TUPAZ IV & TUPAZ V.

CA & BPI, (2005)

Guaranty: Benefit of Excussion, Art. 2058 to 2064, Art. 2081
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
Jose Tupaz bound himself personally liable for El Oro Corporations debts.
1.

First, excussion is not a pre-requisite to secure judgment against a

guarantor. The guarantor can still demand deferment of the execution of the
judgment against him until after the assets of the principal debtor shall have
been exhausted.
2.
Second, the benefit of excussion may be waived. Under the trust receipt
dated 30 September 1981, petitioner Jose Tupaz waived excussion when he
agreed that his liability in [the] guaranty shall be DIRECT AND
IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent
bank] to take any steps or exhaust any legal remedies xxx. The clear import
of this stipulation is that petitioner Jose Tupaz waived the benefit of
excussion under his guarantee.

SECURITY BANK AND TRUST

RODOLFO M. CUENCA, respondent.

COMPANY,

Inc., petitioner,

vs.

agreement to restructure the loan obligations of Sta. Ines, Security Bank and
Sta. Ines executed a Loan Agreement dated 31 October 1989

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

Sta Ines made payments up to (P1,757,000.00) The defaulted in the

payment of its restructured loan obligations to SBTC despite demands made
upon appellant SIMC and CUENCA,

FACTS: Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a

corporation engaged in logging operations. It was a holder of a Timber
License Agreement issued by the DENR
On 10 November 1980, Security Bank and Trust Co. granted
appellant Sta. Ines a credit line in the amount of (P8,000,000.00) effective
til November 30, 1981 to assist the latter in meeting the additional
capitalization requirements of its logging operations.
To secure payment, it executed a chattel mortgage over some of its
machineries and equipments. And as an additional security, its President and
Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity
agreement in favor of Security Bank whereby he bound himself jointly and
severally with Sta. Ines.
Specific stipulations:
The bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower.
As additional security for the payment of the loan, Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17 December
1980 solidary binding himself:
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever
amount x x x the client may be indebted to the bank x x x by virtue of
aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .
1985: Cuenca resigned as President and Chairman of the Board of Directors
of defendant-appellant Sta. Ines. Subsequently, the shareholdings of Cuenca
in Sta. Ines were sold at a public auction to Adolfo Angala. Before and after
this, Sta Ines availed of its credit line.
Sta Ines encountered difficulty in making the amortization payments on its
loans and requested SBTC for a complete restructuring of its
indebtedness. SBTC accommodated SIMCs request and signified its
approval in a letter dated 18 February 1988 wherein SBTC and Sta. Ines,
without notice to or the prior consent of ] Cuenca, agreed to restructure the
past due obligations of defendant-appellant Sta. Ines. To formalize their

SBTC filed a complaint for collection of sum of resulting after trial on the
merits in a decision by the court a quo, from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement novated
the 1980 credit accommodation which extinguished the Indemnity Agreement
for which Cuenca was liable solidarily. No notice/consent to restructure.
Since with expiration date, liable only up to that date and up to that amount
(8M). Amounted to extension.of time with no notice to suret therefore
released from liability.
ISSUES:
(a) whether the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity Agreement YES
(b) whether Cuenca waived his right to be notified of and to give consent to
any substitution, renewal, extension, increase, amendment, conversion or
revival of the said credit accommodation. NO
HELD: Petition of Bank no merit.CA affirmed.
RATIO:
A. Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of
the Civil Code, Novation of a contract is never presumed. Indeed, the
following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old
contract is extinguished; and (4) there is a valid new contract. 16
We reject these contentions. Clearly, the requisites of novation are present in
this case. The 1989 Loan Agreement extinguished the obligation 18 obtained
under the 1980 credit accomodation. This is evident from its explicit provision
to "liquidate" the principal and the interest of the earlier indebtedness, as the
following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding Indebtedness to the
Lender (the "Indebtedness") while the Second Loan shall be applied
to liquidatethe past due interest and penalty portion of the Indebtedness.

Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement
1) NOT mere renewal/ Extension
1989 Loan Agreement expressly stipulated that its purpose was to "liquidate,"
not to renew or extend, the outstanding indebtedness. Moreover, respondent
did not sign or consent to the 1989 Loan Agreement, which had allegedly
extended the original P8 million credit facility. Hence, his obligation as a
surety should be deemed extinguished, "[a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the
guaranty. x x x."
2) Binding Nature of the Credit Approval Memorandum
Bank objects to the appellate courts reliance on that document, contending
that it was not a binding agreement because it was not signed by the parties.
It adds that it was merely for its internal use. Indeed, it cannot take
advantage of that document by agreeing to be bound only by those portions
that are favorable to it, while denying those that are disadvantageous.
B. NO Waiver of Consent
In the Indemnity Agreement, while respondent held himself liable for the
credit accommodation or any modification thereof, such clause should be
understood in the context of the P8 million limit and the November 30, 1981
term. It did not give the bank or Sta. Ines any license to modify the nature
and scope of the original credit accommodation, without informing or getting
the consent of respondent who was solidarily liable.
A contract of surety "cannot extend to more than what is stipulated. It is
strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety." 31 Likewise, the Court has ruled that "it is a
well-settled legal principle that if there is any doubt on the terms and
conditions of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity.32In the absence of an unequivocal provision that
respondent waived his right to be notified of or to give consent to any
alteration of the credit accommodation, we cannot sustain petitioners view
that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly
shows that the bank did not have absolute authority to unilaterally
change the terms of the loan accommodation. At most, the alleged basis
of respondents waiver is vague and uncertain. It confers no clear
authorization on the bank or Sta. Ines to modify or extend the original
obligation without the consent of the surety or notice thereto.

1) NOT Continuing Surety

That the Indemnity Agreement is a continuing surety does not authorize the
bank to extend the scope of the principal obligation inordinately.
To repeat, in the present case, the Indemnity Agreement was subject to the
two limitations of the credit accommodation: (1) that the obligation should not
exceed P8 million, and (2) that the accommodation should expire not later
than November 30, 1981. Hence, it was a continuing surety only in regard to
loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
NO PROVISION: each suretyship is a continuing one which shall remain in
full force and effect until this bank is notified of its revocation.
2) Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary
signature") of a major stockholder or corporate officer, as an additional
security for loans granted to corporations. There are at least two reasons for
this. First, in case of default, the creditors recourse, which is normally limited
to the corporate properties under the veil of separate corporate personality,
would extend to the personal assets of the surety. Second, such surety would
be compelled to ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to
have required the JSS of respondent, who was the chairman and president
of Sta. Ines in 1980 when the credit accommodation was granted. There was
no reason or logic, however, for the bank or Sta. Ines to assume that he
would still agree to act as surety in the 1989 Loan Agreement, because at
that time, he was no longer an officer or a stockholder of the debtorcorporation. Verily, he was not in a position then to ensure the payment of the
obligation. Neither did he have any reason to bind himself further to a bigger
and more onerous obligation.

Palmares vs. CA
(288 SCRA 422)
Facts: 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
30days from the date thereof. 1 On four occasions after the execution of the
promissory note and evenafter 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. 2Consequently, 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.

Facts:
Respondent spouses applied for a loan with respondent
SOLIDBANK. The
loan
was granted subject
to the
condition that spouses execute a chattel mortgage over the 3
vessels to be acquired by them and that a continuing
guarantee be executed by petitioner EZ, Inc. in favor of Solid
Bank.
The spouses defaulted in payment of the entire obligation up
on maturity. Solid Bank filed a complaint for the sum of
money against EZ Zobel.

Issue: WON Palmares is liable

Petitioner moved to dismiss the complaint on the ground that

its liability as guarantor of the loan was extinguished
pursuant to Article 2080.

Held: If a person binds himself solidarily with the principal debtor,

the provisions of Section 4, Chapter3, 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.

Issue:
1.WON Art. 2080 is applicable to petitioner;
2.WON petitioners obligation to SOLIDBANK under the contin
uing guaranty is that of a surety;
3.WON the failure of SOLIDBANK to register the chattel mortg
age extinguish petitioners liability to SOLIDBANK
Held:
1.Art. 2080 is not applicable where liability is a surety
2.Petitioner obligated itself as a surety the contract execute
d is a contract of surety
3. Petitioner bound itself irrespective of existence of
collateral failure to register the chattel mortgage did not
release
petitioner
from
obligation.
Art
2080 The guarantors, even though they be solidarily, are rele
ased from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preferences of the latter.

