners acquittal of estafa under Section 13, PD 115
extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals ruling with the
modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations
debt under the trust receipt dated 30 September 1981.

On Petitioners Undertaking Under

the Trust Receipts

A corporation, being a juridical entity, may act only through its directors, officers,
and employees. Debts incurred by these individuals, acting as such corporate agents,
are not theirs but the direct liability of the corporation they represent. [12] As an
exception, directors or officers are personally liable for the corporations debts only if
they so contractually agree or stipulate.[13]

liable for El Oro Corporations debts. Not being a party to the trust receipt dated 30
September 1981, petitioner Petronila Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupazs Liability
Under the Trust Receipt Dated 30 September 1981

Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands
In
consideration
of
your
releasing
to
under the terms of this Trust Receipt
the goods described herein, I/We, jointly and severally, agree and
promise to pay to you, on demand, whatever sum or sums of
money which you may call upon me/us to pay to you, arising out of,
pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this
undertaking on the part of the said .
I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your
part to take any steps or exhaust any legal remedies that you may
have against the said . before making
demand upon me/us.[14] (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed below this clause
as officers of El Oro Corporation. Thus, under petitioner Petronila Tupazs signature
are the words Vice-PresTreasurer and under petitioner Jose Tupazs signature are
the words Vice-PresOperations. By so signing that trust receipt, petitioners did not
bind themselves personally liable for El Oro Corporations obligation. In Ong v. Court
of Appeals,[15] a corporate representative signed a solidary guarantee clause in two
trust receipts in his capacity as corporate representative. There, the Court held that
the corporate representative did not undertake to guarantee personally the payment
of the corporations debts, thus:
[P]etitioner did not sign in his personal capacity the
solidary guarantee clause found on the dorsal portion of the trust
receipts. Petitioner placed his signature after the typewritten words
ARMCO INDUSTRIAL CORPORATION found at the end of the
solidary guarantee clause. Evidently, petitioner did not undertake to
guaranty personally the payment of the principal and interest of
ARMAGRIs debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that
they are not personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which
petitioner Jose Tupaz signed alone, we find that he did so in his personal capacity.
Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporations
Vice-President for Operations. Hence, petitioner Jose Tupaz bound himself personally

As stated, the dorsal side of the trust receipt dated 30 September 1981
provides:
To the Bank of the Philippine Islands
In
consideration
of
your
releasing
to
under the terms of this Trust Receipt
the goods described herein, I/We, jointly and severally, agree and
promise to pay to you, on demand, whatever sum or sums of
money which you may call upon me/us to pay to you, arising out of,
pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this
undertaking on the part of the said .
I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your
part to take any steps or exhaust any legal remedies that you may
have against the said .
Before making demand upon me/us. (Underlining supplied;
capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latters debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court,[16] the Court
interpreted a substantially identical clause[17] in a trust receipt signed by a corporate
officer who bound himself personally liable for the corporations obligation. The
petitioner in that case contended that the stipulation we jointly and severally agree
and undertake rendered the corporate officer solidarily liable with the corporation. We
dismissed this claim and held the corporate officer liable as guarantor only. The Court
further ruled that had there been more than one signatories to the trust receipt, the
solidary liability would exist between the guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the
clear wording of the xxx clause x x x we jointly and severally agree
and undertake x x x, and the concluding sentence on exhaustion,
[respondent] Chis liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty
clause yields no other conclusion than that the obligation of Chi is
only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which,

nevertheless, is ineffective in this case because the space therein

for the party whose property may not be exhausted was not filled
up. Under Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may be held
liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause we jointly
and severally agree and undertake refers to the undertaking of the
two (2) parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either one
or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of
the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chis participation therein is limited to the affixing of his
signature thereon. It is, therefore, a contract of adhesion; as such, it
must be strictly construed against the party responsible for its
preparation.[18] (Underlining supplied; italicization in the original)

Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest
earns 12% interest per annum from the time of the filing of the Informations in the
Makati Regional Trial Court on 17 January 1984. Further, the total amount due as of
the date of the finality of this Decision will earn interest at 18% per annum until fully
paid since this was the stipulated rate in the applications for the letters of credit.[24]
The accounting of El Oro Corporations debts as of 23 January 1992, which
the trial court used, is no longer useful as it does not specify the amounts owing
under each of the trust receipts. Hence, in the execution of this Decision, the trial
court shall compute El Oro Corporations total liability under each of the trust receipts
dated 30 September 1981 and 9 October 1981 based on the following formula:[25]
TOTAL AMOUNT DUE = [principal + interest + interest on
interest] partial payments made[26]
Interest = principal x 18 % per annum x no. of years from
due date[27] until finality of judgment
Interest on interest = interest computed as of the filing of
the complaint (17 January 1984) x 12% x no. of years until finality
of judgment
Attorneys fees is 10% of the total amount computed as of
finality of judgment
Total amount due as of the date of finality of judgment will
earn an interest of 18% per annum until fully paid.

However, respondent banks suit against petitioner Jose Tupaz stands

despite the Courts finding that he is liable as guarantor only. First, excussion is not a
pre-requisite to secure judgment against a guarantor. The guarantor can still demand
deferment of the execution of the judgment against him until after the assets of the
principal debtor shall have been exhausted.[19] Second, the benefit of excussion may
be waived.[20] Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz
waived excussion when he agreed that his liability in [the] guaranty shall be DIRECT
AND IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent
bank] to take any steps or exhaust any legal remedies xxx. The clear import of this
stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his
guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations
principal debt and other accessory liabilities (as stipulated in the trust receipt and as
provided by law) under the trust receipt dated 30 September 1981. That trust receipt
(and the trust receipt dated 9 October 1981) provided for payment of attorneys fees
equivalent to 10% of the total amount due and an interest at the rate of 7% per
annum, or at such other rate as the bank may fix, from the date due until paid
xxx.[21] In the applications for the letters of credit, the parties stipulated that drafts
drawn under the letters of credit are subject to interest at the rate of 18% per annum.
[22]

The lower courts correctly applied the 18% interest rate per
annum considering that the face value of each of the trust receipts is based on the
drafts drawn under the letters of credit. Based on the guidelines laid down in

In so delegating this task, we reiterate what we said in Rizal Commercial Banking

Corporation v. Alfa RTW Manufacturing Corporation [28] where we also ordered the
trial court to compute the amount of obligation due based on a formula substantially
similar to that indicated above:
The total amount due xxx [under] the xxx contract[] xxx
may be easily determined by the trial court through a simple
mathematical computation based on the formula specified above.
Mathematics is an exact science, the application of which needs no
further proof from the parties.

Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal
action, the civil liability is not extinguished by acquittal
[w]here the acquittal is based
preponderance of evidence is
court expressly declares that
criminal but only civil in nature

on reasonable doubt xxx as only

required in civil cases; where the
the liability of the accused is not
xxx as, for instance, in the felonies

of estafa, theft, and malicious mischief committed by certain

relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is
not based upon the criminal act of which the accused was
acquitted xxx.[29] (Emphasis supplied)
Here, respondent bank chose not to file a separate civil action [30] to recover
payment under the trust receipts. Instead, respondent bank sought to recover
payment in Criminal Case Nos. 8848 and 8849. Although the trial court acquitted
petitioner Jose Tupaz, his acquittal did not extinguish his civil liability. As the Court of
Appeals correctly held, his liability arose not from the criminal act of which he was
acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30 September
1981. Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his
personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro
Corporations debts under the trust receipts are not yet due and demandable.
Alternatively, petitioners assail the trust receipts as simulated. These assertions have
no merit. Under the terms of the trust receipts dated 30 September 1981 and 9
October 1981, El Oro Corporations debts fell due on 29 December 1981 and 8
December 1981, respectively.
Neither is there merit to petitioners claim that the trust receipts were simulated.
During the trial, petitioners did not deny applying for the letters of credit and
subsequently executing the trust receipts to secure payment of the drafts drawn
under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the
Court of Appeals dated 7 September 2000 and its Resolution dated 18 October 2000
with the following MODIFICATIONS:
1)

2)

3)

El Oro Engraver Corporation is principally liable for the total amount

due under the trust receipts dated 30 September 1981 and 9 October
1981, as computed by the Regional Trial Court, Makati, Branch 144,
upon finality of this Decision, based on the formula provided above;
Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations
total debt under the trust receipt dated 30 September 1981 as thus
computed by the Regional Trial Court, Makati, Branch 144; and
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable
under the trust receipt dated 9 October 1981.

SO ORDERED.

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly
and severally liable with the principal debtor in case the latter defaults in the payment
of the loan, is such undertaking of the former deemed to be that of a surety as an
insurer of the debt, or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B.
Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. 1 On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance
of P13,700.00. No payments were made after the last payment on September 26,
1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone
party-defendant, to the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in
August 1990, immediately after the loan matured, she offered to settle the obligation
with respondent corporation but the latter informed her that they would try to collect
from the spouses Azarraga and that she need not worry about it; that there has
already been a partial payment in the amount of P17,010.00; that the interest of 6%
per month compounded at the same rate per month, as well as the penalty charges of
3% per month, are usurious and unconscionable; and that while she agrees to be
liable on the note but only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the loan.

