Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 157309 March 28, 2008

MARLOU L. VELASQUEZ, Petitioner,

vs.
SOLIDBANK CORPORATION, Respondent.

DECISION

REYES, R.T., J.:

PARTIES may not impugn the effectivity of a contract, after much benefit has been gained to the
prejudice of another. They are bound by the obligations they expressly set out to do.

Before Us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA)
which affirmed with modification that of the Regional Trial Court (RTC) in Cebu City,2 holding
petitioner Marlou Velasquez liable under his letter of undertaking to respondent Solidbank
Corporation.

The Facts

Petitioner is engaged in the export business operating under the name Wilderness Trading.
Respondent is a domestic banking corporation organized under Philippine laws.

The case arose out of a business transaction for the sale of dried sea cucumber for export to
South Korea between Wilderness Trading, as seller, and Goldwell Trading of Pusan, South
Korea, as buyer. To facilitate payment of the products, Goldwell Trading opened a letter of credit
in favor of Wilderness Trading in the amount of US$87,500.003 with the Bank of Seoul, Pusan,
Korea.

On November 12, 1992, petitioner applied for credit accommodation with respondent bank for
pre-shipment financing. The credit accommodation was granted. Petitioner was successful in his
first two export transactions both drawn on the letter of credit. The third export shipment,
however, yielded a different result.

On February 22, 1993, petitioner submitted to respondent the necessary documents for his third
shipment. Wanting to be paid the value of the shipment in advance, petitioner negotiated for a
documentary sight draft to be drawn on the letter of credit, chargeable to the account of Bank of
Seoul. The sight draft represented the value of the shipment in the amount of US$59,640.00.4
As a condition for the issuance of the sight draft, petitioner executed a letter of undertaking in
favor of respondent. Under the terms of the letter of undertaking, petitioner promised that the
draft will be accepted and paid by Bank of Seoul according to its tenor. Petitioner also held
himself liable if the sight draft was not accepted. The letter of undertaking provided:

SOLIDBANK CORPORATION Feb. 22, 1993

32 Borromeo Street
Cebu City

Gentlemen: Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN UNDER

LC#M2073210NS00040 FOR US$59,640.00 UNDER OUR CEBP93/102.

In consideration of your negotiating the above described draft(s), we hereby warrant that the
above referred to draft(s) and accompanying documents are genuine and accurately represent the
facts stated therein and that the draft(s) will be accepted and paid in accordance with its/their
tenor. We further undertake and agree, jointly and severally, to hold you free and harmless from
and to defend all actions, claims and demands whatsoever, and to pay on demand all damages,
actual or compensatory, including attorneys fees, in case of suit, at least equal to __% of the
amount due, which you may suffer arising by reason of or on account of your negotiating the
above draft(s) because of the following discrepancies or reasons or any other discrepancy or
reason whatever:

1) B/L MARKED "SAID TO CONTAIN" & "SHIPPERS LOAD, STOWAGE &

COUNT."

2) LATE SHIPMENT.

3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06 TON.

4) NO INSPECTION CERTIFICATE PRESENTED.

We hereby undertake to pay on demand the full amount of the draft(s) or any unpaid balance of
the draft(s), with interest at the prevailing rate of today from the date of negotiation, plus all
charges and expenses whatsoever incurred in connection therewith. You shall neither be
obligated to contest or dispute any refusal to accept or to pay the whole or any part of the above
draft(s) nor to proceed in anyway against the drawee thereof, the issuing bank, or against any
indorser thereof before making a demand on us for the payment of the whole or any unpaid
balance of the draft(s).5 (Emphasis added)

By virtue of the letter of undertaking, respondent advanced the value of the shipment which, at
the current rate of exchange at that time was P1,495,115.16, less bank charges, to petitioner.
Respondent then sent all the documents pertinent to the export transaction to the Bank of Seoul.

Respondent failed to collect on the sight draft as it was dishonored by non-acceptance by the
Bank of Seoul. The reasons given for the dishonor were late shipment, forged inspection
certificate, and absence of countersignature of the negotiating bank on the inspection certificate.6
Goldwell Trading likewise issued a stop payment order on the sight draft because most of the
bags of dried sea cucumber exported by petitioner contained soil.

Due to the dishonor of the sight draft and the stop payment order, respondent demanded
restitution of the sum advanced.7 Petitioner failed to heed the demand.

On June 3, 1993, respondent filed a complaint for recovery of sum of money8 with the RTC in
Cebu City. In his answer, petitioner alleged that his liability under the sight draft was
extinguished when respondent failed to protest its non-acceptance, as required under the
Negotiable Instruments Law (NIL). He also alleged that the letter of undertaking is not binding
because it is a superfluous document, and that he did not violate any of the provisions of the
letter of credit.9

RTC and CA Dispositions

On September 25, 1996, the RTC rendered judgment10 in favor of respondent with the following
fallo:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the defendant:

(1) to pay the plaintiff the principal sum of P1,495, 115.16 plus interest at 20% per
annum counted from February 22, 1993 up to the time the entire amount shall have been
fully paid;

(2) to pay attorneys fees equivalent to 10% of the total amount due the plaintiff; and

(3) to pay the costs.

SO ORDERED.11

The RTC ratiocinated:

This court is not convinced with the defendants argument that because of plaintiffs failure to
protest the dishonor of the sight draft, his liability is extinguished because his liability remains
under the letter of undertaking which he signed and without which plaintiff would not have
advanced or credited to him the amount.

