GUARANTY AND SURETY CASES

1. [G.R. No. 117660. December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE
HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC.,
respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision [1] dated October 17, 1994
of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment
of the Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374,
86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by
respondent bank against herein petitioners. In the decision of the Court of Appeals,
petitioners were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants,
as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are
ordered jointly and severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service charge thereon, at the
rates of 14% and 3% per annum, respectively, computed from
November 10, 1982, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from November 10,
1982, plus 15% as liquidated damage plus 10% of the total amount
due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the
amount of P632,911.39, together with interest and service charge
thereon at the rate of 14% and 3% per annum, respectively,
computed from January 15, 1983, until fully paid, plus stipulated
penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of
the total amount due, plus attorneys fees equivalent to 10% of the
total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on
the first cause of action, the amount of P510,000.00, together with
interest and service charge thereon, at the rates of 14% and 2% per
annum, respectively, computed from March 13, 1983, until fully paid,
plus a penalty of 6% per annum, based on the outstanding principal
of the loan, computed from March 13, 1983, until fully paid; and on
the second cause of action, the amount of P494,936.71, together with
interest and service charge thereon at the rates of 14% and 2%, per
annum, respectively, computed from March 30, 1983, until fully paid,
plus a penalty charge of 6% per annum, based on the unpaid

principal, computed from March 30, 1983, until fully paid, plus (on
both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorneys fees equal to 10% of the
total amounts due, plus costs.[2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two
parcels of land to Wonderland Food Industries, Inc. In their Memorandum of
Agreement,[3] the parties covenanted that the purchase price of Five Million
(P5,000,000.00) Pesos would be settled by the vendee, under the following terms
and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon
the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of
common shares of stock of the Wonderland Food Industries, Inc.; and (3) The
balance of P2,000,000.00 shall be paid in four equal installments, the first
installment falling due, 180 days after the signing of the agreement and every six
months thereafter, with an interest rate of 18% per annum, to be advanced by the
vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an
Addendum[4]to the previous Memorandum of Agreement. The new arrangement
pertained to the revision of settlement of the initial payments of P1,000,000.00 and
prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of
the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties,
they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash,
hereby authorizes the VENDOR to obtain a loan from Summa Savings
and Loan Association with office address at Valenzuela, Metro Manila,
being represented herein by its President, Mr. Jaime Cario and
referred to hereafter as Financier; in the amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus
interest thereon at such rate as the VENDEE and the Financier may
agree, which amount shall cover the ONE MILLION (P1,000,000.00)
PESOS cash which was agreed to be paid upon signing of the
Memorandum of Agreement, plus 18% interest on the balance of two
million pesos stipulated upon in Item No. 1(c) of the said agreement;
provided however, that said loan shall be made for and in the name of
the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly
to the VENDOR; however, the VENDEE hereby undertakes to pay the
full amount of the said loan to the Financier on such terms and
conditions agreed upon by the Financier and the VENDOR, it being
understood that while the loan will be secured from and in the name

of the VENDOR, the VENDEE will be the one liable to pay the entire
proceeds thereof including interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory
notes,[6] payable to the respondent bank.Thereafter, the bank released the proceeds
of the loan to petitioners. However, petitioners failed to meet their obligations as
they fell due. During that time, the bank was experiencing financial turmoil and was
under the supervision of the Central Bank.Central Bank examiner and liquidator
Cordula de Jesus, endorsed the subject promissory notes to the banks counsel for
collection. The bank gave petitioners opportunity to settle their account by
extending payment due dates. Mario Soriano manifested his intention to restructure the loan, yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial
Court of Manila for Collection of Sums of money. The corresponding case histories
are illustrated in the table below:

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In their answer, petitioners interposed the defense of novation and insisted there
was a valid substitution of debtor. They alleged that the addendum specifically
states that although the promissory notes were in their names, Wonderland shall be
responsible for the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its obligation
under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did
not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land
(58 tsn, ibid). Hence, Wonderland is not answerable. And since the loans obtained
under the four promissory notes (Exhs. A, C, G, and E) have not been paid, despite
opportunities given by plaintiff to defendants to make payments, it stands to reason
that defendants are liable to pay their obligations thereunder to plaintiff. In fact,

defendants failed to file a third-party complaint against Wonderland, which shows

the weakness of its stand that Wonderland is answerable to make said payments. [7]
Petitioners appealed to the Court of Appeals. The trial courts decision was
affirmed by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM,
SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC.,
CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR,
WHICH EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY
NOTES.
Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each
party is the cause or consideration for the obligation or promise by the other. The
vendee is obliged to pay the price, while the vendor must deliver actual possession
of the land. In the instant case the original plan was that the initial payments would
be paid in cash. Subsequently, the parties (with the participation of respondent
bank) executed an addendum providing instead, that the petitioners would secure a
loan in the name of Agro Conglomerates Inc. for the total amount of the initial
payments, while the settlement of said loan would be assumed by
Wonderland. Thereafter, petitioner Soriano signed several promissory notes and
received the proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker,
acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person and is liable on the instrument to a holder
for value, notwithstanding such holder at the time of taking the instrument knew
(the signatory) to be an accommodation party.[8] He has the right, after paying the
holder, to obtain reimbursement from the party accommodated, since the relation
between them has in effect become one of principal and surety, the accommodation
party being the surety.[9] Suretyship is defined as the relation which exists where
one person has undertaken an obligation and another person is also under the
obligation or other duty to the obligee, who is entitled to but one performance, and
as between the two who are bound, one rather than the other should perform.
[10]
The suretys liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; in other words, he is directly and equally bound with
the principal.[11] And the creditor may proceed against any one of the solidary
debtors.[12]
We do not give credence to petitioners assertion that, as provided by the
addendum, their obligation to pay the promissory notes was novated by substitution
of a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts
herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which extinguishes or modifies the first,

either by changing the object or principal conditions, or by substituting another in

place of the debtor, or by subrogating a third person in the rights of the creditor.
[13]
In order that a novation can take place, the concurrence of the following
requisites[14] are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new
contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was
no novation by substitution of debtor because there was no prior obligation which
was substituted by a new contract. It will be noted that the promissory notes, which
bound the petitioners to pay, were executed after the addendum. The addendum
modified the contract of sale, not the stipulations in the promissory notes which
pertain to the surety contract. At this instance, Wonderland apparently assured the
payment of future debts to be incurred by the petitioners. Consequently, only a
contract of surety arose. It was wrong for petitioners to presume a novation had
taken place. The well-settled rule is that novation is never presumed, [15] it must be
clearly and unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the
petitioners was extinguished by the rescission of the contract of sale of the
farmland. With the rescission, there was confusion or merger in the persons of the
principal obligor and the surety, namely the petitioners herein. The addendum which
was dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract
is that, if the terms thereof are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning shall control. However, in order to judge the
intention of the parties, their contemporaneous and subsequent acts should be
considered.[17]
The contract of sale between Wonderland and petitioners did not
materialize. But it was admitted that petitioners received the proceeds of the
promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without
just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and
hold Wonderland still liable to pay the loan upon the rescission of their sales
contract.If petitioners sustained damages as a result of the rescission, they should
have impleaded Wonderland and asked damages.The non-inclusion of a necessary
party does not prevent the court from proceeding in the action, and the judgment
rendered therein shall be without prejudice to the rights of such necessary party.
[18]
But respondent appellate court did not err in holding that petitioners are duty-

bound under the law to pay the claims of respondent bank from whom they had
obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision
of the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against
petitioners.

On February 8, 1993, the trial court granted issuance of a writ of replevin

directing the sheriff to take the Isuzu jeepney into his custody. Consequently, on
February 22, 1993, Sheriff Arnel Magat seized the subject vehicle and turned over
the same to plaintiff spouses Ibajan.[4]
On February 15, 1993, the spouses Bartolome filed with the trial court a
motion to quash the writ of replevin and to order the return of the jeepney to them.

SO ORDERED.
2. [G. R. No. 127261. September 7, 2001]
VISAYAN
SURETY
&
INSURANCE
CORPORATION, petitioner,
vs. THE HONORABLE COURT OFAPPEALS, SPOUSES JUN
BARTOLOME+ and SUSAN BARTOLOME and DOMINADOR V. IBAJAN,
+
respondents.

On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed

with the trial court a motion for leave of court to intervene, stating that he has a
right superior to the plaintiffs over the ownership and possession of the subject
vehicle.
On June 1, 1993, the trial court granted the motion to intervene.

DECISION
On August 8, 1993, the trial court issued an order granting the motion to
quash the writ of replevin and ordering plaintiff Mila Ibajan to return the subject
jeepney to the intervenor Dominador Ibajan.[5]

PARDO, J.:

The Case
The case is a petition to review and set aside a decision [1] of the
Court of Appeals affirming that of the Regional Trial Court, Bian, Laguna, Branch 24,
holding the surety liable to the intervenor in lieu of the principal on a replevin bond.
The Facts
The facts, as found by the Court of Appeals,[2] are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed
with the Regional Trial Court, Laguna, Bian a complaint against spouses Jun and
Susan Bartolome, for replevin to recover from them the possession of an Isuzu
jeepney, with damages. Plaintiffs Ibajan alleged that they were the owners of an
Isuzu jeepney which was forcibly and unlawfully taken by defendants Jun and Susan
Bartolome on December 8, 1992, while parked at their residence.
On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan
Surety & Insurance Corporation. The contract of surety provided thus:
WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY &
INSURANCE CORP., of Cebu, Cebu, with branch office at Manila, jointly and severally
bind ourselves in the sum of Three Hundred Thousand Pesos (P300,000.00) for the
return of the property to the defendant, if the return thereof be adjudged, and for
the payment to the defendant of such sum as he/she may recover from the plaintiff
in the action.[3]

On August 31, 1993, the trial court ordered the issuance of a writ of replevin
directing the sheriff to take into his custody the subject motor vehicle and to deliver
the same to the intervenor who was the registered owner.[6]
On September 1, 1993, the trial court issued a writ of replevin in favor of
intervenor Dominador Ibajan but it was returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a
motion/application for judgment against plaintiffs bond.
On June 6, 1994, the trial court rendered judgement the dispositive portion of
which reads:
WHEREFORE, in the light of the foregoing premises, judgment is hereby rendered in
favor of Dominador Ibajan and against Mila Ibajan and the Visayan Surety and
Insurance Corporation ordering them to pay the former jointly and severally the
value of the subject jeepney in the amount of P150,000.00 and such other damages
as may be proved by Dominador Ibajan plus costs.[7]
On June 28, 1994, Visayan Surety and Insurance Corporation and Mila Ibajan
filed with the trial court their respective motions for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance Corporation (hereafter
Visayan Surety) appealed the decision to the Court of Appeals. [8]

On August 30, 1996, the Court of Appeals promulgated its decision affirming
the judgment of the trial court.[9] On September 19, 1996, petitioner filed a motion
for reconsideration.[10] On December 2, 1996, the Court of Appeals denied the
motion for reconsideration for lack of merit.[11]
Hence, this petition.[12]
The Issue
The issue in this case is whether the surety is liable to an intervenor on a
replevin bond posted by petitioner in favor of respondents.[13]
Respondent Dominador Ibajan asserts that as intervenor, he assumed the
personality of the original defendants in relation to the plaintiffs bond for the
issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the intervenor,
Dominador Ibajan, because the intervention of the intervenor makes him a party to
the suit, but not a beneficiary to the plaintiffs bond. The intervenor was not a party
to the contract of surety, hence, he was not bound by the contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally impleaded in a proceeding, who has
legal interest in the matter in litigation, or in the success of either of the parties, or
an interest against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court or of an
officer thereof.[14]
May an intervenor be considered a party to a contract of surety which he did
not sign and which was executed by plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the parties who had
entered into it; it cannot favor or prejudice a third person. [15] Contracts take effect
between the parties, their assigns, and heirs, except in cases where the rights
and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law.[16]
A contract of surety is an agreement where a party called the surety
guarantees the performance by another party called the principal or obligor of an
obligation or undertaking in favor of a third person called the obligee. [17] Specifically,
suretyship is a contractual relation resulting from an agreement whereby one

person, the surety, engages to be answerable for the debt, default or miscarriage of
another, known as the principal.[18]
The obligation of a surety cannot be extended by implication beyond its
specified limits.[19] When a surety executes a bond, it does not guarantee that the
plaintiffs cause of action is meritorious, and that it will be responsible for all the
costs that may be adjudicated against its principal in case the action fails. The
extent of a suretys liability is determined only by the clause of the contract of
suretyship.[20] A contract of surety is not presumed; it cannot extend to more than
what is stipulated.[21]
Since the obligation of the surety cannot be extended by implication, it follows
that the surety cannot be held liable to the intervenor when the relationship and
obligation of the surety is limited to the defendants specified in the contract of
surety.
WHEREFORE, the Court REVERSES and sets aside the decision of the Court
of Appeals in CA-G. R. CV No. 49094. The Court rules that petitioner Visayan Surety
& Insurance Corporation is not liable under the replevin bond to the intervenor,
respondent Dominador V. Ibajan.
No costs.
SO ORDERED.

3. PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. MACAPANGA PRODUCERS

INC., defendant. PLARIDEL SURETY AND INSURANCE CO., defendant-appellee.
G.R. No. L-8349 | 1956-05-23
DECISION
LABRADOR, J.:
Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido A.
Tan, presiding, dismissing the complaint as against Plaridel Surety and Insurance
Company.
Complaint is by Philippine National Bank against Macapanga Producers Inc. and
Plaridel Surety and Insurance Co. Principal allegations are: On December 26, 1952,
Luzon Sugar Company leased a sugar mill located at Calumpit, Bulacan to
Macapanga Producers beginning with the crop year 1952-53 at a minimum annual
royalty of P50,000, which shall be a lien on the sugar produced by the lessee and
shall be paid before sale or removal of sugar from warehouse (copy of lease
contract attached as Annex A to the Complaint); on December 26, 1952, Macapanga
Producers, as principal, and Plaridel Surety & Insurance, as surety, executed and
delivered to plaintiff a performance bond in the amount of P50,000 for the full and

faithful compliance by Macapanga Producers of all terms and conditions of the lease
(copy of bond attached as Annex B to Complaint); on December 21, 1953, Luzon
Sugar assigned to plaintiff the payment due from Macapanga Producers in the sum
of P50,000, representing royalty for the lease of the sugar mill for the crop year
1952-53 (deed of assignment attached as Annex C to Complaint); plaintiff notified
Macapanga Producers and Plaridel Surety & Insurance of said assignment; plaintiff
had demanded from Macapanga Producers payment of said royalty of P50,000, but
the latter has refused and refuses to make payment; and plaintiff also made
demand on Plaridel Surety & Insurance for said payment, but the latter refused and
refuses to make payment.
Plaridel Surety & Insurance moved to dismiss the complaint for failure to state
cause of action, alleging that it is a guarantor and as such is responsible only if
Macapanga Producers has no property or assets to pay its obligation as lessee.
Plaintiff opposed the motion calling attention to the provision of the performance
bond in which Macapanga Producers and Plaridel Surety & Insurance, the former as
principal and the latter as surety, agreed to be held and firmly bound unto Luzon
Sugar in the penal sum of P50,000, "for the payment of which, well and truly be
made, we bind ourselves, our heirs, executors, administrators, successors, and
assigns, jointly and severally." Plaintiff contended that, as Plaridel Surety &
Insurance bound itself solidarily with Macapanga Producers, it became a surety in
accordance with Article 2047, par. 2 of the Civil Code.
The trial court dismissed the complaint against Plaridel Surety & Insurance and
subsequently denied a motion to reconsider the order of dismissal.
The action joining Plaridel Surety & Insurance as party defendant is justified by the
following provisions and cases:.
"ART. 2047. . . .
If a person binds himself solidarily with the principal debtor, the provisions of
section 4, Charter 3, Title I of this Book shall be observed. In such case the contract
is called a suretyship." (Civil Code.)
"The sureties on the superedeas bond given in this particular case, were jointly and
severally liable with principal debtor and that an execution might issue against their
property concurrently with the execution against the property of the principal."
(Molina vs. De la Riva, et al., 7 Phil., 345.)
"Article 1822, invoked by the appellant, provides that 'if the surety bound himself
jointly with the principal debtor, the provisions of section fourth, chapter third, title
first of this book shall be observed,' that is of book fourth of the Civil Code. Section
fourth of the chapter title, and book mentioned provides that 'a creditor may sue
any of the joint debtor or all of them simultaneously.' (Art. 1144). In conformity
with this provision, the sureties Pua Ti and Yap Chatco having bound themselves in
solidum (jointly and severally) with the principal debtor Pua Te Ching, the creditor,
that is, the Chinese Chamber of Commerce, may sue any of them or all of them
simultaneously; which is what the Chinese Chamber of Commerce did in filing suit
against the joint and several debtors." (Chinese Chamber of Commerce vs. Pua Te
Ching, 16 Phil., 406.)
"As the principal debtor's obligation' is valid and has not been satisfied by his
estate, and as the defendant sureties bound themselves solidarily, article 1144 of
the Civil Code is applicable, which provides, as follows:

The creditor may sue any of the solidary debtors or all of them simultaneously. An
action instituted against one shall not be a bar to those which may be subsequently
brought against the others, as long as the debt has not been entirely satisfied.
(Molina vs. De la Riva, 7 Phil., 345; Chinese Chamber of Commerce vs. Pua Te
Ching, 16 Phil., 406; Inchausti & Co. vs. Yulo, 34 Phil., 978.)" (Ferrer vs. Lopez and
Santos, 56 Phil., 592.)
It is also argued on behalf of Plaridel Surety and Insurance that as it was not a
party to the assignment, and same was made without its consent, it is, therefore,
discharged from its obligation. An assignment without knowledge or consent of the
surety is not a material alteration of the contract, sufficient to discharge the surety
(Stearns Law of Suretyship, Elder, fifth edition, p. 113.) There is, besides, no
allegation in the complaint, or provision in the deed of assignment, or any change
therein that makes the obligation of Plaridel Surety & Insurance more onerous than
that stated in the performance bond. Such assignment did not, therefore, release
the Plaridel Surety & Insurance from its obligation under the surety bond. (Bank of
P. I. vs. Albaladejo y Cia, 53 Phil., 141; Bank of P. I. vs. Gooch, et al., 45 Phil., 514;
Visayan Distributors, Inc. vs. Flores, et al., 92 Phil., 145, 48 Off. Gaz., 4784; Del
Rosario vs. Nava, 95 Phil., 637, 50 Off. Gaz., 4189.)
It is lastly contended that as plaintiff or the lessor had a lien in the sugar produced,
and failed to proceed against it or enforce such lien, Plaridel Surety & Insurance was
released thereby. There is no allegation to this effect in the complaint, that lessor or
plaintiff ever had possession or control of the sugar, or ever waived or released the
lien thereon. Appellee cannot raise the issue in a motion to dismiss.
The order of dismissal is hereby reversed, and the appellee ordered to answer the
complaint, with costs.

4. ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING

CORPORATION, respondents.
G.R. No. 126490 | 1998-03-31
DECISION
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

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;

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;
that petitioner, as co-maker, is only secondary 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:
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

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
solidarity 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 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.
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 suretyship

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 abovecontained. 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 equitable 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 solidarity 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, 26 and 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. 39 Under 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 a 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 as that of the principal, then as 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
vis-a-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 herein 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 chargers 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

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

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.

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.

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,

SO ORDERED.
5. SECURITY PACIFIC ASSURANCE CORPORATION, Petitioner, versus THE HON.
AMELIA TRIA-INFANTE, In her official capacity as Presiding Judge, Regional Trial
Court, Branch 9, Manila; THE PEOPLE OF THE PHILIPPINES, represented by Spouses
REYNALDO and ZENAIDA ANZURES; and REYNALDO R. BUAZON, In his official
capacity as Sheriff IV, Regional Trial Court, Branch 9, Manila, Respondents.

G.R. No. 144740 | 2005-08-31

SECOND DIVISION

DECISION

CHICO-NAZARIO, J.:
Before Us is a petition for review on certiorari, assailing the Decision[1] and
Resolution[2] of the Court of Appeals in CA-G.R. SP No. 58147, dated 16 June 2000
and 22 August 2000, respectively. The said Decision and Resolution declared that
there was no grave abuse of discretion on the part of respondent Judge in issuing
the assailed order dated 31 March 2000, which was the subject in CA-G.R. SP No.
58147.
THE FACTS
The factual milieu of the instant case can be traced from this Court's decision in
G.R. No. 106214 promulgated on 05 September 1997.
On 26 August 1988, Reynaldo Anzures instituted a complaint against Teresita
Villaluz (Villaluz) for violation of Batas Pambansa Blg. 22. The criminal information
was brought before the Regional Trial Court, City of Manila, and raffled off to Branch
9, then presided over by Judge Edilberto G. Sandoval, docketed as Criminal Case
No. 89-69257.
An Ex-Parte Motion for Preliminary Attachment[3] dated 06 March 1989 was filed by
Reynaldo Anzures praying that pending the hearing on the merits of the case, a Writ

of Preliminary Attachment be issued ordering the sheriff to attach the properties of

Villaluz in accordance with the Rules.

P2,500,000.00. As reported by the sheriff, petitioner refused to assume its

obligation on the counter-bond it posted for the discharge of the attachment made
by Villaluz.[14]

On 03 July 1989, the trial court issued an Order[4] for the issuance of a writ of
preliminary attachment "upon complainant's posting of a bond which is hereby fixed
at P2,123,400.00 and the Court's approval of the same under the condition
prescribed by Sec. 4 of Rule 57 of the Rules of Court...."

Reynaldo Anzures, through the private prosecutor, filed a Motion to Proceed with
Garnishment,[15] which was opposed by petitioner[16] contending that it should
not be held liable on the counter-attachment bond.

An attachment bond[5] was thereafter posted by Reynaldo Anzures and approved

by the court. Thereafter, the sheriff attached certain properties of Villaluz, which
were duly annotated on the corresponding certificates of title.

The trial court, in its Order dated 31 March 2000,[17] granted the Motion to Proceed
with Garnishment. The sheriff issued a Follow-Up of Garnishment[18] addressed to
the President/General Manager of petitioner dated 03 April 2000.

On 25 May 1990, the trial court rendered a Decision[6] on the case acquitting
Villaluz of the crime charged, but held her civilly liable. The dispositive portion of the
said decision is reproduced hereunder:

On 07 April 2000, petitioner filed a Petition for Certiorari with Preliminary Injunction
and/or Temporary Restraining Order[19] with the Court of Appeals, seeking the
nullification of the trial court's order dated 31 March 2000 granting the motion to
proceed with garnishment. Villaluz was also named as petitioner. The petitioners
contended that the respondent Judge, in issuing the order dated 31 March 2000,
and the sheriff committed grave abuse of discretion and grave errors of law in
proceeding against the petitioner corporation on its counter-attachment bond,
despite the fact that said bond was not approved by the Supreme Court, and that
the condition by which said bond was issued did not happen.[20]

WHEREFORE, premises considered, judgment is hereby rendered ACQUITTING the

accused TERESITA E. VILLALUZ with cost de oficio. As to the civil aspect of the case
however, accused is ordered to pay complainant Reynaldo Anzures the sum of TWO
MILLION ONE HUNDRED TWENTY THREE THOUSAND FOUR HUNDRED
(P2,123,400.00) PESOS with legal rate of interest from December 18, 1987 until
fully paid, the sum of P50,000.00 as attorney's fees and the cost of suit.[7]
Villaluz interposed an appeal with the Court of Appeals, and on 30 April 1992, the
latter rendered its Decision,[8] the dispositive portion of which partly reads:
WHEREFORE, in CA-G.R. CV No. 28780, the Decision of the Regional Trial Court of
Manila, Branch 9, dated May 25, 1990, as to the civil aspect of Criminal Case No.
89-69257, is hereby AFFIRMED, in all respects....
The case was elevated to the Supreme Court (G.R. No. 106214), and during its
pendency, Villaluz posted a counter-bond in the amount of P2,500,000.00 issued by
petitioner Security Pacific Assurance Corporation.[9] Villaluz, on the same date[10]
of the counter-bond, filed an Urgent Motion to Discharge Attachment.[11]
On 05 September 1997, we promulgated our decision in G.R. No. 106214,
affirming in toto the decision of the Court of Appeals.
In view of the finality of this Court's decision in G.R. No. 106214, the private
complainant moved for execution of judgment before the trial court.[12]
On 07 May 1999, the trial court, now presided over by respondent Judge, issued a
Writ of Execution.[13]
Sheriff Reynaldo R. Buazon tried to serve the writ of execution upon Villaluz, but the
latter no longer resided in her given address. This being the case, the sheriff sent a
Notice of Garnishment upon petitioner at its office in Makati City, by virtue of the
counter-bond posted by Villaluz with said insurance corporation in the amount of

On 16 June 2000, the Court of Appeals rendered a Decision,[21] the dispositive

portion of which reads:
WHEREFORE, premises considered, the Court finds no grave abuse of discretion on
the part of respondent judge in issuing the assailed order. Hence, the petition is
dismissed.
A Motion for Reconsideration[22] was filed by petitioner, but was denied for lack of
merit by the Court of Appeals in its Resolution[23] dated 22 August 2000.
Undeterred, petitioner filed the instant petition under Rule 45 of the 1997 Rules of
Civil Procedure, with Urgent Application for a Writ of Preliminary Injunction and/or
Temporary Restraining Order.[24]
On 13 December 2000, this Court issued a Resolution[25] requiring the private
respondents to file their Comment to the Petition, which they did. Petitioner was
required to file its Reply[26] thereafter.
Meanwhile, on 17 January 2001, petitioner and the spouses Reynaldo and Zenaida
Anzures executed a Memorandum of Understanding (MOU).[27] In it, it was
stipulated that as of said date, the total amount garnished from petitioner had
amounted to P1,541,063.85, and so the remaining amount still sought to be
executed was P958,936.15.[28] Petitioner tendered and paid the amount of
P300,000.00 upon signing of the MOU, and the balance of P658,936.15 was to be
paid in installment at P100,000.00 at the end of each month from February 2001 up
to July 2001. At the end of August 2001, the amount of P58,936.00 would have to

be paid. This would make the aggregate amount paid to the private respondents
P2,500,000.00.[29] There was, however, a proviso in the MOU which states that
"this contract shall not be construed as a waiver or abandonment of the appellate
review pending before the Supreme Court and that it will be subject to all such
interim orders and final outcome of said case."
On 13 August 2001, the instant petition was given due course, and the parties were
obliged to submit their respective Memoranda.[30]

Petitioner filed a Reply[34] dated 09 May 2001 to private respondents' Comment,

admitting the binding effect of the bond as between the parties thereto. What it did
not subscribe to was the theory that the attachment was ipso facto or automatically
discharged by the mere filing of the bond in court. Such theory, according to
petitioner, has no foundation. Without an order of discharge of attachment and
approval of the bond, petitioner submits that its stipulated liability on said bond,
premised on their occurrence, could not possibly arise, for to hold otherwise would
be to trample upon the statutorily guaranteed right of the parties to contractual
autonomy.