During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages should
be; (2) whether the liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings
filed and the memoranda to be submitted by them. On November 26, 1992, the
Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the
complaint without prejudice to the filing of a separate action for a sum of money
against the spouses Osmea and Merlyn Azarraga who are primarily liable on the
instrument. 6 This was based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to
pay the obligation is considered a valid tender of payment sufficient to discharge a
person's secondary liability on the instrument; as co-maker, is only secondarily liable
on the instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and
rendered judgment declaring herein petitioner Palmares liable to pay respondent
corporation:

adhesion, the same is not entirely prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is
therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do
not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's
liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is
solidary.
4. The promissory note is a contract of adhesion and should be construed
against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.

1. The sum of P13,700.00 representing the outstanding balance still due and
owing with interest at six percent (6%) per month computed from the date
the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per
month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and severally or
solidarily liable with the principal debtors, the Azarraga spouses, when she signed as
a co-maker. As such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation. It also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court ordered the imposition of
the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of

B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in

strictly imposing the interests and penalty charges on the outstanding
balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material
points by respondent corporation. They are further refuted by accepted doctrines in
the American jurisdiction after which we patterned our statutory law on surety and
guaranty. This case then affords us the opportunity to make an extended exposition
on the ramifications of these two specialized contracts, for such guidance as may be
taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in
this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have
fully understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or
solidarily liable with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may

demand payment of the above loan from me in case the principal
maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to
the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are
conflicting in that while the second paragraph seems to define her liability as that of a
surety which is joint and solidary with the principal maker, on the other hand, under
the third paragraph her liability is actually that of a mere guarantor because she
bound herself to fulfill the obligation only in case the principal debtor should fail to do
so, which is the essence of a contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the third paragraph defines the
nature of her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in the
contract should be interpreted in relation to one another and not by parts. In other
words, the second paragraph should not be taken in isolation, but should be read in
relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner
avers that she could be held liable only as a guarantor for several reasons. First, the
words "jointly and severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an ordinary layman like
herein petitioner, a 65-year old housewife who is likely to enter into such transactions
without fully realizing the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law
looks upon the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified limits,
taking into consideration the peculiar nature of a surety agreement which holds the
surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The note was brought
to petitioner partially filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent pursuant to Art. 1377
of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan
because the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings filed
by private respondent before the trial court. And, while petitioner may have admitted

in her Amended Answer that she received a demand letter from respondent
corporation sometime in 1990, the same did not effectively put her or the principal
debtors in default for the simple reason that the latter subsequently made a partial
payment on the loan in September, 1991, a fact which was never controverted by
herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the
outstanding balance of the loan is only P13,700.00. Where the interest charged on
the loan is exorbitant, iniquitous or unconscionable, and the obligation has been
partially complied with, the court may equitably reduce the penalty 10 on grounds of
substantial justice. More importantly, respondent corporation never refuted petitioner's
allegation that immediately after the loan matured, she informed said respondent of
her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to
dismiss the petition for lack of merit, but to except therefrom the issue anent the
propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the
consistent holding of the Court that contracts of adhesion are not invalid per se and
that on numerous occasions the binding effects thereof have been upheld. The
peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to
which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding circumstances. 12 The factual scenario
obtaining in the case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound
herself to be jointly and severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the
second paragraph of her contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the
promissory note and that she is "fully aware" of her solidary liability with the principal
maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she
cannot now be heard to claim otherwise. Any reference to the existence of fraud is
unavailing. Fraud must be established by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Petitioner's attempt to prove
fraud must, therefore, fail as it was evidenced only by her own uncorroborated and,
expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so under a misapprehension or in
ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule
that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no reason for relieving her of
liability. 16
Petitioner would like to make capital of the fact that although she obligated herself to
be jointly and severally liable with the principal maker, her liability is deemed
restricted by the provisions of the third paragraph of her contract wherein she agreed
"that M.B. Lending Corporation may demand payment of the above loan from me in
case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note,"
which makes her contract one of guaranty and not suretyship. The purported
discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of
the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 18 Stated differently, a surety promises to pay
the principal's debt if the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the guarantor if
the principal is unable to pay. 19 A surety binds himself to perform if the principal does
not, without regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so. 20 In other
words, a surety undertakes directly for the payment and is so responsible at once if

the principal debtor makes default, while a guarantor contracts to pay if, by the use of
due diligence, the debt cannot be made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and
third paragraphs of the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's right against
petitioner. It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein petitioner only if and
when the defaulting principal has become insolvent. A contract of suretyship, to
repeat, is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and
without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes
the rule on strictissimi juris, which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then the liability of the
surety, under his contract, as thus interpreted and construed, is not to be extended
beyond its strict meaning. 23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining whether a party's undertaking is
that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship contract
merely elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by
petitioner, that she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being incongruent with the
judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall also be principally
considered. 24 Several attendant factors in that genre lend support to our finding that
petitioner is a surety. For one, when petitioner was informed about the failure of the
principal debtor to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of
initial payment up to the last, which were all issued in her name and of the Azarraga
spouses. 25 This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly
upon the account and inuring to the benefit of petitioner. The concomitant and

simultaneous compliance of petitioner's obligation with that of her principals only goes
to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, 26and as such is deemed an original promisor and debtor
from the beginning. 27 This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the principal. 28 In essence, the
contract of a surety starts with the agreement, 29 which is precisely the situation
obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately
follows the terms and conditions stipulated between respondent corporation, as
creditor, and the principal obligors. A surety is usually bound with his principal by the
same instrument, executed at the same time and upon the same consideration; he is
an original debtor, and his liability is immediate and direct. 30 Thus, it has been held
that where a written agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the
terms of the principal contract, the signers were "sureties" jointly liable with the
buyer. 31 A surety usually enters into the same obligation as that of his principal, and
the signatures of both usually appear upon the same instrument, and the same
consideration usually supports the obligation for both the principal and the surety. 32
There is no merit in petitioner's contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default, there having
been no judicial or extrajudicial demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions expressed in the
promissory note. Significantly, paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the creditor is no longer necessary in order
that delay may exist since the contract itself already expressly so declares. 33 As a
surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing
suit against them, since the commencement of the suit is a sufficient demand. 34 On
this point, it may be worth mentioning that a surety is not even entitled, as a matter of
right, to be given notice of the principal's default. Inasmuch as the creditor owes no
duty of active diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the creditor has not
notified

him in the absence of a special agreement to that effect in the contract of

suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the
principal debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual requirement, it is not
necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account. 36 The underlying principle therefor is that a suretyship is a direct contract to
pay the debt of another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default. 37 As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited
from the proceeds of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first against the principal
before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal. 39Under Article 1216 of the Civil Code, the creditor may
proceed against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety alone. 40 Since, generally, it is
not necessary for the creditor to proceed against a principal in order to hold the surety
liable, where, by the terms of the contract, the obligation of the surety is the same that
of the principal, then soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against
the principal. 41 Perforce, in accordance with the rule that, in the absence of statute or
agreement otherwise, a surety is primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in the absence of any agreement
limiting the application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue
petitioner on her obligation does not release her from liability. Where a creditor
refrains from proceeding against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the creditor's rights visa-vis the surety, unless the surety requires him by appropriate notice to sue on the
obligation. Such gratuitous indulgence of the principal does not discharge the surety

whether given at the principal's request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to favor the principal, or is only the
result of passiveness. The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such delay continues until the
principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor's mere statement that the creditor will not look
to the surety, 44 or that he need not trouble himself. 45 The consequences of the delay,
such as the subsequent insolvency of the principal, 46 or the fact that the remedies
against the principal may be lost by lapse of time, are immaterial. 47
The raison d'tre for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied
with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of
the creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would
release the surety. 50 In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing
the principal contract within the period during which he could otherwise have enforced
it, and which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within
which to comply with their obligation did not effectively absolve here in petitioner from
the consequences of her undertaking. Besides, the burden is on the surety, herein
petitioner, to show that she has been discharged by some act of the creditor, 52 herein
respondent corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the
interests and penalty charges on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The statement, likewise traversed
by said respondent, is misleading.
In an affidavit 53 executed by petitioner, which was attached to her petition, she stated,
among others, that:

8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same upon
its maturity. I received a telephone call from Mr. Augusto Banusing of MB
Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea
Azarraga. At the same time, I offered to pay MB Lending the outstanding
balance of the principal obligation should he fail to collect from Merlyn and
Osmea Azarraga. Mr. Banusing advised me not to worry because he will try
to collect first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr.
Banusing who reminded that the loan of Merlyn and Osmea Azarraga,
together with interest and penalties thereon, has not been paid. Since I had
no available funds at that time, I offered to pay MB Lending by delivering to
them a parcel of land which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint
filed against me by MB Lending before the RTC-Iloilo. After learning that a
complaint was filed against me, I instructed Sheila Gatia to go to MB
Lending and reiterate my first offer to pay the outstanding balance of the
principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to
Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my
offer to pay the outstanding balance of the principal obligation loan (sic) of
Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to collect
from her principal first, and she offered to pay only in case the creditor fails to collect.
The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.