E Zobel, Inc. vs. CA

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO

CHING, petitioners, vs. COURT OF APPEALS and
TRADERS ROYAL BANK, respondents.
Facts: This case stems from an action to compel Ching to pay
TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by
Trust Receipt No. 106;
2. P1,191,137.13 under Letter of Credit No. 563 AD covered
by Trust Receipt No. 113; and
3. P3,500,000 under the trust loan covered by a notarized
Promissory Note.
Ching was the Senior Vice President of PBM. In his personal
capacity and not as a corporate officer, Ching signed a Deed
of Suretyship dated 21 July 1977 binding himself as follows:
x x x as primary obligor(s) and not as mere guarantor(s),
hereby warrant to the TRADERS ROYAL BANK, its successors
and assigns, the due and punctual payment by the following
individuals and/or companies/firms, hereinafter called the
DEBTOR(S), of such amounts whether due or not, as
indicated opposite their respective names, to wit:
NAME OF DEBTOR(S)
PHIL. BLOOMING MILLS CORP.
10,000,000.00)

AMOUNT OF OBLIGATION
TEN MILLION PESOS

(P

owing to said TRADERS ROYAL BANK, hereafter called the

CREDITOR, as evidenced by all notes, drafts, overdrafts and
other credit obligations of every kind and nature
contracted/incurred by said DEBTOR(S) in favor of said
CREDITOR.
On 24 March and 6 August 1980, TRB granted PBM letters of
credit on application of Ching in his capacity as Senior Vice
President of PBM. Ching later accomplished and delivered to

TRB trust receipts, which acknowledged receipt in trust for

TRB of the merchandise subject of the letters of credit. Under
the trust receipts, PBM had the right to sell the merchandise
for cash with the obligation to turn over the entire proceeds
of the sale to TRB as payment of PBMs indebtedness. Letter
of Credit No. 479 AD, covered by Trust Receipt No. 106, has a
face value of US$591,043, while Letter of Credit No. 563 AD,
covered by Trust Receipt No. 113, has a face value of
US$155,460.34.
Ching further executed an Undertaking for each trust receipt,
which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of
trusts shall bear interest at the rate of ____ per centum (____
%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned
hereby jointly and severally undertake and agree to pay on
demand on the said BANK, all sums and amounts of money
which said BANK may call upon them to pay arising out of,
pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered by
the Trust Receipt by or through an attorney-at-law, the
undersigned hereby further agree(s) to pay an additional of
10% of the total amount due on the draft as attorneys fees,
exclusive of all costs, fees and other expenses of collection
but shall in no case be less than P200.00 (Emphasis
supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from
TRB. Ching signed as co-maker in the notarized Promissory
Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We,
jointly and severally, promise to pay the TRADERS ROYAL
BANK or order, at its Office in 4th Floor, Kanlaon Towers
Bldg., Roxas Blvd., Pasay City, the sum of Pesos: THREE
MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00),
Philippine Currency, with the interest rate of Eighteen Percent
(18%) per annum until fully paid.

PBM defaulted in its payment of Trust Receipt No. 106 for

P959,611.96, and of Trust Receipt No. 113 for P1,191,137.13.
PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for
suspension of payments with the Securities and Exchange
Commission (SEC). The petition sought to suspend
payment of PBMs obligations and prayed that the SEC allow
PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM
was TRB.
On 9 July 1982, the SEC placed all of PBMs assets, liabilities,
and obligations under the rehabilitation receivership of
Kalaw, Escaler and Associates.
On 13 May 1983, ten months after the SEC placed PBM under
rehabilitation receivership, TRB filed with the trial court a
complaint for collection against PBM and Ching. TRB asked
the trial court to order defendants to pay solidarily the
following amounts:
(1) P6,612,l32.74 exclusive of interests, penalties, and bank
charges [representing its indebtedness arising from the
letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other
bank charges [due and owing from the trust loan of 27 April
1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other
bank charges [due and owing from the money market loan of
1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under
the Deed of Suretyship in the event plaintiff can not recover
the full amount of PBMs indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and
for attorneys fees;
(6) Such other amounts that may be proven by the plaintiff
during the trial, by way of damages and expenses for
litigation.
On 25 May 1983, TRB moved to withdraw the complaint
against PBM on the ground that the SEC had already placed