Section 152 of the Negotiable Instruments Law under which defendant claims extinguishment of
his liability to plaintiff is not a bar to the filing of other appropriate remedies which the
aggrieved party may pursue to vindicate his rights and in this instant case, plaintiff wants his
right vindicated by virtue of the letter of undertaking which defendant signed. By the letter of
undertaking, defendant bound himself to pay on demand all damages including attorneys fees
which plaintiff may suffer arising by reason of or on account of negotiating the above draft
because of the following discrepancies or any other discrepancy or reasons whatsoever and
further to pay on demand full amount of any unpaid balance with interest at the prevailing rate.
He should be bound to the fulfillment of what he expressly obligated himself to do and perform
in the letter of undertaking without which, plaintiff would not have advance (sic) and credited to
him the amount in the draft. He should not enrich himself at the expense of plaintiff.12 (Emphasis
added)

Disagreeing, petitioner elevated the matter to the CA.

On June 27, 2002, the CA affirmed with modification the RTC decision, disposing as follows:

WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED with

MODIFICATION. Defendant-appellant Marlou L. Velasquez is hereby ordered to pay plaintiff-
appellee Solidbank Corporation, the following: (1) the principal amount of One Million Four
Hundred Ninety-Five Thousand One Hundred Fifteen and Sixteen Centavos (P1,495,115.16)
plus interest at twelve percent (12%) per annum from February 22, 1993 until fully paid, (2)
attorneys fees equivalent to five percent (5%) of the total amount due, and (3) costs of the suit.

SO ORDERED.13

In ruling against petitioner, the CA opined:

The fact that said draft was dishonored and not paid by the Bank of Seoul-Korea, (sic) it is
incumbent upon defendant-appellant Velasquez to comply with his obligation under the Letter of
Undertaking. He cannot be allowed to impugn the contract of undertaking he entered into by
saying that it was a superfluous document, and therefore, not binding on him. The contract of
undertaking is the law between them, and must be enforced accordingly. This is in accord with
Article 1159 of the New Civil Code, which provides that "obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good faith." And
parties to a contract are bound to the fulfillment of what has expressly been stipulated therein,
regardless of the fact that it turn (sic) out to be financially disadvantageous.14

xxxx

The fact that Defendant-appellant benefited from the advance payment made by Plaintiff
appellee, (sic) it is incumbent upon him to return what he received because the purpose of the
advance payment was not attained and/or realized, as the sight draft was not paid accordingly,
otherwise, it will result to unjust enrichment on the part of Defendant-appellant at the expense of
Plaintiff-appellee, in violation of Articles 19 and 22 of the New Civil Code. The doctrine of
unjust enrichment and restitution simply means that "the exercise of a right ends when the right
disappears, and it disappears when it is abused, especially to the prejudice of others."15
(Emphasis added)

Petitioner moved for reconsideration16 but his motion was denied.17 Hence, the present recourse.

Issues

Petitioner raises twin issues for Our consideration, to wit:

THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE, NOT
HERETOFORE DETERMINED BY THIS HONORABLE COURT, OR HAS DECIDED IT IN
A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE
DECISIONS OF THIS HONORABLE COURT, IN THAT:

I.

THE COURT OF APPEALS RULED THAT PETITIONER IS LIABLE ON THE

ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT PETITIONER WAS ALREADY RELEASED FROM LIABILITY
UNDER THE SIGHT DRAFT, THE PRINCIPAL CONTRACT, UNDER THE
PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL
CODE.

II.

THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER THE

ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT THERE WAS NO PROOF WHATSOEVER THAT PETITIONER
VIOLATED EITHER THE PRINCIPAL CONTRACT, THE SIGHT DRAFT, OR
EVEN THE LETTER OF UNDERTAKING.18 (Underscoring supplied)

The main issue is whether or not petitioner should be held liable to respondent under the sight
draft or the letter of undertaking. There is no dispute that petitioner duly signed and executed
these documents. It is likewise admitted that the sight draft was dishonored by non acceptance by
the Bank of Seoul.

Our Ruling

The petition is without merit.

Petitioner is not liable under the sight draft but he is liable under his letter of undertaking;
liability under the letter of undertaking was not extinguished by non-protest of the dishonor of
the sight draft.

Petitioner argues that he cannot be held liable under either the sight draft or the letter of
undertaking. He claims that the failure of respondent to protest the dishonor of the sight draft
under Section 152 of the NIL discharged him from liability under the negotiable instrument. It is
also contended that his liability under the letter of undertaking is that of a mere guarantor; that
the letter of undertaking is only an accessory contract to the sight draft. Since he was discharged
from liability under the sight draft, he cannot be held liable under the letter of undertaking.

For its part, respondent counters that petitioners liability springs from the letter of undertaking,
independently of the sight draft. It would not have advanced the amount without the letter of
undertaking. According to respondent, the letter of undertaking is an independent agreement and
not merely an accessory contract. To permit petitioner to escape liability under the letter of
undertaking would result in unjust enrichment.1avvphi1

Petitioners liability under the letter of undertaking is independent from his liability under the
sight draft. He may be held liable under either the sight draft or the letter of undertaking or both.