2. Petitioner made a second attempt to settle the obligation by offering a parcel of

land which she owned. Respondent corporation was acting well within its rights when
it refused to accept the offer. The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same value, or more
valuable than that which is due. 54 The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the object of the obligation would
constitute novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based
on the stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
as the case may be. 56 In other words, the prestation must be fulfilled completely. A
person entering into a contract has a right to insist on its performance in all
particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing
to pay because the moment the latter accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection, then
the obligation shall be deemed fully complied with. 58 Precisely, this is what
respondent corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney's fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article
1229 of the Civil Code provides that the court shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the debtor. And,
even if there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent
M.B. Lending Corporation, and which is substantially on all fours with the one at bar,
we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that
the economic impact of the penalty interest of three percent (3 %) per month

on total amount due but unpaid should be equitably reduced. The purpose
for which the penalty interest is intended that is, to punish the obligor
will have been sufficiently served by the effects of compounded interest.
Under the exceptional circumstances in the case at bar, e.g., the original
amount loaned was only P15,000.00; partial payment of P8,600.00 was
made on due date; and the heavy (albeit still lawful) regular compensatory
interest, the penalty interest stipulated in the parties' promissory note is
iniquitous and unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled
that even with an agreement thereon between the parties, the court may nevertheless
reduce such attorney's fees fixed in the contract when the amount thereof appears to
be unconscionable or unreasonable. 60 To that end, it is not even necessary to show,
as in other contracts, that it is contrary to morals or public policy. 61 The grant of
attorney's fees equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection of a sum of money.
We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be
sufficient in this case. 62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the
award of attorney's fees is reduced to P10,000.00.
SO ORDERED.

1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt

No. 106;4
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust
Receipt No. 113;5 and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note.6
Ching was the Senior Vice President of PBM. In his personal capacity and
not as a corporate officer, Ching signed a Deed of Suretyship dated 21 July
1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to
the TRADERS ROYAL BANK, its successors and assigns, the due and
punctual payment by the following individuals and/or companies/firms,
hereinafter called the DEBTOR(S), of such amounts whether due or not, as
indicated opposite their respective names, to wit:
NAME OF DEBTOR(S)

AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP.

TEN MILLION PESOS

(P 10,000,000.00)

G.R. No. 142381

October 15, 2003

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners,

vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 to annul the Decision2 dated 16 July 1999 of
the Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17
February 2000 denying the motion for reconsideration. The Court of Appeals affirmed
with modification the Decision3 dated 31 August 1992 rendered by Branch 113 of the
Regional Trial Court of Pasay City ("trial court"). The trial courts Decision declared
petitioner Alfredo Ching ("Ching") liable to respondent Traders Royal Bank ("TRB") for
the payment of the credit accommodations extended to Philippine Blooming Mills, Inc.
("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as

evidenced by all notes, drafts, overdrafts and other credit obligations of
every kind and nature contracted/incurred by said DEBTOR(S) in favor of
said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or
part of said indebtedness herein secured at maturity, I/We, jointly and
severally, agree and engage to the CREDITOR, its successors and assigns,
the prompt payment, without demand or notice from said CREDITOR, of
such notes, drafts, overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as
may accrue thereon and all expenses which may be incurred by the latter in
collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of
all the obligations to be performed under any contracts, evidencing
indebtedness/obligations and any supplements, amendments, charges or
modifications made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and
also presentment, demand, protest and notice of dishonor of any and all

such instruments, loans, advances, credits, or other indebtedness or

obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and
immediate and not contingent upon the pursuit by the CREDITOR, its
successors or assigns, of whatever remedies it or they may have against the
DEBTOR(S) or the securities or liens it or they may possess; and I/WE
hereby agree to be and remain bound upon this suretyship, irrespective of
the existence, value or condition of any collateral, and notwithstanding also
that all obligations of the DEBTOR(S) to you outstanding and unpaid at any
time may exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the
creditor for and as attorneys fees a sum equivalent to TEN PER CENTUM
(10%) of the total indebtedness (principal and interest) then unpaid,
exclusive of all costs or expenses for collection allowed by law.7 (Emphasis
supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on
application of Ching in his capacity as Senior Vice President of PBM. Ching
later accomplished and delivered to TRB trust receipts, which acknowledged
receipt in trust for TRB of the merchandise subject of the letters of credit.
Under the trust receipts, PBM had the right to sell the merchandise for cash
with the obligation to turn over the entire proceeds of the sale to TRB as
payment of PBMs indebtedness. Letter of Credit No. 479 AD, covered by
Trust Receipt No. 106, has a face value of US$591,043, while Letter of
Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value of
US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which
uniformly provided that:

On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as
co-maker in the notarized Promissory Note evidencing this trust loan. The Promissory
Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally,
promise to pay the TRADERS ROYAL BANK or order, at its Office in 4th Floor,
Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos: THREE MILLION
FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency, with the
interest rate of Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally,
agree to pay an additional amount equivalent to two per cent (2%) of the
principal sum per annum, as penalty and collection charges in the form of
liquidated damages until fully paid, and the further sum of ten percent (10%)
thereof in full, without any deduction, as and for attorneys fees whether actually
incurred or not, exclusive of costs and other judicial/extrajudicial expenses; moreover,
I/We jointly and severally, further empower and authorize the TRADERS ROYAL
BANK at its option, and without notice to set off or to apply to the payment of this note
any and all funds, which may be in its hands on deposit or otherwise belonging to
anyone or all of us, and to hold as security therefor any real or personal property
which may be in its possession or control by virtue of any other contract.9 (Emphasis
supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD)
for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD)
for P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the
Securities and Exchange Commission ("SEC"), docketed as SEC Case No.
2250.10 The petition sought to suspend payment of PBMs obligations and prayed that
the SEC allow PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM was TRB.11

xxx
6. All obligations of the undersigned under the agreement of trusts shall bear
interest at the rate of __ per centum ( __%) per annum from the date due
until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and
severally undertake and agree to pay on demand on the said BANK, all
sums and amounts of money which said BANK may call upon them to pay
arising out of, pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered by the Trust
Receipt by or through an attorney-at-law, the undersigned hereby further
agree(s) to pay an additional of 10% of the total amount due on the draft as
attorneys fees, exclusive of all costs, fees and other expenses of collection
but shall in no case be less than P200.00"8(Emphasis supplied)

On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under
the rehabilitation receivership of Kalaw, Escaler and Associates.12
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation
receivership, TRB filed with the trial court a complaint for collection against PBM and
Ching. TRB asked the trial court to order defendants to pay solidarily the following
amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges
[representing its indebtedness arising from the letters of credit issued to its
various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges
[due and owing from the trust loan of 27 April 1981 evidenced by a
promissory note];

(3) P783,300.00 exclusive of interests, penalties, and other bank charges

[due and owing from the money market loan of 1 April 1981 evidenced by a
promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under the Deed of
Suretyship in the event plaintiff can not recover the full amount of PBMs
indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorneys
fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by
way of damages and expenses for litigation.13
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground
that the SEC had already placed PBM under receivership.14 The trial court thus
dismissed the complaint against PBM.15
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the
ground that the trial court had no jurisdiction over the subject matter of the case. PBM
and Ching invoked the assumption of jurisdiction by the SEC over all of PBMs assets
and liabilities.16
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being
sued in his personal capacity as a surety for PBM; (2) the SEC decision declaring
PBM in suspension of payments is not binding on TRB; and (3) Presidential Decree
No. 1758 ("PD No. 1758"),17 which Ching relied on to support his assertion that all
claims against PBM are suspended, does not apply to Ching as the decree regulates
corporate activities only.18
In its order dated 15 August 1983,19 the trial court denied the motion to dismiss with
respect to Ching and affirmed its dismissal of the case with respect to PBM. The trial
court stressed that TRB was holding Ching liable under the Deed of Suretyship. As
Chings obligation was solidary, the trial court ruled that TRB could proceed against
Ching as surety upon default of the principal debtor PBM. The trial court also held that
PD No. 1758 applied only to corporations, partnerships and associations and not to
individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition
for Certiorari and Prohibition20before the Court of Appeals. The appellate court
granted Chings petition and ordered the dismissal of the case. The appellate court
ruled that the SEC assumed jurisdiction over Ching and PBM to the exclusion of
courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision21 before this Court. In Traders Royal
Bank v. Court of Appeals,22this Court upheld TRB and ruled that Ching was merely a
nominal party in SEC Case No. 2250. Creditors may sue individual sureties of debtor
corporations, like Ching, in a separate proceeding before regular courts despite the
pendency of a case before the SEC involving the debtor corporation.

