G.R. No.

L-158025 November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants,

vs.
GEORGE C. SELLNER, defendant-appellee.

Wolfson, Wolfson and Schwarzkopf for appellants.

William and Ferrier for appellee.

MALCOLM, J.:

This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the
trial court held that the suit was premature, and absolved the defendant from the complaint, with the costs
against the plaintiffs.

The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for
Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:lawph!l.net

DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note
executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and
severally, in your favor and due six months after date for Pesos 10,000 is not fully paid at maturity with
interest, I will, within fifteen days after notice of such default, pay you in cash the sum of P10,000 and interest
upon your surrendering to me the three thousand shares of stock of the Keystone Mining Co. held by you as
security for the payment of said note.

Respectfully,

(Sgd.) GEO. C. SELLNER.

Counsel for both parties agree that the only point at issue is the determination of defendant's status in the
transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor.
Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.

In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled
"De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code
as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish world "fiador" is found in
all of the English translations of the Civil Code as "surety." The law of guaranty is not related of by that name in
the Civil Code, although indirect reference to the same is made in the Code of Commerce. In terminology at
least, no distinction is made in the Civil Code between the obligation of a surety and that of a guarantor.

As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law
origin, we feel free to supplement the statutory law by a reference to the precepts of the law merchant.

The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a
guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor
are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a
regular party to upon an independent agreement to pay the obligation if the primary pay or fails to do so. A
surety is charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The
obligation of the surety is primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero de la
Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich.,
492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)

Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or
suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to do so."
But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter
third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to
be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the
contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title concerning
fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the
common law, the effect of guaranty between guarantor and creditor. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors
liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more
precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender
to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is
not bound with the principals by the same instrument executed at the same time and on the same
consideration, but his responsibility is a secondary one found in an independent collateral agreement, Neither is
Sellner jointly and severally liable with the principal debtors.

With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil Code.

There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the
Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by the
makers until September 30, 1916. When the note became due, it is admitted that the shares of stock used as
collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been
paid was not given to and when the Keyston Mining Company stock was worthless. Defendant, consequently,
through the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount
which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law
of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly
to notify the guarantor, may thus have served to discharge the guarantor.

For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of
this instance against the appellants. So ordered.

G.R. No. L-16666 April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-
appellant

Ross and Laurence and Wolfson & Scwarzkopf for appellant.

Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.

OSTRAND, J.:

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written
agreement undertook to construct a building on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being P64,000. One of the conditions of the
agreement was that the contractor should obtain the "guarantee" of the Fidelity and
Surety Company of the Philippine Islands to the amount of P128,800 and the following
endorsement in the English language appears upon the contract:

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and conditions as
outlined in the above contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER,

Vice-President.

Machetti constructed the building under the supervision of architects representing the
Hospicio de San Jose and, as the work progressed, payments were made to him from
time to time upon the recommendation of the architects, until the entire contract price,
with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that
the work had not been carried out in accordance with the specifications which formed
part of the contract and that the workmanship was not of the standard required, and the
Hospicio de San Jose therefore answered the complaint and presented a counterclaim for
damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on
petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4,
1918, an order was entered suspending the proceeding in the present case in
accordance with section 60 of the Insolvency Law, Act No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and
Surety Company be made cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but still remain suspended as to Machetti.
This motion was granted and on February 7, 1920, the Hospicio filed a complaint against
the Fidelity and Surety Company asking for a judgement for P12,800 against the
company upon its guaranty. After trial, the Court of First Instance rendered judgment
against the Fidelity and Surety Company for P12,800 in accordance with the complaint.
The case is now before this court upon appeal by the Fidelity and Surety Company form
said judgment.

As will be seen, the original action which Machetti was the plaintiff and the Hospicio de
San Jose defendant, has been converted into an action in which the Hospicio de San Jose
is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the
defendant, Machetti having been practically eliminated from the case.

But in this instance the guarantor's case is even stronger than that of an ordinary surety.
The contract of guaranty is written in the English language and the terms employed
must of course be given the signification which ordinarily attaches to them in that
language. In English the term "guarantor" implies an undertaking of guaranty, as
distinguished from suretyship. It is very true that notwithstanding the use of the words
"guarantee" or "guaranty" circumstances may be shown which convert the contract into
one of suretyship but such circumstances do not exist in the present case; on the
contrary it appear affirmatively that the contract is the guarantor's separate undertaking
in which the principal does not join, that its rests on a separate consideration moving
from the principal and that although it is written in continuation of the contract for the
construction of the building, it is a collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing features of contracts of guaranty.

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only
binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the
other an insurer of the solvency of the debtor. (Saint vs. Wheeler & Wilson Mfg. Co., 95
Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs.
Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is
what the Fidelity and Surety Company assumed in the present case. The undertaking is
perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract
and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company
having bound itself to pay only the event its principal, Machetti, cannot pay it follows
that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such
ability may be proven by the return of a writ of execution unsatisfied or by other means,
but is not sufficiently established by the mere fact that he has been declared insolvent in
insolvency proceedings under our statutes, in which the extent of the insolvent's inability
to pay is not determined until the final liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to
such right of action as the cross-complainant, the Hospicio de San Jose, may have after
exhausting its remedy against the plaintiff Machetti. So ordered.