Admittedly, petitioner was discharged from liability under the sight draft when respondent failed
to protest it for non-acceptance by the Bank of Seoul. A sight draft made payable outside the
Philippines is a foreign bill of exchange.19 When a foreign bill is dishonored by non-acceptance
or non-payment, protest is necessary to hold the drawer and indorsers liable. Verily, respondents
failure to protest the non-acceptance of the sight draft resulted in the discharge of petitioner from
liability under the instrument.

Section 152 of the NIL is explicit:

Section 152. In what cases protest necessary. Where a foreign bill appearing on its face to be
such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where
such a bill which has not been previously dishonored by non-acceptance, is dishonored by non-
payment, it must be duly protested for non-payment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest
thereof in case of dishonor is unnecessary. (Emphasis added)

Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that
it is a separate contract from the sight draft. The liability of petitioner under the letter of
undertaking is direct and primary. It is independent from his liability under the sight draft.
Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment.

Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that
he will reimburse the amount in case the sight draft is dishonored. The bank would certainly not
have agreed to grant petitioner an advance export payment were it not for the letter of
undertaking. The consideration for the letter of undertaking was petitioners promise to pay
respondent the value of the sight draft if it was dishonored for any reason by the Bank of Seoul.

We cannot accept petitioners thesis that he is only a mere guarantor under the letter of
credit.1avvphi1 Petitioner cannot be both the primary debtor and the guarantor of his own debt.
This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed
against a third person if the debtor defaults in his obligation. Certainly, to accept such an
argument would make a mockery of commercial transactions.

Petitioner bound himself liable to respondent under the letter of undertaking if the sight draft is
not accepted. He also warranted that the sight draft is genuine; will be paid by the issuing bank in
accordance with its tenor; and that he will be held liable for the full amount of the draft upon
demand, without necessity of proceeding against the drawee bank.20 Petitioner breached his
undertaking when the Bank of Seoul dishonored the sight draft and Goldwell Trading ordered a
stop payment order on it for discrepancies in the export documents.
Petitioner is liable without need for respondent to establish collateral facts such as violations of
the letter of credit.

It is also argued that petitioner cannot be held liable under the letter of undertaking because
respondent failed to prove that he violated any of the provisions in the letter of credit or that sixty
(60) of the seventy-one (71) bags shipped to Goldwell Trading contained soil instead of dried sea
cucumber.

We cannot agree. Respondent need not prove that petitioner violated the provisions of the letter
of credit in order to be held liable under the letter of undertaking. Parties are bound to fulfill
what has been expressly stipulated in the contract.21 Petitioners liability under the letter of
undertaking is clear. He is liable to respondent if the sight draft is not accepted by the Bank of
Seoul. Mere non-acceptance of the sight draft is sufficient for liability to attach. Here, the sight
draft was dishonored for non-acceptance. The non-acceptance of the sight draft triggered
petitioners liability under the letter of undertaking.

Records also show that the Bank of Seoul found discrepancies in the documents submitted by
petitioner. Goldwell Trading issued a stop payment order because the products shipped were
defective. It found that most of the bags shipped contained soil instead of dried sea cucumber. If
petitioner disputes the finding of Goldwell Trading, he can file a case against said company but
he cannot dispute his liability under either the sight draft or the letter of undertaking.

As We see it, this is a straightforward case of collection of sum of money on the basis of a letter
of undertaking. Respondent advanced the export payment to petitioner on the understanding that
the draft will be honored and paid. The draft was dishonored. Justice and equity dictate that
petitioner be held liable to respondent bank.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals
dated June 27, 2002 is hereby AFFIRMED.

SO ORDERED.

RUBEN T. REYES
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 74231 April 10, 1987

CORAZON J. VIZCONDE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT & PEOPLE OF THE PHILIPPINES,
respondents.

NARVASA, J.:

Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision of
the Court of Appeals 1 affirming her conviction of the crime of estafa by the Court of First Instance of Rizal Quezon City Branch,
in Criminal Case No. Q- 5476.

Vizconde and Pilar A. Pagulayan were charged in the Trial Court with misappropriation and conversion of an 8-carat diamond ring belonging
to Dr. Marylon J. Perlas in an information which avers that they:

* * * wilfully, unlawfully and feloniously, with intent of gain and with unfaithfulness and/or abuse of confidence,
defraud(ed) DRA. MARYLOU J. PERLAS in the following manner, to wit: the said accused received from the offended
party one (1) 8-karat solo diamond ring, white, double cut, brilliant cut with multiple bentitos, valued at P85,000.00, to
be sold by them on commission basis, with the obligation to tum over the proceeds of the sale to the offended party, or
to return the said ring if unsold, but the Id accused, once in possession thereof, contrary to their obligation, misapplied,
misappropriated and converted the same to their own personal use and benefit, and in spite of repeated demands
made upon them, both accused failed, omitted and refused, and still fait omit and refuse up to the present, to comply
with their aforesaid obligation, to the damage and prejudice of the offended party, in the aforementioned amount of
P85,000.00, Philippine currency. 2

After trial both accused were convicted and each sentenced to serve an indeterminate prison term of from
eight (8) years, four (4) months and one (1) day to ten (10) years and two (2) months of prision mayor,
with the accessory penalties provided by law, and jointly and severally to indemnify the offended party in
the sum of P55,000.00 for the unaccounted balance of the value of the ring with legal interest from April
22, 1975, the further sum of P30,000.00 as and for moral damages and the sum of P10,000.00 for
attorney's fees. 3

Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded promulgation of
sentence in the Trial Court and had appealed only through counsel the Appellate Court vacated her
appeal as ineffectual. 4 On Vizconde's part, the Court of Appeals affirmed the judgment of the Trial Court
in all respects except the penalty of imprisonment, which it increased to a term of from ten (10) years and
one (1) day of prision mayor to twelve (12) years ten (10) months and twenty-one (21) days of reclusion
temporal. A motion for reconsideration was denied. Vizconde thereafter filed the present petition for
review on certiorari. 5

Required to comment on the petition, the Solicitor General, despite having argued for affirmance of
Vizconde's conviction in the Court of Appeals, now recommends that she be acquitted, but nonetheless
held civilly liable to the complainant in the sum of P55,000.00 (the unaccounted balance of the value of
the ring as found by the Trial Court) " * * * or whatever portion thereof which remains unpaid. * * * 6
From the record and the findings of the courts below, it appears that sometime in the first week of April,
1975, the complainant, Dr. Marylon J. Perlas, called up the appellant Vizconde, a long-time friend and
former high school classmate, asking her to sen Perlas' 8-carat diamond ring. Shortly afterwards, Perlas
delivered the ring to Vizconde to be sold on commission for P 85,000.00. Vizconde signed a receipt for
the ring. 7

About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it because she
needed to show it to a cousin However, Vizconde afterwards called on Perlas at the latter's home, with
another lady, Pilar A. Pagulayan, who claimed to have a "sure buyer" for the ring. 8 Perlas was initially
hesitant to do so, but she eventually parted with the ring so that it could be examined privately by
Pagulayan's buyer when the latter' gave her a postdated check for the price (P 85,000.00) and, together
with Vizconde, signed a receipt prepared by Perlas. This receipt-people's Exhibit "A"- reads as follows:

RECEIPT

Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond ring, white,
double cut, brilliant cut with multiple brilliantitos, which I agree to sell for P85,000.00
(eighty-five thousand pesos) on commission basis and pay her in the following manner:

P85,000.00 postdated check

PNB check 730297

dated April 26, 1975

for P85,000.00

It is understood that in the event the above postdated check is dishonored for any reason
whatsoever on its due date, the total payment of the above item shall become
immediately due and demandable without awaiting further demand.

I guarantee that the above check will be sufficiently funded on the respective due date.

Quezon City, Philippines

22 April 1975

(SGD.) PILAR A.
PAGULAYAN

PILAR
A.
PAGUL
AYAN

16 Rd.
8
Project
6

I guarantee jointly and severally

 (SGD.) CORAZON J.
VIZCONDE

CORAZ
ON J.
VIZCO
NDE 9

After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila Bank. It was
dishonored for the reason, "No arrangement," stated in the debit advice. Perlas then called up Vizconde
to inform her about the dishonor of the check. The latter suggested that Perlas re-deposit the check while
she (Vizconde) followed up the sale of the ring. Perlas re-deposited the check, but again it was
dishonored because drawn against insufficient funds. 10 So Perlas took the matter to counsel who sent separate letters of
demand to Vizconde and Pagulayan for return of the ring or payment of P85,000.00. 11

After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas P5,000.00 against the value of the ring. She also gave
into Perlas' keeping three certificates of title to real estate to guarantee delivery of the balance of such value. A receipt for the money and the
titles was typed and signed by Perlas, which she also made the two sign. 12 The receipt Exhibit "D" of the prosecution reads:

Received from Mrs. Pilar Pagulayan, the sum of FIVE THOUSAND PESOS ONLY (P5,000.00) representing part of the
proceeds of the sale of one (1) solo 8 carat diamond ring, white, double cut, brilliant cut w/multiple brilliantitos, given to
Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission basis for
eighty- five thousand pesos (P85,000.00).

Received also owner's duplicate copies of TCT Nos. 434907, 434909, 434910, which will be returned upon delivery of
the remaining balance of the proceeds of the sale of said diamond ring for eighty five thousand pesos (P85,000.00).

This receipt is being issued without prejudice to legal action.

Quezon City, Philippines

7 May 1975

(Sgd.)
Marylon J.
Perlas

Dra.
Marylon J.
Perlas

Conforme:

(Sgd.) Pilar A. Pagulayan

Pilar A. Pagulayan

(Sgd.) Corazon J. Vizconde

Corazon Vizconde 13

Vizconde and Pagulayan having allegedly reneged on a promise to complete payment for the ring on the very next day, Perlas filed with the
Quezon City Fiscal's office a complaint against them for estafa This notwithstanding, Pagulayan stin paid Perlas various sums totalling
P25,000.00 which, together with the P5,000.00 earlier paid, left a balance of P55,000.00 still owing. 14

Both the Trial Court and the Court of Appeals found istilln these facts sufficient showing that Vizconde and Pagulayan had assumed a joint
agency in favor of Perlas for the sale of the latter's ring, which rendered them criminally liable, upon failure to return the ring or deliver its
agreed value, under Art. 315, par. l(b), of the Revised Penal Code, for defraudation committed " * * * with unfaithfulness or abuse of
confidence * * * by misappropriating or converting, to the prejudice of another, * * * personal property received in trust or on commission, or
under any other obligation involving the duty to make delivery of or to return the same, * * * " The Solicitor General falling back, as already
stated, from an earlier stance, disagrees and submits in his Comment that the appellant cannot be convicted of estafa under a correct
interpretation of the two principal exhibits of the prosecution, the receipts Exhibits A" and "D". 15 He is correct.

Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances attending its execution can logically be considered as
evidencing the creation of an agency between Perlas, as principal, and Vizconde, as agent, for the sale of the former's ring. True, reference
to what may be taken for an agency agreement appears in the clause " * * * which I agree to sell * * * on commission basis" in the main text
of that document. But it is clear that if any agency was established, it was one between Perlas and Pagulayan only, this being the only logical
conclusion from the use of the singular "I" in said clause, in conjunction with the fact that the part of the receipt in which the clause appears
bears only the signature of Pagulayan. To warrant anything more than a mere conjecture that the receipt also constituted Vizconde the agent
of Perlas for the same purpose of selling the ring, the cited clause should at least have used the plural "we," or the text of the receipt
containing that clause should also have carried Vizconde's signature.

As the Solicitor General correctly puts it, the joint and several undertaking assumed by Vizconde in a separate writing below the main body of
the receipt, Exhibit "A", merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the event of her
(Pagulayan's) failure to return said article. It cannot, in any sense, be construed as assuming any criminal responsibility consequent upon the
failure of Pagulayan to return the ring or deliver its value. It is fundamental that criminal responsibility is personal and that in the absence of
conspiracy, one cannot be held criminally liable for the act or default of another.

A person to be guilty of crime, must commit the crime himself or he must, in some manner, participate in its commission
or in the fruits thereof. * * * 16

Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation more than merely civil in character, and staked
her very liberty on Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence of guaranty (or suretyship) as creating
purely civil obligations on the part of the guarantor or surety. To render Vizconde criminally liable for the misappropriation of the ring, more
than her mere guarantee written on Exhibit "A" is necessary. At the least, she must be shown to have acted in concert and conspiracy with
Pagulayan, either in obtaining possession of the ring, or in undertaking to return the same or delivery its value, or in the misappropriation or
conversion of the same.

Now, the information charges conspiracy between Vizconde and Pagulayan, but no adequate proof thereof has been presented. It is of
course true that direct proof of conspiracy is not essential to convict an alleged conspirator, and that conspiracy may be established by
evidence of acts done in pursuance of a common unlawful purpose. 17 Here, however, the circumstances from which a reasonable inference
of conspiracy might arise, such as the fact that Vizconde and the complainant were friends of long standing and former classmates, that it
was Vizconde who introduced Pagulayan to Perlas, that Vizconde was present on the two occasions when the ring was entrusted to
Pagulayan and when part payment of P5,000.00 was made, and that she signed the receipts, Exhibits "A" and "D," on those occasions are,
at best, inconclusive. They are not inconsistent with what Vizconde has asserted to be an innocent desire to help her friend dispose of the
ring; nor do they exclude every reasonable hypothesis other than complicity in a premeditated swindle. 18

The foregoing conclusion in nowise suffers from the fact that the second receipt, Exhibit "D", appears to confirm that the ring "* * * was given
to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty five thousand
pesos (P85,000.00)." 19 The implications and probative value of this writing must be considered in the context of what had already transpired
at the time of its making. The ring had already been given to Pagulayan, and the check that she had issued in payment therefor (or to secure
payment, as the complainant would have it) had already been dishonored twice. That the complainant then already entertained serious
apprehensions about the fate of the ring is evident in her having had her lawyers send Vizconde and Pagulayan demands for restitution or
payment, with threat of legal action. Given that situation, Exhibit "D", insofar as it purports to confirm that Vizconde had also received the ring
in trust, cannot be considered as anything other than an attempt to "cure" the lack of mention of such an entrustment in the first receipt,
Exhibit "A", and thereby bind Vizconde to a commitment far stronger and more compelling than a mere civil guarantee for the value of the
ring. There is otherwise no explanation for requiring Vizconde and Pagulayan to sign the receipt, which needed only the signature of Perlas
as an acknowledgment of the P5,000.00 given in part payment, and the delivery of the land titles to secure the balance.

The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in the transaction involving Perlas' ring is obvious and
cannot be ignored. Neither, as the Court sees it, should these writings be read together in an attempt to reconcile what they contain, since,
as already pointed out, the later receipt was made under circumstances which leave no little doubt of its truth and ;Integrity. What is clear
from Exhibit "A" is that the ring was entrusted to Pilar A. Pagulayan to be sold on commission; there is no mention therein that it was
simultaneously delivered to and received by Vizconde for the same purpose or, therefore, that Vizconde was constituted, or agreed to act as,
agent jointly with Pagulayan for the sale of the ring. What Vizconde solely undertook was to guarantee the obligation of Pagulayan to return
the ring or deliver its value; and that guarantee created only a civil obligation, without more, upon default of the principal. Exhibit "D", on the
other hand, would make out Vizconde an agent for the sale of the ring. The undisputed fact that Exhibit "A" was executed simultaneously
with the delivery of the ring to Pagulayan compellingly argues for accepting it as a more trustworthy memorial of the real agreement and
transaction of the parties than Exhibit "D" which was executed at a later date and after the supervention of events rendering it expedient or
desirable to vary the terms of that agreement or transaction.