ISSUES
The petitioner raises the following issues for the resolution of this Court:
Main Issue - WHETHER OR NOT THE COURT OF Appeals committed reversible error
in affirming the 31 march 2000 order of public respondent judge which allowed
execution on the counter-bond issued by the petitioner.
Corollary Issues - (1) WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
RULED THAT THE ATTACHMENT ON THE PROPERTY OF VILLALUZ WAS DISCHARGED
WITHOUT NEED OF COURT APPROVAL OF THE COUNTER-BOND POSTED; and (2)
WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THE
ATTACHMENT ON THE PROPERTY OF VILLALUZ WAS DISCHARGED BY THE MERE
ACT OF POSTING THE COUNTER-BOND.

Based on the circumstances present in this case, we find no compelling reason to

reverse the ruling of the Court of Appeals.
Over the years, in a number of cases, we have made certain pronouncements about
counter-bonds.
In Tijam v. Sibonghanoy,[35] as reiterated in Vanguard Assurance Corp. v. Court of
Appeals,[36] we held:
. . . [A]fter the judgment for the plaintiff has become executory and the execution is
'returned unsatisfied,' as in this case, the liability of the bond automatically attaches
and, in failure of the surety to satisfy the judgment against the defendant despite
demand therefore, writ of execution may issue against the surety to enforce the
obligation of the bond.

THE COURT'S RULING

In Luzon Steel Coporation v. Sia, et al.: [37]
Petitioner seeks to escape liability by contending, in the main, that the writ of
attachment which was earlier issued against the real properties of Villaluz was not
discharged. Since the writ was not discharged, then its liability did not accrue. The
alleged failure of this Court in G.R. No. 106214 to approve the counter-bond and to
cause the discharge of the attachment against Villaluz prevented the happening of a
condition upon which the counter-bond's issuance was premised, such that
petitioner should not be held liable thereon.[31]
Petitioner further asserts that the agreement between it and Villaluz is not a
suretyship agreement in the sense that petitioner has become an additional debtor
in relation to private respondents. It is merely waiving its right of excussion[32]
that would ordinarily apply to counter-bond guarantors as originally contemplated in
Section 12, Rule 57 of the 1997 Rules.
In their Comment,[33] the private respondents assert that the filing of the counterbond by Villaluz had already ipso facto discharged the attachment on the properties
and made the petitioner liable on the bond. Upon acceptance of the premium, there
was already an express contract for surety between Villaluz and petitioner in the
amount of P2,500,000.00 to answer for any adverse judgment/decision against
Villaluz.

. . . [C]ounterbonds posted to obtain the lifting of a writ of attachment is due to

these bonds being security for the payment of any judgment that the attaching
party may obtain; they are thus mere replacements of the property formerly
attached, and just as the latter may be levied upon after final judgment in the case
in order to realize the amount adjudged, so is the liability of the countersureties
ascertainable after the judgment has become final. . . .
In Imperial Insurance, Inc. v. De Los Angeles,[38] we ruled:
. . . Section 17, Rule 57 of the Rules of Court cannot be construed that an
"execution against the debtor be first returned unsatisfied even if the bond were a
solidary one, for a procedural may not amend the substantive law expressed in the
Civil Code, and further would nullify the express stipulation of the parties that the
surety's obligation should be solidary with that of the defendant.
In Philippine British Assurance Co., Inc. v. Intermediate Appellate Court,[39] we
further held that "the counterbond is intended to secure the payment of 'any
judgment' that the attaching creditor may recover in the action."
Petitioner does not deny that the contract between it and Villaluz is one of surety.
However, it points out that the kind of surety agreement between them is one that

merely waives its right of excussion. This cannot be so. The counter-bond itself
states that the parties jointly and severally bind themselves to secure the payment
of any judgment that the plaintiff may recover against the defendant in the action.
A surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable.[40]
Suretyship is a contractual relation resulting from an agreement whereby one
person, the surety, engages to be answerable for the debt, default or miscarriage of
another, known as the principal. The surety's obligation is not an original and direct
one for the performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract of a
surety is in essence secondary only to a valid principal obligation, his liability to the
creditor or promise of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal. The surety
therefore becomes liable for the debt or duty of another although he possesses no
direct or personal interest over the obligations nor does he receive any benefit
therefrom.[41]
In view of the nature and purpose of a surety agreement, petitioner, thus, is barred
from disclaiming liability.

aforesaid standing in place of the property so released. Should such counter-bond

for any reason be found to be or become insufficient, and the party furnishing the
same fail to file an additional counter-bond, the attaching party may apply for a new
order of attachment.
It should be noted that in G.R. No. 106214, per our Resolution dated 15 January
1997,[44] we permitted Villaluz to file a counter-attachment bond. On 17 February
1997,[45] we required the private respondents to comment on the sufficiency of the
counter-bond posted by Villaluz.
It is quite palpable that the necessary steps in the discharge of an attachment upon
giving counter-bond have been taken. To require a specific order for the discharge
of the attachment when this Court, in our decision in G.R. No. 106214, had already
declared that the petitioner is solidarily bound with Villaluz would be mere
surplusage. Thus:
During the pendency of this petition, a counter-attachment bond was filed by
petitioner Villaluz before this Court to discharge the attachment earlier issued by the
trial court. Said bond amounting to P2.5 million was furnished by Security Pacific
Assurance, Corp. which agreed to bind itself "jointly and severally" with petitioner
for "any judgment" that may be recovered by private respondent against the
former.[46]

Petitioner's argument that the mere filing of a counter-bond in this case cannot
automatically discharge the attachment without first an order of discharge and
approval of the bond, is lame.

We are not unmindful of our ruling in the case of Belisle Investment and Finance
Co., Inc. v. State Investment House, Inc.,[47] where we held:

Under the Rules, there are two (2) ways to secure the discharge of an attachment.
First, the party whose property has been attached or a person appearing on his
behalf may post a security. Second, said party may show that the order of
attachment was improperly or irregularly issued.[42] The first applies in the instant
case. Section 12, Rule 57,[43] provides:

. . . [T]he Court of Appeals correctly ruled that the mere posting of a counterbond
does not automatically discharge the writ of attachment. It is only after hearing and
after the judge has ordered the discharge of the attachment if a cash deposit is
made or a counterbond is executed to the attaching creditor is filed, that the writ of
attachment is properly discharged under Section 12, Rule 57 of the Rules of Court.

SEC. 12. Discharge of attachment upon giving counter-bond. - After a writ of

attachment has been enforced, the party whose property has been attached, or the
person appearing on his behalf, may move for the discharge of the attachment
wholly or in part on the security given. The court shall, after due notice and hearing,
order the discharge of the attachment if the movant makes a cash deposit, or files a
counter-bond executed to the attaching party with the clerk of the court where the
application is made, in an amount equal to that fixed by the court in the order of
attachment, exclusive of costs. But if the attachment is sought to be discharged
with respect to a particular property, the counter-bond shall be equal to the value of
that property as determined by the court. In either case, the cash deposit or the
counter-bond shall secure the payment of any judgment that the attaching party
may recover in the action. A notice of the deposit shall forthwith be served on the
attaching party. Upon the discharge of an attachment in accordance with the
provisions of this section, the property attached, or the proceeds of any sale
thereof, shall be delivered to the party making the deposit or giving the counterbond, or to the person appearing on his behalf, the deposit or counter-bond

The ruling in Belisle, at first glance, would suggest an error in the assailed ruling of
the Court of Appeals because there was no specific resolution discharging the
attachment and approving the counter-bond. As above-explained, however,
consideration of our decision in G.R. No. 106214 in its entirety will readily show that
this Court has virtually discharged the attachment after all the parties therein have
been heard on the matter.
On this score, we hew to the pertinent ratiocination of the Court of Appeals as
regards the heretofore cited provision of Section 12, Rule 57 of the 1997 Rules of
Civil Procedure, on the discharge of attachment upon giving counter-bond:
. . . The filing of the counter-attachment bond by petitioner Villaluz has discharged
the attachment on the properties and made the petitioner corporation liable on the
counter-attachment bond. This can be gleaned from the "DEFENDANT'S BOND FOR
THE DISSOLUTION OF ATTACHMENT", which states that Security Pacific Assurance
Corporation, as surety, in consideration of the dissolution of the said

attachment jointly and severally, binds itself with petitioner Villaluz for any
judgment that may be recovered by private respondent Anzures against petitioner
Villaluz.

respondent Dagupan Electric Corporation (DECORP), on the other hand, was the
grantee of a franchise to operate and maintain electric services in the province of
Pangasinan, including Dagupan City.

The contract of surety is only between petitioner Villaluz and petitioner corporation.
The petitioner corporation cannot escape liability by stating that a court approval is
needed before it can be made liable. This defense can only be availed by petitioner
corporation against petitioner Villaluz but not against third persons who are not
parties to the contract of surety. The petitioners hold themselves out as jointly and
severally liable without any conditions in the counter-attachment bond. The
petitioner corporation cannot impose requisites before it can be made
liable when the law clearly does not require such requisites to be fulfilled.
[48] (Emphases supplied.)

On February 2, 1978, McADORE and DECORP entered into a contract whereby

DECORP shall provide electric power to McADOREs Hotel. During the term of their
contract for power service, DECORP noticed discrepancies between the actual
monthly billings and the estimated monthly billings of McADORE. Upon inspection, it
was discovered that the terminal in the transformers connected to the meter had
been interchanged resulting in the slow rotation of the meter. Consequently,
DECORP issued a corrected bill but McADORE refused to pay. As a result of
McADOREs failure and continued refusal to pay the corrected electric bills, DECORP
disconnected power supply to the hotel on November 27, 1978.

Verily, a judgment must be read in its entirety, and it must be construed as a whole
so as to bring all of its parts into harmony as far as this can be done by fair and
reasonable interpretation and so as to give effect to every word and part, if
possible, and to effectuate the intention and purpose of the Court, consistent with
the provisions of the organic law.[49]
Insurance companies are prone to invent excuses to avoid their just obligation.[50]
It seems that this statement very well fits the instant case.
WHEREFORE, in view of all the foregoing, the Decision and Resolution of the Court
of Appeals dated 16 June 2000 and 22 August 2000, respectively, are
both AFFIRMED. Costs against petitioner.
SO ORDERED.
6. [G.R. No. 110086. July 19, 1999]
PARAMOUNT INSURANCE CORPORATION, petitioner, vs. COURT OF
APPEALS and DAGUPAN ELECTRIC CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before this Court is a petition for review on certiorari assailing the Decision of
the Court of Appeals dated April 30, 1993 in CA-G.R. CV No. 11970 which dismissed
petitioner Paramount Insurance Corporations (PARAMOUNT) appeal, thereby
affirming the decision of the court a quo finding petitioner liable on its injunction
bond.
McAdore Finance and Investment, Inc. (McADORE) was the owner and
operator of the McAdore International Palace Hotel in Dagupan City. Private

Aggrieved, McADORE commenced a suit against DECORP for damages with

prayer for a writ of preliminary injunction. McADORE posted injunction bonds from
several sureties, one of which was herein petitioner PARAMOUNT, which issued an
injunction bond on July 7, 1980 with a face amount of P500,000.00. Accordingly, a
writ of preliminary injunction was issued wherein DECORP was ordered to continue
supplying electric power to the hotel and restrained from further disconnecting it.
After due hearing, the Regional Trial Court of Quezon City, Branch 106,
rendered judgment in favor of DECORP, the dispositive portion of which reads:
WHEREFORE, there being preponderance of evidence, the court hereby dismisses
the amended complaint. Further, the court rescinds the service contract between the
parties, and orders McAdore to pay Decorp the following:
1. Actual damages
rendered from
P3,834,489.62,
date of demand

consisting of total arrearages for electric services

February 1978 to January 1983, in the sum of
plus interest at the legal rate, computed from the
until full payment;

2. Moral damages in the sum of P600,000.00;

3. Exemplary damages in the sum of P400,000.00;
4. Attorneys fees in the sum of P100,000.00; and
5. Costs of the suit.
While this case was under litigation, the court issued a number of restraining orders
or injunctions. During these incidents, McAdore filed the following bonds: Policy No.
8022709 by Paramount Insurance Corporation for P500,000.00; No. 00007 and No.

00008 by Sentinel Insurance Company, Inc. for P100,000.00 and P50,000.00; and
No. 1213 by the Travelers Multi-Indemnity Corporation for P225,000.00.

LIABLE WITH McADORE TO THE EXTENT OF ITS BOND, WHICH DECISION IS NOT
SUPPORTED BY THE EVIDENCE.[3]

Pursuant to the dispositive portion of this decision, the court holds that these
bonding companies are jointly and severally liable with McAdore, to the extent of
the value of their bonds, to pay the damages adjudged to Decorp.

PARAMOUNT asserts that (t)he bone of contention in the instant case is the
matter of evidence (or lack thereof) presented by private respondent during the
hearing of the case a quo, notice (or lack thereof) to the surety relative to the
proceedings before the court a quoduring which said evidence was presented, as
well as the actual proceedings themselves. [4] PARAMOUNT further asseverates that
no evidence relative to damages suffered by private respondent as a result of the
injunction was ever presented, or that if any such evidence was presented, the
same was done without notice to petitioner and in violation of its right to due
process.[5] Moreover, petitioner maintains that the injunction bond was issued and
approved sometime in April 1980 to guarantee actual and material damages as may
be sustained and duly proved by private respondent. Thus, it can only cover the
period prospectively from the date of its issuance and does not retroact to the date
of the initial controversy.

Send this decision to: plaintiffs counsel Atty. Pagapong; defendants counsel Atty.
Vera Cruz; and to each of the bondsman.
It is so ordered.[1]
McADORE did not appeal the above decision. PARAMOUNT, however, appealed
to the Court of Appeals assigning the following errors, to wit:
I. APPELLANT SURETY WAS NOT GRANTED DUE PROCESS NOR GIVEN
ITS DAY IN COURT.
II. APPELLANTS SURETY BOND, BEING AN INJUNCTION OR TEMPORARY
RESTRAINING ORDER BOND, THE MANDATORY PROCEDURE IN SEC.
20, RULE 57, IN RELATION TO SEC. 9, RULE 58, RULES OF COURT
WAS NOT OBSERVED IN THIS CASE;
III. NO EVIDENCE NOR PROOF HAD BEEN PRESENTED TO SHOW THAT
HEREIN APPELLANT SURETY BOND SHOULD BE HELD LIABLE FOR
TOTAL DAMAGES AS ADJUDGED IN THE CHALLENGED DECISION.[2]
In essence, PARAMOUNT contended that it was not given its day in court
because it was not notified by DECORP of its intention to present evidence of
damages against its injunction bond, as mandated by Sec. 9 of Rule 58, in relation
to Sec. 20 of Rule 57 of the Revised Rules of Court.

In its Comment, DECORP claims that PARAMOUNT participated in the

proceedings and was given its day in court. This is evidenced by the Notice of
Hearing dated February 26, 1985 addressed to the three sureties. In fact, at the
hearing on March 22, 1985, PARAMOUNT was in attendance represented by Atty.
Nonito Q. Cordero. Likewise, PARAMOUNT was notified of the next hearing
scheduled for April 26, 1985. DECORP further stressed that the hearing on April 26,
1985 proceeded as scheduled without any comment, objection, opposition or
reservation from PARAMOUNT.
The core issue to be resolved here is whether or not petitioner Paramount
Insurance Corporation was denied due process when the trial court found the
injunction bond it issued in favor of McADORE liable to DECORP. Stated otherwise,
was there sufficient evidence to establish the liability of the petitioner on its
injunction bond?
The petition is devoid of merit.

The Court of Appeals was not convinced with petitioners contentions. On April
30, 1993, it affirmed the decision of the trial court.
In the instant petition, PARAMOUNT seeks to reverse and set aside the
decision of the Court of Appeals on the following assignment of errors:
FIRSTLY, THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT NOTICE TO
PETITIONER AND ITS PRESENCE THROUGH COUNSEL IN ONE HEARING WHERE NO
EVIDENCE IN SUPPORT OF THE DAMAGES GUARANTEED BY PETITIONERS BOND
RENDERS THE NEED FOR ANOTHER HEARING ON THAT MATTER A SUPERFLUITY.
SECONDLY, THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE
DECISION OF THE COURT A QUO THAT PETITIONER IS JOINTLY AND SEVERALLY

Petitioners submissions necessitates going into the nature of an injunction as

well as over the procedure in claiming, ascertaining and awarding damages upon
the injunction bond.
Injunction is an extraordinary remedy calculated to preserve the status quo of
things and to prevent actual or threatened acts violative of the rules of equity and
good conscience as would consequently afford an injured party a cause of action
resulting from the failure of the law to provide for an adequate or complete relief.
[6]
A preliminary injunction is an order granted at any stage of an action or
proceeding prior to the judgment or final order, requiring a party or a court, agency
or a person to refrain from a particular act or acts. It may also require the
performance of a particular act or acts, in which case it shall be known as a

preliminary mandatory injunction.[7] Its sole purpose is not to correct a wrong of the
past, in the sense of redress for injury already sustained, but to prevent further
injury.[8]
A preliminary injunction or temporary restraining order may be granted only
when, among others, the applicant, unless exempted by the court, files with the
court where the action or proceeding is pending, a bond executed to the party or
person enjoined, in an amount to be fixed by the court, to the effect that the
applicant will pay such party or person all damages which he may sustain by reason
of the injunction or temporary restraining order if the court should finally decide
that the applicant was not entitled thereto. Upon approval of the requisite bond, a
writ of preliminary injunction shall be issued.[9] At the trial, the amount of damages
to be awarded to either party, upon the bond of the adverse party, shall be claimed,
ascertained, and awarded under the same procedure prescribed in Section 20 of
Rule 57.[10]
Rule 57, Section 20, of the 1997 Rules of Civil Procedure, which is similarly
applicable to preliminary injunction, pertinently provides:
Sec. 20. Claim for damages on account of improper, irregular or excessive
attachment. - An application for damages on account of improper, irregular or
excessive attachment must be filed before the trial or before appeal is perfected or
before the judgment becomes executory, with due notice to the attaching obligee or
his surety or sureties, setting forth the facts showing his right to damages and the
amount thereof. Such damages may be awarded only after proper hearing and shall
be included in the judgment on the main case.
If the judgment of the appellate court be favorable to the party against whom the
attachment was issued, he must claim damages sustained during the pendency of
the appeal by filing an application in the appellate court with notice to the party in
whose favor the attachment was issued or his surety or sureties, before the
judgment of the appellate court becomes executory. The appellate court may allow
the application to be heard and decided by the trial court.
Nothing herein contained shall prevent the party against whom the attachment was
issued from recovering in the same action the damages awarded to him from any
property of the attaching obligee not exempt from execution should the bond or
deposit given by the latter be insufficient or fail to fully satisfy the award. (mutatis
mutandis)
The above rule comes into play when the plaintiff-applicant for injunction fails
to sustain his action, and the defendant is thereby granted the right to proceed
against the bond posted by the former. In the case at bench, the trial court
dismissed McADOREs action for damages with prayer for writ of preliminary
injunction and eventually adjudged the payment of actual, moral, and exemplary
damages against plaintiff-applicant. Consequently, private respondent DECORP can

proceed against the injunction bond posted by plaintiff-applicant to recover the

damages occasioned by the issuance by the trial court of the writ of injunction.
In order for the injunction bond to become answerable for the above-described
damages, the following requisites must concur: [11]
1. The application for damages must be filed in the same case where the
bond was issued;
2. Such application for damages must be filed before the entry of
judgment; and
3. After hearing with notice to the surety.
The records of this case reveal that during its pendency in the trial court,
DECORP filed its Answer raising compulsory counterclaims for rescission of contract,
moral damages, exemplary damages, attorneys fees and litigation expenses.
[12]
During the trial, Atty. Nonito Cordero appeared [13] as counsel for
petitioner. PARAMOUNT as well as the other sureties were properly notified of the
hearing and given their day in court. Specifically, notice was sent to Atty. Cordero of
the hearing on April 27, 1985, which was set for the purpose of determining the
liability of the sureties. The counterclaims for damages of DECORP were proven at
the trial and yet PARAMOUNT did not exert any effort to controvert the evidence
presented by DECORP. Given these circumstances, PARAMOUNT cannot hide under
the cloak of non-liability on its injunction bond on the mere expediency that it was
deprived of due process. It bears stressing that what the law abhors is not the
absence of previous notice but rather the absolute lack of opportunity to ventilate a
partys side.[14] In other words, petitioner cannot successfully invoke denial of due
process where it was given the chance to be heard. As aptly held by the Court of
Appeals, viz.:
The records of the case disclose that during the trial of the case, PARAMOUNT was
present and represented by its counsel Atty. Nonito Q. Cordero as shown in the trial
courts order dated March 22, 1985 (Annex A of Appellees Brief). In the said order,
PARAMOUNT was duly notified of the next hearing which was scheduled on April 26,
1985. Evidently, PARAMOUNT was well-apprised of the next hearing and it cannot
feign lack of notice. Having been given an opportunity to be heard during the main
hearing for the matter of damages, PARAMOUNT therefore, cannot bewail that it
was not given an opportunity to be heard upon denial of its motion to cancel its
injunction bond. Of what use, therefore, is there to conduct another hearing when
the issue of damages has been the subject of the main action of which PARAMOUNT
had been duly notified? A new notice and hearing prescribed by Sec. 20, Rule 57, is
therefore a repetition and a superfluity.
Moreover, PARAMOUNT has only itself to blame when it did not make any opposition
or objection during the hearing for the reception of DECORPs evidence. Having

manifested its desire to cancel its bond, it should have asked for a deferment of
hearing on DECORPs evidence but PARAMOUNT did not do anything of this
sort. Only when an adverse judgment was rendered by the trial court against its
principal McAdore did it whimper a denial of procedural due process. [15]
On the same point, PARAMOUNT argues that contrary to the ruling of the Court
of Appeals, there is a need for a separate hearing for the purpose of presenting
evidence on the alleged damages claimed by DECORP on petitioners injunction
bond. PARAMOUNT contends that a separate hearing is needed as no evidence
dealing with DECORPs claim for damages on petitioners bond was presented during
the hearing wherein petitioners counsel attended nor in the next hearing wherein
petitioner was notified but failed to attend. Since no hearing was held for the
purpose of establishing its liability on the injunction bond, PARAMOUNT concludes
that it is released from its obligation as surety.
Contrary to petitioners thesis, it is neither mandatory nor fatal that there
should be a separate hearing in order that damages upon the bond can be claimed,
ascertained and awarded, as can be gleaned from a cursory reading of the
provisions of Rule 57, Section 20. This Court agrees with the appellate courts ruling
that:
Jurisprudential findings laid down the doctrine that a final adjudication that the
applicant is not entitled to the injunction does not suffice to make the surety
liable. It is necessary, in addition, that the surety be accorded due process, that is,
that it be given an opportunity to be heard on the question of its solidary liability for
damages arising from a wrongful injunction order. Withal, the fact that the matter of
damages was among the issues tried during the hearings on the merits will not
render unnecessary or superfluous a summary hearing to determine the extent of a
suretys liability unless of course, the surety had been impleaded as a party, or
otherwise earlier notified and given opportunity to be present and ventilate
its side on the matter during the trial.
The exception under the doctrinal ruling abovenoted is extant in the case at bar.[16]
What is necessary only is for the attaching party and his surety or sureties to
be duly notified and given the opportunity to be heard. In the case at bench, this
Court accords due respect to the factual finding of the Court of Appeals that
PARAMOUNT was present and represented by its counsel Atty. Nonito Q. Cordero as
shown in the trial courts order dated March 22, 1985 x x x. [17]
As stated, PARAMOUNT also argues that assuming it is liable on its injunction
bond, its liability should be limited only to the amount of damages accruing from the
time the injunction bond was issued until the termination of the case, and not from
the time the suit was commenced. In short, it claims that the injunction bond is
prospective and not retroactive in application.

This Court does not agree. Rule 58, Section 4(b), provides that a bond is
executed in favor of the party enjoined to answer for all damages which he may
sustain by reason of the injunction. This Court already had occasion to rule on this
matter in Mendoza v. Cruz,[18]where it held that (t)he injunction bond is intended as
a security for damages in case it is finally decided that the injunction ought not to
have been granted. It is designed to cover all damages which the party enjoined can
possibly suffer. Its principal purpose is to protect the enjoined party against loss or
damage by reason of an injunction. No distinction was made as to when the
damages should have been incurred.
Moreover, when petitioner issued its injunction bond in favor of DECORP, it was
done with the full knowledge of the relevant facts obtaining in the controversy
between DECORP and McADORE. At the time the injunction bond was issued,
DECORP was already claiming arrears in electric bills and damages from McADORE.
It bears stressing that McADORE was found liable to pay actual damages,
moral damages, exemplary damages, attorneys fees and costs of the suit. To argue
therefore that PARAMOUNT is only liable on its injunction bond from the time of its
issuance and not from the time the suit was commenced is preposterous if not
absurd. Indeed, it would be impossible to determine the reckoning point when moral
damages, exemplary damages, attorneys fees and costs of the suit were supposed
to have been incurred. Consequently, it can be safely deduced that the bond
answers for any and all damages arising from the injunction, regardless of whether
it was sustained before or after the filing of the injunction bond.
PARAMOUNT further maintains that it is liable to pay actual damages only.
However, Rule 58, Section 4(b), clearly provides that the injunction bond is
answerable for all damages. The bond insures with all practicable certainty that the
defendant may sustain no ultimate loss in the event that the injunction could finally
be dissolved. Consequently, the bond may obligate the bondsmen to account to the
defendant in the injunction suit for all: (1) such damages; (2) costs and damages;
(3) costs, damages and reasonable attorneys fees as shall be incurred or sustained
by the person enjoined in case it is determined that the injunction was wrongfully
issued.[20] Thus, PARAMOUNT is liable, jointly and severally, for actual damages,
moral damages, exemplary damages, attorneys fees and costs of the suit, to the
extent of the amount of the bond.
[19]

Be that as it may, a scrutiny of petitioners Indemnity Agreement [21] with

McADORE shows that the former agreed to become surety for the stated amount in
favor of Dagupan Electric Corp. It should be noted that McADORE was already in
arrears starting from June 1979[22] up to the time it entered into an Indemnity
Agreement with PARAMOUNT on July 17, 1980.
It may not be amiss to point out that by the contract of suretyship, it is not for
the obligee to see to it that the principal pays the debt or fulfills the contract, but for
the surety to see to it that the principal pay or perform. [23] The purpose of the
injunction bond is to protect the defendant against loss or damage by reason of the

injunction in case the court finally decides that the plaintiff was not entitled to it,
and the bond is usually conditioned accordingly. Thus, the bondsmen are obligated
to account to the defendant in the injunction suit for all damages, or costs and
reasonable counsels fees, incurred or sustained by the latter in case it is determined
that the injunction was wrongfully issued.[24]
The posting of a bond in connection with a preliminary injunction (or
attachment under Rule 57, or receivership under Rule 59, or seizure or delivery of
personal property under Rule 60) does not operate to relieve the party obtaining an
injunction from any and all responsibility for the damages that the writ may thereby
cause. It merely gives additional protection to the party against whom the
injunction is directed. It gives the latter a right of recourse against either the
applicant or his surety, or against both. [25] In the same manner, when petitioner
PARAMOUNT issued the bond in favor of its principal, it undertook to assume all the
damages that may be suffered after finding that the principal is not entitled to the
relief being sought.
WHEREFORE, based on the foregoing, the instant petition is DENIED. The
decision of the Court of Appeals dated April 30, 1993 in CA-G.R. CV No. 11970 is
AFFIRMED. With costs.
SO ORDERED.
7. G.R. No. L-46658

May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court
of First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY,
INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.
FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to
annul and set aside the orders dated March 4, 1977 and May 31, 1977 rendered in
Civil Case No. 24422 1 of the Court of First Instance of Rizal, Branch XXI,
respectively granting private respondent Tayabas Cement Company, Inc.'s
application for a writ of preliminary injunction to enjoin the foreclosure sale of
certain properties in Quezon City and Negros Occidental and denying petitioner's
motion for reconsideration thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses),
obtained a loan of P580,000.00 from petitioner bank to purchase 60% of the
subscribed capital stock, and thereby acquire the controlling interest of private
respondent Tayabas Cement Company, Inc. (TCC). 2 As security for said loan, the

spouses Arroyo executed a real estate mortgage over a parcel of land covered by
Transfer Certificate of Title No. 55323 of the Register of Deeds of Quezon City
known as the La Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement for the
establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00
in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a
cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo
Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed the
following documents to secure this loan accommodation: Surety Agreement dated
August 5, 1964 3 and Covenant dated August 6, 1964. 4
The imported cement plant machinery and equipment arrived from Japan and were
released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha,
Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however,
failed to remit and/or pay the corresponding amount covered by the drawings. Thus,
on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its
intention to repossess, as it later did, the imported machinery and equipment for
failure of TCC to settle its obligations under the L/C. 5
In the meantime, the personal accounts of the spouses Arroyo, which included
another loan of P160,000.00 secured by a real estate mortgage over parcels of
agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental,
had likewise become due. The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose the real estate mortgages
executed by the spouses Arroyo in its favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extrajudicial foreclosure under Act 3138, as amended by Act 4118 and under Presidential
Decree No. 385 of the real estate mortgage over the properties known as the La
Vista property covered by TCT No. 55323. 6 PNB likewise filed a similar petition with
the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged
properties located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At
the auction sale, PNB was the highest bidder with a bid price of P1,000,001.00.
However, when said property was about to be awarded to PNB, the representative of
the mortgagor-spouses objected and demanded from the PNB the difference
between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the
Arroyo spouses on their personal account. It was the contention of the spouses
Arroyo's representative that the foreclosure proceedings referred only to the
personal account of the mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975
requesting the Sheriff's Office to proceed with the sale of the subject real properties
to satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their
personal account but also the amount of P35,019,901.49 exclusive of interest,
commission charges and other expenses owed by said spouses as sureties of
TCC. 7 Said petition was opposed by the spouses Arroyo and the other bidder, Jose
L. Araneta.