In his Answer dated 6 November 1989, Ching denied liability as surety and
accommodation co-maker of PBM. He claimed that the SEC had already issued a
decision23 approving a revised rehabilitation plan for PBMs creditors, and that PBM
obtained the credit accommodations for corporate purposes that did not redound to
his personal benefit. He further claimed that even as a surety, he has the right to the
defenses personal to PBM. Thus, his liability as surety would attach only if, after the
implementation of payments scheduled under the rehabilitation plan, there would
remain a balance of PBMs debt to TRB.24 Although Ching admitted PBMs availment
of the credit accommodations, he did not show any proof of payment by PBM or by
him.
TRB admitted certain partial payments on the PBM account made by PBM itself and
by the SEC-appointed receiver.25 Thus, the trial court had to resolve the following
remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to
the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how
much?26
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management
Department of TRB, and Ms. Carla Pecson, manager of the International Department
of TRB, as witnesses. Both witnesses testified to the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by
Ching for PBMs liabilities to TRB up to P10,000,000;27
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of
Credit No. 479 AD for US$591,043, and the actual availment by PBM of the
full proceeds of the credit accommodation;28
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of
Credit No. 563 AD for US$156,000, and the actual availment by PBM of the
full proceeds of the credit accommodation;29 and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized
Promissory Note dated 27 April 1981 wherein Ching bound himself solidarily
with PBM;30 and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31
October 1991.31
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of
the Human Resources Department of TRB, as witness. Ching sought to establish that
TRBs Board of Directors adopted a resolution fixing the PBM account at an amount
lower than what TRB wanted to collect from Ching. The trial court allowed Atty.
Aranda to testify over TRBs manifestation that the Answer failed to plead the subject

matter of his testimony. Atty. Aranda produced TRB Board Resolution No. 5935,
series of 1990, which contained the minutes of the special meeting of TRBs Board of
Directors held on 8 June 1990.32 In the resolution, the Board of Directors advised
TRBs Management "not to release Alfredo Ching from his JSS liability to the
bank."33 The resolution also stated the following:

HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100)
as of October 31, 1991, and to pay the legal interest thereon from such date until it is
fully paid. To pay plaintiff 5% of the entire amount by way of attorneys fees.

a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted per hereto attached
schedule). The amount of P1.373 million shall be considered as full payment of
PBMs account. (The receiver is amenable to this alternative)

The Ruling of the Court of Appeals

The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon

approval of the above and conforme to PISCOR and PBM. Subsequent deposits shall
start on the 3rd year and annually thereafter (every June 30th of the year) until June
30, 2006.
Failure to pay one annual installment shall make the whole obligation due and
demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain
outstanding in the books of the Bank. Said balance will equal the deposits to be
remitted to the Bank for a period of 17 years.34
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were
never complied with or implemented. Not only was there no initial deposit of P150,000
as required in the resolution, TRB also disapproved the document prepared by the
receiver, which would have released Ching from his suretyship.35
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of
Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a
stockholder of the Philippine Blooming Mills. Indisputably, under the Deed of
Suretyship defendant Ching unconditionally agreed to assume PBMs liability to the
plaintiff in the event PBM defaulted in the payment of the said obligation in addition to
whatever penalties, expenses and bank charges that may occur by reason of default.
Clear enough, under the Deed of Suretyship (Exh. J), defendant Ching bound himself
jointly and severally with PBM in the payment of the latters obligation to the plaintiff.
The obligation being solidary, the plaintiff Bank can hold Ching liable upon default of
the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code
already quoted above.36
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable
to plaintiff bank in the amount of P19,333,558.16 (NINETEEN MILLION THREE

SO ORDERED.37

On appeal, Ching stated that as surety and solidary debtor, he should benefit from the
changed nature of the obligation as provided in Article 1222 of the Civil Code, which
reads:
Article 1222. 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.
Ching claimed that his liability should likewise be reduced since the equitable
apportionment of PBMs remaining assets among its creditors under the rehabilitation
proceedings would have the effect of reducing PBMs liability. He also claimed that
the amount for which he was being held liable was excessive. He contended that the
outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990,
was only P5,650,749.09.38Ching also contended that he was not liable for interest, as
the loan documents did not stipulate the interest rate, pursuant to Article 1956 of the
Civil Code.39 Finally, Ching asserted that the Deed of Suretyship executed on 21 July
1977 could not guarantee obligations incurred after its execution.40
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the
case for decision.41
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM
under rehabilitation receivership, and if in the affirmative, for how much.42
The Court of Appeals resolved the first two questions in favor of TRB. The appellate
court stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust
Receipts, Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note
upon which TRBs action rested. He is, therefore, presumed to be liable unless he
presents evidence showing payment, partially or in full, of these obligations
(Investment and Underwriting Corporation of the Philippines v. Comptronics
Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).

As surety of a corporation placed under rehabilitation receivership, Ching can answer

separately for the obligations of debtor PBM (Rizal Banking Corporation v. Court of
Appeals, Philippine Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738 [1990],
and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA
788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation
since the rehabilitation receivers are limited to the existing assets of the corporation.43
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified
with respect to the amount of liability of defendant Alfredo Ching which is lowered
from P19,333,558.16 to P15,773,708.78 with legal interest of 12% per annum until it
is fully paid.

PBM in 1980 and 1981. Ching contended that no accessory contract of suretyship
could arise without an existing principal contract of loan. Ching likewise argued that
TRB could no longer claim on the trust receipts because TRB had already taken the
properties subject of the trust receipts. Ching likewise maintained that his obligation
as surety could not exceed the P1,373,415 apportioned to PBM under the SECapproved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues
not brought before the trial court. Furthermore, TRB pointed out that Ching never
presented PBMs rehabilitation plan before the trial court. TRB also stated that the
Supreme Court ruling in Traders Royal Bank v. Court of Appeals46 constitutes res
judicata between the parties. Therefore, TRB could proceed against Ching separately
from PBM to enforce in full Chings liability as surety.47
The Ruling of the Court

SO ORDERED.44

The petition has no merit.

The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.

The case before us is an offshoot of the trial courts denial of Chings motion to have
the case dismissed against him. The petition is a thinly veiled attempt to make this
Court reconsider its decision in the prior case of Traders Royal Bank v. Court of
Appeals.48 This Court has already resolved the issue of Chings separate liability as a
surety despite the rehabilitation proceedings before the SEC. We held in Traders
Royal Bank that:

Hence, this petition.

Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED
THAT PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS
CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED
OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED
THAT THE PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS
DESPITE THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED
THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND
PETITIONER ALFREDO CHING LIABLE FOR P15,773,708.78 WITH
LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE
THE FACT THAT UNDER THE REHABILITATION PLAN OF PETITIONER
PBM, WHICH WAS APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED
TOP1,373,415.00.45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for
obligations not yet in existence at the time of its execution. Specifically, Ching
maintained that the Deed of Suretyship could not answer for debts contracted by

Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the
SEC could not assume jurisdiction over his person and properties. The Securities and
Exchange Commission was empowered, as rehabilitation receiver, to take custody
and control of the assets and properties of PBM only, for the SEC has jurisdiction
over corporations only [and] not over private individuals, except stockholders in an
intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal
party in SEC Case No. 2250, Chings properties were not included in the rehabilitation
receivership that the SEC constituted to take custody of PBMs assets. Therefore, the
petitioner bank was not barred from filing a suit against Ching, as a surety for PBM.
An anomalous situation would arise if individual sureties for debtor corporations may
escape liability by simply co-filing with the corporation a petition for suspension of
payments in the SEC whose jurisdiction is limited only to corporations and their
corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as
expressly provided by Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its
individual stockholders and members. Being an officer or stockholder of a corporation

does not make ones property the property also of the corporation, for they are
separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest
in the SEC jurisdiction over his person or property, for jurisdiction does not depend on
the consent or acts of the parties but upon express provision of law (Tolentino vs.
Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City,
Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety
of the credit accommodations TRB extended to PBM. The decision amounts to res
judicata49 which bars Ching from raising the same issue again. Hence, the only
question that remains is the amount of Chings liability. Nevertheless, we shall resolve
the issues Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after
the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor
of the deed itself, referring to amounts PBM "may now be indebted or may hereafter
become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code
provides:
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. (Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals50 that:
Under the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not be known at the time the guaranty is executed. This is the
basis for contracts denominated as continuing guaranty or suretyship. 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 states that the guaranty is
to secure advances to be made "from time to time," it 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," 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.
Whether Chings liability is limited to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount
stated in PBMs rehabilitation plan. In claiming this reduced liability, Ching invokes
Article 1222 of the Civil Code which reads:
Art. 1222. 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.
In granting the loan to PBM, TRB required Chings surety precisely to insure full
recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was
the very purpose of the surety. Thus, Ching cannot use PBMs failure to pay in full as
justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full
PBMs loan in case PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the
entire amount of PBMs loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. 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. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This
resolution states that PBMs outstanding loans may be reduced to P1.373 million
subject to certain conditions like the payment of P150,000 initial payment.51 The
resolution also states that TRB should not release Chings solidary liability under his
surety. The resolution even directs TRBs management to study Chings criminal
liability under the trust documents.52
Chings own witness testified that Resolution No. 5935 was never implemented. For
one, PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also
rejected the document that PBMs receiver presented which would have released
Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to
escape liability under his suretyship.
Chings attempts to have this Court review the factual issues of the case are
improper. It is not a function of the Supreme Court to assess and evaluate again the
evidence, testimonial and evidentiary, adduced by the parties particularly where the
findings of both the trial court and the appellate court coincide on the matter.53

Whether Ching is liable for the trust receipts

Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or
settlement with TRB. Atty. Vicente Aranda, TRBs corporate secretary and First Vice
President of its Human Resource Management Department, testified that the
conditions in the TRB board resolution presented by Ching were not met or
implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined,
and may I refer you to condition or step No. 1, which reads: "a) Accept
the P1.373 million deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted per hereto
attached schedule). The amount of P1.373 million shall be considered as full
payment of PBMs account. (The receiver is amenable to this alternative.)
The initial deposit/remittance which amounts to P150,000.00 shall be
remitted upon approval of the above and conforme of PISCOR [xxx] and
PBM. Subsequent deposits shall start on the 3rd year and annually
thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due
and demandable. Now Mr. Witness, would you be in a position to inform [the
court] if these conditions listed in item (a) in Resolution No. 5935, series of
1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial
deposit/remittance in the amount ofP150,000.00 which have to be done with
approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court
if those conditions were met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution
which I read and quote: "Write off immediately P4.278 million. The balance
of P1.373 million to remain outstanding in the books of the bank. Said
balance will be remitted to the Bank for a period of 17 years." Mr. Witness,
would you be in a position to inform the court if the bank implemented that
particular condition?
A In the implementation of this settlement the receiver prepared a document
for approval and conformity of the bank. The said document would in effect
release the suretyship of Alfredo Ching and for that reason the bank refused
or denied fixing its conformity and approval with the court.

xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not
implement these conditionalities [sic] was because the former defendant
corporation requested that the suretyship of Alfredo Ching be released, is
that correct?
A I did not say that. I said that in effect the document prepared by the lawyer
of the receiver xxx the bank would release the suretyship of Alfredo Ching,
that is why the bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of said requirement or
conformity did not seek to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed
in that document because it was the condition of the board that the
suretyship should not be released but the document being presented to the
bank for signature and conformity in effect if signed would release the
suretyship. So it would be a violation with the approval of the board so the
bank did not sign the conformity.54
Ching also claims that TRB prevented PBM from fulfilling its obligations under the
trust receipts when TRB, together with other creditor banks, took hold of PBMs
inventories, including the goods covered by the trust receipts. Ching asserts that this
act of TRB released him from liability under the suretyship. Ching forgets that he
executed, on behalf of PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at any time to protect TRBs
interests. TRB may exercise such right without waiving its right to collect the full
amount of the loan to PBM. The Undertakings also provide that any suspension of
payment or any assignment by PBM for the benefit of creditors renders the loan due
and demandable. Thus, the separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take
possession of said merchandise with the right to sell and dispose of the same
under such terms and conditions it may deem best, or of the proceeds of such
of the same as may then have been sold, wherever the said merchandise or
proceeds may then be found and all the provisions of the Trust Receipt shall apply to
and be deemed to include said above-mentioned merchandise if the same shall have
been made up or used in the manufacture of any other goods, or merchandise, and
the said BANK shall have the same rights and remedies against the said
merchandise in its manufactured state, or the product of said manufacture as it would
have had in the event that such merchandise had remained [in] its original state and
irrespective of the fact that other and different merchandise is used in completing
such manufacture. In the event of any suspension, or failure or assignment for
the benefit of creditors on the part of the undersigned or of the non-fulfillment
of any obligation, or of the non-payment at maturity of any acceptance made
under said credit, or any other credit issued by the said BANK on account of the

undersigned or of the non-payment of any indebtedness on the part of the

undersigned to the said BANK, all obligations, acceptances, indebtedness and
liabilities whatsoever shall thereupon without notice mature and become due
and payable and the BANK may avail of the remedies provided
herein.55 (Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts
Law, expressly allows TRB to take possession of the goods covered by the trust
receipts. Thus, Section of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds
from the sale of the goods, documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owing to the entruster or as appears in
the trust receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time upon default or failure of the entrustee to comply with
any of the terms and conditions of the trust receipt or any other agreement
between the entruster and the entrustee, and the entruster in possession of the
goods, documents or instruments may, on or after default, give notice to the entrustee
of the intention to sell, and may, not less than five days after serving or sending of
such notice, sell the goods, documents or instruments at public or private sale, and
the entruster may, at a public sale, become a purchaser. The proceeds of any such
sale, whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the
entrustees indebtedness to the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for any deficiency. Notice of sale shall
be deemed sufficiently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustees last known business
address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts,
PBM and Ching remained liable for the entire amount of the loans covered by the
trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with
TRB, Chings liability is what the Deed of Suretyship stipulates, plus the applicable
interest and penalties. The trust receipts, as well as the Letter of Undertaking dated
16 April 198056 executed by PBM, stipulate in writing the payment of interest without
specifying the rate. In such a case, the applicable interest rate shall be the legal rate,
which is now 12% per annum.57 This is in accordance with Central Bank Circular No.
416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the "Usury Law," the Monetary Board, in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or

forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve per cent (12%)
per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan
provides for 18% interest per annum plus 2% penalty interest per annum in case of
default. This stipulated interest should continue to run until full payment of
the P3,500,000 trust loan. In addition, the accrued interest on all the credit
accommodations should earn legal interest from the date of filing of the complaint
pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal
amounts as of the filing of the complaint with the trial court on 13 May 1983
were P959,611.96 under Trust Receipt No. 106, P1,191,137.13 under Trust Receipt
No. 113, and P3,500,000 for the trust loan. As extracted from TRBs Statement of
Account as of 31 October 1991,58 the accrued interest on the trust receipts and the
trust loan as of the filing of the complaint on 13 May 1983 were P311,387.5159 under
Trust Receipt No. 106, P338,739.8160 under Trust Receipt No. 113,
and P1,287,616.4461 under the trust loan. The penalty interest on the trust loan
amounted to P137,315.07.62Ching did not rebut this Statement of Account which TRB
presented during trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13
May 1983, the date of filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal P 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal P 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal P 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07

WHEREFORE, we AFFIRM the decision of the Court of Appeals with

MODIFICATION. Petitioner Alfredo Ching shall pay respondent Traders Royal Bank
the following (1) on the credit accommodations under the trust receipts, the total
principal amount of P2,150,749.09 with legal interest at 12% per annum from 14 May
1983 until full payment; (2) on the trust loan evidenced by the Promissory Note, the
principal sum of P3,500,000 with 20% interest per annum from 14 May 1983 until full
payment; (3) on the total accrued interest as of 13 May 1983, P2,075,058.84 with
12% interest per annum from 14 May 1983 until full payment. Petitioner Alfredo Ching
shall also pay attorneys fees to respondent Traders Royal Bank equivalent to 5% of
the total principal and interest.
SO ORDERED.

G.R. No. 173526

August 28, 2008

BENJAMIN BITANGA, petitioner,

vs.
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Assailed in this Petition for Review under Rule 451 of the Revised Rules of Court are:
(1) the Decision2dated 11 April 2006 of the Court of Appeals in CA-G.R. CV No.
78007 which affirmed with modification the partial Decision3 dated 29 November 2002
of the Regional Trial Court (RTC), Branch 96, of Quezon City, in Civil Case No. Q-0145041, granting the motion for summary judgment filed by respondent Pyramid
Construction and Engineering Corporation and declaring petitioner Benjamin Bitanga
and his wife, Marilyn Bitanga (Marilyn), solidarily liable to pay P6,000,000.000 to
respondent; and (2) the Resolution4 dated 5 July 2006 of the appellate court in the
same case denying petitioners Motion for Reconsideration.
The generative facts are:
On 6 September 2001, respondent filed with the RTC a Complaint for specific
performance and damages with application for the issuance of a writ of preliminary
attachment against the petitioner and Marilyn. The Complaint was docketed as Civil
Case No. Q-01-45041.
Respondent alleged in its Complaint that on 26 March 1997, it entered into an
agreement with Macrogen Realty, of which petitioner is the President, to construct for
the latter the Shoppers Gold Building, located at Dr. A. Santos Avenue corner Palayag

Road, Sucat, Paraaque City. Respondent commenced civil, structural, and

architectural works on the construction project by May 1997. However, Macrogen
Realty failed to settle respondents progress billings. Petitioner, through his
representatives and agents, assured respondent that the outstanding account of
Macrogen Realty would be paid, and requested respondent to continue working on
the construction project. Relying on the assurances made by petitioner, who was no
less than the President of Macrogen Realty, respondent continued the construction
project.
In August 1998, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty. On 1 September 1999,
respondent instituted with the Construction Industry Arbitration Commission (CIAC) a
case for arbitration against Macrogen Realty seeking payment by the latter of its
unpaid billings and project costs. Petitioner, through counsel, then conveyed to
respondent his purported willingness to amicably settle the arbitration case. On 17
April 2000, before the arbitration case could be set for trial, respondent and Macrogen
Realty entered into a Compromise Agreement,5with petitioner acting as signatory for
and in behalf of Macrogen Realty. Under the Compromise Agreement, Macrogen
Realty agreed to pay respondent the total amount of P6,000,000.00 in six equal
monthly installments, with each installment to be delivered on the 15th day of the
month, beginning 15 June 2000. Macrogen Realty also agreed that if it would default
in the payment of two successive monthly installments, immediate execution could
issue against it for the unpaid balance, without need of judgment or decree from any
court or tribunal. Petitioner guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of Guaranty6 in favor of respondent,
by virtue of which he irrevocably and unconditionally guaranteed the full and complete
payment of the principal amount of liability of Macrogen Realty in the sum
of P6,000,000.00. Upon joint motion of respondent and Macrogen Realty, the CIAC
approved the Compromise Agreement on 25 April 2000.7
However, contrary to petitioners assurances, Macrogen Realty failed and refused to
pay all the monthly installments agreed upon in the Compromise Agreement. Hence,
on 7 September 2000, respondent moved for the issuance of a writ of
execution8 against Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff9 filed a return stating that he was unable to locate
any property of Macrogen Realty, except its bank deposit of P20,242.33, with the
Planters Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written demand10 on petitioner, as
guarantor of Macrogen Realty, to pay the P6,000,000.00, or to point out available
properties of the Macrogen Realty within the Philippines sufficient to cover the

obligation guaranteed. It also made verbal demands on petitioner. Yet, respondents