G.R. No. 34642 September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,

vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.

R. Nepomuceno for appellant.

Jacinto E. Evidente for appellees.

STREET, J.:

This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with whom
is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo
Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the
trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from November 15,
1929, the date of the filing of the complaint, with costs. But it was declared that execution of this judgment
should issue first against the property of Guillermo Severino, and if no property should be found belonging to
said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be
issued against the property of Enrique Echaus as guarantor. From this judgment the defendant Echaus
appealed, but his principal, Guillermo Severino, did not.

The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident
of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable property
and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other
heirs of the deceased on the other part. In order to make an end of this litigation a compromise was effected by
which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the estate of his
father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of
money was made payable, first, P40,000 in cash upon the execution of the document of compromise, and the
balance in three several payments of P20,000 at the end of one year; two years, and three years respectively.
To this contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of P40,000 was
made on July 11, 1924, the date when the contract of compromise was executed; and of this amount the
plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola
Severino is entitled to the sum of P20,000.

It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had
not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the
last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should retained
on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on
June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to
the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of
moment.

The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and
the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received
nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the
contract was lacking in consideration as to him.

The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal
of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas
Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which
is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his
principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former
action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the
principal or his guarantor.

The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the
appellant. So ordered.

G.R. No. 172041 December 18, 2008

GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS REYES, JR., petitioners,

vs.
ASIANBANK CORPORATION, respondent.

DECISION

VELASCO, JR., J.:

This petition for review under Rule 45 seeks to nullify and set aside the Decision1 dated October 28, 2005 of the
Court of Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution2 of March 17, 2006 denying petitioners
motion for reconsideration.

The Facts

Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the
semi-conductor business. During the period material, petitioner Geronimo B. delos Reyes, Jr. was its president
and one Andrew delos Reyes its executive vice-president.

On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for
Gateway in favor of respondent Asianbank Corporation (Asianbank), pertinently providing:

I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x due and punctual
payment by the following individuals/companies/firms, hereinafter called the DEBTOR(S), of such amounts
whether due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

GATEWAY ELECTRONICS *P10,000,000.00 *US$3,000,000.00

CORPORATION *DOMESTIC BILLS *OMNIBUS CREDIT LINE
[PURCHASED LINE]

owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other [credit] obligations of every kind and nature contracted/incurred by said DEBTOR(S) in
favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebt nbsp
nbsp nbsp nbsp erein secured at maturity, I/WE BR
vs.
and severally agree and engage to the CREDITOR, its successors and assigns, the prompt payment, x x x of
such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or
may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges
as may accrue thereon x x x.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be performed
under any contracts evidencing indebtedness/obligations and any supplements, amendments, changes or
modifications made thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the
pursuit by the CREDITOR x x x of whatever remedies it or they may have against the DEBTOR(S) or the
securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon this suretyship,
x x x and notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time
may exceed the aggregate principal sum hereinabove stated.3

Later developments saw Asianbank extending to Gateway several export packing loans in the total aggregate
amount of USD 1,700,883.48. This loan package was later consolidated with Dollar Promissory Note (PN) No.
FCD-0599-27494 for the amount of USD 1,700,883.48 and secured by a chattel mortgage over Gateways
equipment for USD 2 million.

Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateways request,
Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity of three
of Gateways officers, among them Andrew.

On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank checks for the amounts
of USD 40,000 and USD 20,000, respectively, as payment for its arrearages and interests for the periods June
30 and July 30, 1999; but both checks were dishonored for insufficiency of funds. Asianbanks demands for
payment made upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateways obligation
to Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.

Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati City a complaint for
a sum of money against Gateway, Geronimo, and Andrew. The complaint, as later amended, was eventually
raffled to Branch 60 of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank Corporation v.
Gateway Electronics Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.

In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the
steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts
toward recovery.

Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the
PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did not include PN No.
FCD-0599-2749, the payment of which was extended several times without his consent.

Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his
signature on it, was signed without his wifes consent and should, thus, be considered as a mere continuing
offer. Like Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement
inasmuch as he too never consented to the repeated loan maturity date extensions given by Asianbank to
Gateway.

After due hearing, the RTC rendered judgment dated October 7, 20035 in favor of Gateway, the dispositive
portion of which states:

WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants Gateway Electronics
Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and severally liable to pay the plaintiff
the following:

a) The sum of $2,235,452.17 United States Currency with interest to be added on at the prevailing market rate
over a given thirty day London Interbank Offered Rate (LIBOR) plus a spread of 5.5358 percent or ten and
[45,455/100,000] percent per annum for the first 35 days and every thirty days beginning November 23, 1999
until fully paid;

b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully paid;

c) attorneys fees of twenty percent (20%) of the total amount due and unpaid; and

d) costs of the suit.

SO ORDERED.

Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed as CA-G.R. CV No.
80734. Following the filing of its and Geronimos joint appellants brief, Gateway filed on November 10, 2004 a
petition for voluntary insolvency6 with the RTC in Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04,
in which Asianbank was listed in the attached Schedule of Obligations as one of the creditors. On March 16,
2005, Metrobank, as successor-in-interest of Asianbank, via a Notice of Creditors Claim, prayed that it be
allowed to participate in the Gatewayss creditors meeting.