On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L.
Dungca issued a resolution finding that the questions raised by the parties required
the reception and evaluation of evidence, hence, proper for adjudication by the
courts of law. Since said questions were prejudicial to the holding of the foreclosure
sale, she ruled that her "Office, therefore, cannot properly proceed with the
foreclosure sale unless and until there be a court ruling on the aforementioned
issues." 8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch
V a petition for mandamus 9against said Diana Dungca in her capacity as City Sheriff
of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 in order to satisfy both the personal obligation
of the spouses Arroyo as well as their liabilities as sureties of TCC. 10
On September 6, 1976, the petition was granted and Dungca was directed to
proceed with the foreclosure sale of the mortgaged properties covered by TCT No.
55323 pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate
of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the
Court of First Instance of Rizal, Pasig, Branch XXI a complaint 12 against PNB,
Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of
Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property and Hacienda
Bacon as well as a declaration that its obligation with PNB had been fully paid by
reason of the latter's repossession of the imported machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a
restraining order 14 and on March 4, 1977, granted a writ of preliminary
injunction. 15 PNB's motion for reconsideration was denied, hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary
injunction, namely: a) that it contravenes P.D. No. 385 which prohibits the issuance
of a restraining order against a government financial institution in any action taken
by such institution in compliance with the mandatory foreclosure provided in Section
1 thereof; b) that the writ countermands a final decision of a co-equal and
coordinate court; c) that the writ seeks to prohibit the performance of acts beyond
the court's territorial jurisdiction; and, d) private respondent TCC has not shown any
clear legal right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385 does not
apply to the case at bar, firstly because no foreclosure proceedings have been
instituted against it by PNB and secondly, because its account under the L/C has
been fully satisfied with the repossession of the imported machinery and equipment
by PNB.
The resolution of the instant controversy lies primarily on the question of whether or
not TCC's liability has been extinguished by the repossession of PNB of the imported
cement plant machinery and equipment.

We rule for the petitioner PNB. It must be remembered that PNB took possession of
the imported cement plant machinery and equipment pursuant to the trust receipt
agreement executed by and between PNB and TCC giving the former the unqualified
right to the possession and disposal of all property shipped under the Letter of
Credit until such time as all the liabilities and obligations under said letter had been
discharged. 16 In the case of Vintola vs. Insular Bank of Asia and America 17 wherein
the same argument was advanced by the Vintolas as entrustees of imported
seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has
been extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have relinquished
possession thereof to the IBAA, as owner of the goods, by depositing them
with the Court.
The foregoing submission overlooks the nature and mercantile usage of the
transaction involved. A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and characteristics. Under that
set-up, a bank extends a loan covered by the Letter of Credit, with the
trust receipt as a security for the loan. In other words, the transaction
involves a loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt.
xxx

xxx

xxx

A trust receipt, therefore, is a security agreement, pursuant to which a

bank acquires a "security interest" in the goods.1wphi1 It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. As defined in our laws:
(h) "Security interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only.
xxx

xxx

xxx

Contrary to the allegation of the VINTOLAS, IBAA did not become the real
owner of the goods. It was merely the holder of a security title for the
advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold
it at their own risk. The trust receipt arrangement did not convert the IBAA
into an investor; the latter remained a lender and creditor.
xxx

xxx

xxx

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are

absolutely relieved of their obligation to pay their loan because of their

inability to dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the advances it
had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession
by itself cannot be considered payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere possession does not
amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes
the sale itself. 18
Neither can said repossession amount to dacion en pago. Dation in payment takes
place when property is alienated to the creditor in satisfaction of a debt in money
and the same is governed by sales. 19 Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. 20 As aforesaid, the repossession of
the machinery and equipment in question was merely to secure the payment of
TCC's loan obligation and not for the purpose of transferring ownership thereof to
PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed
by the spouses Arroyo as sureties of TCC. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation
of the latter, and their liabilities are interwoven as to be inseparable. 21 As sureties,
the Arroyo spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding. 22
Under Presidential Decree No. 385 which took effect on January 31, 1974,
government financial institutions like herein petitioner PNB are required to foreclose
on the collaterals and/or securities for any loan, credit or accommodation whenever
the arrearages on such account amount to at least twenty percent (20%) of the
total outstanding obligations, including interests and charges, as appearing in the
books of account of the financial institution concerned. 23 It is further provided
therein that "no restraining order, temporary or permanent injunction shall be
issued by the court against any government financial institution in any action taken
by such institution in compliance with the mandatory foreclosure provided in Section
1 hereof, whether such restraining order, temporary or permanent injunction is
sought by the borrower(s) or any third party or parties . . ." 24
It is not disputed that the foreclosure proceedings instituted by PNB against the
Arroyo spouses were in compliance with the mandate of P.D. 385. This being the
case, the respondent judge acted in excess of his jurisdiction in issuing the
injunction specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction complained of is
that it interfered with the order of a co-equal and coordinate court. Since Branch V
of the CFI of Rizal had already acquired jurisdiction over the question of foreclosure
of mortgage over the La Vista property and rendered judgment in relation thereto,
then it retained jurisdiction to the exclusion of all other coordinate courts over its

judgment, including all incidents relative to the control and conduct of its ministerial
officers, namely the sheriff thereof. 25 The foreclosure sale having been ordered by
Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with
Branch XXI of the same CFI, but instead should have first sought relief by proper
motion and application from the former court which had exclusive jurisdiction over
the foreclosure proceeding. 26
This doctrine of non-interference is premised on the principle that a judgment of a
court of competent jurisdiction may not be opened, modified or vacated by any
court of concurrent jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed against the
Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a
jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can
only enforce their writs of injunction within their respective designated territories. 28
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby
set aside. Costs against private respondent.

8. PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. JULIA MANIEGO, accusedappellant.

G.R. No. L-30910 | 1987-02-27
DECISION
NARVASA, J.:
Application of the established rule in this jurisdiction, that the acquittal of an
accused on reasonable doubt is not generally an impediment to the imposition, in
the same criminal action, of civil liability for damages on said accused, is what is
essentially called into question by the appellant in this case.
The information which initiated the instant criminal proceedings in the Court of First
Instance of Rizal indicted three (3) persons ---- Lt. Rizalino M. Ubay, Mrs. Milagros
Pamintuan, and Mrs. Julia T. Maniego ---- for the crime of MALVERSATION
committed as follows:
"That on or about the period covering the month of May, 1957 up to and including
the month of August, 1957, in Quezon City, Philippines, the above-named accused,
conspiring together, confederating with and helping one another, with intent of gain
and without authority of law, did, then and there, wilfully, unlawfully and feloniously
malverse, misappropriate and misapply public funds in the amount of P66,434.50
belonging to the Republic of the Philippines, in the following manner, to wit: the
accused, Lt. RIZALINO M. Ubay, a duly appointed officer in the Armed Forces of the
Philippines in active duty, who, during the period specified above, was designated as
Disbursing Officer in the Officer of the Chief of Finance, GHQ, Camp Murphy, Quezon

City, and as such was entrusted with and had under his custody and control public
funds, conspiring and confederating with his co-accused, MILAGROS T. PAMINTUAN
and JULIA T. MANIEGO, did then and there, unlawfully, willfully and feloniously, with
intent of gain and without authority of law, and in pursuance of their conspiracy,
take, receive, and accept from his said co-accused several personal checks drawn
against the Philippine National Bank and the Bank of the Philippine Islands, of which
the accused, MILAGROS T. PAMINTUAN is the drawer and the accused, JULIA T.
MANIEGO, is the indorser, in the total amount of P66,434.50, cashing said checks
and using for this purpose the public funds entrusted to and placed under the
custody and control of the said Lt. Rizalino M. Ubay, all the said accused knowing
fully well that the said checks are worthless and are not covered by funds in the
aforementioned banks, for which reason the same were dishonored and rejected by
the said banks when presented for encashment, to the damage and prejudice of the
Republic of the Philippines, in the amount of P66,434.50, Philippine currency." 1
Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having apparently
fled to the United States in August, 1962. 2 Both Ubay and Maniego entered a plea
of not guilty. 3
After trial judgment was rendered by the Court of First Instance, 4 the dispositive
part whereof reads:
"There being sufficient evidence beyond reasonable doubt against the accused,
Rizalino M. Ubay, the Court hereby convicts him of the crime of malversation and
sentences him to suffer the penalty of reclusion temporal of TWELVE (12) YEARS,
ONE (1) DAY to FOURTEEN (14) YEARS, EIGHT (8) MONTHS, and a fine of
P57,434.50 which is the amount malversed, and to suffer perpetual special
disqualification.
"In the absence of evidence against accused Julia T. Maniego, the Court hereby
acquits her, but both she and Rizal T. Ubay are hereby ordered to pay jointly and
severally the amount of P57,434.50 to the government." 5
Maniego sought reconsideration of the judgment, praying that she be absolved from
civil liability or, at the very least, that her liability be reduced to P46,934.50. 6 The
Court declined to negate her civil liability, but did reduce the amount thereof to
P46,934.50. 7 She appealed to the Court of Appeals 8 as Ubay had earlier done. 9
Ubay's appeal was subsequently dismissed by the Appellate Court because of his
failure to file brief. 10 On the other hand, Maniego submitted her brief in due
course, and ascribed three (3) errors to the Court a quo, to wit:
1) The Lower Court erred in holding her civilly liable to indemnify the Government
for the value of the checks after she had been found not guilty of the crime out of
which the civil liability arises.
2) Even assuming arguendo that she could properly be held civilly liable after her
acquittal, it was error for the lower Court to adjudge her liable as an indorser to

indemnify the government for the amount of the checks.

3) The Lower Court erred in declaring her civilly liable jointly and severally with her
co-defendant Ubay, instead of absolving her altogether. 11
Because, in the Appellate Court's view, Maniego's brief raised only questions of law,
her appeal was later certified to this Court pursuant to Section 17, in relation to
Section 31, of the Judiciary Act, as amended, and Section 3, Rule 50 of the Rules of
Court. 12
The verdict must go against the appellant.
Well known is the principle that "any person criminally liable for felony is also civilly
liable." 13 But a person adjudged not criminally responsible may still be held to be
civilly liable. A person's acquittal of a crime on the ground that his guilt has not
been proven beyond reasonable doubt 14 does not bar a civil action for damages
founded on the same acts involved in the offense. 15 "Extinction of the penal action
does not carry with it extinction of the civil, unless the extinction proceeds from a
declaration in a final judgment that the fact from which the civil might arise did not
exist." 16
"Rule 111 SEC. 3(b) Extinction of the penal action does not carry with it extinction
of the civil, unless the extinction proceeds from a declaration in a final judgment
that the fact from which the civil might arise did not exist. In other cases, the
person entitled to the civil action may institute it in the jurisdiction and in the
manner provided by law against the person who may be liable for restitution of the
thing and reparation of indemnity for the damage suffered." (1985 Rules on
Criminal Procedure).
Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of
the crime of Malversation imputed to her and her two (2) co-accused did not
operate to absolve her from civil liability for reimbursement of the amount rightfully
due to the Government as owner thereof. Her liability therefor could properly be
adjudged, as it was so adjudged, by the Trial Court on the basis of the evidence
before it, which adequately establishes that she was an indorser of several checks
drawn by her sister, which were dishonored after they had been exchanged with
cash belonging to the Government, then in the official custody of Lt. Ubay.
Appellant's contention that as mere indorser, she may not be made liable on
account of the dishonor of the checks indorsed by her, is likewise untenable. Under
the law, the holder or last indorsee of a negotiable instrument has the right to
"enforce payment of the instrument for the full amount thereof against all parties
liable thereon." 18 Among the "parties liable thereon" is an indorser of the
instrument i.e., "a person placing his signature upon an instrument otherwise than
as maker, drawer, or acceptor . . . unless he clearly indicates by appropriate words
his intention to be bound in some other capacity." 19 Such an indorser "who
indorses without qualification," inter alia "engages that on due presentment, . . .
(the instrument) shall be accepted or paid, or both, as the case may be, according

to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it." 20 Maniego may also be deemed an
"accommodation party" in the light of the facts, i.e., a person "who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person." 21 As such, she is
under the law "liable on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew . . . (her) to be only an
accommodation party," 22 although she has the right, after paying the holder, to
obtain reimbursement from the party accommodated, "since the relation between
them is in effect that of principal and surety, the accommodation party being the
surety." 23
One last word. The Trial Court acted correctly in adjudging Maniego to be civilly
liable in the same criminal action in which she had been acquitted of the felony of
Malversation ascribed to her, dispensing with the necessity of having a separate civil
action subsequently instituted against her for the purpose. 24
WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts
and the law, is hereby affirmed in toto, with costs against the appellant.
SO ORDERED.
9. TOWERS ASSURANCE CORPORATION, petitioner, vs. ORORAMA SUPERMART, ITS
OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding
Judge, Court of First Instance of Misamis Oriental, Branch I, respondents.

G.R. No. L-45848 | 1977-11-09

DECISION
AQUINO, J:
This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.

On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre-trial, the Ong spouses were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering not only the
Ong spouses but also their surety, Towers Assurance Corporation, to pay solidarily
to See Hong the sum of P58,400. The court also ordered the Ong spouses to pay
P10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama
Supermart filed a motion for execution. The lower court granted that motion. The
writ of execution was issued on March 14 against the judgment debtors and their
surety. On March 29, 1977, Towers Assurance Corporation filed the instant petition
for certiorari where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as
required in Rule 57 of the Rules of Court which provides:
"SEC. 17.When execution returned unsatisfied, recovers had upon bond. - If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbond given pursuant to the provisions of this rule to secure the payment of
the judgment shall become charged on such counterbond, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment, which
amount may be recovered from such surety or sureties after notice and summary
hearing in the action."
Under section 17, in order that the judgment creditor might recover from the surety
on the counterbond, it is necessary (1) that execution be first issued against the
principal debtor and that such execution was returned unsatisfied in whole or in
part; (2) that the creditor made a demand upon the surety for the satisfaction of
the judgment, and (3) that the surety be given notice and a summary hearing in the
same action as to his liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for the satisfaction of the
judgment. A surety is not entitled to the exhaustion of the properties of the
principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449,
May 15, 1969, 28 SCRA 58, 63).

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan
de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First
Instance of Misamis Oriental for the collection of the sum of P58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).

But certainly, the surety is entitled to be, heard before an execution can be issued
against him since he is not a party in the case involving his principal. Notice and
hearing constitute the essence of procedural due process. (Martinez vs. Villacete,
116 Phil. 326; Alliance Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192,
1200; Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30, 1970, 31 SCRA
313)

See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower
court issued an order of attachment. The deputy sheriff attached the properties of
the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

WHEREFORE, the order and writ of execution, insofar as they concern Towers
Assurance Corporation, are set aside. The lower court is directed to conduct a
summary hearing on the surety's liability on its counterbond. No costs.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in
the amount of P58,400 with Towers Assurance Corporation as surety. In that
undertaking, the Ong spouses and Towers Assurance Corporation bound themselves
to pay solidarily to See Hong the sum of P58,400.

SO ORDERED.

10. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION,

petitioner, vs. V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.;
VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA
SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE COMPANY, INC.,
respondents.

G.R. No. 140047 | 2004-07-13

DECISION
DAVIDE, JR., C.J.:
This case is an offshoot of a service contract entered into by a Filipino construction
firm with the Iraqi Government for the construction of the Institute of Physical
Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq
war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil
Case No. 91-1906 and assigned to Branch 58, petitioner Philippine Export and
Foreign Loan Guarantee Corporation[1] (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of
Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction,
Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of
Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute
of Physical Therapy-Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
(hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter
Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total
contract price of ID5,416,089/046 (or about US$18,739,668).[2]
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of
respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor
engaged in construction business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire Project, while the latter
would be entitled to a commission of 4% of the contract price.[3] Later, or on 8
April 1981, respondent 3-Plex, not being accredited by or registered with the
Philippine Overseas Construction Board (POCB), assigned and transferred all its
rights and interests under the joint venture agreement to VPECI, a construction and
engineering firm duly registered with the POCB.[4] However, on 2 May 1981, 3-Plex
and VPECI entered into an agreement that the execution of the Project would be
under their joint management.[5]
The SOB required the contractors to submit (1) a performance bond of
ID271,808/610 representing 5% of the total contract price and (2) an advance
payment bond of ID541,608/901 representing 10% of the advance payment to be
released upon signing of the contract.[6] To comply with these requirements,
respondents 3-Plex and VPECI applied for the issuance of a guarantee with
petitioner Philguarantee, a government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure the performance of approved
service contracts abroad.[7]

Petitioner Philguarantee approved respondents' application. Subsequently, letters of

guarantee[8] were issued by Philguarantee to the Rafidain Bank of Baghdad
covering 100% of the performance and advance payment bonds, but they were not
accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank,
the government bank of Iraq. Rafidain Bank then issued a performance bond in
favor of SOB on the condition that another foreign bank, not Philguarantee, would
issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required
a similar counter-guarantee in its favor from the petitioner. Thus, three layers of
guarantees had to be arranged.[9]
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee
issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F [10]
(Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of
Guarantee No. 81-195-F[11] (Advance Payment Guarantee) in the amount of
ID541,608/901, both for a term of eighteen months from 25 May 1981. These
letters of guarantee were secured by (1) a Deed of Undertaking[12] executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and
Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond[13]
issued by respondent First Integrated Bonding and Insurance Company, Inc.
(FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the
amount of coverage from P6.4 million to P6.967 million and to change the bank in
whose favor the petitioner's guarantee was issued, from Rafidain Bank to Al Ahli
Bank of Kuwait.[14]
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service
contract[15] for the construction of the Institute of Physical Therapy - Medical
Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture
contractor undertook to complete the Project within a period of 547 days or 18
months. Under the Contract, the Joint Venture would supply manpower and
materials, and SOB would refund to the former 25% of the project cost in Iraqi
Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US
Dollars.[16]
The construction, which was supposed to start on 2 June 1981, commenced only on
the last week of August 1981. Because of this delay and the slow progress of the
construction work due to some setbacks and difficulties, the Project was not
completed on 15 November 1982 as scheduled. But in October 1982, upon
foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli
Bank, the joint venture contractor worked for the renewal or extension of the
Performance Bond and Advance Payment Guarantee. Petitioner's Letters of
Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment
Bond) with expiry date of 25 November 1982 were then renewed or extended to 9
February 1983 and 9 March 1983, respectively.[17] The surety bond was also
extended for another period of one year, from 12 May 1982 to 12 May 1983.[18]
The Performance Bond was further extended twelve times with validity of up to 8
December 1986,[19] while the Advance Payment Guarantee was extended three
times more up to 24 May 1984 when the latter was cancelled after full refund or
reimbursement by the joint venture contractor.[20] The surety bond was likewise
extended to 8 May 1987.[21]
As of March 1986, the status of the Project was 51% accomplished, meaning the
structures were already finished. The remaining 47% consisted in electromechanical works and the 2%, sanitary works, which both required importation of

equipment and materials.[22]

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner
demanding full payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI
requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein
to recall the telex call on the performance guarantee for being a drastic action in
contravention of its mutual agreement with the latter that (1) the imposition of
penalty would be held in abeyance until the completion of the project; and (2) the
time extension would be open, depending on the developments on the negotiations
for a foreign loan to finance the completion of the project.[23] It also wrote SOB
protesting the call for lack of factual or legal basis, since the failure to complete the
Project was due to (1) the Iraqi government's lack of foreign exchange with which
to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past
several years with the provision in the contract that 75% of the billings would be
paid in US dollars.[24] Subsequently, or on 19 November 1986, respondent VPECI
advised the petitioner not to pay yet Al Ahli Bank because efforts were being
exerted for the amicable settlement of the Project.[25]
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank
stating that it had already paid to Rafidain Bank the sum of US$876,564 under its
letter of guarantee, and demanding reimbursement by the petitioner of what it paid
to the latter bank plus interest thereon and related expenses.[26]
Both petitioner Philguarantee and respondent VPECI sought the assistance of some
government agencies of the Philippines. On 10 August 1987, VPECI requested the
Central Bank to hold in abeyance the payment by the petitioner \"to allow the
diplomatic machinery to take its course, for otherwise, the Philippine government ,
through the Philguarantee and the Central Bank, would become instruments of the
Iraqi Government in consummating a clear act of injustice and inequity committed
against a Filipino contractor.\"[27]
On 27 August 1987, the Central Bank authorized the remittance for its account of
the amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank
representing full payment of the performance counter-guarantee for VPECI's project
in Iraq. [28]
On 6 November 1987, Philguarantee informed VPECI that it would remit
US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the
respondents to reimburse the petitioner for the advances made on its counterguarantee.[29]
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21
January 1988.[30] Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of
Kuwait US$59,129.83 representing interest and penalty charges demanded by the
latter bank.[31]
On 19 June 1991, the petitioner sent to the respondents separate letters demanding
full payment of the amount of P47,872,373.98 plus accruing interest, penalty
charges, and 10% attorney's fees pursuant to their joint and solidary obligations
under the deed of undertaking and surety bond.[32] When the respondents failed to
pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money
against the respondents before the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter
had no valid cause of action against the respondents. It opined that at the time the
call was made on the guarantee which was executed for a specific period, the
guarantee had already lapsed or expired. There was no valid renewal or extension of
the guarantee for failure of the petitioner to secure respondents' express consent
thereto. The trial court also found that the joint venture contractor incurred no delay
in the execution of the Project. Considering the Project owner's violations of the
contract which rendered impossible the joint venture contractor's performance of its
undertaking, no valid call on the guarantee could be made. Furthermore, the trial
court held that no valid notice was first made by the Project owner SOB to the joint
venture contractor before the call on the guarantee. Accordingly, it dismissed the
complaint, as well as the counterclaims and cross-claim, and ordered the petitioner
to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and
P100,000 to 3-Plex and the Santos Spouses, plus costs. [33]
In its 14 June 1999 Decision,[34] the Court of Appeals affirmed the trial court's
decision, ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to
1985, having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the
SOB (project owner) which had not anyway complied with its contractual
commitment to tender 75% of payment in US Dollars, and which still retained
overdue amounts collectible by VPECI.
Second, appellant was very much aware of the violations committed by the SOB of
its contractual undertakings with VPECI, principally, the payment of foreign currency
(US$) for 75% of the total contract price, as well as of the complications and
injustice that will result from its payment of the full amount of the performance
guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987 -.
Third, appellant was fully aware that SOB was in fact still obligated to the Joint
Venture and there was still an amount collectible from and still being retained by the
project owner, which amount can be set-off with the sum covered by the
performance guarantee.
Fourth, well-apprised of the above conditions obtaining at the Project site and
cognizant of the war situation at the time in Iraq, appellant, though earlier has
made representations with the SOB regarding a possible amicable termination of the
Project as suggested by VPECI, made a complete turn-around and insisted on acting
in favor of the unjustified "call" by the foreign banks.[35]
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming
that the Court of Appeals erred in affirming the trial court's ruling that

I
-RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF
ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.