demands were left unheeded.
Thus, according to respondent, petitioners obligation as guarantor was already due
and demandable. As to Marilyns liability, respondent contended that Macrogen Realty
was owned and controlled by petitioner and Marilyn and/or by corporations owned
and controlled by them. Macrogen Realty is 99% owned by the Asian Appraisal
Holdings, Inc. (AAHI), which in turn is 99% owned by Marilyn. Since the completion of
the construction project would have redounded to the benefit of both petitioner and
Marilyn and/or their corporations; and considering, moreover, Marilyns enormous
interest in AAHI, the corporation which controls Macrogen Realty, Marilyn cannot be
unaware of the obligations incurred by Macrogen Realty and/or petitioner in the
course of the business operations of the said corporation.
Respondent prayed in its Complaint that the RTC, after hearing, render a judgment
ordering petitioner and Marilyn to comply with their obligation under the Contract of
Guaranty by paying respondent the amount of P6,000,000.000 (less the bank deposit
of Macrogen Realty with Planters Bank in the amount of P20,242.23)
and P400,000.000 for attorneys fees and expenses of litigation. Respondent also
sought the issuance of a writ of preliminary attachment as security for the satisfaction
of any judgment that may be recovered in the case in its favor.
Marilyn filed a Motion to Dismiss,11 asserting that respondent had no cause of action
against her, since she did not co-sign the Contract of Guaranty with her husband; nor
was she a party to the Compromise Agreement between respondent and Macrogen
Realty. She had no part at all in the execution of the said contracts. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital
stock of another corporation is not by itself a sufficient ground for disregarding the
separate personality of the latter corporation. Respondent misread Section 4, Rule 3
of the Revised Rules of Court.
The RTC denied Marilyns Motion to Dismiss for lack of merit, and in its Order dated
24 January 2002 decreed that:
The Motion To Dismiss Complaint Against Defendant Marilyn Andal Bitanga
filed on November 12, 2001 is denied for lack of merit considering that Sec.
4, Rule 3, of the Rules of Court (1997) specifically provides, as follows:
"SEC. 4. Spouses as parties. Husband and wife shall sue or be
sued jointly, except as provided by law."
and that this case does not come within the exception.12

Petitioner filed with the RTC on 12 November 2001, his Answer13 to respondents
Complaint averring therein that he never made representations to respondent that
Macrogen Realty would faithfully comply with its obligations under the Compromise
Agreement. He did not offer to guarantee the obligations of Macrogen Realty to entice
respondent to enter into the Compromise Agreement but that, on the contrary, it was
respondent that required Macrogen Realty to offer some form of security for its
obligations before agreeing to the compromise. Petitioner further alleged that his wife
Marilyn was not aware of the obligations that he assumed under both the
Compromise Agreement and the Contract of Guaranty as he did not inform her about
said contracts, nor did he secure her consent thereto at the time of their execution.
As a special and affirmative defense, petitioner argued that the benefit of excussion
was still available to him as a guarantor since he had set it up prior to any judgment
against him. According to petitioner, respondent failed to exhaust all legal remedies to
collect from Macrogen Realty the amount due under the Compromise Agreement,
considering that Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premise, petitioner could not be held liable
as guarantor. Consequently, petitioner presented his counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the following issues
for the resolution of the RTC:
(1) whether the defendants were liable under the contract of guarantee
dated April 17, 2000 entered into between Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this action;
(3) whether the defendants are entitled to the benefit of excussion, the
plaintiff on the one hand claiming that it gave due notice to the guarantor,
Benjamin Bitanga, and the defendants contending that no proper notice was
received by Benjamin Bitanga;
(4) if damages are due, which party is liable; and
(5) whether the benefit of excussion can still be invoked by the defendant
guarantor even after the notice has been allegedly sent by the plaintiff
although proper receipt is denied.14
On 20 September 2002, prior to the trial proper, respondent filed a Motion for
Summary Judgment.15Respondent alleged therein that it was entitled to a summary
judgment on account of petitioners admission during the pre-trial of the genuineness
and due execution of the Contract of Guaranty. The contention of petitioner and
Marilyn that they were entitled to the benefit of excussion was not a genuine issue.
Respondent had already exhausted all legal remedies to collect from Macrogen

Realty, but its efforts proved unsuccessful. Given that the inability of Macrogen Realty
as debtor to pay the amount of its debt was already proven by the return of the writ of
execution to CIAC unsatisfied, the liability of petitioner as guarantor already
arose.16 In any event, petitioner and Marilyn were deemed to have forfeited their right
to avail themselves of the benefit of excussion because they failed to comply with
Article 206017 of the Civil Code when petitioner ignored respondents demand letter
dated 3 January 2001 for payment of the amount he guaranteed.18 The duty to collect
the supposed receivables of Macrogen Realty from its creditors could not be imposed
on respondent, since petitioner and Marilyn never informed respondent about such
uncollected credits even after receipt of the demand letter for payment. The allegation
of petitioner and Marilyn that they could not respond to respondents demand letter
since they did not receive the same was unsubstantiated and insufficient to raise a
genuine issue of fact which could defeat respondents Motion for Summary Judgment.
The claim that Marilyn never participated in the transactions that culminated in
petitioners execution of the Contract of Guaranty was nothing more than a sham.
In opposing respondents foregoing Motion for Summary Judgment, petitioner and
Marilyn countered that there were genuinely disputed facts that would require trial on
the merits. They appended thereto an affidavit executed by petitioner, in which he
declared that his spouse Marilyn could not be held personally liable under the
Contract of Guaranty or the Compromise Agreement, nor should her share in the
conjugal partnership be made answerable for the guaranty petitioner assumed,
because his undertaking of the guaranty did not in any way redound to the benefit of
their family. As guarantor, petitioner was entitled to the benefit of excussion, and he
did not waive his right thereto. He never received the respondents demand letter
dated 3 January 2001, as Ms. Dette Ramos, the person who received it, was not an
employee of Macrogen Realty nor was she authorized to receive the letter on his
behalf. As a guarantor, petitioner could resort to the benefit of excussion at any time
before judgment was rendered against him.19 Petitioner reiterated that Macrogen
Realty had uncollected credits which were more than sufficient to satisfy the claim of
respondent.
On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion of
which provides:

Petitioner and Marilyn filed a Motion for Reconsideration of the afore-quoted Decision,
which the RTC denied in an Order dated 26 January 2003.21
In time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as
CA-G.R. CV 78007. In its Decision dated 11 April 2006, the appellate court held:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from must be, as it hereby is, MODIFIED to the effect that defendantappellant Marilyn Bitanga is adjudged not liable, whether solidarily or
otherwise, with her husband the defendant-appellant Benjamin Bitanga,
under the compromise agreement or the contract of guaranty. No costs in
this instance.22
In holding that Marilyn Bitanga was not liable, the Court of Appeals cited Ramos v.
Court of Appeals,23 in which it was declared that a contract cannot be enforced
against one who is not a party to it. The Court of Appeals stated further that the
substantial ownership of shares in Macrogen Realty by Marilyn Bitanga was not
enough basis to hold her liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioners Motion
for Reconsideration24 of its earlier Decision.
Petitioner is now before us via the present Petition with the following assignment of
errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE
VALIDITY OF THE PARTIAL SUMMARY JUDGMENT BY THE REGIONAL
TRIAL COURT OF QUEZON CITY, BRANCH 96, DESPITE THE CLEAR
EXISTENCE OF DISPUTED GENUINE AND MATERIAL FACTS OF THE
CASE THAT SHOULD HAVE REQUIRED A TRIAL ON THE MERITS.
II

WHEREFORE, summary judgment is rendered ordering defendants

SPOUSES BENJAMIN BITANGA and MARILYN ANDAL BITANGA to pay
the [herein respondent], jointly and severally, the amount of P6,000,000.00,
less P20,242.23 (representing the amount garnished bank deposit of
MACROGEN in the Planters Bank, Buendia Branch); and the costs of suit.
Within 10 days from receipt of this partial decision, the [respondent] shall
inform the Court whether it shall still pursue the rest of the claims against the
defendants. Otherwise, such claims shall be considered waived.20

THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING THE

RIGHT OF PETITIONER BENJAMIN M. BITANGA AS A MERE
GUARANTOR TO THE BENEFIT OF EXCUSSION UNDER ARTICLES
2058, 2059, 2060, 2061, AND 2062 OF THE CIVIL CODE OF THE
PHILIPPINES.25

As in the two courts below, it is petitioners position that summary judgment is

improper in Civil Case No. Q-01-45041 because there are genuine issues of fact
which have to be threshed out during trial, to wit:
(A) Whether or not there was proper service of notice to petitioner
considering the said letter of demand was allegedly received by one Dette
Ramos at Macrogen office and not by him at his residence.
(B) Whether or not petitioner is entitled to the benefit of excussion?26
We are not persuaded by petitioners arguments.
Rule 35 of the Revised Rules of Civil Procedure provides:
Section 1. Summary judgment for claimant. A party seeking to recover
upon a claim, counterclaim, or cross-claim or to obtain a declaratory relief
may, at any time after the pleading in answer thereto has been served, move
with supporting affidavits, depositions or admissions for a summary
judgment in his favor upon all or any part thereof.
For a summary judgment to be proper, the movant must establish two requisites: (a)
there must be no genuine issue as to any material fact, except for the amount of
damages; and (b) the party presenting the motion for summary judgment must be
entitled to a judgment as a matter of law. Where, on the basis of the pleadings of a
moving party, including documents appended thereto, no genuine issue as to a
material fact exists, the burden to produce a genuine issue shifts to the opposing
party. If the opposing party fails, the moving party is entitled to a summary judgment.27
In a summary judgment, the crucial question is: are the issues raised by the opposing
party not genuine so as to justify a summary judgment?28
First off, we rule that the issue regarding the propriety of the service of a copy of the
demand letter on the petitioner in his office is a sham issue. It is not a bar to the
issuance of a summary judgment in respondents favor.
A genuine issue is an issue of fact which requires the presentation of evidence as
distinguished from an issue which is a sham, fictitious, contrived or false claim. To
forestall summary judgment, it is essential for the non-moving party to confirm the
existence of genuine issues, as to which he has substantial, plausible and fairly
arguable defense, i.e.,29 issues of fact calling for the presentation of evidence upon
which reasonable findings of fact could return a verdict for the non-moving party,
although a mere scintilla of evidence in support of the party opposing summary
judgment will be insufficient to preclude entry thereof.