PBM under receivership. The trial court thus dismissed the

complaint against PBM.
On 23 June 1983, PBM and Ching also moved to dismiss the
complaint on the ground that the trial court had no
jurisdiction over the subject matter of the case.
TRB filed an opposition to the Motion to Dismiss. TRB argued,
among others, that Ching is being sued in his personal
capacity as a surety for PBM.
In its order dated 15 August 1983, the trial court denied the
motion to dismiss with respect to Ching and affirmed its
dismissal of the case with respect to PBM. The trial court
stressed that TRB was holding Ching liable under the Deed of
Suretyship.
Upon the trial courts denial of his Motion for
Reconsideration, Ching filed a Petition for Certiorari and
Prohibition before the Court of Appeals. The appellate court
granted Chings petition and ordered the dismissal of the
case. The appellate court ruled that the SEC assumed
jurisdiction over Ching and PBM to the exclusion of courts or
tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision before this Court.
In Traders Royal Bank v. Court of Appeals, this Court upheld
TRB and ruled that Ching was merely a nominal party in SEC
Case No. 2250. Creditors may sue individual sureties of
debtor corporations, like Ching, in a separate proceeding
before regular courts despite the pendency of a case before
the SEC involving the debtor corporation.
Ching denied liability as surety and accommodation co-maker
of PBM. He claimed that the SEC had already issued a
decision approving a revised rehabilitation plan for PBMs
creditors, and that PBM obtained the credit accommodations
for corporate purposes that did not redound to his personal
benefit. He further claimed that even as a surety, he has the
right to the defenses personal to PBM. Thus, his liability as
surety would attach only if, after the implementation of
payments scheduled under the rehabilitation plan, there
would remain a balance of PBMs debt to TRB.

The Ruling of the Trial Court

The trial court found Ching liable to TRB for P19,333,558.16
under the Deed of Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently
from his capacity as a stockholder of the Philippine Blooming
Mills. Indisputably, under the Deed of Suretyship defendant
Ching unconditionally agreed to assume PBMs liability to the
plaintiff in the event PBM defaulted in the payment of the
said obligation in addition to whatever penalties, expenses
and bank charges that may occur by reason of default. Clear
enough, under the Deed of Suretyship (Exh. J), defendant
Ching bound himself jointly and severally with PBM in the
payment of the latters obligation to the plaintiff. The
obligation being solidary, the plaintiff Bank can hold Ching
liable upon default of the principal debtor. This is explicitly
provided in Article 1216 of the New Civil Code already quoted
above.
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary debtor,
he should benefit from the changed nature of the obligation
as provided in Article 1222 of the Civil Code.
Ching claimed that his liability should likewise be reduced
since the equitable apportionment of PBMs remaining assets
among its creditors under the rehabilitation proceedings
would have the effect of reducing PBMs liability. He also
claimed that the amount for which he was being held liable
was excessive. He contended that the outstanding principal
balance, as stated in TRB Board Resolution No. 5893-1990,
was only P5,650,749.09. Ching also contended that he was
not liable for interest, as the loan documents did not stipulate
the interest rate, pursuant to Article 1956 of the Civil Code.
Finally, Ching asserted that the Deed of Suretyship executed
on 21 July 1977 could not guarantee obligations incurred
after its execution.
The Court of Appeals resolved in favor of TRB.
The Court of Appeals denied
Reconsideration for lack of merit.

Chings

Motion

for

Hence, this petition.

Issue: WON PETITIONER ALFREDO CHING WAS LIABLE FOR
OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE
EXECUTION OF THE DEED OF SURETYSHIP.
Held: Yes.
Ching is liable for credit obligations contracted by PBM
against TRB before and after the execution of the 21 July
1977 Deed of Suretyship. This is evident from the tenor of
the deed itself, referring to amounts PBM may now be
indebted or may hereafter become indebted to TRB.
The law expressly allows a suretyship for future debts.
Article 2053 of the Civil Code provides:
A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A
conditional obligation may also be secured. (Emphasis
supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals
that:
Under the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not be known at
the time the guaranty is executed. This is the basis for
contracts denominated as continuing guaranty or suretyship.
A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of
dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its
operation and is generally intended to provide security with
respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable; Otherwise stated, a
continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the
description or contemplation of the contract of guaranty,
until the expiration or termination thereof. A guaranty shall
be construed as continuing when by the terms thereof it is

evident that the object is to give a standing credit to the

principal debtor to be used from time to time either
indefinitely or until a certain period; especially if the right to
recall the guaranty is expressly reserved. Hence, where the
contract states that the guaranty is to secure advances to be

made from time to time, it will be construed to be a

continuing one.