II
-PETITIONER CANNOT CLAIM SUBROGATION.
III
-IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.[36]
The main issue in this case is whether the petitioner is entitled to reimbursement of
what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of
Kuwait based on the deed of undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are analogous to
those of suretyship. Its liability accrued upon the failure of the respondents to finish
the construction of the Institute of Physical Therapy Buildings in Baghdad.
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 contract is called suretyship.
[37]
Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. In both contracts, there is a promise to answer for the debt or
default of another. However, in this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at
the same time and on the same consideration. On the other hand, the contract of
guaranty is the guarantor\'s own separate undertaking often supported by a
consideration separate from that supporting the contract of the principal; the
original contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability
of a guarantor is conditional depending on the failure of the primary debtor to pay
the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a
guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a
guarantor is not bound to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the
creditor to the principal or by want of notice of the default of the principal, no
matter how much he may be injured thereby. A guarantor is often discharged by the
mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal. [38]
In determining petitioner's status, it is necessary to read Letter of Guarantee No.
81-194-F, which provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-

guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No.
LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two
Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten
(ID271,808/610) representing 100% of the performance bond required of V.P.
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad,
Iraq, plus interest and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus
interest and other incidental expenses-. (Emphasis supplied)[39]
Guided by the abovementioned distinctions between a surety and a guaranty, as
well as the factual milieu of this case, we find that the Court of Appeals and the trial
court were correct in ruling that the petitioner is a guarantor and not a surety. That
the guarantee issued by the petitioner is unconditional and irrevocable does not
make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary
and conditional quality because it does not take effect until the fulfillment of the
condition, namely, that the principal obligor should fail in his obligation at the time
and in the form he bound himself.[40] In other words, an unconditional guarantee is
still subject to the condition that the principal debtor should default in his obligation
first before resort to the guarantor could be had. A conditional guaranty, as opposed
to an unconditional guaranty, is one which depends upon some extraneous event,
beyond the mere default of the principal, and generally upon notice of the principal's
default and reasonable diligence in exhausting proper remedies against the
principal.[41]
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event
of default by respondent VPECI the petitioner shall pay, the obligation assumed by
the petitioner was simply that of an unconditional guaranty, not conditional
guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional
does not make it a surety. Besides, surety is never presumed. A party should not be
considered a surety where the contract itself stipulates that he is acting only as a
guarantor. It is only when the guarantor binds himself solidarily with the principal
debtor that the contract becomes one of suretyship.[42]
Having determined petitioner's liability as guarantor, the next question we have to
grapple with is whether the respondent contractor has defaulted in its obligations
that would justify resort to the guaranty. This is a mixed question of fact and law
that is better addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the
Court of Appeals are binding or conclusive upon this Court unless they are not
supported by the evidence or unless strong and cogent reasons dictate otherwise.
[43] The factual findings of the Court of Appeals are normally not reviewable by us
under Rule 45 of the Rules of Court except when they are at variance with those of
the trial court. [44] The trial court and the Court of Appeals were in unison that the
respondent contractor cannot be considered to have defaulted in its obligations
because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the
respondent contractor has defaulted in the performance of its obligations under the
service contract. The question of whether there is a breach of an agreement, which
includes default or mora,[45] pertains to the essential or intrinsic validity of a
contract. [46]

No conflicts rule on essential validity of contracts is expressly provided for in our

laws. The rule followed by most legal systems, however, is that the intrinsic validity
of a contract must be governed by the lex contractus or "proper law of the
contract." This is the law voluntarily agreed upon by the parties (the lex loci
voluntatis) or the law intended by them either expressly or implicitly (the lex loci
intentionis). The law selected may be implied from such factors as substantial
connection with the transaction, or the nationality or domicile of the parties.[47]
Philippine courts would do well to adopt the first and most basic rule in most legal
systems, namely, to allow the parties to select the law applicable to their contract,
subject to the limitation that it is not against the law, morals, or public policy of the
forum and that the chosen law must bear a substantive relationship to the
transaction. [48]
It must be noted that the service contract between SOB and VPECI contains no
express choice of the law that would govern it. In the United States and Europe, the
two rules that now seem to have emerged as "kings of the hill" are (1) the parties
may choose the governing law; and (2) in the absence of such a choice, the
applicable law is that of the State that "has the most significant relationship to the
transaction and the parties."[49] Another authority proposed that all matters
relating to the time, place, and manner of performance and valid excuses for nonperformance are determined by the law of the place of performance or lex loci
solutionis, which is useful because it is undoubtedly always connected to the
contract in a significant way.[50]
In this case, the laws of Iraq bear substantial connection to the transaction, since
one of the parties is the Iraqi Government and the place of performance is in Iraq.
Hence, the issue of whether respondent VPECI defaulted in its obligations may be
determined by the laws of Iraq. However, since that foreign law was not properly
pleaded or proved, the presumption of identity or similarity, otherwise known as the
processual presumption, comes into play. Where foreign law is not pleaded or, even
if pleaded, is not proved, the presumption is that foreign law is the same as ours.
[51]
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: \"In
reciprocal obligations, neither party incurs in delay if the other party does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him."
Default or mora on the part of the debtor is the delay in the fulfillment of the
prestation by reason of a cause imputable to the former. [52] It is the nonfulfillment of an obligation with respect to time.[53]
It is undisputed that only 51.7% of the total work had been accomplished. The
48.3% unfinished portion consisted in the purchase and installation of electromechanical equipment and materials, which were available from foreign suppliers,
thus requiring US Dollars for their importation. The monthly billings and payments
made by SOB[54] reveal that the agreement between the parties was a periodic
payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. [55] The payments were, in turn, to be used by
the contractor to finance the subsequent phase of the work. [56] However, as
explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the
payment by SOB purely in Dinars adversely affected the completion of the project;
thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment
billings of the Contractor purely in Iraqi Dinars and which payment came only after
some delays.
5. SOB is fully aware of the following:
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign
currency (US$), to finance the purchase of various equipment, materials, supplies,
tools and to pay for the cost of project management, supervision and skilled labor
not available in Iraq and therefore have to be imported and or obtained from the
Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the
remittance into the Philippines of 70% of the salaries of Filipino workers working
abroad in US Dollars;
5.5 That the Iraqi Dinar is not a freely convertible currency such that the same
cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available
in Iraq and therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui
Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium of acquisition.
8. Following the approved construction program of the CONTRACT, upon completion
of the civil works portion of the installation of equipment for the building, should
immediately follow, however, the CONTRACT specified that these equipment which
are to be installed and to form part of the PROJECT have to be procured outside
Iraq since these are not being locally manufactured. Copy f the relevant portion of
the Technical Specification is hereto attached as Annex \"C\" and made an integral
part hereof;
10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June
1985. SOB is informed of the developments of this negotiation, attached is a copy of
the draft of the loan Agreement between SOB as the Borrower and Agent. The
Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito
A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito
All'Exportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto
attached as Annex \"D\" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle
International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the loan to SOB
shall be deferred indefinitely, a copy of the letter of Circle International together

with the news clippings are hereto attached as Annexes \"F\" and \"F-1\",
respectively.[57]
As found by both the Court of Appeals and the trial court, the delay or the noncompletion of the Project was caused by factors not imputable to the respondent
contractor. It was rather due mainly to the persistent violations by SOB of the terms
and conditions of the contract, particularly its failure to pay 75% of the
accomplished work in US Dollars. Indeed, where one of the parties to a contract
does not perform in a proper manner the prestation which he is bound to perform
under the contract, he is not entitled to demand the performance of the other party.
A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings
in purely Iraqi Dinars did not render impossible the performance of the Project by
VPECI. Such posture is quite contrary to its previous representations. In his 26
March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA),
DFA, Manila, petitioner's Executive Vice-President Jesus M. Taedo stated that while
VPECI had taken every possible measure to complete the Project, the war situation
in Iraq, particularly the lack of foreign exchange, was proving to be a great
obstacle; thus:

demandable of the principal debtor.

As found by the Court of Appeals, the petitioner fully knew that the joint venture
contractor had collectibles from SOB which could be set off with the amount covered
by the performance guarantee. In February 1987, the OMEAA transmitted to the
petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in
Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign
Affairs stating that the past due obligations of the joint venture contractor from the
petitioner would \"be deducted from the dues of the two contractors.\"[64]
Also, in the project situationer attached to the letter to the OMEAA dated 26 March
1987, the petitioner raised as among the arguments to be presented in support of
the cancellation of the counter-guarantee the fact that the amount of
ID281,414/066 retained by SOB from the Project was more than enough to cover
the counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

The Iraqi Government does not have the foreign exchange to fulfill its contractual

VPECI has taken every possible measure for the completion of the project but the
war situation in Iraq particularly the lack of foreign exchange is proving to be a
great obstacle. Our performance counterguarantee was called last 26 October 1986
when the negotiations for a foreign currency loan with the Italian government
through Banco de Roma bogged down following news report that Iraq has defaulted
in its obligation with major European banks. Unless the situation in Iraq is improved
as to allay the bank's apprehension, there is no assurance that the project will ever
be completed. [58]
In order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3) that the creditor requires the
performance because it must appear that the tolerance or benevolence of the
creditor must have ended. [59]
As stated earlier, SOB cannot yet demand complete performance from VPECI
because it has not yet itself performed its obligation in a proper manner, particularly
the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot
yet be said to have incurred in delay. Even assuming that there was delay and that
the delay was attributable to VPECI, still the effects of that delay ceased upon the
renunciation by the creditor, SOB, which could be implied when the latter granted
several extensions of time to the former. [60] Besides, no demand has yet been
made by SOB against the respondent contractor. Demand is generally necessary
even if a period has been fixed in the obligation. And default generally begins from
the moment the creditor demands judicially or extra-judicially the performance of
the obligation. Without such demand, the effects of default will not arise.[61]
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that
is, it cannot be compelled to pay the creditor SOB unless the property of the debtor
VPECI has been exhausted and all legal remedies against the said debtor have been
resorted to by the creditor.[62] It could also set up compensation as regards what
the creditor SOB may owe the principal debtor VPECI.[63] In this case, however, the
petitioner has clearly waived these rights and remedies by making the payment of
an obligation that was yet to be shown to be rightfully due the creditor and

obligations

of

paying

75%

of

progress

billings

in

US

dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from
the proposed project is more than the amount of the outstanding counterguarantee.
[65]
In a nutshell, since the petitioner was aware of the contractor's outstanding
receivables from SOB, it should have set up compensation as was proposed in its
project situationer.
Moreover, the petitioner was very much aware of the predicament of the
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was mainly due
to SOB's violation of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity
committed against a Filipino contractor. It is for this reason that we are constrained
to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim
that it has paid Rafidain Bank but possibly averting such an event. As any payment
effected by the banks will complicate matters, we cannot help underscore the
urgency of VPECI's bid for government intervention for the amicable termination of
the contract and release of the performance guarantee. [66]
But surprisingly, though fully cognizant of SOB's violations of the service contract
and VPECI's outstanding receivables from SOB, as well as the situation obtaining in
the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the

second layer guarantor not only the full amount of the performance bond counterguarantee but also interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure
reimbursement from the respondents for what it has paid under Letter of Guarantee
No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter[67]
and would be legally subrogated to the rights which the creditor has against the
debtor.[68] However, a person who makes payment without the knowledge or
against the will of the debtor has the right to recover only insofar as the payment
has been beneficial to the debtor.[69] If the obligation was subject to defenses on
the part of the debtor, the same defenses which could have been set up against the
creditor can be set up against the paying guarantor.[70]

No pronouncement as to costs.
SO ORDERED.

11. LIRAG TEXTILE MILLS, INC. and BASILIO L. LIRAG, petitioners, vs. SOCIAL
SECURITY SYSTEM and HON. PACIFICO DE CASTRO, respondents.
G.R. No. L-33205 | 1987-08-31
DECISION
FERNAN, J.:

From the findings of the Court of Appeals and the trial court, it is clear that the
payment made by the petitioner guarantor did not in any way benefit the principal
debtor, given the project status and the conditions obtaining at the Project site at
that time. Moreover, the respondent contractor was found to have valid defenses
against SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in this case. And
even if the deed of undertaking and the surety bond secured petitioner's guaranty,
the petitioner is precluded from enforcing the same by reason of the petitioner's
undue payment on the guaranty. Rights under the deed of undertaking and the
surety bond do not arise because these contracts depend on the validity of the
enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the
debtor VPECI should have, in the first place, defaulted in its obligation and that the
creditor SOB should have first made a demand from the principal debtor. It is only
when the debtor does not or cannot pay, in whole or in part, that the guarantor
should pay.[71] When the petitioner guarantor in this case paid against the will of
the debtor VPECI, the debtor VPECI may set up against it defenses available against
the creditor SOB at the time of payment. This is the hard lesson that the petitioner
must learn.
As the government arm in pursuing its objective of providing \"\"he necessary
support and assistance in order to enable \" [Filipino exporters and contractors to
operate viably under the prevailing economic and business conditions,"[72] the
petitioner should have exercised prudence and caution under the circumstances. As
aptly put by the Court of Appeals, it would be the height of inequity to allow the
petitioner to pass on its losses to the Filipino contractor VPECI which had sternly
warned against paying the Al Ahli Bank and constantly apprised it of the
developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of
merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302 is
AFFIRMED.

This is an appeal by certiorari involving purely questions of law from the decision
rendered by respondent judge in Civil Case No. Q-12275 entitled "Social Security
System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."
The antecedent facts, as stipulated by the parties during the trial, are as follows:
"1. That on September 4, 1961, the plaintiff [herein respondent Social Security
System] and the defendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio
Lirag entered into a Purchase Agreement under which the plaintiff agreed to
purchase from the said defendant preferred shares of stock worth ONE MILLION
PESOS [P1,000,000.00] subject to the conditions set forth in such agreement; . . .
"2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff, on
January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE
HUNDRED THOUSAND PESOS [P500,000.00] for which the said defendant issued to
plaintiff 5,000 preferred shares with a par value of one hundred pesos [P100.00]
per share as evidenced by stock Certificate No. 128; . . .
"3. That further in pursuance of the Purchase Agreement of September 4, 1961, the
plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE HUNDRED THOUSAND
PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000
preferred shares with a par value of one hundred pesos [P100.00] per share as
evidenced by Stock Certificate No. 139; . . .
"4. That in accordance with paragraph 3 of the Purchase Agreement of September
4, 1961 which provides for the repurchase by the Lirag Textile Mills, Inc. of the
shares of stock at regular intervals of one year beginning with the 4th year following
the date of issue, Stock Certificates Nos. 128 and 139 were to be repurchased by
the Lirag Textile Mills, Inc. thus:
CERT. NO. AMOUNT DATE OF REDEMPTION
128 P100,000.00 February 14, 1965

100,000.00 February 14, 1966

100,000.00 February 14, 1967
100,000.00 February 14, 1968
100,000.00 February 14, 1969
139 P 100,000.00 July 3, 1966
100,000.00 July 3, 1967
100,000.00 July 3, 1968
100,000.00 July 3, 1969
100,000.00 July 3, 1970
"5. That to guarantee the redemption of the stocks purchased by the plaintiff, the
payment of dividends, as well as the other obligations of the Lirag Textile Mills, Inc.,
defendants Basilio L. Lirag signed the Purchase Agreement of September 4, 1961
not only as president of the defendant corporation, but also as surety so that should
the Lirag Textile Mills, Inc. fail to perform any of its obligations in the said Purchase
Agreement, the surety shall immediately pay to the vendee the amounts then
outstanding pursuant to Condition No. 4, to wit:
'To guarantee the redemption of the stocks herein purchased, the payment of the
dividends, as well as other obligations of the VENDOR herein, the SURETY hereby
binds himself jointly and severally liable with the VENDOR so that should the
VENDOR fail to perform any of its obligations hereunder, the SURETY shall
immediately pay to the VENDEE the amounts then outstanding.'
"6. That defendant corporation failed to redeem certificates of Stock Nos. 128 and
139 by payment of the amounts mentioned in paragraph 4 above;
"7. That the Lirag Textile Mills, Inc. has not paid dividends in the amounts and
within the period set forth in paragraph 10 of the complaint; *
"8. That letters of demands have been sent by the plaintiff to the defendant to
redeem the foregoing stock certificates and pay the dividends set forth in paragraph
10 of the complaint, but the Lirag Textile Mills, Inc. has not made such redemption
nor made such dividend payments;
"9. That defendant Basilio L. Lirag likewise received letters of demand from the
plaintiff requiring him to make good his obligation as surety;
"10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag,
Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no
dividends have been paid on said stock certificates;
"11. That paragraph 5 of the Purchase Agreement provides that should the Lirag
Textile Mills, Inc. fail to effect any of the redemptions stipulated therein, the entire
obligation shall immediately become due and demandable and the Lirag Textile Mills,
Inc., shall, furthermore, be liable to the plaintiff in an amount equivalent to twelve
per cent [12%] of the amount then outstanding as liquidated
damages;

"12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing
certificates of stock and pay dividends thereon were due to financial reverses, to
wit:
[a] Unrestrained smuggling into the country of textiles from the United States and
other countries;
[b] Unrestricted entry of supposed remnants which competed with textiles of
domestic produce to the disadvantage and economic prejudice of the latter;
[c] Scarcity of money and the unavailability of financing facilities;
[d] Payment of interest on matured loans extended to defendant corporation:
[e] Construction of the Montalban plant of the defendant corporation financed
largely through reparation benefits;
[f] Labor problems occasioned by the fact that the defendant company is financial
(sic) unable to improve, in a substantial way, the economic plight of its workers as a
result of which two costly strikes had occurred, one in 1965 and another in 1968;
and
[g] The occurrence of a fire which destroyed more than P1 million worth of raw
cotton, paralyzed operations partially, increased overhead costs and wiped out any
expected profits that year;
"13. That it has been the policy of the plaintiff to be represented in the board of
directors of the corporation or entity which has obtained financial assistance from
the System be it in terms of loans, mortgages or equity investments. Thus,
pursuant to paragraph 6 of the Purchase Agreement of September 4, 1961 which
provides as follows:
'The VENDEE shall be allowed to have a representative in the Board of Directors of
the VENDOR with the right to participate in the discussions and to vote therein;'
"14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each
issued one common share of stock as a qualifying share to their election to the
Board of Directors of the Lirag Textiles Mills, Inc.;
"15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their
respective tenure as member of the Board of Directors of the Lirag Textile Mills, Inc.
attended the meetings of the said Board, received per diems for their attendance
therein in the same manner and in the same amount as any other member of the
Board of Directors, participated in the deliberations therein and freely exercised
their right to vote in such meetings. However, the per diems received by the SSS
representative do not go to the coffers of the System but personally to the
representative in the said board of directors." 1

For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of
the Purchase Agreement, the SSS filed an action for specific performance and
damages before the then Court of First Instance of Rizal, Quezon City, praying that
therein defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for
[1] the entire obligation of P1M which became due and demandable upon
defendants' failure to repurchase the stocks as scheduled; [2] dividends in the
amount of P220,000.00; [3] liquidated damages in an amount equivalent to twelve
percent (12%) of the amount then outstanding; [4] exemplary damages in the
amount of P100,000.00 and [5] attorney's fees of P20,000.00.
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint,
but were denied the relief sought. Thus, they filed their answer with counterclaim,
denying the existence of any obligation on their part to redeem the preferred
stocks, on the ground that the SSS became and still is a preferred stockholder of
the corporation so that redemption of the shares purchased depended upon the
financial ability of said corporation. Insofar as defendant Basilio Lirag is concerned,
it was alleged that his liability arises only if the corporation is liable and does not
perform its obligations under the Purchase Agreement. They further contended that
no liability on their part has arisen because of the financial condition of the
corporation upon which such liability was made to depend, particularly the nonrealization of any profit or earned surplus. Thus, the other claims for dividends,
liquidated damages and exemplary damages are allegedly without basis.
After entering into the Stipulation of Facts above-quoted, the parties filed their
respective memoranda and submitted the case for decision.
The lower court, ruling that the purchase agreement was a debt instrument, decided
in favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS
jointly and severally P1,000,000.00 plus legal interest until the said amount is fully
paid; P220,000.00 representing the 8% per annum dividends on the preferred
shares plus legal interest up to the time of actual payment; P146,400.00 as
liquidated damages; and P10,000.00 as attorney's fees. The counterclaim of Lirag
Textile Mills, Inc. and Basilio L. Lirag was dismissed.
Hence, this petition.
Petitioners assign the following errors:
1. The trial court erred in deciding that the Purchase Agreement is a debt
instrument;
2. Respondent judge erred in holding petitioner corporation liable for the payment of
the 8% preferred and cumulative dividends on the preferred shares since the
purchase agreement provides that said dividends shall be paid from the net profits
and earned surplus of petitioner corporation and respondent SSS has admitted that
due to losses sustained since 1964, no dividends had been and can be declared by
petitioner corporation;

3. Respondent judge erred in sentencing petitioners to pay P146,400.00 in

liquidated damages;
4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by way of
attorney's fees;
5. Respondent judge erred in sentencing petitioners to pay interest from the time of
filing the complaint up to the time of full payment both on the P1,000,000.00
invested by respondent SSS in petitioner's corporation and on the P220,000.00
which the SSS claims as dividends due on its investments;
6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the
P1,000,000.00 worth of preferred shares purchased by respondent SSS from
petitioner corporation and the 8% cumulative dividend, it appearing that Lirag was
merely a surety and not an insurer of the obligation;
7. Respondent judge erred in dismissing the counterclaim of petitioners.
The fundamental issue in this case is whether or not the Purchase Agreement
entered into by petitioners and respondent SSS is a debt instrument.
Petitioners claim that respondent SSS merely became and still is a preferred
stockholder of the petitioner corporation, the redemption of the shares purchased
by said respondent being dependent upon the financial ability of petitioner
corporation. Petitioner corporation, thus, has no obligation to redeem the preferred
stocks.
On the other hand, respondent SSS claims that the Purchase Agreement is a debt
instrument, imposing upon the petitioners the obligation to pay the amount owed,
and creating as between them the relation of creditor and debtor, not that of a
stockholder and a corporation.
We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt
instrument. Its terms and conditions unmistakably show that the parties intended
the repurchase of the preferred shares on the respective scheduled dates to be an
absolute obligation which does not depend upon the financial ability of petitioner
corporation. This absolute obligation on the part of petitioner corporation is made
manifest by the fact that a surety was required to see to it that the obligation is
fulfilled in the event of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred shares at the
specified dates constitutes a debt which is defined "as an obligation to pay money at
some fixed future time, or at a time which becomes definite and fixed by acts of
either party and which they expressly or impliedly, agree to perform in the contract.
2
A stockholder sinks or swims with the corporation and there is no obligation to
return the value of his shares by means of repurchase if the corporation incurs
losses and financial reverses, much less guarantee such repurchase through a

surety.
As private respondent rightly contends, if the parties intended it [SSS] to be merely
a stockholder of petitioner corporation, it would have been sufficient that Preferred
Certificates Nos. 128 and 139 were issued in its name as the preferred certificates
contained all the rights of a stockholder as well as certain obligations on the part of
petitioner corporation. However, the parties did in fact execute the Purchase
Agreement, at the same time that the petitioner corporation issued its preferred
stock to the respondent SSS. The Purchase Agreement serves to define the rights
and obligations of the parties and to establish firmly the liability of petitioners in
case of breach of contract. The Certificates of Preferred Stock serve as additional
evidence of the agreement between the parties, though the precise terms and
conditions thereof must be read together with, and regarded as qualified by the
terms and conditions of the Purchase Agreement.
The rights given by the Purchase Agreement to respondent SSS are rights not
enjoyed by ordinary stockholders. This fact could only lead to the conclusion made
by the trial court that:
"The aforementioned rights specially stipulated for the benefit of the plaintiff
[respondent SSS] suggest eloquently an intention on the part of the plaintiff
[respondent SSS] to facilitate a loan to the defendant corporation upon the latter's
request. In order to afford protection to the plaintiff which otherwise is provided by
means of collaterals, as the plaintiff exacts in its grants of loans in its ordinary
transactions of this kind, as it is looked upon more as a lending institution rather
than as in investing agency, the purchase agreement supplied these protective
rights which would otherwise be furnished by collaterals to the loan. Thus, the
membership in the board is to have a watchdog in the operation of the business of
the corporation, so as to insure against mismanagement which may result in losses
not entirely unavoidable since payment for purposes of redemption as well as the
dividends is expressly stipulated to come from profits and or surplus. Such a right is
never exacted by an ordinary stockholder merely investing in the corporation." 3
Moreover, the Purchase Agreement provided that failure on the part of petitioner to
repurchase the preferred shares on the scheduled due dates renders the entire
obligation due and demandable, with petitioner in such eventuality liable to pay
12% of the then outstanding obligation as liquidated damages. These features of
the Purchase Agreement, taken collectively, clearly show the intent of the parties to
be bound therein as debtor and creditor, and not as corporation and stockholder.
Petitioners' contention that it is beyond the power and competence of petitioner
corporation to redeem the preferred shares or pay the accrued dividends due to
financial reverses can not serve as legal justification for their failure to perform
under the Purchase Agreement. The Purchase Agreement constitutes the law
between the parties and obligations arising ex contractu must be fulfilled in
accordance with the stipulations. 4 Besides, it was precisely this eventuality that
was sought to be avoided when respondent SSS required a surety for the
obligation.

Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner
corporation's default. As surety, Basilio L. Lirag is bound immediately to pay
respondent SSS the amount then outstanding.
"The obligation of a surety differs from that of a guarantor in that the surety insures
the debt, whereas the guarantor merely insures solvency of the debtor; and the
surety undertakes to pay if the principal does not pay, whereas a guarantor merely
binds itself to pay if the principal is unable to pay." 5
On the liability of petitioners to pay 8% cumulative dividend, We agree with the
observation of the lower court that the dividends stipulated by the parties served
evidently as interests. 6 The amount thereof was fixed at 8% per annum and was
not made to depend upon or to fluctuate with the amount of profits or surplus
realized, a clear indication that the parties intended to give a sure and fixed
earnings on the principal loan. The fact that the dividends were supposed to be paid
out of net profits and earned surplus, of which there were none, does not excuse
petitioners from the payment thereof, again for the reason that the undertaking of
petitioner Basilio L. Lirag as surety, included the payment of dividends and other
obligations then outstanding.
The award of the sum of P146,400.00 in liquidated damages representing 12% of
the amount then outstanding is correct, considering that petitioners in the
stipulation of facts admitted having failed to fulfill their obligations under the
Purchase Agreement. The grant of liquidated damages in the amount stated is
expressly provided for in the Purchase Agreement in case of contractual breach.
The pronouncement of the lower court for the payment of interests on both the
unredeemed shares and unpaid dividends is also in order. Per stipulation of facts,
petitioners did not deny the fact of non-payment of dividends nor their failure to
purchase the preferred shares. Since these involve sums of money which are
overdue, they are bound to earn legal interest from the time of demand, in this
case, judicial, i.e., the time of filing the action.
Petitioner Basilio L. Lirag is precluded from denying his liability under the Purchase
Agreement. After his firm representation to "pay immediately to the VENDEE the
amounts then outstanding" evidencing his commitment as SURETY, he is estopped
from denying the same. His signature in the agreement carries with it the official
imprimatur as petitioner corporation's president, in his personal capacity as majority
stockholder, as surety and as solidary obligor. The essence of his obligation as
surety is to pay immediately without qualification whatsoever if petitioner
corporation does not pay. To have another interpretation of petitioner Lirag's liability
as surety would violate the integrity of the Purchase Agreement as well as the clear
and unmistakable intent of the parties to the same.
WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security
System vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto.
Costs against petitioners.

SO ORDERED.

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.

12. ANTONIO GARCIA, JR., petitioner, vs. COURT OF APPEALS, LASAL

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.

DEVELOPMENT CORPORATION, respondents.