Significantly, petitioner does not deny the receipt of the demand letter from the
respondent. He merely raises a howl on the impropriety of service thereof, stating that
"the address to which the said letter was sent was not his residence but the office of
Macrogen Realty, thus it cannot be considered as the correct manner of conveying a
letter of demand upon him in his personal capacity."30
Section 6, Rule 13 of the Rules of Court states:
SEC. 6. Personal service. Service of the papers may be made by
delivering personally a copy to the party or his counsel, or by leaving it in
his office with his clerk or with a person having charge thereof. If no
person is found in his office, or his office is not known, or he has no office,
then by leaving the copy, between the hours of eight in the morning and six
in the evening, at the partys or counsels residence, if known, with a person
of sufficient age and discretion then residing therein.
The affidavit of Mr. Robert O. Pagdilao, messenger of respondents counsel states in
part:
2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of the
Associates of the ACCRA Law Offices, instructed me to deliver to the office
of Mr. Benjamin Bitanga a letter dated 3 January 2001, pertaining to
Construction Industry Arbitration Commission (hereafter, "CIAC") Case No.
99-56, entitled "Pyramid Construction Engineering Corporation vs. Macrogen
Realty Corporation."
3. As instructed, I immediately proceeded to the office of Mr. Bitanga located
at the 12th Floor, Planters Development Bank Building, 314 Senator Gil
Puyat Avenue, Makati City. I delivered the said letter to Ms. Dette Ramos,
a person of sufficient age and discretion, who introduced herself as one of
the employees of Mr. Bitanga and/or of the latters companies.31 (Emphasis
supplied.)
We emphasize that when petitioner signed the Contract of Guaranty and assumed
obligation as guarantor, his address in the said contract was the same address where
the demand letter was served.32 He does not deny that the said place of service,
which is the office of Macrogen, was also the address that he used when he signed
as guarantor in the Contract of Guaranty. Nor does he deny that this is his office
address; instead, he merely insists that the person who received the letter and signed
the receiving copy is not an employee of his company. Petitioner could have easily
substantiated his allegation by a submission of an affidavit of the personnel manager
of his office that no such person is indeed employed by petitioner in his office, but that
evidence was not submitted.33 All things are presumed to have been done correctly
and with due formality until the contrary is proved. This juris tantum presumption

stands even against the most well-reasoned allegation pointing to some possible
irregularity or anomaly.34 It is petitioners burden to overcome the presumption by
sufficient evidence, and so far we have not seen anything in the record to support
petitioners charges of anomaly beyond his bare allegation. Petitioner cannot now be
heard to complain that there was an irregular service of the demand letter, as it does
not escape our attention that petitioner himself indicated "314 Sen. Gil Puyat Avenue,
Makati City" as his office address in the Contract of Guaranty.
Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of
service when the papers, or in this case, when the demand letter is personally
delivered to the party or his counsel, or by leaving it in his office with his clerk or
with a person having charge thereof, such as what was done in this case.
We have consistently expostulated that in summary judgments, the trial court can
determine a genuine issue on the basis of the pleadings, admissions, documents,
affidavits or counter affidavits submitted by the parties. When the facts as pleaded
appear uncontested or undisputed, then there is no real or genuine issue or question
as to any fact, and summary judgment is called for.35

Art. 2060. In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latters 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.38
The afore-quoted provision imposes a condition for the invocation of the defense of
excussion. Article 2060 of the Civil Code clearly requires that in order for the
guarantor to make use of the benefit of excussion, he must set it up against the
creditor upon the latters demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the
debt.39
It must be stressed that despite having been served a demand letter at his office,
petitioner still failed to point out to the respondent properties of Macrogen Realty
sufficient to cover its debt as required under Article 2060 of the Civil Code. Such
failure on petitioners part forecloses his right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only property of Macrogen
Realty which he found was its deposit of P20,242.23 with the Planters Bank.

The Court of Appeals was correct in holding that:

Here, the issue of non-receipt of the letter of demand is a sham or pretended
issue, not a genuine and substantial issue. Indeed, against the positive
assertion of Mr. Roberto O. Pagdilao (the private courier) in his affidavit that
he delivered the subject letter to a certain Ms. Dette Ramos who introduced
herself as one of the employees of [herein petitioner] Mr. Benjamin Bitanga
and/or of the latters companies, said [petitioner] merely offered a bare
denial. But bare denials, unsubstantiated by facts, which would be
admissible in evidence at a hearing, are not sufficient to raise a genuine
issue of fact sufficient to defeat a motion for summary judgment.36
We further affirm the findings of both the RTC and the Court of Appeals that, given the
settled facts of this case, petitioner cannot avail himself of the benefit of excussion.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor
who pays for a debtor, in turn, must be indemnified by the latter. However, the
guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor and resorted to all the legal remedies against the debtor.
This is what is otherwise known as the benefit of excussion.37
Article 2060 of the Civil Code reads:

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from
interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the [herein petitioner] Benjamin Bitanga
cannot be compelled to pay Pyramid because the Macrogen Realty has
allegedly sufficient assets. Reason: The said [petitioner] had not genuinely
controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that,
after exerting diligent efforts, he was not able to locate any property
belonging to the Macrogen Realty, except for a bank deposit with the
Planters Bank at Buendia, in the amount ofP20,242.23. It is axiomatic that
the liability of the guarantor arises when the insolvency or inability of the
debtor to pay the amount of debt is proven by the return of the writ of
execution that had not been unsatisfied.40

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit.
The Decision of the Court of Appeals dated 11 April 2006 and its Resolution dated 5
July 2006 are AFFIRMED. Costs against petitioner.
SO ORDERED.

[G.R. No. 151060. August 31, 2005]

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA.
ANA, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION, respondent.
[G.R. No. 151311. August 31, 2005]
NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN
GUARANTEE CORPORATION, respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision[1] of the Court of
Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan
Guarantee Corporation v. JN Development Corporation, et al., which reversed
the Decision of the Regional Trial Court (RTC) of Makati, Branch 60.
On 13 December 1979, petitioner JN Development Corporation (JN) and
Traders Royal Bank (TRB) entered into an agreement whereby TRB would extend to
JN an Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan
was covered by several securities, including a real estate mortgage [2] and a letter of
guarantee from respondent Philippine Export and Foreign Loan Guarantee
Corporation (PhilGuarantee), now Trade and Investment Development Corporation
of the Philippines, covering seventy percent (70%) of the credit line.[3] With
PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo
and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of
Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.

It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8
October 1980 TRB requested PhilGuarantee to make good its guarantee.
[8]
PhilGuarantee informed JN about the call made by TRB, and inquired about the
action of JN to settle the loan. [9] Having received no response from JN, on 10 March
1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred
Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10] Subsequently,
PhilGuarantee made several demands on JN, but the latter failed to pay. On 30 May
1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation by way of
development and sale of the mortgaged property.[11] PhilGuarantee, however,
rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and damages
against herein petitioners.
In
its Decision dated
20
August
1998,
the
RTC
dismissed
PhilGuarantees Complaint as well as the counterclaim of petitioners. It ruled that
petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial
to this holding was the courts finding that TRB was able to foreclose the real estate
mortgage executed by JN, thus extinguishing petitioners obligation. [13] Moreover,
there was no showing that after the said foreclosure, TRB had demanded from JN
any deficiency or the payment of the difference between the proceeds of the
foreclosure sale and the actual loan.[14] In addition, the RTC held that since
PhilGuarantees guarantee was good for only one year from 17 December 1979, or
until 17 December 1980, and since it was not renewed after the expiry of said period,
PhilGuarantee had no more legal duty to pay TRB on 10 March 1981. [15] The RTC
likewise ruled that Cruz cannot be held liable under the Undertaking since he was not
the one who signed the document, in line with its finding that his signature found in
the records is totally different from the signature on the Undertaking.[16]
According to the RTC, the failure of TRB to sue JN for the recovery of the loan
precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and
Cruz what it paid to TRB. Thus, PhilGuarantees payment to TRB amounts to a
waiver of its right under Art. 2058 of the Civil Code.[17]
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The
appellate court reversed the RTC and ordered petitioners to pay PhilGuarantee Nine
Hundred Thirty Four Thousand Six Hundred Twenty Four Pesos and Thirty Four
Centavos (P934,624.34), plus service charge and interest.[18]
In reaching its denouement, the CA held that the RTCs finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no
factual support,[19] and that such finding is negated by Rodrigo Sta. Anas testimony
that JN did not receive any notice of foreclosure from PhilGuarantee or from