In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City RTC. In time, Gateway
and Geronimo interposed a motion for reconsideration. This was followed by a Supplemental Motion for
Reconsideration dated January 20, 2006, stating that in SEC Case No. 037-04, the RTC in Imus, Cavite had
issued an Order dated December 2, 2004, declaring Gateway insolvent and directing all its creditors to appear
before the court on a certain date for the purpose of choosing among themselves the assignee of Gateways
estate which the courts sheriff has meanwhile placed in custodia legis.7 Gateway and Geronimo thus prayed
that the assailed decision of the Makati City RTC be set aside, the insolvency court having acquired exclusive
jurisdiction over the properties of Gateway by virtue of Section 60 of Act No. 1956, without prejudice to
Asianbank pursuing its claim in the insolvency proceedings.

In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration and its supplement.

Hence, Gateway and Geronimo filed this petition anchored on the following grounds:

The [CA] erred in disregarding the established rule that an action commenced by a creditor against a judicially
declared insolvent for the recovery of his claim should be dismissed and referred to the insolvency court.
Where, therefore, as in this case, petitioner GEC [referring to Gateway] has been declared insolvent x x x,
respondent Asianbanks claim for the payment of GECs loans should be ventilated before the insolvency court x
x x.

II

The [CA] erred in admitting as evidence the Deed of Surety purportedly signed by petitioner GBR [referring to
Geronimo] despite the unexplained failure of respondent Asianbank to present the originals of the Deed of
Surety during the trial.

III

The [CA] erred in holding that the repeated extensions granted by respondent Asianbank to GEC without notice
to and the express consent of petitioner GBR did not discharge petitioner GBR from his liabilities as surety GEC
in that:

A. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty.

B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as "too comprehensive and all
encompassing as to amount to absurdity."

C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from exercising his right of
subrogation under Article 2080 of the Civil Code. As such, petitioner GBR should be released from his
obligations as surety of GEC.
IV

It is a well-settled rule that when a bank deviates from normal banking practice in a transaction and sustains
injury as a result thereof, the bank is deemed to have assumed the risk and no right of payment accrues to the
latter against any party to the transaction. By repeatedly extending the period for the payment of GECs
obligations and granting GEC other loans after the suretyship agreement despite GECs default and in failing to
foreclose the chattel mortgage constituted as security for GECs loan contrary to normal banking practices,
Asianbank failed to exercise reasonable caution for its own protection and assumed the risk of non-payment
through its own acts, and thus has no right to proceed against petitioner GBR as surety for the payment of
GECs loans.

In Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the precise relief to give, the
court will "balance the equities" or the respective interests of the parties and take into account the relative
hardship that one relief or another may occasion to them. Upon a balancing of interests of both petitioner GBR
and respondent Asianbank, greater and irreparable harm and injury would be suffered by petitioner GBR than
respondent Asianbank if the assailed Decision and Resolution of the [CA] would be upheld x x x. This Honorable
Court x x x should thus exercise its equity jurisdiction in the instant case to the end that it may render complete
justice to both parties and declare petitioner GBR as released and discharged from any liability in respect of
respondent Asianbanks claims.8

The Ruling of the Court

Gateway May Be Discharged from Liability But Not Geronimo

Gateway, having been declared insolvent, argues that jurisdiction over all claims against all of its properties and
assets properly pertains to the insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956,9 as
amended, or the Insolvency Law, any pending action against its properties and assets must be dismissed, the
claimant relegated to the insolvency proceedings for the claimants relief.

The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched,
the issuance of an order declaring the petitioner insolvent after the insolvency court finds the corresponding
petition for insolvency to be meritorious shall stay all pending civil actions against the petitioners property. For
reference, said Sec. 18, setting forth the effects and contents of a voluntary insolvency order,10 pertinently
provides:

Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x shall make an order
declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to
take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers,
books of account, papers, notes, bonds, bills, and securities of the debtor and all his real and personal property,
estate and effects x x x. Said order shall further forbid the payment to the creditor of any debts due to him and
the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any
property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee
of the estate. Said order shall [be published] x x x. Upon the granting of said order, all civil proceedings pending
against the said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in
this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be all the property,
assets, and belongings of the insolvent which have come into his possession x x x. (Emphasis supplied.)

Complementing Sec. 18 which appropriately comes into play "upon the granting of [the] order" of insolvency is
the succeeding Sec. 60 which properly applies to the period "after the commencement of proceedings in
insolvency." The two provisions may be harmonized as follows: Upon the filing of the petition for insolvency,
pending civil actions against the property of the petitioner are not ipso facto stayed, but the insolvent may apply
with the court in which the actions are pending for a stay of the actions against the insolvents property. If the
court grants such application, pending civil actions against the petitioners property shall be stayed; otherwise,
they shall continue. Once an order of insolvency nevertheless issues, all civil proceedings against the
petitioners property are, by statutory command, automatically stayed. Sec. 60 is reproduced below:

SECTION 60. Creditors proving claims cannot sue; Stay of action.No creditor, proving his debt or claim, shall
be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of
action and suit against him, and all proceedings already commenced, or any unsatisfied judgment already
obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtors discharge,
upon proper application and proof to the court having jurisdiction, all such proceedings shall be, dismissed, and
such unsatisfied judgments satisfied of record: Provided, x x x. A creditor proving his debt or claim shall not be
held to have waived his right of action or suit against the debtor when a discharge has have been refused or the
proceedings have been determined to the without a discharge. No creditor whose debt is provable under this Act
shall be allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any
action therefor against the debtor until the question of the debtors discharge shall have been determined, and
any such suit proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be stayed
to await the determination of the court on the question of discharge: Provided, That if the amount due the
creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to judgment for purpose of
ascertaining the amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but
execution shall be stayed aforesaid. (Emphasis supplied.)

Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order of
December 2, 2004 had the effect of automatically staying the civil action for a sum of money filed by Asianbank
against Gateway. In net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the
claim against Gateway was concerned, was, or ought to have been, suspended after December 2, 2004,
Asianbank having been duly notified of and in fact was a participant in the insolvency proceedings. The Court of
course takes stock of the proviso in Sec. 60 of Act No. 1956 which in a way provided the CA with a justifying
tool to continue and to proceed to judgment in CA-G.R. CV No. 80734, but only for the purpose of ascertaining
the amount due from Gateway. At any event, on the postulate that jurisdiction over the properties of the
insolvent-declared Gateway lies with the insolvency court, execution of the CA insolvency judgment against
Gateway can only be pursued before the insolvency court. Asianbank, no less, tends to agree to this conclusion
when it stated: "[E]ven it if is assumed that the declaration of insolvency of petitioner Gateway can be taken
cognizance of, such fact does relieve petitioner Geronimo and/or Andrew delos Reyes from performing their
obligations based on the Deeds of Suretyship x x x."11

Geronimo, however, is a different story.

Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of
Geronimo as a surety, adding that claims against a surety may proceed independently from that against the
principal debtor. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway
as a defense to evade liability.

Geronimo counters with the argument that his liability as a surety cannot be separated from Gateways liability.
As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its
insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also
be so relieved.

Geronimos above contention is untenable.

Suretyship is covered by Article 2047 of the Civil Code, which states:

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.

The Courts disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship
is an undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principals
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. A surety binds himself to perform
if the principal does not, without regard to his ability to do so. x x x In other words, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor makes default x x x.

xxxx

A creditors right to proceed against the surety exists independently of his right to proceed against the principal.
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. Since, generally, it is not necessary for the creditor to
proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation
of the surety is the same as that of the principal, then soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against the principal. Perforce, x x x
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.12

Clearly, Asianbanks right to collect payment for the full amount from Geronimo, as surety, exists independently
of its right against Gateway as principal debtor;13 it could thus proceed against one of them or file separate
actions against them to recover the principal debt covered by the deed on suretyship, subject to the rule
prohibiting double recovery from the same cause.14 This legal postulate becomes all the more cogent in case of
an insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the sureties of the
principal debtor. As Asianbank aptly points out, a suit against the surety, insofar as the suretys solidary liability
is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The same
principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation
proceeding before the Securities and Exchange Commission (SEC). As we held in Commercial Banking
Corporation v. CA, a surety of the distressed corporation can be sued separately to enforce his liability as such,
notwithstanding an SEC order declaring the former under a state of suspension of payment.15

Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is contextually more
onerous and burdensome, precluded as he is from seeking recourse against the insolvent corporation. From this
premise, Geronimo claims that since Gateway cannot, owing to the order of insolvency, be made to pay its
obligation, he, too, being just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the
Civil Code, as follows:

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.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.

The Court is not convinced. The above article enunciates the rule that the obligation of a guarantor may be less,
but cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be stretched
to mean that a guarantor or surety is freed from liability as such guarantor or surety in the event the principal
debtor becomes insolvent or is unable to pay the obligation. This interpretation would defeat the very essence
of a suretyship contract which, by definition, refers to an agreement whereunder one person, the surety,
engages to be answerable for the debt, default, or miscarriage of another known as the principal.16 Geronimos
position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and must be
rejected.

The CA Did Not Err in Admitting

the Deed of Suretyship as Evidence

Going to the next ground, Geronimo maintains that the CA erred in admitting the Deed of Suretyship
purportedly signed by him, given that Asianbank failed to present its original copy.

This contention is bereft of merit.

As may be noted, paragraph 6 of Asianbanks complaint alleged the following:

6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were executed by defendants
Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached as Annexes "B" and "C," respectively, are
photocopies of the Deeds of Suretyship executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S.
De Los Reyes. Subsequently, a chattel mortgage over defendant Gateways equipment for $2 million, United
States currency, was executed.17

Geronimo traversed in his answer the foregoing allegation in the following wise: "2.5. Paragraph 6 is denied,
subject to the special and affirmative defenses and allegations hereinafter set forth."

The ensuing special and affirmative defenses were raised in Gateways answer:
15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not given her consent
thereto. Accordingly, the security created by the suretyship shall be construed only as a continuing offer on the
part of [Geronimo] and plaintiff and may only be perfected as a binding contract upon acceptance by Mrs. Delos
Reyes. x x x

17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the suretyship agreement, there
is no showing that he has consented to the repeated extensions made by plaintiff in favor of GEC or to a waiver
of notice of such extensions. It should be pointed out that Mr. Geronimo delos Reyes executed the suretyship
agreement in his personal capacity and not in his capacity as Chairman of the Board of GEC. His consent,
insofar as the continuing application of the suretyship agreement to GECs obligations in view of the repeated
extension extended by plaintiff [is concerned], is therefore necessary. Obviously, plaintiff cannot now hold him
liable as a surety to GECs obligations.18

The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit or defense is
predicated on a written document, thus:

Sec. 7. Action or defense based on document.Whenever an action or defense is based upon a written
instrument or document, the substance of such instrument or document shall be set forth in the pleading, and
the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part
of the pleading, or said copy may with like effect be set forth in the pleading.