G.R. No. 80201 | 1990-11-20
DECISION
CRUZ, J.:
On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the
Philippine Investments Systems Organization (PISO) two loans for P2,500,000.00
and P1,000,000.00 for which it issued the corresponding promissory notes payable
on May 30, 1977. On the same date, Antonio Garcia and Ernest Kahn executed a
surety agreement binding themselves jointly and severally for the payment of the
loan of P2,500,000.00 on due date.
Upon failure of WMC to pay after repeated demands, demand was made on Garcia
pursuant to the surety agreement. Garcia also failed to pay. Hence, on April 5,
1983, Lasal Development Corporation (to which the credit had been assigned earlier
by PISO) sued Garcia for recovery of the debt in the Regional Trial Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint
stated no cause of action; (b) the suit would result in unjust enrichment of the
plaintiff because he had not received any consideration from PISO; (c) the surety
agreement violated the doctrine of the limited liability of corporations; and (d) the
principal obligation had been novated.
After considering the arguments and evidence of the parties, the trial court granted
the motion and dismissed the complaint on the ground that the surety agreement
was invalid for absence of consideration.
The plaintiff moved for reconsideration and when this was denied elevated the
matter to the Court of Appeals. In a decision dated June 23, 1987, the respondent
court reversed Judge Jesus M. Elbinias and remanded the records of the case for
trial on the merits. Garcia then came to this Court in this petition for review on
certiorari, pleading the same arguments raised in the trial court.
The petitioner's first ground is that, as found by the trial court, the surety
agreement was invalid because no consideration had been paid to him by PISO for
executing the contract and that the amount of the entire loan had been received
and enjoyed by WMC. He cites the following articles of the Civil Code in support of
his contention that lack of consideration was a personal defense available to him as
surety:

Art. 1222. A solidary debtor may, in action 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.
The point is not well taken in view of the nature and purpose of a surety
agreement.
Suretyship is a contractual relation resulting from an agreement whereby one
person, the surety, engages to be answerable for the debt, default or miscarriage of
another, known as the principal. The surety's obligation is not an original and direct
one for the performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; 1 in other words, he is directly and equally
bound with the principal. The surety therefore becomes liable for the debt or duty of
another although he possesses no direct or personal interest over the obligations
nor does he receive any benefit therefrom. 2
The peculiar nature of a surety agreement is that it is regarded as valid despite the
absence of any direct consideration received by the surety either from the principal
obligor or from the creditor. A contract of surety, like any other contract, must
generally be supported by a sufficient consideration.
However, the consideration necessary to support a surety obligation need not pass
directly to the surety; a consideration moving to the principal alone will suffice.
It has been held that if the delivery of the original contract is contemporaneous with
the delivery of the surety's obligation, each contract becomes completed at the
same time, and the consideration which supports the principal contract likewise
supports the subsidiary one. 3 And this is the kind of surety contract to which the
rule of strict construction applies as opposed to a compensated surety contract
undertaken by surety corporations which are organized for the purpose of
conducting an indemnity business at established rates and compensation unlike an
ordinary surety agreement where the surety binds his name through motives of
friendship and accomodation. 4

It follows from the above principles that Lasal would not be unjustly enriched if the
petitioner were to be held liable for the obligation contracted by WMC. The creditor
would only be recovering the amount of its loan plus its increments.
The petitioner, for his part, can still go against WMC for the amount he may have to
pay Lasal as assignee of the PISO credit.

Art. 2079. An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. The mere failure on the part of the creditor
to demand payment after the debt has become due does not of itself constitute any
extension of time referred to herein.
However, Paragraph 5 of the surety agreement clearly stipulated as follows:

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC,
the surety agreement shows that he signed the same not in representation of WMC
or as its president but in his personal capacity. He is therefore personally bound.
There is no law that prohibits a corporate officer from binding himself personally to
answer for a corporate debt. While the limited liability doctrine is intended to protect
the stockholder by immunizing him from personal liability for the corporate debts,
he may nevertheless divest himself of this protection by voluntarily binding himself
to the payment of the corporate debts. The petitioner cannot therefore take refuge
in this doctrine that he has by his own acts effectively waived.
Concerning the issue of novation, we note first the following provisions of the
memorandum of agreement supposedly entered into by WMC and its creditors which
the petitioner argues had the effect of releasing him from the surety agreement:
IV. Release of JSS
The CREDITORS expressly agree to release and hereby release the Joint and
Several Signatories (JSS) of MINOLCO's officers from any liability whatsoever on the
obligations which they have personally guaranteed or secured. Any action therefore
against all the aforesaid signatories are waived in view of the promissory notes to
be issued by NDC which are fully and unconditionally guaranteed by the Philippine
Government, in payment of MINOLCO's obligations to said CREDITORS.
xxx xxx xxx
VI. The CREDITORS who have filed cases in court against MINOLCO and who are
signatories to this agreement agree to dismiss the case with prejudice, accepting
the repayment scheme set forth in paragraph II as a just and equitable procedure
for collecting their credits.
Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as
chairman of the board of directors of WMC and does not carry the signature of any
of the creditors. 5 Hence, it has no binding force whatsoever on such creditors.
The petitioner cites other developments or transactions between the parties to the
original loans that he contends had the effect of novating the said contracts and
consequently extinguished the surety agreement. Among these are the extension of
the original period of payment and the compounding of the interest on the principal
obligations, both of which operated to the prejudice of the petitioner.
The petitioner invokes Article 2079 of the Civil Code, which provides:

The sureties expressly waive all rights to demand payment and notice of nonpayment and protest, and agree that the securities of every kind, that now or may
hereafter be left with the lender, its successors, indorsees or assigns, as collateral,
for the said loan, or any evidence of debt or obligations, or upon which a lien may
exist may be withdrawn or surrendered at any time, and the time of payment
thereof extended, without notice to or consent by the sureties, and the liability on
this suretyship shall be solidary, direct and immediate and not contingent upon any
pursuit by the lender, its successors, indorsees or assigns, of whatever remedies the
lender may have against the principal or the securities or liens it may possess.
Since in the surety contract, the petitioner not only consented to an extension in the
payment of the obligation but even waived his right to be notified of such extension,
he cannot now claim that he has been released from his undertaking because of the
extension granted to the principal.
As for the compounded interest, we apply by analogy the case of Bank of the
Philippine Islands v. Gooch and Redfern, 6 which was affirmed in the later case of
the Bank of the Philippine Islands v. Albaladejo & Cia. 7 In the said cases, the
respective sureties claimed that since the creditor changed the rate of interest in
the principal obligation without their knowledge or consent, they were relieved from
liability under their contract. It was held, however, that the change in the rate of
interest was merely a collateral agreement between the creditor bank and the
principal debtor that did not affect the surety. When the debtor promised to pay the
extra rate of interest on demand of the plaintiff, the liability he assumed was his
alone and was separate and apart from the original contract. His agreement to pay
the additional rate of interest was an additional burden upon him and him only. That
obligation in no way affected the original contract of the surety, whose liability
remained unchanged. 8
Thus, despite the compounding of the interest, the liability of the surety remains
only up to the original uncompounded interest, as stipulated in the promissory note,
that is, 17% per annum, with a penalty charge of 2 1/2% per month until full
payment.
The petitioner cites other supposed agreements in support of his theory of novation
such as the prepayment of the restructured loans of WMC before the distribution of
dividends to the common stockholders, the proposed sale on installments of its
assets to Negros Occidental Copperfield Mines, and the preference given to other
creditors of WMC over PISO. But we do not think these are material as, to be so, the
alteration must change the legal effects of the original contract. The alleged

alterations do not have that effect.

It is axiomatic, and only fair, that the creditors of a corporation must be paid first
before dividends may be distributed among the stockholders. Unsecured creditors
are given preference in bankruptcy or insolvency proceedings because secured
creditors can after all go against the security given by the debtor. As for the
installment sale of WMC's assets to Negros Occidental Copperfield Mines, which
might make it difficult for the petitioner to recover any amount it may have to pay
on the loan of WMC, this was a risk he took when he signed the surety agreement.
As it did not prohibit the alienation of the properties of the principal debtor, the sale
to Negros cannot be considered a novation of the original agreement. In fact, the
proposed sale was intended precisely to enable WMC to meet its pending
obligations.

effect, what DBP did was merely to restructure its credit with WMC and make
additional accommodations in the form of investments on preferred and common
shares of stock of WMC. It was clearly an effort to assist WMC perform its
obligations with its creditors. But not more than that.
Concerning the promissory notes supposedly issued by NDC to the creditors of WMC
and with the full and unconditional guaranty of the Philippine Government as
contained in Annex 5, suffice it to repeat that such Annex 5 (memorandum of
agreement between WMC and DBP), as well as Annex 6 (addendum to Annex 5,
making NOCOMIN, instead of NDC as the buyer) and Annex 7 (contract of sale
between WMC and NOCOMIN), are all not signed by the contracting parties and
therefore have no evidentiary weight or binding force.
We approve the following observations made by the Court of Appeals:

The most important argument against the alleged novation is the failure of the
petitioner to establish the validity of the new contract, an essential requisite for the
novation of a previous valid obligation. Petitioner insists that the various
communications made by WMC with DBP, together with the memorandum of
agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made
by WMC with all its creditors, including DBP. We do not think so.
It is true as a general rule no form of words or writing is necessary to give effect to
a novation. 9 Nevertheless, since the parties involved here are corporations, it must
first be proved that the contracts, assuming they were made, were executed by the
persons possessing the proper authority to bind their respective principals. Annexes
1-4 are a mere exchange of correspondence between the officers of WMC and DBP.
Although they contain the provisions and proposals that, according to petitioner,
should suffice to establish that the original contract between WMC and PISO has
been materially altered, they cannot be considered per se sufficient to give rise to a
valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant
Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the Office
of the Chief Legal Counsel for the preparation and execution of the necessary legal
documents to cover the approval and confirmation of the several proposals made.
No such documents, as duly signed by the parties, were ever presented in court.
Annexes 5 to 7 10 are also incomplete documents and not binding without the
signatures of the supposed contracting parties.
The argument of subrogation cannot be considered at this stage as it is being
invoked only now. It is settled that an issue not raised in the court a quo cannot be
raised for the first time on appeal because this would be offensive to the basic rules
of fair play. 11
As for the alleged substitution of debtors, nowhere in the record can we find
evidence of this claim. The commitment made by DBP to the creditors of WMC was
that, although they had a first mortgage lien over substantially all the assets of
WMC (which if foreclosed would leave most of its creditors without recourse), they
would nevertheless defer proceedings against those assets and instead allow their
sale to NDC (with better terms) to enable WMC to meet the obligations. 12 In

Novation of contract cannot be presumed. In order that an obligation may be

extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other (Art. 1292, Civil Code). In every novation there
are four essential requisites. (1) a previous valid obligation; (2) the agreement of all
the parties to the new contract; (3) the extinguishment of the old contract; and (4)
validity of the new one. Novation requires the creation of new contractual relations
as well as the extinguishment of the old. There must be a consent of all the parties
to the substitution, resulting in the extinction of the old obligation and the creation
of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the
promissory note by the plaintiff is not novation of the contract. The legal doctrine is
that an obligation to pay a sum of money is not novated in a new instrument by
changing the term of payment and adding other obligations not incompatible with
the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider an
obligation novated as in the case at bar by the mere granting of extension of
payment which did not even alter its essence. To sustain novation necessitates that
the same be so declared in unequivocal terms or that there is complete and
substantial incompatibility between the two obligations (Sandico v. Paquing, 42
SCRA 322). An obligation to pay a sum of money is not novated in a new instrument
wherein the old is ratified by changing only the terms of payment and adding other
obligations not incompatible with the old one or wherein the old contract is merely
supplementing the new one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA
1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial
Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance
Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985).
WHEREFORE, the petition is DENIED and the challenged decision of the respondent
court AFFIRMED, with costs against the petitioner.
SO ORDERED.

13. WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,

obligation to Atrium Capital.

vs. HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

On the other hand, Willex Plastic denied the material allegations of the complaint
and interposed the following Special Affirmative Defenses:

G.R. No. 103066 | 1996-04-25

(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's
liability is extinguished due to the accidental fire that destroyed its premises, which
liability is covered by sufficient insurance assigned to plaintiff;

MENDOZA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in
C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex
Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and
severally, to pay private respondent International Corporate Bank certain sums of
money, and the appellate court's resolution of October 17, 1989 denying petitioner's
motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with
the Manila Banking Corporation. To secure payment of the credit accomodation,
Inter-Resin Industrial and the Investment and Underwriting Corporation of the
Philippines (IUCP) executed two documents, both entitled "Continuing Surety
Agreement" and dated December 1, 1978, whereby they bound themselves
solidarily to pay Manilabank "obligations of every kind, on which the [Inter-Resin
Industrial] may now be indebted or hereafter become indebted to the
[Manilabank]." The two agreements (Exhs. J and K) are the same in all respects,
except as to the limit of liability of the surety, the first surety agreement being
limited to US$333,830.00, while the second one is limited to US$334,087.00.

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its
account is now very much lesser than those stated in the complaint because of
some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only
secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the
principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case
then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the
right to present evidence for its failure to appear at the hearing despite due notice.
On the other hand, Willex Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their respective memoranda.

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries

Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in
consideration of the sum or sums obtained and/or to be obtained by Inter-Resin
Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly
and severally guaranteed "the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of
FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties
paid, Atrium filed this case in the court below against Inter-Resin Industrial and
Willex Plastic.

(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount
due.

On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the
latter had paid to Manilabank. It claimed, however, that it had already fully paid its

(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of
17% per annum from August 11, 1982, when Inter-Resin Industrial paid
P687,500.00 to the plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the
Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its
brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied on December 6, 1991:

The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin

Industrial's motion for reception of evidence because the situation or situations in
which we could exercise the power under BP 129 did not exist. Movant here has not
presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on
April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with
Inter-Resin Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-ininterest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety
Agreements" made on December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for
sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the
latter to Manilabank for the account of Inter-Resin Industrial. In support of this
contention Willex Plastic cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from
you and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to
secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank that the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted to
defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required
defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor
and a Continuing Guaranty which was signed by the other defendant WPIC [Willex
Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that
it had already paid its obligation in its entirety. On the other hand, Willex Plastic,
while denying the allegation in question, merely did so "for lack of knowledge or
information of the same." But, at the hearing of the case on September 16, 1986,
when asked by the trial judge whether Willex Plastic had not filed a crossclaim
against Inter-Resin Industrial, Willex Plastic's counsel replied in the negative and
manifested that "the plaintiff in this case [Interbank] is the guarantor and my client
[Willex Plastic] only signed as a guarantor to the guarantee." 2

For its part Interbank adduced evidence to show that the "Continuing Guaranty" had
been made to guarantee payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified
under cross examination by counsel for Willex Plastic that Willex "guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will later be made because
of the guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it relates.
4 At all events, Willex Plastic cannot now claim that its liability is limited to any
amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as
debtor because, by failing to object to the parol evidence presented, Willex Plastic
waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by
plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin
Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a
chattel mortgage in its favor and a Continuing Guaranty which was signed by the
defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required
defendant-appellants to sign a Continuing Guaranty." These factual findings of the
trial court and of the Court of Appeals are binding on us not only because of the rule
that on appeal to the Supreme Court such findings are entitled to great weight and
respect but also because our own examination of the record of the trial court
confirms these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin Industrial
may have obtained sums of money from Interbank. It can reasonably be assumed
that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a
"Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in
consideration of the loan obtained by IRIC [Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal obligation.
8 Its contention is based on the fact that it is not a party either to the "Continuing
Surety Agreement" or to the loan agreement between Manilabank and Interbank
Industrial.
Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a "guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be,
accruing to his principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the

purpose of having an additional capital for buying and selling coco-shell charcoal
and importation of activated carbon, the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement. The only condition that would make him
liable thereunder is that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." There is no doubt that Daicor is liable on the promissory
note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory
note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt
applied so as to secure payments made by Interbank under the two "Continuing
Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11
and Dio v. Court of Appeals 12 in support of its contention that a contract of
suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor
v. Canlas we held that a contract of suretyship "is not retrospective and no liability
attaches for defaults occurring before it is entered into unless an intent to be so
liable is indicated." There we found nothing in the contract to show that the paries
intended the surety bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in this case, the parties to the "Continuing
Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to
be obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties
could be held liable for an obligation contracted after the execution of the continuing
surety agreement. It was held that by its very nature a continuing suretyship
contemplates a future course of dealing. "It is prospective in its operation and is
generally intended to provide security with respect to future transactions." By no
means, however, was it meant in that case that in all instances a contrast of
guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a
contract of suretyship is ordinarily not to be construed as retrospective, in the end
the intention of the parties as revealed by the evidence is controlling. What was said
there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or
other contracts of suretyship are ordinarily not to be construed as retrospective, but
that rule must yield to the intention of the contracting parties as revealed by the
evidence, and does not interfere with the use of the ordinary tests and canons of
interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot possibly adopt the view of the
court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the

benefit of excussion. The Civil Code provides, however:

Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and
Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations.
This stipulation embodies an express renunciation of the right of excussion. In
addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under
the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from
you and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed by the
Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin
Industrial had been given generous opportunity to present its evidence but it failed
to make use of the same. On the otherhand, Willex Plastic rested its case without
presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26
and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of
Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for
the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial
court issued the following order:
Considering that, as shown by the records, the Court had exerted every earnest
effort to cause the service of notice or subpoena on the defendant Inter-Resin
Industrial but to no avail, even with the assistance of the defendant Willex the
defendant Inter-Resin Industrial is hereby deemed to have waived the right to
present its evidence.
On the other hand, Willex Plastic announced it was resting its case without

presenting any evidence.

Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order
and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved
for the postponement of the hearing be postponed to August 11, 1987. The hearing
was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on
October 13, 1987, this time upon motion of Interbank. To give Interbank time to
comment on a motion filed by Inter-Resin Industrial, the reception of evidence for
Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987.
However, Inter-Resin Industrial again moved for the postponement of the hearing.
Accordingly the hearing was reset on November 26 and December 11, 1987, with
warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22,
1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still
failed to present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however,
the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel
did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to
have waived the right to present its evidence.
On the other hand, Willex Plastic, as before, manifested that it was not presenting
evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.
SO ORDERED.

14. JACINTO UY DINO and NORBERTO UY, petitioners, vs. HON. COURT OF APPEALS
and METROPOLITAN BANK AND TRUST COMPANY, respondents.
G.R. No. 89775 | 1992-11-26
DECISION
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 of Appeals in CA-G.R. CV
No. 17729 1 which reversed the 2 December 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 respondent 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 obtained by UTEFS without the
participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document
denominated as 'Commercial Letter of Credit and Application.' 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 that 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 the former, drawn on and
accepted by UTEFS (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK a 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 entrustee, 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 nonoperational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendants 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 sureties-movants
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 suretiesdefendants 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, 1987, rendered its judgment, a
portion of which reads:
'The evidence and the pleadings, thus, pose the querry (sic):
'Are the defendants Jacinto Uy Dio and Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1979
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 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 Uy Tiam the 1979 Letter of 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 with 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. 333-334).'" 3

from July 18, 1987 until the whole monetary obligation is paid; and

xxx xxx xxx

SO ORDERED." 6

In its Decision, the trial court decreed as follows:

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.

"PREMISES CONSIDERED, judgment is hereby rendered:

'a) dismissing the COMPLAINT against JACINTO UY DI'O 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 DI'O 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.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DI'O 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

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.

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 that 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:
". . . 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 26 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., this 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 is 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 be known at the time the guaranty is executed. 8 This is
the basis for contracts denominated as a 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 s 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, of
for the account of the Borrower, either with or without security, and/or to purchase
or discount, or to make any loans or advances evidenced 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
BANK of any and all such instruments, 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
hereinbefore 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 Borrower 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 currency(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 HUNDRED 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 recept (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

his obligation, he is bound, and no farther. 17

The foregoing stipulations unequivocally reveal that the suretyship agreements 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.

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
bind 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

xxx xxx xxx

They further provide that:
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 obligations, 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

"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 interests, 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."
Interests 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 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 METROBANK 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 (531-82 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 extent of petitioners' liability. As
modified, petitioners JACINTO UY DI'O 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.

15. ATOK FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, SANYU

CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI, respondents.
G.R. No. 80078 | 1993-05-18
DECISION

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside the

Decision of the Court of Appeals which reversed a decision of the trial court ordering
private respondents to pay jointly and severally to petitioner Atok Finance certain
sums of money.
On 27 July 1979, private respondents Sanyu Chemical Corporation ("Sanyu
Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with
individual private stockholders of Sanyu Chemical, namely, private respondents
spouses Danilo E. Arrieta and Nenita B. Arrieta, Leopoldo G. Halili and Pablito
Bermundo as sureties, executed a Continuing Suretyship Agreement in favor of Atok
Finance as creditor. Under this Agreement, Sanyu Trading and the individual private
respondents who were officers and stockholders of Sanyu Chemical did:
"(1) For Valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called
Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor.
The word 'indebtedness' is used herein in its most comprehensive sense and
includes any and all advances, debts, obligations and liabilities of Principal or any
one or more of them, here[to]fore, now or hereafter made, incurred or created,
whether voluntary or involuntary and however arising, whether direct or acquired by
the Creditor by assignment or succession, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined and whether the
Principal may be liable individually or jointly with others, or whether recovery upon
such indebtedness may be or hereafter become barred by any statute of limitations,
or whether such indebtedness may be or otherwise become unenforceable." 1
(Emphasis supplied).
Other relevant provisions of the Continuing Suretyship Agreement follow:
"(2) This is a continuing suretyship relating to any indebtedness, including that
arising under successive transactions which shall either continue the indebtedness
from time to time or renew it after it has been satisfied. This suretyship is binding
upon the heirs, successors, executors, administrators and assigns of the surety, and
the benefits hereof shall extend to and include the successors and assigns of the
Creditor.
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be brought and
prosecuted against the Principal and whether or not the Principal be joined in any
such action or actions.
xxx xxx xxx
(6) In addition to all liens upon, and rights of set-off against the moneys, securities
or other property of the Surety given to the Creditor by law, the Creditor shall have
a lien upon and a right of set-off against all moneys, securities, and other property
of the Surety now or hereafter in the possession of the Creditor; and every such lien
or right of set-off may be exercised without need of demand upon or notice to the

Surety. No lien or right of set-off shall be deemed to have been waived by any act,
omission or conduct on the part of the Creditor, or by any neglect to exercise such
right of set-off or to enforce such lien, or by any delay in so doing, and every right
of set-off or lien shall continue in full force and effect until such right of set-off or
lien is specifically waived or released by an instrument in writing executed by the
Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby
subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor
so requests, such indebtedness of the Principal to the Surety shall be collected,
enforced and received by the Surety as trustee for the Creditor and shall be paid
over to the Creditor on account of the indebtedness of the Principal to the Creditor
but without reducing or affecting in any manner the liability of the Surety under the
other provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding
as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in
consideration of receipt from Atok Finance of the amount of P105,000.00. The
assigned receivables carried a standard term of thirty (30) days; it appeared,
however, that the standard commercial practice was to grant an extension of up to
one hundred twenty (120) days without penalties. The relevant portions of this
Deed of Assignment read as follows:
"1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and
ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts,
notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks,
negotiable instruments and evidences of indebtedness listed in the schedule forming
part hereinafter called `Contract' or 'Contracts.'
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does
hereby certify, warrant and represent that:
(a) He/It is the sole owner of the assigned Contracts free and clear of claims of any
other party except the herein ASSIGNEE and has the right to transfer absolute title
thereto the ASSIGNEE;
(b) Each assigned Contract is bonafide and the amount owing and to become due on
each contract is correctly stated upon the schedule or other evidences of the
Contract delivered pursuant thereto;
(c ) Each assigned Contract arises out of the sale of merchandise/s which has been
delivered and/or services which have been rendered and none of the Contract is
now, nor will at any time become, contingent upon the fulfillment of any contract or
condition whatsoever, or subject to any defense, offset or counterclaim;

(d) No assigned Contract is represented by any note or other evidence of

indebtedness or other security document except such as may have been endorsed,
assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the
assignment of such Contract;
(e) No agreement has been made, or will be made, with any debtor for any
deduction discount or return of merchandise, except as may be specifically noted at
the time of the assignment of the Contract;
(f) None of the terms or provisions of the assigned Contracts have been amended,
modified or waived;

claim upon the ground that such claim had prescribed under Article 1629 of the Civil
Code and for lack of cause of action. The private respondents contended that the
Continuing Suretyship Agreement, being an accessory contract, was null and void
since, at the time of its execution, Sanyu Chemical had no pre-existing obligation
due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to present
any evidence on their own behalf, although the individual private respondents
submitted a memorandum in support of their argument. After trial, on 1 April 1985,
the trial court rendered a decision in favor of Atok Finance. The dispositive portion
of this decision reads as follows:

(g) The debtor/s under the assigned Contract/s are solvent and his/its/their failure
to pay the assigned Contracts and/or any installment thereon upon maturity thereof
shall be conclusively considered as a violation of this warranty; and

"ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE

CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION,
DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO
HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff:

(h) Each assigned Contract is a valid obligation of the buyer of the merchandise
and/or service rendered under the Contract and that no Contract is overdue.

(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983
until the whole amount is fully paid;

The foregoing warranties and representations are in addition to those provided for in
the Negotiable Instruments Law and other applicable laws. Any violation thereof
shall render the ASSIGNOR immediately and unconditionally liable to pay the
ASSIGNEE jointly and severally with the debtors under the assigned contracts, the
amounts due thereon.

(2) P5,000.00 as attorney's fees; and

xxx xxx xxx

Private respondents went on appeal before the then Intermediate Appellate Court
("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was
raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March
1986, that Division dismissed the appeal upon the ground of abandonment, since
the private respondents had failed to file their appeal brief notwithstanding receipt
of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of
Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a
writ of execution to enforce the decision of the trial court of 1 April 1985. The trial
court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of
execution was served on private respondents. 6

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for
the ASSIGNEE all payments made upon the assigned contracts and shall remit to
the ASSIGNEE all collections on the said Contracts as follows:
P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until
November 1, 1982.
P110,550.00 balloon payment after 12 months." 3 (Emphases supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance
with a total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the
Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial
Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting
to P0.03 for every peso due and payable for each month starting from 1 September
1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the
amounts due under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's

(3) To pay the costs.

SO ORDERED." 4

However, on 27 August 1986, private respondents filed a Petition for Relief from
Judgment before the Court of Appeals. This Petition was raffled off to the 15th
Division of the Court of Appeals. In that Petition, private respondents claimed that
their failure to file their appeal brief was due to excusable negligence, that is, that
their previous counsel had entrusted the preparation and filing of the brief to one of
his associates, which associate, however, had unexpectedly resigned from the law
firm without returning the records of cases he had been handling, including the
appeal of private respondents. Atok Finance opposed the Petition for Relief arguing
that no valid ground existed for setting aside the resolution of the Third Division of
the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief
from Judgment "in the paramount interest of justice," 7 set aside the resolution of
the Third Civil Cases Division of the then IAC, and gave private respondents a nonextendible period of fifteen (15) days within which to file their appeal brief. Private
respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the
appeal, and reversed and set aside the decision of the trial court and entered a new
judgment dismissing the complaint of Atok Finance, ordering it to pay private
respondents P3,000.00 as attorney's fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th Division of the Court of
Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of
21 March 1986 originally dismissing private respondents' appeal for abandonment
thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok
Finance's motion stating that it had granted the Petition for Relief from Judgment
and given private respondents herein fifteen (15) days within which to file an appeal
brief, while Atok Finance did not file an appellee's brief, and that its decision was
arrived at "on the basis of appellant's brief and the original records of the appeal
case."
In the present Petition for Review, Atok Finance assigns the following as errors on
the part of the Court of Appeals in rendering its decision of 18 August 1987:

the same time, nothing in this decision should be read as impliedly holding that a
petition for relief from judgment is available in respect of a decision rendered by the
Court of Appeals; this issue is best reserved for determination in some future case
where it shall have been adequately argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the
Court of Appeals in rendering its Decision on the merits of the appeal: whether the
individual private respondents may be held solidarily liable with Sanyu Chemical
under the provisions of the Continuing Suretyship Agreement, or whether that
Agreement must be held null and void as having been executed without
consideration and without a pre-existing principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
"It is the contention of private appellants that the suretyship agreement is null and
void because it is not in consonance with the laws on guaranty and security. The
said agreement was entered into by the parties two years before the Deed of
Assignment was executed. Thus, allegedly, it ran counter to the provision that
guaranty cannot exist independently because by nature it is merely an accessory
contract. The law on guaranty is applicable to surety to some extent Manila Surety
and Fidelity Co. v. Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila
Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.