TRB. [20] Moreover, Sta. Ana even offered the same mortgaged property to
PhilGuarantee to settle its obligations with the latter.[21]
The CA also ruled that JNs obligation had become due and demandable within
the one-year period of effectivity of the guarantee; thus, PhilGuarantees payment to
TRB conformed with its guarantee, although the payment itself was effected one year
after the maturity date of the loan. [22] Contrary to the trial courts finding, the CA ruled
that the contract of guarantee was not extinguished by the alleged lack of evidence
on PhilGuarantees consent to the extensions granted by TRB to JN. [23] Interpreting
Art. 2058 of the Civil Code, [24] the appellate court explained that while the provision
states that the guarantor cannot be compelled to pay unless the properties of the
debtor are exhausted, the guarantor is not precluded from waiving the benefit of
excussion and paying the obligation altogether.[25]
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery
of his signature in the Undertaking, the evidence presented not being sufficient to
overcome the presumption of regularity of the Undertaking which is a notarized
document. [26]
Petitioners sought reconsideration of the Decision and prayed for the admission
of documents evidencing the foreclosure of the real estate mortgage, but the motion
for reconsideration was denied by the CA for lack of merit. The CA ruled that the
documentary evidence presented by petitioners cannot be considered as newly
discovered evidence, it being already in existence while the case was pending before
the trial court, the very forum before which it should have been presented. Besides, a
foreclosure sale per se is not proof of petitioners payment of the loan to
PhilGuarantee, the CA added.[27]
So now before the Court are the separate petitions for review of the
CA Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that
the CA erred in interpreting Articles 2079, 2058, and 2059 of the Civil Code in
its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the
CA erred when it held that petitioners are liable to PhilGuarantee despite its payment
after the expiration of its contract of guarantee and the lack of PhilGuarantees
consent to the extensions granted by TRB to JN. Moreover, Cruz questions the
reversal of the ruling of the trial court anent his liability as a signatory to the
Undertaking.[29]
On the other hand, PhilGuarantee maintains that the date of default, not the
actual date of payment, determines the liability of the guarantor and that having paid
TRB when the loan became due, it should be indemnified by petitioners. [30] It argues
that, contrary to petitioners claim, there could be no waiver of its right to excussion
more explicit than its act of payment to TRB very directly.[31] Besides, the right to
excussion is for the benefit of the guarantor and is not a defense for the debtor to

raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is no
sufficient evidence proving the alleged forgery of Cruzs signature on the Undertaking,
which is a notarized document and as such must be accorded the presumption of
regularity.[33]
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so. [34] The
guarantor who pays for a debtor, in turn, must be indemnified by the latter.
[35]
However, the guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor and resorted to all the legal remedies
against the debtor.[36] This is what is otherwise known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the
principal debtor have been expanded. Thus, it was held that the creditor must first
obtain a judgment against the principal debtor before assuming to run after the
alleged guarantor, for obviously the exhaustion of the principals property cannot
even begin to take place before judgment has been obtained.[37] The law imposes
conditions precedent for the invocation of the defense. Thus, in order that the
guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latters demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the debt.
[38]

While a guarantor enjoys the benefit of excussion, nothing prevents him from
paying the obligation once demand is made on him. Excussion, after all, is a right
granted to him by law and as such he may opt to make use of it or waive it.
PhilGuarantees waiver of the right of excussion cannot prevent it from demanding
reimbursement from petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.[39]

This guarantee shall be valid for a period of one (1) year from date hereof but may be
renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per
annum.[40]
The guarantee was only up to 17 December 1980. JNs obligation with TRB fell
due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08
October 1980. That payment was actually made only on 10 March 1981 does not
take it out of the terms of the guarantee. What is controlling is that default and
demand on PhilGuarantee had taken place while the guarantee was still in force.
There is likewise no merit in petitioners claim that PhilGuarantees failure to give
its express consent to the alleged extensions granted by TRB to JN had extinguished
the guarantee. The requirement that the guarantor should consent to any extension
granted by the creditor to the debtor under Art. 2079 is for the benefit of the
guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming
that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted
to waive the need for consent to such extensions. Indeed, a guarantor is not
precluded from waiving his right to be notified of or to give his consent to extensions
obtained by the debtor. Such waiver is not contrary to public policy as it is purely
personal and does not affect public interest. [41] In the instant case, PhilGuarantees
waiver can be inferred from its actual payment to TRB after the latters demand,
despite JNs failure to pay the renewal/guarantee fee as indicated in the guarantee.[42]
For the above reasons, there is no basis for petitioners claim that
PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB.
The law does not prohibit the payment by a guarantor on his own volition, heedless of
the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what
it has paid, even if payment was made before the debt becomes due, [43] or if made
without notice to the debtor,[44] subject of course to some conditions.

Petitioners claim that PhilGuarantee had no more obligation to pay TRB

because of the alleged expiration of the contract of guarantee is untenable. The
guarantee, dated17 December 1979, states:

Petitioners invocation of our ruling in Willex Plastic Industries, Corp. v. Court of

Appeals[45] is misplaced, if not irrelevant. In the said case, the guarantor claimed that
it could not be proceeded against without first exhausting all of the properties of the
debtor. The Court, finding that there was an express renunciation of the benefit of
excussion in the contract of guarantee, ruled against the guarantor.

In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is

made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE
shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid

The cited case finds no application in the case a quo. PhilGuarantee is not
invoking the benefit of excussion. It cannot be overemphasized that excussion is a
right granted to the guarantor and, therefore, only he may invoke it at his discretion.

....

The benefit of excussion, as well as the requirement of consent to extensions of

payment, is a protective device pertaining to and conferred on the guarantor. These
may be invoked by the guarantor against the creditor as defenses to bar the
unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of

these defenses when it paid its obligation according to the tenor of the guarantee
once demand was made on it. What is peculiar in the instant case is that petitioners,
the principal debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the guarantor. The Court cannot
countenance their self-seeking desire to be exonerated from the duty to reimburse
PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves
at the expense of PhilGuarantee.
Petitioners assert that TRBs alleged foreclosure of the real estate mortgage
over the land executed as security for the loan agreement had extinguished
PhilGuarantees obligation; thus, PhilGuarantees recourse should be directed against
TRB, as per the pari-passu provision[46] in the contract of guarantee.[47] We disagree.
The foreclosure was made on 27 August 1993, after the case was submitted for
decision in 1992 and before the issuance of the decision of the court a quo in 1998.
[48]
Thus, foreclosure was resorted to by TRB against JN when they both had become
aware that PhilGuarantee had already paid TRB and that there was a pending case
filed by PhilGuarantee against petitioners. This matter was not raised and proved in
the trial court, nor in the appeal before the CA, but raised for the first time in
petitioners motion for reconsideration in the CA. In their appellants Brief, petitioners
claimed that there was no need for the defendant-appellee JNDC to present any
evidence before the lower court to show that indeed foreclosure of the REM took
place.[49] As properly held by the CA,
Firstly, the documents evidencing foreclosure of mortgage cannot be considered
as newly discovered evidence. The said documents were already subsisting and
should have been presented during the trial of the case. The alleged foreclosure sale
was made on August 23, 1993 while the decision was rendered by the trial court
on August 20, 1998 about five (5) years thereafter. These documents were likewise
not submitted by the defendants-appellees when they submitted their appellees Brief
to this Court. Thus, these cannot be considered as newly discovered evidence but
are more correctly ascribed as suppressed forgotten evidence Secondly, the
alleged foreclosure sale is not proof of payment of the loan by defendant-appellees to
the plaintiffs-appellants.[50]
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN,
and its cause of action was premised on its payment of JNs obligation after the
latters default. PhilGuarantee was well within its rights to demand reimbursement for
such payment made, regardless of whether the creditor, TRB, was subsequently able

to obtain payment from JN. If double payment was indeed made, then it is JN which
should go after TRB, and not PhilGuarantee. Petitioners have no one to blame but
themselves, having allowed the foreclosure of the property for the full value of the
loan despite knowledge of PhilGuarantees payment to TRB. Having been aware of
such payment, they should have opposed the foreclosure, or at the very least, filed a
supplemental pleading with the trial court informing the same of the foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not
being parties to the said agreement. The clause is clearly for the benefit of the
guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement
of JNs obligations to PhilGuarantee, the very same parcel of land mortgaged as
security for the loan agreement. This further weakens the position of petitioners,
since it becomes obvious that they acknowledged the payment made by
PhilGuarantee on their behalf and that they were in fact willing to negotiate with
PhilGuarantee for the settlement of the said obligation before the filing of the
complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the trial
court. Save for the denial of Narciso Cruz that it was not his signature in the
Undertaking and the perfunctory comparison of the signatures, nothing in the records
would support the claim of forgery. Forgery cannot be presumed and must be proved
by clear, positive and convincing evidence and the burden of proof lies on the party
alleging forgery.[52] Mere denial will not suffice to overcome the positive value of the
Undertaking, which is a notarized document, has in its favor the presumption of
regularity, and carries the evidentiary weight conferred upon it with respect to its due
execution.[53] Even in cases where the alleged forged signature was compared to
samples of genuine signatures to show its variance therefrom, this Court still found
such evidence insufficient.[54] Mere variance of the signatures cannot be considered
as conclusive proof that the same were forged.[55]
WHEREFORE, the consolidated petitions are DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.