Sec. 8. How to contest such documents.When an action or defense is founded upon a written instrument,
copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically
denies them, and sets forth what he claims to be the facts; but the requirement of an oath does not apply when
the adverse party does not appear to be a party to the instrument or when compliance with an order for an
inspection of the original instrument is refused. (Emphasis supplied.)

Given the above perspective, Asianbank, by attaching a photocopy of the Deed of Suretyship to its underlying
complaint, hewed to the requirements of the above twin provisions. Asianbank, thus, effectively alleged the due
execution and genuineness of the said deed. From that point, Geronimo, if he intended to contest the surety
deed, should have specifically denied the due execution and genuineness of the deed in the manner provided by
Sec. 10, Rule 8 of the Rules of Court, thus:

Sec. 10. Specific denial.A defendant must specify each material allegation of fact the truth of which he does
not admit and, whenever practicable, shall set forth the substance of the matters upon which he relies to
support his denial. Where a defendant desires to deny only a part of an averment, he shall specify so much of it
as is true and material and shall deny only the remainder. Where a defendant is without knowledge or
information sufficient to form a belief as to the truth of a material averment made in the complaint, he shall so
state, and this shall have the effect of a denial. (Emphasis supplied.)

In the instant case, Geronimo should have categorically stated that he did not execute the Deed of Suretyship
and that the signature appearing on it was not his or was falsified. His Answer does not, however, contain any
such statement. Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to have admitted,
the genuineness and due execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules of Court
states:

Sec. 11. Allegations not specifically denied deemed admitted.Material averment in the complaint, other than
those as to the amount of unliquidated damages, shall be deemed admitted when not specifically denied. x x x

Owing to Geronimos virtual admission of the genuineness and due execution of the deed of suretyship,
Asianbank, contrary to the view of Gateway and Geronimo, need not present the original of the deed during the
hearings of the case. Sec. 4, Rule 129 of the Rules says so:

Sec. 4. Judicial admissions.An admission, verbal or written, made by the party in the course of the proceedings
in the same case, does not require proof. The admission may be contradicted only by showing that it was made
through palpable mistake or that no such admission was made. (Emphasis supplied.)

Geronimo Is Liable for PN No. FCD-0599-2749

under His Deed of Suretyship
This brings us to the third ground which involves the issue of the coverage of the suretyship. Preliminarily, an
overview on the process of taking out loans should first be made. Generally, especially for large loans, banks
first approve a line or facility out of which a client may avail itself of loans in the form of promissory notes
without need of further processing and/or approval every time a draw down is made. In the instant case,
Asianbank approved in favor of Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3
million-Omnibus Credit Line. Asianbank approved these credit lines which were covered by a chattel mortgage
as well as the deeds of suretyship, such that loans extended from these lines would already be secured and pre-
approved. In other words, these facilities are not financial obligations yet. Asianbank did not yet lend out any
money to Gateway with the approval of these lines. The loan transaction occurred or the principal obligation, as
secured by a surety agreement, was born after the execution of loan documents, such as PN No. FCD-0599-
2749.

Geronimo now excepts from the ruling that the deed of suretyship he executed covered PN No. FCD-0599-2749
which embodied several export packing loans issued by Asianbank to Gateway. He claims that the deed only
secured the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo
describes as absurd the notion that a deed of suretyship would secure a loan obligation contracted three (3)
years after the execution of the surety deed.

Geronimos thesis that the deed in question cannot be accorded prospective application is erroneous. To be
sure, the provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.)
v. Court of Appeals,19 the Court, citing cases, defined and upheld the validity of a continuing suretyship in this
wise:

"x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is
born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is
valid and binding even before the principal obligation intended to be secured thereby is born, any more than
there would be in saying that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and
commercial practice. A bank or financing company which anticipates entering into a series of credit transactions
with a particular company, commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be
no need to execute a separate surety contract or bond for each financing or credit accommodation extended to
the principal debtor."20

In Dio vs. Court of Appeals,21 we again had occasion to discourse on continuing guaranty/suretyship thus:

"x x x 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 x x x.

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." (Emphasis supplied.)

By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan
transactions, they are, to borrow from Dio, as cited above, "within the description or contemplation of the
contract of guaranty." The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the
express terms of the deed, he warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line, as evidenced by:

x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or
may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges
as may accrue thereon and all expenses which may be incurred by the latter in collecting any or all such
instruments.22

Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the
Domestic Bills Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan.

Geronimos application of Garcia v. Court of Appeals, a case covering two separate loans, denominated as SWAP
Loan and Export Loan, is quite misplaced. There, the Court ruled that the continuing suretyship only covered
the SWAP Loan as it was only this loan that was referred to in the continuing suretyship. The Court wrote in
Garcia:

Particular attention must be paid to the statement appearing on the face of the Indemnity [Suretyship]
Agreement x x x "evidenced by those certain loan documents dated April 20, 1982" x x x. From this statement,
it is clear that the Indemnity Agreement refers only to the loan document of April 20, 1982 which is the SWAP
loan. It did not include the EXPORT loan. Hence, petitioner cannot be held answerable for the EXPORT loan.23
(Emphasis supplied.)