In view of the conclusions already reached, consideration of the Solicitor General's argument also quite persuasive that Exhibit "D" in
fact evidences a consummated sale of the ring for an agreed price not fully paid for, which yields the same result, is no longer necessary. It
is, however, at least another factor reinforcing the hypothesis of Vizconde's innocence.

Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary one to be sure, of the obligation assumed by Pilar A.
Pagulayan to complainant Marylon J. Perlas for the return of the latter's ring or the delivery of its value. Whatever liability was incured by
Pagulayan for defaulting on such obligation and this is not inquired into that of Vizconde consequent upon such default was merely
civil, not criminal. It was, therefore, error to convict her of estafa.
As already stated, the Solicitor General however maintains, on the authority of People vs. Padilla, 20
that the appellant should be
held hable to pay the complainant the amount of P55,000.00, or whatever part of such amount remains
unpaid, for the value of the ring. Again, this is a correct proposition, there being no question as in fact
admitted by her that the appellant executed the guarantee already referred to.

WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering appellant Corazon J.
Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the complainant Marylon J. Perlas in the
amount of P55,000.00 for the unaccounted balance of the value of the latter's ring, the appellant pealed
Decision of the Court of Appeals is reversed and set aside, and said appellant is acquitted, with costs de
oficio. As the record indicates that levies on preliminary attachment and on execution pending appeal
have been made on behalf of the complainant, 21 which may have resulted in further reducing the
abovestated balance, the appellant may, upon remand of this case to the Trial Court, prove any
reductions, by the operation of said levies or otherwise, to which the amount of the indemnity adjudged
may be justly subject.

SO ORDERED.

Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

Yap (Chairman), J., is on leave.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 166058 April 4, 2007

EMERITA GARON, Petitioner,

vs.
PROJECT MOVERS REALTY AND DEVELOPMENT CORPORATION and
STONGHOLD INSURANCE COMPANY, INC., Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) dated
May 7, 2004 in CA-G.R. CV No. 69962, and its Resolution2 dated November 16, 2004. The
assailed Decision affirmed with modification the Order3 dated September 19, 2000 issued by the
Regional Trial Court (RTC), Makati City, Branch 56, in Civil Case No. 99-1051.

Antecedents

On December 19, 1997, Project Movers Realty and Development Corporation (PMRDC)
obtained a loan from Emerita Garon in the amount of P6,088,783.68. The loan was covered by
Promissory Note No. PMRDC-97-12-3324 to mature on December 19, 1998. The stipulated
interest rate, in accordance with the schedule5 of payment attached to the note, was 36% per
annum. To secure the payment of the loan, PMRDC undertook to assign to Garon its leasehold
rights over a space at the Monumento Plaza Commercial Complex, covered by Original
Certificate of Leasehold Title (OCLT) No. 1108. The parties stipulated that failure to pay the
note or any portion thereof, or any interest thereon, shall constitute default, and the entire
obligation shall become due and payable without need of demand.

On December 31, 1997, PMRDC obtained another loan from Garon in the amount of
US$189,418.75, at 17% per annum, to mature on December 31, 1998. The transaction was
covered by Promissory Note No. PMRDC-D97-12-333.6 This loan was secured by an assignment
of leasehold rights over another space of the Monumento Plaza Commercial Complex covered
by OCLT No. 0161.

To secure its obligation to assign the leasehold rights to Garon, PMRDC procured a surety bond7
from Stronghold Insurance Company, Inc. (SICI). The surety bond was subject to the following
conditions:
WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the
Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original
Certificate of Leasehold Title No. 0161 and 0108 (sic).

WHEREAS, the liability of the surety company upon determination under this bond shall in no
case exceed the penal sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY-FIVE
THOUSAND ONE HUNDRED THIRTY-NINE & 85/100 (P12,755,139.85) Only, Philippine
Currency.

xxx

Liability of surety on this bond will expire on November 7, 1998 and said bond will be cancelled
five days after its expiration, unless surety is notified of any existing obligations thereunder.8

When PMRDC defaulted in the payment of its obligations, Garon sent a demand letter9 dated
November 3, 1998, requiring PMRDC to execute and deliver a unilateral Deed of Assignment of
its leasehold rights over the commercial spaces covered by OCLT Nos. 1108 and 0161. Garon
also sent a formal demand letter10 dated November 6, 1998 for SICI to comply with its obligation
under the surety bond.

In view of PMRDCs and SICIs failure to comply with their respective obligations, Garon filed
a Complaint11 for collection before the RTC of Makati City. The case was raffled to Branch 56,
and was docketed as Civil Case No. 99-1051. The complaint contained the following prayer:

WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this Court render[s]
judgment in favor of plaintiff and against defendants as follows:

1. Ordering defendant PMRDC to pay plaintiff the sums of:

1.1. PESOS: Six Million Eighty-Eight Thousand Seven Hundred Eighty-Three

and 68/100 (P6,088,783.68) under PMRDC-97-12-332; and

1.2. DOLLARS: One Hundred Eighty-Nine Thousand Four Hundred Eighteen

and 75/100 (US$189,418.75) under PMRDC-97-12-333.

2. Declaring defendant Stronghold solidarily liable, and ordering it to pay plaintiff the
sum of PESOS: Twelve Million Seven Hundred Fifty-Five Thousand One Hundred
Thirty-Nine and 85/100 (P12,755,139.85) under SICI Bond No. 67831.