"(1) that it had erred in ruling that a continuing suretyship agreement cannot be
effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was null and
void for lack of consideration without any evidence whatsoever [being] adduced by
private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going in the trial court." 8 (Emphasis in the
original).
As a preliminary matter, we note that a Division of the Court of Appeals is co-equal
with any other Division of the same court. Accordingly, a Division of the Court of
Appeals has no authority to consider and grant a petition for relief from a judgment
rendered by another Division of the same court. In the case at bar, however, we
must note that an intervening event had occurred between the resolution of 21
March 1986 of the Third Civil Cases Division of the IAC dismissing private
respondents' appeal and the 30 September 1986 order of the 15th Division of the
Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986,
the old Intermediate Appellate Court went out of existence and a new court, the
Court of Appeals, came into being, was organized and commenced functioning. 9
This event, and the probability that some confusion may have accompanied the
period of transition from the IAC to the Court of Appeals, lead us to believe that the
defect here involved should be disregarded as being of secondary importance. At

Although obligations arising from contracts have the force of law between the
contracting parties, (Article 1159 of the Civil Code) this does not mean that the law
is inferior to it; the terms of the contract could not be enforced if not valid. So, even
if, as in this case, the agreement was for a continuing suretyship to include
obligations enumerated in paragraph 2 of the agreement, the same could not be
enforced. First, because this contract, just like guaranty, cannot exist without a valid
obligation (Art. 2052, Civil Code); and, second, although it may be given as security
for future debt (Art. 2053, C.C.), the obligation contemplated in the case at bar
cannot be considered 'future debt' as envisioned by this law.
There is no proof that when the suretyship agreement was entered into, there was a
pre-existing obligation which served as the principal obligation between the parties.
Furthermore, the 'future debts' alluded to in Article 2053 refer to debts already
existing at the time of the constitution of the agreement but the amount thereof is
unknown, unlike in the case at bar where the obligation was acquired two years
after the agreement." 10 (Emphasis supplied)
We consider that the Court of Appeals here was in serious error. It is true that a
guaranty or a suretyship agreement is an accessory contract in the sense that it is
entered into for the purpose of securing the performance of another obligation
which is denominated as the principal obligation. It is also true that Article 2052 of
the Civil Code states that "a guarantee cannot exist without a valid obligation." This
legal proposition is not, however, like most legal principles, to be read in an absolute

and literal manner and carried to the limit of its logic. This is clear from Article 2052
of the Civil Code itself:

Moreover, Article 2053 of the Civil Code states:

"The surety agreement which was earlier signed by Enrique Go., Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory
note. What obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms that are unequivocal, it can be
clearly seen that the surety agreement was executed to guarantee future debts
which Daicor may incur with petitioner, as is legally allowable under the Civil Code.
Thus --

"Art. 2053. A guaranty may also be given as security for future debts, the amount
of which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured." (Emphasis
supplied)

'Article 2053. A guarantee 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.'" 13 (Emphasis
supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052
and 2053 of the Civil Code. In National Rice and Corn Corporation (NARIC) v. Jose
A. Fojas and Alto Surety Co., Inc., 11 the private respondents assailed the decision
of the trial court holding them liable under certain surety bonds filed by private
respondent Fojas and issued by private respondent Alto Surety Co. in favor of
petitioner NARIC, upon the ground that those surety bonds were null and void
"there being no principal obligation to be secured by said bonds." In affirming the
decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes,
made short shrift of the private respondents' doctrinaire argument:

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases
rejected the distinction which the Court of Appeals in the case at bar sought to
make with respect to Article 2053, that is, that the "future debts" referred to in that
Article relate to "debts already existing at the time of the constitution of the
agreement but the amount [of which] is unknown," and not to debts not yet
incurred and existing at that time. Of course, a surety is not bound under any
particular principal obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship agreement
itself is valid and binding even before the principal obligation intended to be secured
thereby is born, any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the occurrence of the
condition precedent. 14

"Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation."
(Emphases supplied).

"Under his third assignment of error, appellant Fojas questions the validity of the
additional bonds (Exhs. D and D-1) on the theory that when they were executed,
the principal obligation referred to in said bonds had not yet been entered into, as
no copy thereof was attached to the deeds of suretyship. This defense is untenable,
because in its complaint the NARIC averred, and the appellant did not deny that
these bonds were posted to secure the additional credit that Fojas has applied for,
and the credit increase over his original contract was sufficient consideration for the
bonds. That the latter were signed and filed before the additional credit was
extended by the NARIC is no ground for complaint. Article 1825 of the Civil Code of
1889, in force in 1948, expressly recognized that 'a guaranty may also be given as
security for future debts the amount of which is not yet known.'" (Emphasis
supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again
with the same issue, that is, whether private respondent was liable to pay a
promissory note dated 29 April 1977 executed by the principal debtor in the light of
the provisions of a comprehensive surety agreement which petitioner bank and the
private respondent had earlier entered into on 19 October 1976. Under the
comprehensive surety agreement, the private respondents had bound themselves
as solidary debtors of the Diacor Corporation not only in respect of existing
obligations but also in respect of future ones. In holding private respondent surety
(Residoro Chua) liable under the comprehensive surety agreement, the Court said:

Comprehensive or continuing surety agreements are in fact quite commonplace in

present day financial and commercial practice. A bank or a financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of transactions with its
creditor; with such suretyship agreement, there would be no need to execute a
separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is precisely what
happened in the case at bar.
We turn to the second substantive issue, that is, whether private respondents are
liable under the Deed of Assignment which they, along with the principal debtor
Sanyu Chemical, executed in favor of petitioner, on the receivables thereby
assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of action
under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the
debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied

on Article 1629 of the Civil Code which reads as follows:

warranty period.

"Art. 1629. In case the assignor in good faith should have made himself responsible
for the solvency of the debtor, and the contracting parties should not have agreed
upon the duration of the liability, it shall last for one year only, from the time of the
assignment if the period had already expired.

In effect, therefore, company-appellant was right when it claimed that appellee had
no cause of action against it or had lost its cause of action." 15 (Emphasis supplied)

If the credit should be payable within a term or period which has not yet expired,
the liability shall cease one year after the maturity."
Once more, the Court of Appeals upheld the contention of private respondents and
held that Sanyu Chemical was free from liability under the Deed of Assignment. The
Court of Appeals said:
". . . Article 1629 provides for the duration of assignor's warranty of debtor's
solvency depending on whether there was a period agreed upon for the existence of
such warranty, analyzing the law thus:

Once again, however, we consider that the Court of Appeals was in reversible error
in so concluding. The relevant provision of the Deed of Assignment may be quoted
again in this connection:
"2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the
ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . . .
(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to
pay the assigned contract/s and/or any installment thereon upon maturity thereof
shall be conclusively considered as a violation of this warranty; and . . . .

(2) if no period (or length of time) was agreed upon, then:

The foregoing warranties and representations are in addition to those provided for in
the Negotiable Instruments Law and other applicable laws. Any violation thereof
shall render the ASSIGNOR immediately and unconditionally liable to pay the
ASSIGNEE jointly and severally with the debtors under the assigned contracts, the
amounts due thereon.

(a) one year from assignment -- if debt was due at the time of the assignment

xxx xxx xxx

(b) one year from maturity -- if debt was not yet due at the time of the
assignment.

(Emphases supplied)

(1) if there is a period (or length of time) agreed upon, then, for such period;

The debt referred to in this law is the debt under the assigned contract or the
original debts in favor of the assignor which were later assigned to the assignee.
The debt alluded to in the law, is not the debt incurred by the assignor to the
assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of the
assigned receivables had matured on November 27, 1981 when the Deed of
Assignment was executed. The oldest debt then existing was that contracted on
November 3, 1981 and the latest was contracted on December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits
B-3-A to 5-and extended by the notation which appeared in the 'Schedule of
Assigned Receivables' which states that the '. . . the terms stated on our invoices
were normally extended up to a period of 120 days . . . .' (Exhibit B-2). Considering
the terms in the invoices plus the ordinary practice of the company, thus, the
assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's
warranty for debtor's warranty, in this case, would then be from the maturity period
up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D)
and the complaint was filed on January 13, 1984. Both dates were beyond the

It may be stressed as a preliminary matter that the Deed of Assignment was valid
and binding upon Sanyu Chemical. Assignment of receivables is a commonplace
commercial transaction today. It is an activity or operation that permits the assignee
to monetize or realize the value of the receivables before the maturity thereof. In
other words, Sanyu Chemical received from Atok Finance the value of its trade
receivables it had assigned; Sanyu Chemical obviously benefitted from the
assignment. The payments due in the first instance from the trade debtors of Sanyu
Chemical would represent the return of the investment which Atok Finance had
made when it paid Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted by the
Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical
to Atok Finance rests not on the breach of the warranty of solvency; the liability of
Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under
the Deed of Assignment, the effect of non-payment by the original trade debtors
was a breach of warranty of solvency by Sanyu Chemical, resulting in turn in the
assumption of solidary liability by the assignor under the receivables assigned. In
other words, the assignor Sanyu Chemical becomes a solidary debtor under the
terms of the receivables covered and transferred by virtue of the Deed of
Assignment. And because assignor Sanyu Chemical became, under the terms of the
Deed of Assignment, solidary obligor under each of the assigned receivables, the
other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo

Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of
the operation of the Continuing Suretyship Agreement. Put a little differently, the
obligations of individual private respondent officers and stockholders of Sanyu
Chemical under the Continuing Suretyship Agreement, were activated by the
resulting obligations of Sanyu Chemical as solidary obligor under each of the
assigned receivables by virtue of the operation of the Deed of Assignment. That
solidary liability of Sanyu Chemical is not subject to the limiting period set out in
Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in the
trial court, it had a valid and enforceable cause of action against Sanyu Chemical
and the other private respondents. We also agree with the Court of Appeals that the
original obligors under the receivables assigned to Atok Finance remain liable under
the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE
COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its
Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new
judgment is hereby entered REINSTATING the Decision of the trial court in Civil
Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this
Court's discretionary authority equitably to mitigate the penalty clause attached to
the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%)
per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so
modified, the Decision of the trial court is hereby AFFIRMED. Costs against private
respondents.
SO ORDERED.

16. BA FINANCE CORPORATION, petitioner, vs. HON. COURT OF APPEALS and

TRADERS ROYAL BANK, respondents.
G.R. No. 94566 | 1992-07-03
DECISION
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the respondent appellate
court which reversed the ruling of the trial court dismissing the case against
petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business under the name Gebbs
International, applied for and was granted a loan with respondent Traders Royal
Bank in the amount of P60,000.00. As security for the payment of said loan, the

Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly
and severally to respondent bank the amount of the loan including interests, penalty
and other bank charges.
In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as
credit administrator of BA Finance Corporation for and in behalf of the latter,
undertook to guarantee the loan of the Gaytano spouses. The letter reads:
"This is in reference to the application of Gebbs International for a twenty-five (25)
month term loan of 60,000.00 with your Bank.
"In this connection, please be advised that we unconditionally guarantee full
payment in peso value the said accommodation (sic) upon non-payment by subject
up to a maximum amount of P60,000.00.
"Hoping this would meet your requirement and expedite the early processing of
their application.
"Thank you.
Very truly yours,

BA FINANCE CORPORATION
(signed)
PHILIP H. WONG
Credit Administrator"
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid balance in the amount of
P85,807.25. Since the Gaytano spouses refusal to pay their obligation, respondent
bank filed with the trial court a complaint for sum of money against the Gaytano
spouses and petitioner corporation as alternative defendant.
The Gaytano spouses did not present evidence for their defense. Petitioner
corporation, on the other hand, raised the defense of lack of authority of its credit
administrator to bind the corporation.
On December 12, 1988, the trial court rendered a decision the dispositive portion of
which states:
"IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiff and
against defendants/Gaytano spouses, ordering the latter to jointly and severally pay
the plaintiff the following:
"1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND 25/100 (P85,807.25),
representing the total unpaid balance with accumulated interests, penalties and

bank charges as of September 22, 1987, plus interests, penalties and bank charges
thereafter until the whole obligation shall have been fully paid.
"2) Attorney's fees at the stipulated rate of ten (10%) percent computed from the
total obligation; and
"3) The costs of suit.
"The dismissal of the case against defendant BA Finance Corporation is hereby
ordered without pronouncement as to cost.
"SO ORDERED." (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed with the Court of Appeals.
On March 13, 1990, respondent appellate court rendered judgment modifying the
decision of the trial court as follows:
"In view of the foregoing, the judgment is hereby rendered ordering the defendants
Gaytano spouses and alternative defendant BA Finance Corporation, jointly and
severally, to pay the plaintiff the amount of P85,807.25 as of September 8, 1987,
including interests, penalties and other back (sic) charges thereon, until the full
obligation shall have been fully paid. No pronouncement as to costs.

corporation beyond the scope of his authority since the petitioner itself is not even
empowered by its articles of incorporation and by-laws to issue guaranties.
Petitioner also submits that it is not guilty of estoppel to make it liable under the
letter-guaranty because petitioner had no knowledge or notice of such letterguaranty; that the allegation of Philip Wong, credit administrator, that there was an
audit was not supported by evidence of any audit report or record of such
transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that persons
dealing with an assumed agent, whether the assumed agency be a general or
special one are bound at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to establish it
(Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, the burden is on respondent bank to
satisfactorily prove that the credit administrator with whom they transacted acted
within the authority given to him by his principal, petitioner corporation. The only
evidence presented by respondent bank was the testimony of Philip Wong, credit
administrator, who testified that he had authority to issue guarantees as can be
deduced from the wording of the memorandum given to him by petitioner
corporation on his lending authority.
The said memorandum which allegedly authorized Wong not only to approve and
grant loans but also to enter into contracts of guaranty in behalf of the corporation,
partly reads:

"SO ORDERED." (p. 27, Rollo)

Hence this petition was filed with the petitioner assigning the following errors
committed by respondent appellate court:
"1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
PETITIONER IS JOINTLY AND SEVERALLY LIABLE WITH GAYTANO SPOUSES DESPITE
ITS FINDINGS THAT THE LETTER GUARANTY (EXH. 'C') IS `INVALID AT ITS
INCEPTION';
"2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE
PETITIONER WAS GUILTY OF ESTOPPEL DESPITE THE FACT THAT IT NEVER KNEW
OF SUCH ALLEGED LETTER-GUARANTY;
"3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT
SUCH LETTER GUARANTY (EXHIBIT `C`) BEING PATENTLY ULTRA VIRES, IS
UNENFORCEABLE;
"4. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING RELIEF ON
PETITIONER'S COUNTERCLAIM (p. 10, Rollo)."

To: Philip H. Wong, SAM

Credit Administrator.
From: Hospicio B. Bayona, Jr.,
VP and Head of Credit Administration.
Re: Lending Authority.
I am pleased to delegate to you in your capacity as Credit Administrator the
following lending limits:
a) P650,000.00 Secured Loans
b) P550,000.00 Supported Loans
c) P350,000.00 Truck Loans/Contracts/Leases
d) P350,000.00 Auto Loan Contracts/Leases
e) P350,000.00 Appliance Loan Contracts
f) P350,000.00 Unsecured Loans.
Total loans and/or credits [combination of (a) thru (f) extended to any one borrower
including parents, affiliates and/or subsidiaries, should not exceed P750,000.00. In
exercising the limits aforementioned, both direct and contingent commitments to
the borrower (s) should be considered.

Since the issues are interrelated, it would be well to discuss them jointly.
All loans must be within the Company's established lending guideline and policies.
Petitioner contends that the letter guaranty is ultra vires, and therefore
unenforceable; that said letter-guaranty was issued by an employee of petitioner

xxx xxx xxx

LEVELS OF APPROVAL.
All transactions in excess of any branch's limit must be recommended to you
through the Official Credit Report for approval. If the transaction exceeds your limit,
you must concur in application before submitting it to the Vice President, Credit
Administration for approval or concurrence.

of estoppel in allowing its credit administrator to act as though the latter had power
to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed decision of the respondent
appellate court dated March 13, 1990 is hereby REVERSED and SET ASIDE and
another one is rendered dismissing the complaint for sum of money against BA
Finance Corporation.

xxx xxx xxx

SO ORDERED.
(pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans even up to F350,000.00
without any security requirement, which is far above the amount subject of the
guaranty in the amount of P60,000.00, nothing in the said memorandum expressly
vests on the credit administrator power to issue guarantees. We cannot agree with
respondent's contention that the phrase "contingent commitment" set forth in the
memorandum means guarantees. It has been held that a power of attorney or
authority of an agent should not be inferred from the use of vague or general
words. Guaranty is not presumed, it must be expressed and cannot be extended
beyond its specified limits (Director v. Sing Juco, 53 Phi. 205). In one case, where it
appears that a wife gave her husband power of attorney to loan money, this Court
ruled that such fact did not authorize him to make her liable as a surety for the
payment of the debt of a third person (Bank of Philippine Islands v. Coster, 47 Phil.
594).
The sole allegation of the credit administrator in the absence of any other proof that
he is authorized to bind petitioner in a contract of guaranty with third persons
should not be given weight. The representation of one who acts as agent cannot by
itself serve as proof of his authority to act as agent or of the extent of his authority
as agent (Velasco v. La Urbana, 58 Phil. 681).
Wong's testimony that he had entered into similar transactions of guaranty in the
past for and in behalf of the petitioner, lacks credence due to his failure to show
documents or records of the alleged past transactions. The actuation of Wong in
claiming and testifying that he has the authority is understandable.
He would naturally take steps to save himself from personal liability for damages to
respondent bank considering that he had exceeded his authority.
The rule is clear that an agent who exceeds his authority is personally liable for
damages (National Power Corporation v. National Merchandising Corporation, Nos.
L-33819 and L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that petitioner is estopped from
alleging lack of authority due to its failure to cancel or disallow the guaranty, We
find that the said conclusion has no basis in fact.
Respondent bank had not shown any evidence aside from the testimony of the
credit administrator that the disputed transaction of guaranty was in fact entered
into the official records or files of petitioner corporation, which will show notice or
knowledge on the latter's part and its consequent ratification of the said transaction.
In the absence of clear proof, it would be unfair to hold petitioner corporation guilty

17. JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners, versus THE COURT OF
APPEALS and BANK OF THE PHILIPPINE ISLANDS, Respondents.
G.R. No. 145578 | 2005-11-18
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 Corporation's 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 bank's
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 Fiscal's Office found probable cause to
indict petitioners. The Makati Fiscal's 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 Corporation's principal debt under the
trust receipts. The dispositive portion of the trial court's Decision provides:

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 attorney's 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 Corporation's debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial court's
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 Asiaand 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 ariseex 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

WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C.

Tupaz, IV and Petronila Tupaz based upon reasonable doubt.

[W]e hereby hold that the acquittal of the accused-appellants 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.

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

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."

The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro Corporation's
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 Corporation's
debt under the trust receipt dated 30 September 1981.

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 attorney's fees, P5,000.00 as expenses of litigation and costs of suit.[10]

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 corporation's debts
only if they so contractually agree or stipulate.[13]
Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands

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]

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 Tupaz's signature are
the words "Vice-Pres-Treasurer" and under petitioner Jose Tupaz's signature are the

words "Vice-Pres-Operations." By so signing that trust receipt, petitioners did not

bind themselves personally liable for El Oro Corporation's 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 corporation's 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 ARMAGRI's 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 Corporation's 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 Corporation's
Vice-President for Operations. Hence, petitioner Jose Tupaz bound himself
personally liable for El Oro Corporation's 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 Tupaz's Liability
Under the Trust Receipt Dated 30 September 1981
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 latter's 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 corporation's 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] Chi's 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; Chi's 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)
However, respondent bank's suit against petitioner Jose Tupaz stands despite the
Court's finding that he is liable as guarantor only. First, excussion is not a prerequisite 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 Corporation's principal debt
and other accessory liabilities (as stipulated in the trust receipt and as provided by
law) under the trust receipt dated 30 September 1981. That trust receipt (and the
trust receipt dated 9 October 1981) provided for payment of attorney's fees
equivalent to 10% of the total amount due and an "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
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 Corporation's 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 Corporation's 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
Attorney's 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.
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 Tupaz's 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 on reasonable doubt xxx as only preponderance of
evidence is required in civil cases; where the court expressly declares that the
liability of the accused is not criminal but only civil in nature 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
Corporation's 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 Corporation's 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) 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;

latter's business. Private respondent, persuaded by the assurances of petitioner that

Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon
money in the amount of P150,000. On June 22, 1987, Luanzon issued and signed a
promissory note acknowledging receipt of the P150,000 from private respondent

2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation's total debt
under the trust receipt dated 30 September 1981 as thus computed by the Regional
Trial Court, Makati, Branch 144; and

and obliging herself to pay the former the said amount on or before August 22,

3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust
receipt dated 9 October 1981.

dated August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.[5]

SO ORDERED.

1987.[4] Petitioner signed the promissory note, affixing her signature under the
word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437

Subsequently, Luanzon replaced this check with another postdated Solidbank check
no. 432945 dated December 22, 1987, in favor of the same payee and covering the
same amount.[6] Several checks in the amount of P7,500 each were also issued by
Luanzon and made payable to private respondent.[7]

18. PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS

(Former Ninth Division) and LEONILA TOMACRUZ, respondents.

Private respondent made a written demand upon petitioner for payment, which
petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for

G.R. No. 109941 | 1999-08-17

DECISION

GONZAGA-REYES, J.:

This is a petition for review by way of certiorari under Rule 45 of the Revised Rules
of Court of the decision of the Court of Appeals[1] dated November 29, 1991 in CAG.R. CV No. 27779 affirming the decision[2] of the Regional Trial Court of Quezon
City, Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the
Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion
for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by respondent court,
are briefly narrated as follows:

Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent

Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.[3]
Petitioner told private respondent that Luanzon has been engaged in business as a
contractor for twenty years and she invited private respondent to lend Luanzon
money at a monthly interest rate of five percent (5%), to be used as capital for the

the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City,
Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon,
husband of petitioner, as an additional defendant. However, summons was never
served upon Luanzon.

In her answer, petitioner denied having guaranteed the payment of the promissory
note issued by Luanzon. She claimed that private respondent gave Luanzon the
money, not as a loan, but rather as an investment in Art Enterprises and
Construction, Inc. - the construction business of Luanzon. Furthermore, petitioner
avers that, granting arguendo that there was a loan and petitioner guaranteed the
same, private respondent has not exhausted the property of the principal debtor nor
has she resorted to all the legal remedies against the principal debtor as required by
law. Finally, petitioner claims that there was an extension of the maturity date of the
loan without her consent, thus releasing her from her obligation.[8]

After trial on the merits, the lower court ruled in favor of private respondent. In its
Decision dated June 14, 1990, it stated that -

The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%)

monthly interest and not an investment. In fact they all admitted in their

LUANZON.

testimonies that they are not given any stock certificate but only promissory notes
similar to Exhibit "B" wherein it was clearly stated that defendant Luanzon would

III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS

pay the amount of indebtedness on the date due. Postdated checks were issued

A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE

simultaneously with the promissory notes to enable the plaintiff and others to

LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER

withdraw their money on a certain fixed time. This shows that they were never

GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-

participants in the business transaction of defendant Luanzon but were creditors.

APPELLANT AND DEFENDANT LUANZON.

The evidences presented likewise show that plaintiff and others loan their money to

At the outset, we note that petitioner's claim that the factual findings of the lower

defendant Luanzon because of the assurance of the monthly income of five percent

court, which were affirmed by the Court of Appeals, were based on a

(5%) of their money and that they could withdraw it anytime after the due date add

misapprehension of facts and contradicted by the evidence on records[10] is a bare

to it the fact that their friend, Pacionaria Baylon, expresses her unequivocal

allegation and devoid of merit. As a rule, the conclusions of fact of the trial court,

gurarantee to the payment of the amount loaned.

especially when affirmed by the Court of Appeals, are final and conclusive and
cannot be reviewed on appeal by the Supreme Court.[11] Although this rule admits

xxx xx xxx

of several exceptions,[12] none of the exceptions are in point in the present case.
The factual findings of the respondent court are borne out by the record and are

WHEREFORE, premises considered, judgment is hereby rendered against the

based on substantial evidence.

defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of
P150,000.00, with interest at the legal rate from the filing of this complaint until full

Petitioner claims that there is no loan to begin with; that private respondent gave

payment thereof, to pay the total sum of P21,000.00 as attorney's fees and costs of

Luanzon the amount of P150,000, not as a loan, but rather as an investment in the

suit.[9]

construction project of the latter.[13] In support of her claim, petitioner cites the
use by private respondent of the words "investment," "dividends," and

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence,

"commission" in her testimony before the lower court; the fact that private

this present case wherein petitioner makes the following assignment of errors -

respondent received monthly checks from Luanzon in the amount of P7,500 from
July to December, 1987, representing dividends on her investment; and the fact

I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT

that other employees of the Development Bank of the Philippines made similar

TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN

investments in Luanzon's construction business.[14]

THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

However, all the circumstances mentioned by petitioner cannot override the clear
II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS

and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon

A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT

promised to pay private respondent the amount of P150,000 on or before August

ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE

22, 1987. The promissory note states as follows:

PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST
THE PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE
LEGAL REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT

June 22, 1987

To Whom It May Concern:

The transaction at bench is therefore a loan, not an investment.

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount

It is petitioner's contention that, even though she is held to be a guarantor under

of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before

the terms of the promissory note, she is not liable because private respondent did

August 22, 1987.

not exhaust the property of the principal debtor and has not resorted to all the legal
remedies provided by the law against the debtor.[19] Petitioner is invoking the

The above amount is covered by _____ Check No. _____ dated August 22, 1987.

benefit of excussion pursuant to article 2058 of the Civil Code, which provides that
-

(signed)
The guarantor cannot be compelled to pay the creditor unless the latter has
ROSITA B. LUANZON

exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor.

GURARANTOR:
It is axiomatic that the liability of the guarantor is only subsidiary.[20] All the
(signed)

properties of the principal debtor must first be exhausted before his own is levied
upon. Thus, the creditor may hold the guarantor liable only after judgment has been

PACIONARIA O. BAYLON

obtained against the principal debtor and the latter is unable to pay, "for obviously
the 'exhaustion of the principal's property' - the benefit of which the guarantor

Tel. No. 801-28-00

claims - cannot even begin to take place before judgment has been obtained."[21]
This rule is embodied in article 2062 of the Civil Code which provides that the action

18 P. Mapa St., DBP Village

brought by the creditor must be filed against the principal debtor alone, except in
some instances when the action may be brought against both the debtor and the

Almanza, Las Pinas, M.M.[15]

principal debtor.[22]

If the terms of a contract are clear and leave no doubt as to the intention of the

Under the circumstances availing in the present case, we hold that it is premature

contracting parties, the literal meaning of its stipulation shall control.[16] Resort to

for this Court to even determine whether or not petitioner is liable as a guarantor

extrinsic aids and other extraneous sources are not necessary in order to ascertain

and whether she is entitled to the concomitant rights as such, like the benefit of

the parties' intent when there is no ambiguity in the terms of the agreement.[17]

excussion, since the most basic prerequisite is wanting - that is, no judgment was

Both petitioner and private respondent do not deny the due execution and

first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak

authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are

of a guarantor when no debtor has been held liable for the obligation which is

directed at uncovering the real intention of the parties in executing the promissory

allegedly secured by such guarantee. Although the principal debtor Luanzon was

note, but no amount of argumentation will change the plain import of the terms

impleaded as defendant, there is nothing in the records to show that summons was

thereof, and accordingly, no attempt to read into it any alleged intention of the

served upon her. Thus, the trial court never even acquired jurisdiction over the

parties thereto may be justified.[18] The clear terms of the promissory note

principal debtor. We hold that private respondent must first obtain a judgment

establish a creditor-debtor relationship between Luanzon and private respondent.

against the principal debtor before assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of
the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993
are SET ASIDE. No pronouncement as to costs.