The Indemnity Agreement in Garcia specifically identified loan documents evidencing obligations of the debtor
that the agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed
did not limit itself to a specific loan document to the exclusion of another. The suretyship document merely
mentioned the Domestic Bills Purchased Line and Omnibus Credit Line as evidenced by "all notes, drafts x x x
contracted/incurred by [Gateway] in favor of [Asianbank]."24 As explained earlier, such credit facilities are not
loans by themselves. Thus, the Deed of Suretyship was intended to secure future loans for which these facilities
were opened in the first place.

Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line referred to in the Deed
of Suretyship as covering the export packing credit loans Asianbank extended to Gateway. We agree with this
factual determination. By the very use of the term "omnibus," and in practice, an omnibus credit line refers to a
credit facility whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus line is
broad enough to refer to or cover an export packing credit loan.

Geronimos allegation that an export packing credit loan is separate and distinct from an omnibus credit line is
but a bare and self-serving assertion bereft of any factual or legal basis. One who alleges something must prove
it: a mere allegation is not evidence.25 Geronimo has not discharged his burden of proof. His contention cannot
be given any weight.

As a final and major ground for his release as surety, Geronimo alleges that Asianbank repeatedly extended the
maturity dates of the obligations of Gateway without his knowledge and consent. Pressing this point, he avers
that, contrary to the findings of the CA, he did not waive his right to notice of extensions of Gateways
obligations.

Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is
embedded in surety document itself, built in the ensuing provision:

In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness herein secured
at maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the
prompt payment, without demand or notice from said CREDITOR of such notes, drafts, overdrafts and other
credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all such instruments.26 (Emphasis supplied.)

In light of the above provision, Geronimo verily waived his right to notice of the maturity of notes, drafts,
overdraft, and other credit obligations for which Gateway shall become indebted. This waiver necessarily
includes new agreements resulting from the novation of previous agreements due to changes in their maturity
dates.

Additionally, Geronimos lament about losing his right to subrogation is erroneous. He argues that by virtue of
the order of insolvency issued by the insolvency court, title and right to possession to all the properties and
assets of Gateway were vested upon Gateways assignee in accordance with Sec. 32 of the Insolvency Law.

The transfer of Gateways property to the insolvency assignee, if this be the case, does not negate Geronimos
right of subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that
he may only recover a portion of the amount he is liable to pay is the risk he assumed as a surety of Gateway.
Such loss does not, however, render ineffectual, let alone invalidate, his suretyship.

Geronimos other arguments to escape liability are puerile and really partake more of a plea for liberality. They
need not detain us long. In gist, Geronimo argues: first, that he is a gratuitous surety of Gateway; second,
Asianbank deviated from normal banking practice, such as when it extended the period for payment of
Gateways obligation and when it opted not to foreclose the chattel mortgage constituted as guarantee of
Gateways loan obligation; and third, implementing the appealed CAs decision would cause him great harm and
injury.

Anent the first argument, suffice it to state that Geronimo was then the president of Gateway and, as such, was
benefited, albeit perhaps indirectly, by the loan thus granted by Asianbank. And as we said in Security Pacific
Assurance Corporation, the surety is liable for the debt of another although the surety possesses no direct or
personal interest over the obligation nor does the surety receive any benefit from it.27

Whether or not Asianbank really deviated from normal banking practice by extending the period for Gateway to
comply with its loan obligation or by not going after the chattel mortgage adverted to is really of no moment.
Banks are primarily in the business of extending loans and earn income from their lending operations by way of
service and interest charges. This is why Asianbank opted to give Gateway ample opportunity to pay its
obligations instead of foreclosing the chattel mortgage and in the process holding on to assets of which the bank
has really no direct use.

The following excerpts from Palmares are in point:

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 creditors rights vis--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 principals request or without it,
and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal x x x.
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. And, in the absence of proof of resultant injury, a
surety is not discharged by the creditors mere statement that the creditor will not look to the surety, or that he
need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or
the fact that the remedies against the principal may be lost by lapse of time, are immaterial.28

The Courts Equity Jurisdiction

Finds No Application to the Instant Case

Geronimo urges the Court to release and discharge him from any liability arising from Asianbanks claims if what
he terms as "complete justice" is to be served. He cites, as supporting reference, Agcaoili v. GSIS,29 presenting
in the same breath the following arguments: first, the Deed of Suretyship is a gratuitous contract from which he
did not benefit; second, Asianbank assured him that the deed would not be enforced against him; third, the
enforcement of the judgment of the CA would reduce Geronimo and his family to a life of penury; and fourth,
Geronimo would be unable to exercise his right of subrogation, Gateway having already been declared as
insolvent.

The first and last arguments have already been addressed and found to be without merit. The second argument
is a matter of defense which has remained unproved and even belied by Asianbank by its filing of the complaint.
We see no need to further belabor any of them.