3. Ordering defendant PMRDC to pay:

3.1. Interest at 36% per annum and a penalty of 3% per month until full payment
on the unpaid amount due under PMRDC-97-12-332;

3.2. Interest at 17% per annum and a penalty of 3% per month until full payment
on the unpaid amount due under PMRDC-97-12-333;
 3.3. Legal interest on the interest accruing at the time of the filing of the
complaint conformably with Article 2212 of the New Civil Code.

4. On the third cause of action, ordering:

4.1. defendant PMRDC to pay PESOS: Ten Thousand (P10,000.00) as attorneys

fees stipulated in PMRDC-97-12-332;

4.2. defendant PMRDC to pay PESOS: Ten Thousand (P10,000.00) as attorneys

fees stipulated in PMRDC-97-12-333; and

4.3. defendant Stronghold to pay Attorneys fees in the amount of P200,000.00.

4.4. defendants PMRDC and Stronghold to pay plaintiff such amounts of

litigation expenses and costs of suit as may be proven during trial.

Other reliefs just and equitable under the premises are likewise prayed for.12

In its Answer,13 SICI averred, as special and affirmative defenses, that the complaint stated no
cause of action and was prematurely filed; its obligation had been extinguished; the liability on
the bond had been discharged by the act of plaintiff and by the act of law; and its liability on the
bond had prescribed.14 It likewise contended that at the time plaintiff sent the demand letter, the
obligation guaranteed by the bond had not yet matured.15 It further claimed that it was misled by
plaintiff and PMRDC that the bond guaranteed its investment with the project of PMRDC at
Monumento Plaza. SICI also asserted that Garon did not exercise the diligence of a good father
of a family to avoid or minimize losses since she did not even require the surrender of the
OCLTs before the promissory notes were signed and the loans released. SICI also set up a cross-
claim against PMRDC for the payment of any amount it may be ordered to pay to Garon,
pursuant to the Indemnity Agreement16 executed by the latter.17

For its part, PMRDC denied that it executed the above-stated promissory notes and alleged
instead that they were merely roll-overs of PN No. 97-07-228 and 97-08-260.18 It also alleged
that it had already complied with its undertaking under the promissory notes when it put up a
surety bond;19 and when Garon chose to demand from SICI, she effectively waived the right to
claim from it.20 PMRDC further denied liability on the stipulated interest on the ground that the
same is exorbitant and unconscionable.21 As a counterclaim, PMRDC asked for moral and
exemplary damages, as well as for attorneys fees.22 As and by way of cross-claim against SICI,
it likewise demanded the payment of moral damages and attorneys fees.23

Garon filed her Reply24 and a motion25 to render summary judgment. The RTC granted the
motion and ruled as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of plaintiff
Mrs. Emerita I. Garon as follows:
 1. Defendant Project Movers Realty and Development Corporation is hereby directed to
pay plaintiff as follows:

On Promissory Note No. PMRDC 97-12-332:

(A) The sum of PESOS: Six Million Eighty-Eight Thousand Seven Hundred
Eighty-Three and 68/100 (P6,088,783.68) under PMRDC-97-12-332;

(B) Interest thereon at 36% per annum computed from 19 December 1997 until
fully paid.

(C) A penalty of 3% per month computed from 03 November 1998 until full
payment on all unpaid amounts consisting of the principal and interest.

On Promissory Note PMRDC No. 97-12-333:

(A) The peso equivalent of the sum of DOLLARS: One Hundred Eighty-Nine
Thousand Four Hundred Eighteen and 75/100 (US$189,418.75) under PMRDC-
97-12-333.

(B) Interest thereon at the stipulated rate of 17% per annum computed from 31
December 1997;

(C) A penalty of 3% per month computed from 03 November 1998 until full
payment on all unpaid amounts consisting of the principal and interest.

2. Defendant Stronghold Insurance Company, Inc. is hereby held jointly and solidarily
liable to plaintiff Mrs. Garon in the amount of PESOS: TWELVE MILLION SEVEN
HUNDRED FIFTY FIVE THOUSAND ONE HUNDRED THIRTY NINE AND
EIGHTY FIVE CENTAVOS (P12,755,139.85).

3. Defendants Project Movers Realty and Development Corporation and Stronghold

Insurance Company, Inc. are also ordered to pay plaintiff Mrs. Garon jointly and
severally the sum of PESOS: TWO HUNDRED THOUSAND as attorneys fees plus
costs of suit.

All other claims and counter-claims of the parties are hereby ordered dismissed.

SO ORDERED.26

The RTC found that the assignment of PMRDCs leasehold rights was merely an accessory
obligation and not an alternative one; hence, Garons demand on SICIs obligation on the surety
bond could not be considered a waiver of her right to collect from PMRDC. On SICIs
contention that her claim was premature, the RTC ruled that the formers liability arose upon
PMRDCs failure to assign the leasehold rights, not on the maturity date of the loan. The court
further held that SICIs claim of prescription is without merit because plaintiff made a demand
on November 6, 1998, while the surety bond expired on November 7, 1998.