SO ORDERED.

19. ANTONIO R. BANZON and ROSA BALMACEDA, petitioners, vs.

HON. FERNANDO CRUZ, Spouses PEDRO CARDENAS and LEONILA
BALUYOT and ASSOCIATED INSURANCE & SURETY COMPANY, INC.
represented by INSURANCE COMMISSIONER in her capacity as
LIQUIDATOR OF ASSOCIATED INSURAN
G.R. No. L-31789 | 1972-06-29
DECISION
TEEHANKEE, J.:
An original action to enjoin respondent court from enforcing a writ
of possession and order of demolition over one of two Caloocan City
lots originally owned by petitioners-spouses pending the outcome
of their suit for reconveyance of said lots from private respondents.
Sometime in 1952, Maximo Sta. Maria obtained crop loans from the
Philippine National Bank (hereinafter referred to as the bank).
Respondent Associated Insurance & Surety Co., Inc. (hereinafter
referred to as Associated) acted as surety of Sta. Maria, filing surety
bonds in favor of the bank to answer for prompt repayment of the
loans. Petitioner Antonio R. Banzon and Emilio Ma. Naval in turn
acted as indemnitors of Associated and were obligated to indemnify
and hold harmless Associated from any liability for thus acting as
surety of the loan. Sta. Maria failed to pay his obligations to the
bank, which accordingly demanded payment from Associated as
surety.
Instead of paying the bank, Associated filed a complaint dated
November 19, 1956 with the Court of First Instance of Manila [1]
against debtor Sta. Maria and indemnitors Banzon and Naval,
alleging that the outstanding obligations of Sta. Maria with the bank
guaranteed by it amounted to P6,100.00, P9,346.44 and

P14,811.42, or atotal of P30,257.86, excluding interest. On

December 11, 1957, the said court rendered judgment ordering
Sta. Maria, Banzon and Naval "to pay jointly and severally unto
plaintif for the benefit of the Philippine National Bank"the amounts
mentioned above, with interest thereon at 12% per annum,
P593.76 for premiums and documentary stamps due, and 15%
attorney's fees, "the 15% and the interest to be paid for the benefit
only of the plaintif."
What happened thereafter is narrated in the decision of this Court
rendered on November 29, 1968 in the appeal instituted by
petitioner Banzon and his spouse, co-petitioner Rosa Balmaceda,
from a subsequent action of Associated in the Court of First
Instance of Rizal wherein the Rizal court ordered Banzon to
surrender for cancellation his owner's duplicates of titles to his two
Caloocan City lots which had been levied upon and purchased at
the execution sale by Associated in supposed satisfaction of the
Manila court's judgment, docketed as Case L-23971 of this Court,
entitled Associated Ins. & Surety Co, Inc.,plaintiff-appellee vs.
Antonio Banzon and Rosa Balmaceda, defendants-appellants, [2] as
follows:
"As the above decision[3] became final and executory, the
corresponding writ of execution was issued and levy was made
upon the properties of the judgment debtor Antonio R. Banzon
covered by Transfer Certificates of Title Nos. 39685 and 53759
issued in his name by the Register of Deeds of Rizal. The first
covered a parcel of land containing an area of 650 square meters
situated in Barrio Calaanan, Caloocan, Rizal, and the second,
another parcel of 650 square meters situated in the same barrio of
the same municipality. After the proceedings required by law in
connection with execution sales, the aforesaid properties were sold,
the judgment creditor, Associated Insurance and Surety Co., Inc.,
having been the highest bidder, for the total sum of P41,000.00.
The Sherif of Rizal issued in its favor the corresponding certificate
of sale dated June 27, 1957, which was duly registered on June 30,
1959. As the period of redemption expired on June 20, 1960
without the judgment debtor or any proper party having exercised
it, the judgment creditor and purchaser obtained in due time the
corresponding final certificate of sale, which was likewise duly
registered.
"In view of the foregoing, herein petitioner-appellee made demands
upon Antonio R. Banzon to deliver to it the owner's duplicate of
Certificate of Title Nos. 39685 and 53759 mentioned heretofore, but
the latter refused to do so. As a result it filed in the Court of First

Instanceof Rizal in Case No. 3885, G.L.R.O. Record No. 11267, a

petition for an order directing Antonio R. Banzon to present his
owner's duplicate of Certificate of Title Nos. 39685 and 53759 to
the Register of Deeds of Rizal for cancellation, and for another
order directing the Register of Deeds of Rizal to cancel said
duplicates and to issue new transfer certificates of title covering
the properties in the name of petitioner.
"Banzon filed his opposition to the petition claiming mainly that (1)
the decision of the Court of First Instance of Manila in Civil Case No.
31237 was void as far as he was concerned because he had never
been summoned in connection therewith, and that (2) the levy and
sale of the properties covered by the petition were likewise void
because they were conjugal properties belonging to him and his
wife, Rosa Balmaceda.
"After a hearing on the motion and opposition mentioned above,
the lower court, on February 17, 1961, rendered a decision whose
dispositive portion is as follows:
In view of the foregoing, judgment is hereby rendered in favor of
the petitioner granting the relief prayed for. The oppositors are
hereby ordered to surrender to the Register of Deeds of Rizal the
Certificate of Title in question for cancellation and let a new one be
issued in the name of the petitioner.
"In this appeal interposed by them, the Banzons seek a reversal of
the above decision upon the same grounds relied upon in their
opposition filed in the lower court."[4]
This Court in its decision of November 29, 1968 affirmed the
decision of the trial court, relying upon the lower court's findings on
Banzon's failure to substantiate his claims which "would amount to
a deprivation of (Banzon's) property without due process of law"
had he but discharged his burden of proof, thus:
With respect to appellants' contention that Antonio R. Banzon had
not been duly served with summons in connection with Civil Case
No. 31237 of the Court of First Instance of Manila, it is enough for
us to quote here the pertinent portions of the well-considered
decision of the lower court
With respect to the first contention of oppositors, the latter in efect
contends that not having been served by summons, Antonio
Banzon never became a party defendant to the aforesaid civil case
and hence not bound by any judgment rendered therein. It is

erroneous on the part of the petitioner to contend that the

objection as to lack of jurisdiction on the defendant's person has
been waived for said waiver applies only when summons has been
served although defectively, such as one not served by the proper
officer. If the contention of the oppositor were true, that is, no
summons was ever served upon him and that he was completely
unaware of the proceedings in the civil case aforementioned, the
properties in question could not be levied upon for that would
amount to a deprivation of oppositor's property without due
process of law.
The burden, however, rests upon the oppositors to prove that there
was in fact no service of summons and this, the court believes, the
oppositors have failed to substantiate with sufficient evidence. It is
a fundamental rule that the regularity of all official actions and
proceedings will be presumed until the contrary is proved. In said
civil case No. 31237, the records show, particularly the answer and
the motion to dismiss, that the proceedings were conducted by
counsel in behalf of all the defendants therein including the
oppositor, Antonio Banzon. The presumption therefore, of the
regularity of the proceedings as against said defendant will be
maintained including the fact that either summons was duly served
or that the defendant Banzon voluntarily appeared in court without
such summons. It is therefore incumbent upon the oppositors to
rebut this presumption with competent and proper evidence such
as the return made by the sherif who served the summons in
question. This, however, the oppositors have not met.
'Moreover, the circumstances of the case all the more bear out the
strength of this presumption when it considered that the oppositor
Antonio Banzon received a notice of execution and levy of these
properties and notice of the sale of the same at public auction. Had
the oppositors have been prejudiced by being deprived of due
process, they should have filed either a third party claim upon the
property levied or an injunction proceeding to prevent its sale at
public auction, nor would they have allowed the consummation of
the sale and the lapse of one year within which the redemption
would have been exercised. These facts gravely militate against
the merits of the opposition, not only insofar as it strengthens the
aforesaid presumption of regularity, but also insofar as they are
indicative of the fact that the properties levied upon are not
conjugal property or even if they were that the debt involved was
one which redound to the benefit of the family for which the
conjugal partnership may be held liable.' "Appellants' second
contention namely, that the properties now in question are their
conjugal properties, is belied by the record before us which shows

that Transfer Certificates of Title Nos. 39685 and 53759 were issued
in the name of Antonio R. Banzon. Moreover, there is no sufficient
evidence in the record to show that the properties were acquired
during appellants' marriage.
"IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby affirmed, with costs."[5]
It has now been exposed that notwithstanding the judgment
of December 11, 1957 obtained from the Manila court by
Associated and executed by it against petitioner Banzon as
indemnitor for the benefit of the Philippine National Bank," and
which judgment it obtained and executed on the representation to
the said court that the bank was exacting payment from it as surety
of the debtor Sta. Maria's loans, and that it was therefore enforcing
Banzon's undertaking as indemnitor in turn to indemnify it, that it
never discharged its liability as surety to the bank nor ever made
any payment to the bank, whether in money or property, to
discharge Sta. Maria's outstanding obligations as guaranteed by it.
As will be shown later, this suit of Associated against Banzon as
indemnitor and the execution against him of the judgment obtained
in trust "for the benefit of the Philippine National Bank" were
absolutely premature and uncalled for, since Article 2071 of the
Civil Code permits the surety, even before having paid; to proceed
only against the principal debtor * * * (4) when the debt has
become demandable, by reason of the expiration of the period for
payment" and that "the action of the guarantor is to obtain release
from the guaranty, or to demand a security that shall protect him
from any proceedings by the creditor and from the danger of
insolvency of the debtor."
In fact, since the bank failed to exact payment from Associated as
surety of the debtor Maximo Sta. Maria's matured obligations, the
bank itself filed on February 10, 1961, its own complaint with the
Court
of
First
Instance
of
Pampanga against
principal
debtor Maximo Sta. Maria, his six brothers and sisters (who had
executed a special power of attorney in Sta. Maria's favor to
mortgage a 16-hectare parcel of land jointly owned by all of them
as security also for the bank's loans), and Associated itself, surety,
as defendants, for the collection of the outstanding obligations due
from the principal debtor, Maximo Sta. Maria.
After trial, the court ordered all the defendants jointly and severally
to pay the bank the outstanding amounts due on the crop loans to
Sta. Maria, which as of that much later date, August 20, 1963,

amounted only to P6,100.00 and P9,346.44 or a total

of P15,446.44, exclusive of interests. It should be noted therefore,
that the debtor Sta. Maria had been making payments all along to
the bank on account of his crop loans so much so that by 1963, the
total principal due and amount outstanding thereon amounted only
to P15,446.44. This amounts to practically one-half of the advance
judgment for the total amount of P30,257,86, excluding interests,
obtained by Associated six (6) years earlier in 1957 against
Banzon 'for the benefit of the Philippine National Bank" allegedly as
the amount due from Sta. Maria and which Associated as surety
would have to pay the bank, and which as it turns out,
Associatednever paid to the bank.
These facts and figures are of record in this Court's decision
of August 29, 1969, in Philippine National Bank vs. Sta. Maria, et
al.;[6] wherein it is further recorded that "(D)efendant Maximo Sta.
Maria and his surety, defendant Associated Insurance & Surety Co.,
Inc. who did not resist the action, did not appeal the
judgment (sentencing all defendants jointly and severally to pay
the bank the above referred to principal amount of P15,446.44,
excluding interests)."
This Court sustained the appeal taken by the debtor Maximo Sta.
Maria's brothers and sisters, and reversed the lower court's
judgment against them, as follows:
" * * * This appeal has been taken by his six brothers and sisters,
defendants-appellants who reiterate in their brief their main
contention in their Answer to the complaint that under the special
power of attorney, Exh. E, they had not given their brother,
Maximo, the authority to borrow money but only to mortgage the
real estate jointly owned by them; and that if they are liable at all,
their liability should not go beyond the value of the property which
they had authorized to be given as security for the loans obtained
by Maximo. In their answer, defendants-appellants had further
contended that they did not benefit whatsoever from the loans, and
that the plaintif bank's only recourse against them is to foreclose
on the property which they had authorized Maximo to mortgage.
"We find the appeal of defendants-appellants, except for defendant
Valeriana Sta. Maria who had executed another special power of
attorney, Exh. E-1, expressly authorizing Maximo to borrow money
on her behalf, to be well taken.
1. Plaintif bank has not made out a cause, of action against
defendants-appellants (except Valeriana), so as to hold them liable

for the unpaid balances of the loans obtained by Maximo under the
chattel mortgages executed by him in his own name chattel alone.
***

***

"6. Finally, as to the 10% award of attorney's fees, this Court

believes that considering the resources of plaintif bank and the
fact that the principal debtor, Maximo Sta. Maria, had not contested
the suit, an award of five (5%) per cent of the balance due on the
principal, exclusive of interests, i. e., a balance of P6,100.00 on the
first cause of action and a balance of P9,346.44 on the second
cause of action, per the bank's statements of August 20, 1963,
(Exhs. Q-1 and BB-1, respectively) should be sufficient.
"WHEREFORE, the judgment of the trial court against defendantsappellants Emeteria, Teofilo, Quintin, Rosario and Leonila, all
surnamed Sta. Maria is hereby reversed and set aside, with costs in
both instances against plaintif. The judgment against defendantappellant Valeriana Sta. Maria is modified in that her liability is held
to be joint and not solidary, and the award of attorney's fees is
reduced as set forth in the preceding paragraph, without costs in
this instance."
The bank thus collected directly from its debtor Sta. Maria the
amounts owing to it, with Associated never having put in one
centavo. Per the bank's letter dated February 20, 1970 to
Associated, it informed Associated that the amounts of its judgment
credit against judgment defendants in the aforementioned case
terminated by this Court's decision of August 29, 1969, "had
already been satisfied as of February 16, 1970 by virtue of
the payment made by and thru the Provincial Sheriff of Bataan on
the proceeds of the extra-judicial sale of the mortgaged properties
of defendants Sta. Marias in view of which "we (Philippine National
Bank, have now released the Associated Insurance & Surety Co..
Inc. of its joint obligation with Maximo Sta. Maria, et al. in the
aforementioned case."[7]
This should have put an end to the matter and Banzon's two lots
therefore restored fully to his ownership, but for certain
complications involving the intervention of the other private
respondents, the spouses Pedro Cardenas and Leonila Baluyot, and
Associated's own unjustifiable actions, as shall presently be seen.
According to the Banzons' petition at bar, sometime in 1965, even
before ownership over the two parcels of land belonging to the
Banzons could be consolidated in the name of Associated (since the

judgment was "for the benefit of the Philippine National Bank" and
it had not discharged its surety's liability to the bank), Associated
"in clear collusion and confederation with (respondent) Pedro
Cardenas, allowed and permitted the latter to execute and levy on
one of the two parcels of land (that covered by T.C.T. No. 39685Rizal, Lot 6, Block No. 176 of subdivision plan Psd-2896, G.L.R.O.
Rec. No. 11267) for a judgment debt of P5,100.00 (of Associated in
favor of Cardenas)[8] notwithstanding that the property in question
was worth P130,000.00 more or less, and further notwithstanding
the fact that said respondent (Associated) knew the property was
merely being held in trust by it for the benefit of the Philippine
National Bank and therefore, not being the legal owner thereof, it
cannot validly dispose of it in any manner." [9] Respondent Cardenas
being allegedly the lone bidder in the auction sale for execution of
his P5,100.00 judgment against Associated was awarded the
property in full satisfaction of his judgment, and eventually
succeeded in having Banzon's title cancelled and a new one, T.C.T.
No. 8567-Caloocan City issued thereto in his name, notwithstanding
that Associated's right thereto was still sub-judice in Associated vs.
Banzon, to be resolved much later yet by this Court's decision
of November 29, 1968. Associated made no move to question or
challenge this action of Cardenas, notwithstanding an order for its
liquidation and dissolution issued on December 31, 1965 by the
Court of First Instance of Manila and eventually affirmed by this
Court per resolution of June 20, 1968 in G.R. No. L-38934. Nor did
Associated make any efort to resist execution on said property of
Banzon's, knowing as it did that its interest in said property was
impressed with a trust character since the clear tenor and intent of
the judgment granted against Banzon nominally in its favor but
expressly "for the benefit of the Philippine National Bank" was to
make
the
execution
and
operation
of
the
judgment contingent orconditioned, upon Associated's being made
or
compelled
to
pay
the
bank,
which
contingency never materialized.
The Cardenas, spouses thereafter filed with the Court of First
Instance of Rizal, Caloocan City Branch XII, Reg. Case No. C-211
(LRC Case No. 11267) entitled "Pedro Cardenas, et al.,
petitioners vs. Antonio Banzon, et al., respondents," to secure
possession from the Banzons of the lot covered by T.C.T. No. 8567.
A writ of possession was issued in said case on May 21, 1965, but
the enforcement thereof was held in abeyance in view of the filing
with the same court of Civil Case No. C-531 entitled "Antonio
Banzon, et al. vs. Pedro Cardenas and Leonila Baluyot, Associated
Insurance and Surety Co., Inc. and Benito Macrohon." Banzon's
complaint in Civil Case No. C-53I was, however, dismissed

on August 6, 1969, on the ground that "the matter of the legality of

the transfer of ownership of the property in question from the
plaintif to the Associated Insurance & Surety Co., Inc., has been
upheld by the Supreme Court in its decision promulgated on
November 29, 1968, and consequently the transfer to the spouses
Pedro Cardenas and Leonila Baluyot must perforce be considered
also as valid and legal."
Consequently, respondent Cardenas filed a motion on October 13,
1969, in Case No. C-211 for the issuance of analias writ of
possession; this was granted on October 23, 1969. The alias writ
was served on Banzon, who refused to vacate the premises and to
remove the improvements thereon. In view of this, an order was
issued on December 9, 1969, for the issuance of a writ of
demolition, but its enforcement was held in abeyance because a
temporary restraining order, later changed to a writ of preliminary
injunction, was issued by the Court of Appeals on December 13,
1969, in view of the filing by the Banzons with the said appellate
court of a petition for injunction.[10]
On February 28, 1970 the Court of Appeals rendered judgment
dismissing the petition because it found the same to be allegedly
"merely a device to prevent the execution of a final judgment by
the filing of a new suit based upon the same grounds which have
already been interposed and passed upon in the case where the
final judgment had already been rendered * * *. " Cardenas
thereafter filed a motion for the enforcement of the order of
demolition and writ of possession previously issued in Reg. Case
No. C-211. On March 13, 1970, Judge Fernando A. Cruz of the Court
of First Instance of Caloocan City Branch XII, issued an order
granting the motion.[11]
On March 13, 1970, the Banzons having learned of the bank's
release to Associated as of February 20, 1970, supra, accordingly
filed a complaint for reconveyance and damages with the Court of
First Instance of Manila against respondents Associated and the
Cardenas spouses.[12] In their complaint, the Banzons impute bad
faith, collusion and confederation between Associated and the
Cardenases with regard to the latter's prematurely obtaining T.C.T.
No. 8567 covering one of Banzon's lots in their name. The Banzons
therein alleged for the first time their new cause of action based on
the subsequent development that the Philippine National Bank had
collected directly on February 16, 1970 from the principal debtor
Sta. Maria the loan guaranteed by Associated (which amounted
only to a principal of P15,446.44 as of August, 1963, excluding

interests or just one-half of thepremature judgment for P30,257.86,

excluding interests obtained by Associated six (6) years earlier in
1957 against Banzon in trust and for the benefit of the
bank allegedly as the amount owed by Sta. Maria and to be
discharged by Associated, which Associated never discharged);
[12a]
and that the bank, per its letter of February 20, 1970 had
therefore absolutely released Associated of any liability on its
surety undertaking.[12b] The Banzons therefore prayed for the
return and reconyeyance of their two parcels of land covered by
T.C.T. No. 8567 (in Cardenas' name) and No. 53759 (still in Banzon's
name), in discharge of Associated's implied trust not to unjustly
enrich itself and appropriate Banzon's properties at absolutely no
cost to itself.
On March 16, 1970, the Sherif of Caloocan City served upon the
Banzons copy of the aforesaid order giving them until March 20,
1970, within which to deliver possession of the parcel of land
covered by T.C.T. No. 8567, and to remove the improvements
thereon; otherwise, the said sherif would proceed to enforce the
same.
Petitioners Banzons therefore came to this Court on March 20,
1970, by means of the present petition for injunction. At
petitioners' instance, the Court on March 24, 1970 restrained
respondents and their representatives from enforcing the
questioned writ of execution and order of demolition, and
respondent Associated from disposing in any manner of its alleged
rights and interests over the two lots in question.
Respondents Cardenas spouses filed in due course their Answer
dated April 2, 1970, admitting in efect the antecedents of the case
as recited above, citing even this Court's decision of November 29,
1968 in Associated vs. Banzon, supra, which affirmed the money
judgment in favor of Associated "for the benefit of the Philippine
National Bank[13] but alleging that ownership to one parcel (Lot 6,
Block 176 covered by T.C.T. No. 8567) "has already absolutely and
irrevocably vested in herein respondent Pedro Cardenas." [14] Said
respondents further averred that "there is no longer anything that
may be restrained," since per the sherif's return of March 23, 1970,
he enforced on said date respondent court's writ of possession and
demolition order and demolished all the improvements erected in
the premises.[15]
To this petitioners countered that "the special deputy sherif of Rizal
did succeed in demolishing the building erected on the lot in
question. This he did notwithstanding the fact that he has been

duly informed by petitioner Banzon of the existence of a restraining

order in this case. However, after accomplishing his purpose, he
and his men left the premises."[16]
Most relevant, however, was a pleading entitled "Explanation and
Manifestation" dated April 25, 1970 filed by Atty. Feliberto Castillo,
as former counsel for Associated, "in the interest of justice and in
the name of truth and as an officer of the Court," wherein with
respect to the summons for Associated received by his law office,
he manifests:
"3. That he is entertaining a serious doubt whether he could still
represent the Associated Insurance & Surety Co., Inc. in view of the
fact that in Civil Case No. 56995 of the Court of First Instance of
Manila, entitled 'Republic of the Philippines, represented by the
Insurance Commissioner vs. Associated Insurance & Surety Co.,
Inc.' the said Court of First Instance of Manila ordered the
liquidation and dissolution of this surety company, which was
appealed to the Court of Appeals, CA-G.R. No. 37985-R, but
affirmed the decision of the Court of First Instance of Manila in a
decision promulgated on January 3, 1968, which was appealed
again by the Associated Insurance & Surety Co., Inc. to the
Honorable Tribunal, G.R. No. L-28934, also affirming the decision of
the Court of Appeals by denying the petition for a writ of certiorari
in its resolution of June 20, 1968, and therefore, since then, the
decision of the Court of First Instance of Manila ordering the
liquidation and dissolution of the Associated Insurance & Surety
Co., Inc. became final and executory, and thereafter, the Insurance
Commissioner demanded the surrender of books, documents and
other papers of this surety company, and as a matter of fact,
books, documents and other papers salvaged were already
surrendered to the Insurance Commissioner for liquidation of this
company, so that by virtue thereof, the Insurance Commissioner
being the liquidator appointed by the court toliquidate the
Associated Insurance & Surety Co., Inc., is now the legal
representative of this surety company to whom a copy of this paper
will be furnished."[17]
In his "Explanation and Manifestation," Atty. Castillo further states
that his law office was the counsel for Associated in the cases
involved in these proceedings, viz, Civil Case No. 31237 of the
Court of First Instance of Manila, Case No. 3885, G.L.R.O. Record
No. 11267 of the Court of First Instance of Rizal, for consolidation in
Associated's favor of T.C.T. No. 29685-Rizal and T.C.T. No. 53759Rizal, and in G.R. No. L-23971 of the Supreme Court, Associated vs.