As regards the third allegation, suffice it to state that the predicament Geronimo finds himself in is his very own
doing. His misfortune is but the result of the implementation of a bona fide contract he freely executed, the
terms of which he is presumed to have thoroughly examined. He was not at all compelled to act as surety; he
had a choice. It may be more offensive to public policy or good customs if he be allowed to go back on his
undertaking under the surety contract. The Court cannot be a party to the contracts impairment and relieve a
surety from the effects of an unwise but nonetheless a valid surety contract.

WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October 28, 2005 of the CA
and its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are hereby AFFIRMED with the modification that
any claim of Asianbank or its successor-in-interest against Gateway, if any, arising from the judgment in this
suit shall be pursued before the RTC, Branch 22 in Imus, Cavite as the insolvency court.
Costs against petitioners.

SO ORDERED.

G.R. No. 113931 May 6, 1998

E. ZOBEL, INC., petitioner,

vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION, and SPOUSES RAUL and
ELEA R. CLAVERIA, respondents.

MARTINEZ, J.:

This petition for review on certiorari seeks the reversal of the decision 1 of the Court of Appeals dated July 13,
1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to
Dismiss the complaint, as well as the Resolution 2 dated February 15, 1994 denying the motion for
reconsideration thereto.

The facts are as follows:

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan
with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight
Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges and
one tugboat 3 which would be used in their molasses business. The loan was granted subject to the condition
that respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a
continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc.,
in favor of SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage
and a Continuing Guaranty 4 were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31,
1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment,
against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional
Trial Court of Manila.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be
subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage with
the appropriate government agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.

On February 18, 1993, the trial court issued an Order, portions of which reads:

After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss without
merit. The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as follows:

For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by
Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any other manner, to, or at the request or for the account of the borrower, . . .
The provisions of the document are clear, plain and explicit.

Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is
"Continuing Guaranty", the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting as guarantor.
In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is requesting
that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the bank inasmuch as the
said loan is covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it said that
because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is rendered unnecessary and
redundant.

With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes the
obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as the basis
of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety. The chattel
mortgage is an additional security and should not be considered as payment of the debt in case of failure of
payment. The same is true with the failure to register, extinction of the liability would not lie.

WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its answer
to the complaint within ten (10) days from receipt of a copy of this Order. 5

Petitioner moved for reconsideration but was denied on April 26, 1993. 6

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition for
certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to dismiss.

On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive portion of which reads:

WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing the
herein assailed orders, We hereby DISMISS the petition.

A motion for reconsideration filed by petitioner was denied for lack of merit on February 15, 1994.

Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its finding:
(1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the failure of respondent
SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.

We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated itself to
SOLIDBANK as a guarantor or a surety.

A contract of surety is an accessory promise by which a person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the debtor does not. 7 A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. 8

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal by the
same instrument, executed at the same time, and on the same consideration. He is an original promissor and
debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of
the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is
the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before
or after that of the principal, and is often supported on a separate consideration from that supporting the
contract of the principal. The original contract of his principal is not his contract, and he is not bound to take
notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal,
and is usually not liable unless notified of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the
debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt,
and he obligates himself to pay if the principal does not pay. 10

Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent spouses. This
can be seen in the following stipulations.

For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned
by MR. RAUL P. CLAVERIA, of legal age, married and with business address . . . (hereinafter called the
Borrower), for the payment of which the undersigned is now obligated to you as surety and in order to induce
you, in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend
credit in any other manner to, or at the request or for the account of the Borrower, either with or without
purchase or discount, or to make any loans or advances evidenced or secured by any notes, bills receivable,
drafts, acceptances, checks or other instruments or evidences of indebtedness . . . upon which the Borrower is
or may become liable as maker, endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and
does hereby guarantee, the punctual payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all
other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower,
together with any and all expenses which may be incurred by you in collecting all or any such instruments or
other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights hereunder, and also to
make or cause any and all such payments to be made strictly in accordance with the terms and provisions of
any agreement (g), 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, now or hereafter in effect which
might in any manner affect any of the terms or provisions of any such agreements(s) or your right 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; . . . (Emphasis Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and the intention of
the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to
the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the
obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or
exhaust respondent spouses' properties before it can hold petitioner liable for the obligation. This can be
gleaned from a reading of the stipulations in the contract, to wit:

. . . If default be made in the payment of any of the instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or
become insolvent, . . ., or if any funds or other property of the Borrower, or of the undersigned which may be or
come into your possession or control or that of any third party acting in your behalf as aforesaid should be
attached of distrained, or should be or become subject to any mandatory order of court or other legal process,
then, or any time after the happening of any such event any or all of the instruments of indebtedness or other
obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty) due and payable
by the undersigned forthwith without demand of notice, and full power and authority are hereby given you, in
your discretion, to sell, assign and deliver all or any part of the property upon which you may then have a lien
hereunder at any broker's board, or at public or private sale at your option, either for cash or for credit or for
future delivery without assumption by you of credit risk, and without either the demand, advertisement or
notice of any kind, all of which are hereby expressly waived. At any sale hereunder, you may, at your option,
purchase the whole or any part of the property so sold, free from any right of redemption on the part of the
undersigned, all such rights being also hereby waived and released. In case of any sale and other disposition of
any of the property aforesaid, after deducting all costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue of the proceeds of the sale and other
disposition thereof, to the payment or reduction, either in whole or in part, of any one or more of the obligations
or liabilities hereunder of the undersigned whether or not except for disagreement such liabilities or obligations
would then be due, making proper allowance or interest on the obligations and liabilities not otherwise then
due, and returning the overplus, if any, to the undersigned; all without prejudice to your rights as against the
undersigned with respect to any and all amounts which may be or remain unpaid on any of the obligations or
liabilities aforesaid at any time (s).