Banzon, supra, affirming on November 29, 1968 the Rizal court's

judgment for consolidation; and
That since Associated was ordered liquidated and dissolved by
the Manila court of first instance in Civil Case No. 56995, as
affirmed by the Court of Appeals in CA-G.R. No. 37985-R, which
became final upon this Court's denial of review per its resolution
of June 20, 1968 in G.R. No. L-28934, the Insurance Commissioner
as the appointed liquidator of Associated is the legal representative
thereof who may duly act for Associated and upon whom summons
should be served;
That even before the promulgation of the Supreme Court decision
on November 29, 1968 in Associated vs. Banzon he, as counsel for
Associated, never attempted to secure new titles for his said client,
considering that its ownership over the parcel of land covered by
them was then "still sub judice;"
That even after the promulgation of the said Supreme Court
decision, he never attempted to secure new titles for his client,
because by that time Associated had already been ordered
dissolved and liquidated, hence, to be represented in all instances
by the Insurance Commissioner as liquidator;
That he wonders how respondent Pedro Cardenas was able to
secure T.C.T. No. 8567 (formerly T.C.T. No. 39685-Rizal) in his name
in 1965, when Associated, which really owed Cardenas a certain
sum, could only secure new titles over the parcels of land after not
before November 29, 1968, when the Supreme Court's decision in
G.R. No. L-23971 was promulgated; and that in his opinion, the
issuance to respondent Cardenas of T.C.T. No. 8567 was "fraudulent
and irregular for being without basis when the same was issued, so
that the register of deeds of Caloocan City committed some sort of
mistakes or negligence in issuing this title to respondent Pedro
Cardenas, and as such, this T.C.T. No. 8567 is null and void and
without force and effect and calls for an investigation of the guilty
parties responsible for the issuance of this T.C.T. No. 8567 in the
name of respondent Pedro Cardenas, who might have committed
some falsifications;" (for indeed how could Cardenas cause title to
said lot to be transferred to Associated for him in turn to levy
against it for his P5,100 judgment against Associated, when
Associated's case against Banzon for such transfer and
consolidation of title was then still pending appeal before this
Court, and Associated's judgment against Banzon was one of
trust, expressly therein declared to be "for the benefit of the
Philippine National Bank?[18] and

 That "anybody who will attempt to ofer the said parcel of land for
sale would be committing a crime as the disposition of the same
belongs exclusively to the Insurance Commissioner who is
the liquidator of the Associated Insurance & Surety Co., Inc.;
consequently, the petitioner should not entertain any worry as said
parcel of land is not being disposed of not only because the power
to sell the same exclusively belongs to the Insurance
Commissioner, but also because the Associated Insurance & Surety
to., Inc. has no titles yet over these parcels of land as it did not
attempt to secure any even before and after the promulgation of
the decision of the Honorable Tribunal in G. R. No. L-23971 in view
of the circumstances earlier explained."
On May 11, 1970, we issued summons on the Insurance
Commissioner as liquidator of Associated to answer the petition. In
her answer filed on May 29, 1970, the Acting Insurance
Commissioner through the Solicitor General disclaimed knowledge
of practically all the allegations of the petition for lack of knowledge
or information sufficient to form a belief as to their truth,
manifesting that she first learned of the material facts averred in
the petition when she received copy of Atty. Castillo's "Explanation
and Manifestation", because the records and documents pertinent
to this case were not among those surrendered to her, and
affirming she is the liquidator of Associated by virtue of the Manila
court's order dated December 31, 1965 of liquidation and
dissolution of said corporation, as follows:
3. That the herein Acting Insurance Commissioner is the liquidator
of Associated Insurance & Surety Co., Inc. by virtue of an order of
liquidation and dissolution of said corporation dated December 31,
1965, by the Court of First Instance of Manila in Civil Case No.
56995, which decision was affirmed on appeal by the Court of
Appeals in its decision (CA-G. R. No. 37985) dated January 3, 1968,
which decision was again affirmed on appeal by this Honorable
Tribunal when it denied the petition for a writ of certiorari in its
Resolution of June 20, 1968 (G. R. No. L-38934) and which on July 9,
1968, became final and executory;
"4. That by virtue of the aforesaid decision, the Insurance
Commissioner as liquidator of Associated Insurance & Surety Co.,
Inc., is vested by authority of law with the title to all of the
property, contracts, and rights of action of said corporation as of
the date of the order of liquidation (Sec. 175-C, par. 3 of the
Insurance Act, as amended);

5. That any subsequent sale or disposition of the property of said

corporation without the knowledge and consent of the herein
Acting Insurance Commissioner and approval by the Liquidation
Court is contrary to law and null and void;
6. That after the aforesaid order of liquidation, and dissolution
became final and executory, the Acting Insurance Commissioner
demanded for the surrender of all the books, documents and
properties of Associated Insurance & Surety Co., Inc. However, the
records and documents pertinent to the above-entitled case
were not among those surrendered to the Insurance Commissioner
and it was only upon receipt of the 'Explanation and Manifestation'
of Atty. Feliberto Castillo, dated April 25, 1970, and the present
'Petition' that she came to know for the first time of the alleged
facts averred in this case."[19]
A "Motion to Dissolve Temporary Restraining Order and to Dismiss
Petition" was filed on February 12, 1971, by respondents spouses
Cardenas and Baluyot. They contend that the restraining order
issued by this Court should be dissolved, and the petition itself,
insofar as they are concerned, be dismissed, because the petition is
predicated on petitioners' complaint for reconveyance and
damages in Civil Case No. 79244 before Branch VIII of the Court of
First Instance of Manila, and the said court issued an order on
October 28, 1970, dismissing the said complaint with respect to
defendants therein Cardenas and Baluyot, which dismissal was not
appealed and became final and executory on January 5, 1971, per
entry of judgment attached to the motion. Consequently, according
to these respondents, the temporary restraining order issued by
this Court enjoining the enforcement of the writ of execution and
the order of demolition in Reg. Case No. C-211 of the Court of First
Instance of Rizal, has become inoperative and without any legal
basis, the present petition has lost its legal basis, and petitioners
have no more cause of action against respondents Cardenas and
Baluyot. The said order of dismissal of the complaint against these
respondents was issued pursuant to Section 5, Rule 16 of the Rules
of Court, after a preliminary hearing on the affirmative defenses of
bar by prior judgment and lack of cause of action set up by said
respondents in their answer, with the lower court opening that
petitioners' action was already barred by the prior judgments of this
Court of November 29, 1968 in Associated vs. Banzon and of the
Court of Appeals of February 28, 1970 inBanzon vs. Hon. Fernando
Cruz, supra.[20]
The Solicitor General filed on March 29, 1971 on behalf of the
Insurance Commissioner as liquidator of Associated a strong

opposition to the motion to dissolve the restraining order and

dismiss
the
petition.[21] The
commissioner-liquidator
after
complaining that "she is still demanding for the surrender of all the
books, documents and properties of Associated" and that "it was
only upon receipt on March 11, 1971 of the voluminous records of
the cases handled by counsel Feliberto V. Castillo for (Associated)
that (her) undersigned counsel have verified and confirmed the
truth of the status of the diferent cases," contends inter alia as
follows:
"18. That, however, during the pendency of the aforesaid appeal
of petitioner Antonio R. Banzon with this Honorable Tribunal and
while the case was still sub-judice, particularly on February 8,
1964, the herein respondent Pedro Cardenas as winning party in a
case entitled 'Pedro Cardenas vs. Victoria Vda. de Tengco and Pablo
Tuazon,' Civil Case No. 36174, Court of First Instance of Manila, and
where the Associated Insurance and Surety Co., Inc. was surety for
the defendants therein, executed and levied upon one of the
parcels of lands involved in the aforesaid appeal. Ultimately, Pedro
Cardenas was able to acquire the land in question (Lot No. 6, Block
No. 176, then covered by T.C.T. No. 39685) as highest bidder, for
the judgment debt of defendants in said action, plus incidental
expenses for the sum of P5,100.00 only;
"19. That subsequently thereafter, said respondents Cardenas,
thru some scheme and devise, succeeded in having the title of said
parcel of land transferred in their names under T.C.T. No. 8567,
Registry of Deeds of Caloocan City; on May 5, 1965, at a time when
the Associated Insurance & Surety Co., Inc. had not yet earned the
authority to consolidate in its name said property, as the case was
then pending with this Honorable Tribunal. As alleged in paragraph
18 hereof, the question of consolidation was resolved by this
Honorable Tribunal onFebruary 28, 1968;[21a]
20. That by the nature of the decision in Civil Case No. 31237,
CFI, Manila, as alleged in paragraph 15 hereof, the property or
sums of money recovered from defendants therein shall be
reserved for the benefit of the Philippine National Bank for the
purpose of paying the principal debtor's (Maximo Sta. Maria's)
obligation therein, and consequently, the Associated Insurance &
Surety Co., Inc. shall hold the property in question or the sums
recovered in said action, in trust and for the purpose of paying the
aforesaid obligation of Maximo Sta. Maria.[22]

21. That the Associated Insurance & Surety Co., Inc. failed to pay
from its own funds under its surety undertaking, nor from funds
realized from the property levied upon by virtue of the decision in
Civil Case No. 31237, CFI, Manila, but on the other hand,
the principal debtor Sta. Maria paid his own obligation with the
Philippine National Bank thus, releasing it (Associated Insurance &
Surety Co., Inc.) from its obligation under the suretyship
undertaking with respect to said obligation of Maximo Sta. Maria,
and similarly herein petitioner Antonio R. Banzon was released
from his obligation as co-indemnitor in said undertaking;
22. That in fairness to petitioners Antonio R. Banzon and Rosa
Balmaceda, the two parcels of land executed and levied upon by
virtue of the decision in Civil Case No. 31237, Court of First Instance
of Manila, deserve to be reconveyed to them;
23. That one of the lots involved, namely, Lot No. 6, Block No.
176 covered by T.C.T. No. 856 Registry of Deeds of Caloocan City,
in the names of the present respondents Pedro Cardenas and
Leonila Baluyot, being one of the two parcels of lands levied upon
in Civil Case No. 31237 but transferred to said respondents under
dubious circumstances and patently unauthorized by law, should
be ordered reconveyed to the Associated Insurance Co., Inc.
through the Insurance Commissioner for the purpose stated in the
next preceding paragraph, as thetransaction on the transfer of said
parcel of land to them is null and void from the very beginning." [23]
Petitioners likewise oppose the motion of the Cardenases. They
contend that the present petition is not solely predicated on their
complaint for reconveyance and damages in Civil Case No. 79244
for, as admitted by the Insurance Commissioner, they are entitled
to the reconveyance of the lot covered by T.C.T. No. 8567 and for
contribution or indemnification for damages which they may
recover from Associated; that respondents Cardenases secured said
title fraudulently and irregularly without any legal basis, hence, said
title having been anomalously issued, is null and void and without
force and efect, and, that, as stated by the Insurance
Commissioner-liquidator, in fairness and justice to petitioners, the
two parcels of land levied in favor of Associated by virtue of the
decision in Civil Case No. 31237 should be reconveyed to them; and
that to dissolve the temporary restraining order and to dismiss the
present petition would leave petitioners without a legal remedy.
In a minute resolution dated April 19, 1971, the Court denied the
said motion to respondents Cardenas and Baluyot "to dissolve
temporary restraining order and to dismiss petition."

1. The immediate objectives of this petition are: (a) to enjoin

respondent Judge Fernando Cruz of the Court of First Instance of
Rizal, Caloocan City Branch, and respondents Pedro Cardenas and
Leonila Baluyot, and their representatives, from enforcing the writ
of execution and order of demolition issued by said respondent
Judge in Reg. Case No. C-211 in relation to the lot covered by T.C.T.
No. 8567; and (b) to enjoin respondent Associated from disposing
its alleged rights and interests in the two lots covered by T.C.T. No.
8567 and T.C.T. No. 53759, the injunction in both cases to be made
efective during the pendency of the reconveyance case, Civil Case
No. 79244, filed by petitioners as plaintifs before the Manila court
of first instance.
The real and substantive objectives of the petition are to seek the
rightful restoration and reconveyance to petitioners Banzons of
their two Caloocan city lots, covered by T.C.T. 53759 (still in
Banzon's name, but on the back whereof is annotated the sherif's
final deed of sale in favor of Associated) and by T.C.T. No. 8567 (in
the name of respondents Cardenases) on the fundamental ground
that Associated's levy in execution of said lots wasin trust for the
benefit of the Philippine National Bank for the purpose of paying
the bank the loan obligation of Maximo Sta. Maria which Associated
had guaranteed as surety and against which liability Banzon in turn
as indemnitor had undertaken to indemnify and hold harmless
Associated.
Now, the basic 1957 judgment of the Manila court sentencing
Banzon to pay Associated a total of P30,257.86 excluding
interest, "for the benefit of the Philippine National Bank" expressly
made of record the said court's intent and disposition that
the execution and operation of its judgment against Banzon
were contingent and conditionedupon
Associated
as plaintiffsurety actually paying or being made or compelled to pay
the bank-creditor anequivalent amount as guaranteed by it. That
this is so is made more evident when we consider the provisions of
Article 2071 of the Civil Code which permit the surety to file such
an advance suit against the principal debtor (not against an
indemnitor such as Banzon) only to obtain release from the
guaranty or security against the danger of the debtor's insolvency.
Where the debtor directly discharged his loan obligation to the
bank which in turn released Associated from its suretyship liability
without Associated having incurred a centavo of liability, it is
indisputable that Associated in turn would necessarily release
Banzon as indemnitor and the basic 1957 judgment would
be inoperable and unenforceable against Banzon.

When Associated nevertheless prematurely and contrary to the

intent and condition of the basic 1957 judgment levied in execution
on the two Caloocan City lots of Banzon, the interest it acquired
was clearly impressed with atrust character. Such acquisition of
Banzon's properties by Associated was efected, if not
through fraud[23a] on
Associated's
part,
certainly
through mistake[23b] and therefore, Associated was "by force of law,
considered a trustee of an implied trust for the benefit of the
person from whom the property comes" by virtue of Article 1456 of
the Civil Code[23c] since Associated not having paid nor having been
compelled to pay the bank had no right in law or equity to so
execute the judgment against Banzon as indemnitor. Had there
been no fraudulent concealment or suppression of the fact of such
non-payment by Associated or a mistaken notion just assumed
without factual basis that Associated had paid the bank and was
thus entitled to enforce its judgment against Banzon as indemnitor,
the writ for execution of the judgment against Banzon's properties
would not have been issued.[23d]
Furthermore, Associated's conduct, upon being sued by the
Philippine National Bank directly with the principal debtor Sta.
Maria for collection of the debt[23e] and sentenced by the Pampanga
court of first instance in 1963(which it did not appeal) to pay the
debt in the much lesser amount of only P15,446.44, excluding
interests, in notso discharging its liability notwithstanding that it
had already executed its 1957 judgment against Banzon as
indemnitor and taken in execution Banzon's two properties, was
indeed rank fraud. Associated therefore stands legally bound by
force of law to now discharge its implied trust and return Banzon's
properties to him as their true and rightful owner.
The obligation imposed upon Associated as implied trustee to so
restore Banzon's properties becomes even more compelling when it
is considered that in the premature execution sale by virtue of the
basic 1957 judgment, Associated ostensibly was the highest bidder
therefor applying its purported judgment credit of P41,000.00
whenin law such judgment was not subject to execution since the
condition of Associated as surety being made to pay the bank to
make the judgment operable and enforceable had not materialized
and in fact. Associated not having paid anything to the bank did
not possess such purported judgment credit of P41,000.00, nor did
it put out a single centavo for which it could hold Banzon
answerable and therefore take Banzon's properties in execution
and satisfaction thereof. Actually, as already indicated above, the

principal debt of the bank's debtor, when directly collected by the

bank six (6) years later, amounted merely to 1/2 the amount or
P15,446.44 as of August, 1963, excluding interests: [23f] As already
stated above, Associated did not pay even this much lesser
amount, notwithstanding the Pampanga court's judgment against it
in the suit directly filed by the bank.
Finally, it would be an outrage on simple justice and iniquitous
unjust enrichment if a surety such as Associated, after taking title
in execution to the indemnitor's properties in order to protect or
reimburse itself from liability to the creditor for the debt
guaranteed by it, were to be allowed to retain ownership of the
properties even though it did not incur or discharge its liability at
all, 'since it succeeded in evading payment to the creditor who
thereafter collected the debt directly from the debtor. Thus, the
law (Article 1456, Civil Code) impresses properties thus acquired
with a trust character and constitutes the erring surety as "trustee
of an implied trust for the benefit of the person from whom the
property comes," in this case, Banzon as the true and rightful
owner of the properties.
2. As Cardenas in levying in turn for satisfaction of his P5,100.00
judgment against Associated on one of Banzon's lots acquired only
whatever interest Associated had in the lot, and with the
knowledge that Associated's basic 1957 judgment against Banzon
was "for the benefit of the Philippine National Bank" and hence
Associated's interest in the Banzon properties was impressed with
a trust character, subject to the obligation of Associated as implied
trustee to return the properties to Banzon, the trust character of
the lot titled by Cardenas necessarily passed to him. Cardenas
could not claim actual or absolute ownership of the lot so titled but
could only hold the same as trustee, like Associated as
his causante or predecessor.
The respondents Cardenases' pleadings of record show clearly that
they were fully aware of these vital antecedents and premises of
the suits between Associated and the Banzons. In their
memorandum, they cite the Manila court of first instance's basic
decision in Civil Case No. 31237 "condemning defendants to pay
jointly and severally upon (sic) plaintif (Associated) but for the
benefit of the Philippine National Bank" [24] the several amounts
sought by Associated, as surety, totalling P30,257.86. As far as
their own claim against Associated is concerned, they likewise
recite in their memorandum that

"On April 29, 1959, then Judge (now Justice) Jesus Perez of the
Court of First Instance of Manila rendered a decision in Civil Case
No. 36194, entitled 'Pedro Cardenas vs. Victoria Vda. de Tengco, et
al.,' ordering the defendants, including the Associated Insurance &
Surety Co. Inc., as surety, to pay certain sums of money to Pedro
Cardenas. The liability of the Associated Insurance & Surety Co.
Inc., was affirmed by the Court of Appeals in a Decision
promulgated on October 30, 1963, in CA-G.R. No. 25227-R.
Consequently, pursuant to a writ of Execution issued on February 8,
1964, the City Sherif of Caloocan sold on March 23, 1964 at a
public auction to Pedro Cardenas, the highest and only bidder, all
the rights, interests, claims and title' of the judgment-debtor
Associated Insurance & Surety Co. Inc., over the property plus the
improvements thereon covered by Transfer Certificate of Title No.
39685 (one of the properties acquired from Antonio Banzon). The
property not having been redeemed within the one year period, a
Deed of Absolute Sale was issued in favor of Pedro Cardenas on
April 2, 1965. On April 23, 1965, Pedro Cardenas filed a petition
with the Court of First Instance of Rizal, Branch XII, Caloocan City,
in Registration Case No. C-211 (LRC Rec. No. 11267), entitled 'Pedro
Cardenas, Petitioner,' for the issuance of a new transfer certificate
of title over the property m question and to declare null and void
the one previously issued. On May 5, 1965, a Transfer Certificate of
Title was issued by the Register of Deeds of Caloocan City in the
name of Pedro Cardenas pursuant to the order of the court in
aforecited Registration Case No. C-211; dated May 3, 1965, as
amended."[25]
It is obvious that since what Cardenas acquired in his execution for
his P5,100 judgment against Associated wasonly 'all the rights,
interests, claims and titles of the judgment-debtor (Associated)
over the property * * * (one of the properties acquired from Antonio
Banzon)" and Associated's rights, if they could be so denominated,
over Banzon's properties were merely those of a trustee,
supra and Cardenas thereby acquired no absolute rights, interests,
claim and title" at all but Associated's obligation as trustee to
restore Banzon's lawful properties to him.
3. As a point of law, even though under Associated's suretyship
agreement guaranteeing Sta. Maria's crop loans with the bank, it
was permitted, supposedly for its protection, to proceed judicially
against the principal debtor and indemnitors even prior to the
surety's making payment to the creditor bank, Article 2071 of the
Civil Code regulates such relations' and provides that in such cases,
the surety's right is against the principal debtor and that "in all
these cases, the action of the guarantor is to obtain release from

the guaranty, or to demand a security that shall protect him from

any proceedings by the creditor and from the danger of insolvency
of the debtor."
Associated thus did not even have any valid cause of action against
Banzon as its indemnitor, but could proceed only against Sta. Maria
as the principal debtor. And even as against such principal debtor,
it could not prematurely demand payment even before it had paid
the creditor, its action being limited only for the purpose of
obtainingrelease from the guaranty or a security against an
eventual insolvency of the debtor. As was emphasized by Mr.
Justice Reyes for the Court in General Indemnity Co. Inc.
vs. Alvarez,[26] while a guarantor may under Article 2071 of the
Civil Code proceed against the principal debtor, even before having
paid, when the debt has become demandable, "(T)he last
paragraph of this same article, however, provides that in such
instance, the only action the guarantor can file against the debtor
is to obtain release from the guaranty, or to demand
a security that shall protect him from any proceeding by the
creditor and from the danger of insolvency of the debtor.' An
action by the guarantor against the principal, debtor for payment,
before the former has paid the creditor, is premature."
4. The realization of the Banzons' rightful objectives in law and
equity as thus restated has somewhat been hampered and
beclouded by the ineptitude and sorry neglect with which they
and/or their counsel have pursued their remedies in the various
suits brought by them. To cite the latest instance, the pending suit
filed by them in the Manila court of first instance, Civil Case No.
79244, is from the record the first real case that they have properly
filed for reconveyance of their two Caloocan City lots based on
their new cause of action that with the debtor's direct payment to
the bank, Associated had been released as surety and Banzon
consequently likewise released as Associated's indemnitor, and
therefore Associated in discharge of the implied trust under which it
executed the basic 1957 judgment "for the benefit of the Philippine
National Bank" against Banzon was now called upon to discharge
such trust and reconvey and restore Banzon's properties to him.
Yet Banzon filed no appeal from the Manila Court's dismissal of his
complaint against the Cardenas spouses for reconveyance of the lot
wrongfully titled by the latter on the lower court's mistaken concept
that this Court's decision of November 29, 1968 in Associated vs.
Banzon; supra, constituted res judicata and apparently allowed
such dismissal to become final. In reality, since Associated never
had to pay the bank, Banzon's two lots, which had been levied

upon prematurely under Associated's judgment against Banzon and

were therefore held by it inimplied trust for Banzon by force of
law, "deserve to be reconveyed to them" in the very words of the
insurance commissioner, who alone and officially represents and
acts for Associated as liquidator.
As manifested by Associated's former counsel even when
Associated was acting on its own unauthorizedly and in violation of
law, since an order for its liquidation and dissolution had already
been issued by the Manila court since December 31, 1965, he, as
Associated's counsel, never attempted to transfer Banzon's titles to
Associated since the question sub-judice, before this Court and
resolved
only
per
its
decision
in Associated
vs.
Banzon of November 29, 1968, as of which time, this Court had
already previously affirmed on June 20, 1968 in G.R. No. L-28934,
the Manila court's dissolution and liquidation order against
Associated thus removing all doubt that only the Insurance
Commissioner as liquidator could act in any and all matters for
Associated.[27]
5. Under Sec. 175-C, paragraph 3 of the Insurance Act as
amended,[28] the Insurance
Commissioner
as
liquidator of
Associated was vested by authority of law with the title to all of the
property, contracts and rights of action of Associated as of the date
of the judicial order of liquidation, and any sale or disposition of
Associated's properties or rights without the knowledge and
consent of the insurance commissioner as liquidator and without
the approval by the liquidation court is contrary to law and null and
void.
Accordingly, petitioners Banzons are, as against their and their
counsel's neglect and inattention, nevertheless saved from the
otherwise fatal consequences of the invoked final dismissal of their
complaint against the Cardenases in Civil Case No. 79244 of the
Manila court for recovery of the lot wrongfully titled in the
Cardenases' name per T.C.T. No. 8567. Since in all the
litigations subsequent to Associated's prematurely obtaining in the
Manila court of first instance in Civil Case 31237 the basic 1957
judgment as surety against Banzon as a mere indemnitor to cover
the principal debtor Sta. Maria's demandable loans to the bank and
thereafter levying in execution on Banzon's two Caloocan City lots,
notwithstanding that such judgment was expressly held to be in
trust and for the benefit of the bank, the insurance comissioner as
liquidator of Associated and therefore anindispensable party was
never impleaded and therefore there could be no final

determination of said actions.

Under Rule 3, section
7, indispensable parties must always be joined either as plaintifs or
defendants, for the court cannot proceed without them, and hence
all judgments and proceedings held after the liquidation and
dissolution order against Associated became void for lack of an
indispensable party in the person of the insurance commissionerliquidator. The insurance commissioner as liquidator of Associated
by authority of law was indisputably an indispensable party with
such
an
interest
in
the
controversies
afecting
the
judgment for Associated (against Banzon) and against Associated
(in favor of Cardenas) that a final decree would necessarily afect
its rights (administered by the Commissioner in the public interest
and for the public's protection) so that the courts could not proceed
therein without the commissioner-liquidator's official presence.
6. The wrongful dismissal by the Manila court of the Banzons'
reconveyance suit, Civil Case No. 79244, as against the Cardenases
thus does not produce what would otherwise have been fatal
consequences due to the Banzons' failure to appeal from such
dismissal.
Their reconveyance case as against Associated as principal
defendant remains pending in court.
And theinsurance
commissioner us liquidator of Associated, now that she is fully
aware of the status of these antecedent cases after she finally
received on March 11, 1971 the voluminous records thereof which
had hitherto not been surrendered to her office despite demands
therefor, is called upon to appear for Associated in the said case, if
she has not as yet been duly impleaded as such liquidator. With
the insurance commissioner, as liquidator of Associated and an
indispensable party now in the case, the said reconveyance
suit may now proceed anew andthe Cardenas spouses caused by
the liquidator to be duly impleaded anew for they are
also indispensable partiesinsofar as the insurance commissionerliquidator's claim on behalf of Associated to the lot covered by
T.C.T. No. 8567 issued in their name is concerned. Herein
petitioners seek principally in the said case the reconveyance to
them by Associated of their two parcels of land covered by T.C.T.
No. 8567 and T.C.T. No. 53759, as acquired in execution by
Associated, and thereafter, with respect to the lot covered by T.C.T.
No. 8567, by the Cardenases, by virtue of the trust
character impressed upon them and Associated's duty as implied
trustee to restore said properties to the Banzons.
Considering that the insurance commissioner herself, who now
legally can alone represent Associated as liquidator, has herein

recognized such trust character and has expressed the belief

that the said lot, no less than the other lot covered by T.C.T. No.
8567, should, in Justice to petitioners, be reconveyed to them on
account, among others, of petitioner Banzon's release from his
obligation as indemnitor by virtue of the principal debtor's
subsequent payment of his obligation with the Philippine National
Bank which likewise released Associated from any liability as
surety, the present petition should therefore be granted in the
interests of justice and equity so as to enable the insurance
commissioner-liquidator in due course to discharge the trust of
reconveying Banzons' properties to them.
7. The circumstances that respondents Cardenases, insofar as the
lot wrongfully claimed by them, caused the Caloocan City special
deputy sherif to enforce on March 23, 1970 respondent court's
challenged order of demolition and writ of possession on the very
day that this Court ordered the issuance of a restraining order
against the enforcement of said challenged order and writ, and
notwithstanding that said sherif was duly advised by Banzon of the
petition at bar having been filed on March 20, 1970, does not make
the restraining order in any manner moot. The Court does not look
with favor upon parties "racing to beat an injunction or restraining
order" which they have reason to believe might be forthcoming
from the Court by virtue of the filing and pendency of the
appropriate petition therefor. Where the restraining order or
preliminary injunction are found to have been properly issued, as in
the case at bar, mandatory writs shall be issued by the Court to
restore matters to the status quo ante.[29]
In the case at bar, with the insurance commissioner as liquidator of
Associated, recognizing through the Solicitor General that the
Banzons' two lots wrongfully taken from them by Associated's
premature actions should be reconveyed to them, there is
established a clear and indubitable showing on the record that the
petitioners are entitled to a writ restoring the status quo ante. A
mandatory writ shall therefore issue commanding respondent court
to forthwith restore petitioners to their possession of Lot 6, Block
176, covered by T.C.T. 8567 from which they have been removed
by enforcement of said respondent court's enjoined order of
demolition and writ of possession dated March 13, 1970, Annex "F"
of the petition. As to petitioners' building thereon claimed to be
worth P10,000.00 (but countered by Cardenas to be a "mere
barong-barong"[30] ), respondent court shall at Banzon's petition
cause respondents Cardenases to restore the demolished building
or pay Banzon the determined value thereof. As to the fruits of
possession of the land, with Cardenas acknowledging that he has

been leasing the same to a third person at P200.00 a month,

[31]
respondents Cardenases shall forthwith pay to petitioners
Banzons the whole amount of rentals so received by them to the
time that possession of the lot is efectively restored to petitioners.
By the very nature of this mandatory writ, the same shall be
immediately executory upon promulgation of this decision.
WHEREFORE, the petition for a permanent injunction, during the
pendency of Civil Case No. 79244 of the Court of First Instance of
Manila against the disposition in any manner of the two parcels of
land subject of said case other than their reconveyance to
petitioners as the true and rightful owners thereof as expressly
recognized by the insurance commissioner as liquidator of
Associated is hereby granted. In lieu of the permanent injunction
against enforcement of respondent court's order dated March 13,
1970 in Case No. C-211 thereof ordering the delivery of possession
of the property covered by T.C.T. No. 8567 to respondents
Cardenases and demolition of petitioners Banzons' improvements
thereon, (which were prematurely carried out by respondent court's
sherif on March 23, 1970) a writ of mandatory injunction
commanding respondent court to forthwith restore the status ante
quo and to restore petitioners Banzons to full possession of the

property and enjoyment of the fruits and rentals thereof under the
terms and conditions stated in the next preceding paragraph is
hereby issued, which shall be immediately executory upon
promulgation of this decision. With costs against respondents
Pedro Cardenas and Leonila Baluyot.
This decision is without prejudice to such civil and criminal liability
as the officers of the defunct Associated Insurance & Surety Co. Inc.
may have incurred by virtue of their acts of commission and
omission which have resulted in grave prejudice and damage to
petitioners as well as to the public interest, as in the suppression
from and non-surrender to the Insurance Commissioner as
liquidator of the records of the relevant antecedent cases, and in
the possible misrepresentation to the courts therein that Associated
had duly discharged to the bank its liability as surety and could
therefore lawfully levy on the properties of Banzon as indemnitor,
which would have resulted in respondents' unjust enrichment at
Banzon's expense. The insurance commissioner is directed to
conduct the corresponding investigation for the purpose of filing
such criminal and other appropriate actions as may be warranted
against the responsible parties. So ordered.