xxx xxx xxx

Should the Borrower at this or at any future time furnish, or should be heretofore have furnished, another
surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby expressly waives
all benefits to which the undersigned might be entitled under the provisions of Article 1837 of the Civil Code
(beneficio division), the liability of the undersigned under any and all circumstances being joint and several;
(Emphasis Ours)

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently employed in business transactions to describe not the security
of the debt but an intention to be bound by a primary or independent obligation. 11 As aptly observed by the
trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of
the parties.

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds
no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, 12 we have ruled that
Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.

But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not
release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner
bound itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract. The pertinent portions of the contract so provides:

. . . the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective of
the existence, value or condition of any collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and notwithstanding also that all
obligations of the Borrower to you outstanding and unpaid at any time(s) may exceed the aggregate principal
sum herein above prescribed.

This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been
received by you that it has been revoked by the undersigned, but any such notice shall not be released the
undersigned from any liability as to any instruments, loans, advances or other obligations hereby guaranteed,
which may be held by you, or in which you may have any interest, at the time of the receipt of such notice. No
act or omission of any kind on your part in the premises shall in any event affect or impair this guaranty, nor
shall same be affected by any change which may arise by reason of the death of the undersigned, of any
partner (s) of the undersigned, or of the Borrower, or of the accession to any such partnership of any one or
more new partners. (Emphasis supplied)

In fine, we find the petition to be without merit as no reversible error was committed by respondent Court of
Appeals in rendering the assailed decision.

WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. 140047 July 13, 2004

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.

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 Corporation1 (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 TherapyMedical 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 guarantee8 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-F11 (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
Undertaking12 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 bond13 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 contract15 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 electro-mechanical 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 counter-guarantee.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

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 non-performance 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 non-fulfillment 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 electro-mechanical equipment and materials, which were available
from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made
by SOB54 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 non-completion 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:
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 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 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
counter-guarantee 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 latter67 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

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 "the 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.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 160466 January 17, 2005

SPOUSES ALFREDO and SUSANA ONG, petitioners,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.

DECISION

PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the
Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court
denying petitioners motion to dismiss.

The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and
export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer,
respectively.

On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial
International Bank or E-PCIB) filed a case for collection of a sum of money1 against petitioners-spouses.
Respondent bank sought to hold petitioners-spouses liable as sureties on the three (3) promissory notes they
issued to secure some of BMCs loans, totalling five million pesos (P5,000,000.00).

The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans,
amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for
these loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was
stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining
balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency,
or if it is declared to be in a state of suspension of payments. Respondent bank granted BMCs loan applications.

On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities
and Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered
debtor BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as
sureties. In due time, petitioners-spouses filed their Answer.1awphi1.nt

On October 13, 1992, a Memorandum of Agreement (MOA)2 was executed by debtor BMC, the petitioners-
spouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent
bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.3

Thereafter, petitioners-spouses moved to dismiss4 the complaint. They argued that as the SEC declared the
principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits
of the MOA should be extended to petitioners-spouses who acted as BMCs sureties in their contracts of loan
with respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection
case filed against them.

The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which
affirmed the trial courts ruling that a creditor can proceed against petitioners-spouses as surety independently
of its right to proceed against the principal debtor BMC.

Hence this appeal.

Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for
three (3) reasons: First, the MOA provided that during its effectivity, there shall be a suspension of filing or
pursuing of collection cases against the BMC and this provision should benefit petitioners as sureties. Second,
principal debtor BMC has been placed under suspension of payment of debts by the SEC; petitioners contend
that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts
while petitioners, who acted only as sureties for some of BMCs debts, would be compelled to make the
payment; petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which
provides that a compromise between the creditor and principal debtor benefits the guarantor and should not
prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: "the guarantor
may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the
debt; but not those which are purely personal to the debtor." Petitioners aver that if the principal debtor BMC
can set up the defense of suspension of payment of debts and filing of collection suits against respondent bank,
petitioners as sureties should likewise be allowed to avail of these defenses.

We find no merit in petitioners contentions.

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions
refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors
but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety.
A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has
proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can
be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract,
however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the
debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not
pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is
made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the
payment of the debt and is deemed as an original promissor and debtor from the beginning.5

Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated
themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank
amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,6 respondent bank as
creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided
for the suspension of payment and filing of collection suits against BMC. Respondent banks right to collect
payment from the surety exists independently of its right to proceed directly against the principal debtor. In
fact, the creditor bank may go against the surety alone without prior demand for payment on the principal
debtor.7

The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits
by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC.8 Secondly,
there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct
from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the
creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets.
It has no jurisdiction over the properties of BMCs officers or sureties.1awphi1.nt

Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper. The trial
courts denial of petitioners motion to dismiss was proper.

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs.

SO ORDERED.