Garon filed a Motion for Execution Pending Appeal,27 while SICI filed a Motion for
Reconsideration.28 The court denied29 the motion for reconsideration and granted30 the motion
for execution pending appeal. SICI then filed a special civil action for Certiorari with Temporary
Restraining Order (TRO) and/or Writ of Preliminary Injunction31 before the CA, docketed as
CA-G.R. SP No. 63334 assailing the order of the court granting execution pending appeal. On
February 23, 2001, the CA issued a TRO32 enjoining petitioner from enforcing the writ of
execution pending appeal.

Meanwhile, on October 11, 2000 and February 16, 2001, PMRDC and SICI filed their respective
Notices of Appeal33 which the RTC approved. However, in view of PMRDCs failure to file its
appellants brief, the CA issued a Resolution34 dismissing its appeal for having been abandoned.
The Resolution became final and executory.1awphi1.nt

On the other hand, in its brief, SICI raised the following errors:

I. THE LOWER COURT PALPABLY COMMITTED GRAVE ERROR IN GRANTING

APPELLEES MOTION FOR SUMMARY JUDGMENT, DESPITE LACK OF VALID
BASIS THEREFOR.

II. THE LOWER COURT LIKEWISE PALPABLY COMMITTED GRAVE ERROR IN

RENDERING THE SUMMARY JUDGMENT HOLDING APPELLANT
STRONGHOLD LIABLE UNDER ITS SURETY BOND TO APPELLEE DESPITE
LACK OF FACTUAL AND LEGAL BASIS FOR ITS JUDGMENT.35

According to SICI, the RTC erroneously rendered summary judgment notwithstanding the
genuine issues raised by the parties.36 It claimed that its obligations under the surety bond never
became effective because of PMRDCs failure to assign its leasehold rights. It likewise insisted
that when the promissory notes matured, Garon could no longer run after it as its liability under
the surety bond had already expired.

On May 7, 2004, the CA affirmed with modification the decision of the RTC. 37 The fallo reads:

WHEREFORE, foregoing considered, the appealed decision is affirmed with the modification
that defendant-appellant SICI is not liable to plaintiff-appellee.

No pronouncement as to cost.

SO ORDERED.38

In upholding the propriety of the summary judgment rendered by the RTC, the CA declared that
no genuine issue was raised since the parties admitted executing the promissory notes and surety
bond, and the non-performance of the correlative obligations; the liabilities of the parties were
likewise clearly set forth in the contracts. The CA further affirmed the RTCs finding that
PMRDC was not relieved of its liability despite the enforcement of Garons right against SICI;
so long as the debt has not been fully paid, SICI is still liable.

The CA found, however, that appellant cannot be held liable because its liability had long
expired (on November 7, 1998) prior to the maturity dates of the loans on December 17 and 31,
1998. Thus, at the time PMRDC defaulted, the surety bond had long expired.

Garon, now petitioner, comes before this Court on the sole ground that:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN MODIFYING THE

TRIAL COURTS DECISION AND FINDING THAT PROMISSORY NOTES NO. PMRDC
97-12-332 AND PMRDC NO. 97-12-333 MATURED ONLY ON 17 DECEMBER 1998 AND
31 DECEMBER 1998, RESPECTIVELY.39

Petitioner avers that it was specifically stated in the promissory notes that failure to pay any of
the note or interest thereon shall constitute default, and the entire obligation shall immediately
become due and payable. In view of PMRDCs default, the entire obligation became due and
demandable. Moreover, the liability of respondent SICI attached the moment PMRDC failed to
assign its leasehold rights. Thus, the CAs ruling that respondent cannot be held liable because
the notes have not yet matured is utterly incorrect.

For its part, respondent SICI avers that petitioner invoked the alleged acceleration clauses of the
promissory notes only before this Court. It likewise argues that the maturity date of the loan is
immaterial because the promissory notes were not guaranteed by the surety bond. As such,
respondent SICI cannot be made to answer for the payment of the loan.40

In her Reply,41 petitioner asserts that the promissory notes, which explicitly provide for the
acceleration of the maturity dates, are all part of the record. Since respondent SICI did not deny
the authenticity and due execution of the notes, the contents may be read in evidence in the
resolution of the issues. She further states that in view of the admission of respondent SICI that
the leasehold rights of PMRDC were never assigned to petitioner, the SICI should be held liable.

Thus, the issue in this case is whether respondent SICI is liable to petitioner under its surety
bond.

The present controversy arose from the following contracts: (1) the contracts of loan covered by
promissory notes No. PMRDC-97-12-33242 and PMRDC-D97-12-33343 dated December 19 and
31, 1997, between petitioner and PMRDC; and (2) the surety bond44 dated November 7, 1997,
between PMRDC and respondent SICI.1a\^/phi1.net

In the subject promissory notes, PMRDC undertook to pay the amount of the loan covered by the
two notes, as well as to assign its leasehold rights over two spaces in the Monumento Plaza
Commercial Complex covered by OCLT Nos. 0161 and 1108, as a security for the loan.

To secure PMRDCs obligation to assign its leasehold rights to petitioner, the former procured
the surety bond from respondent SICI subject to the following conditions:
WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the
Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original
Certificate of Leasehold Title No. 0161 and 0108 (sic).

WHEREAS, the liability of the surety company upon determination under this bond shall in no
case exceed the penal sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY FIVE
THOUSAND ONE HUNDRED THIRTY NINE & 85/100 (P12,755,139.85) Only, Philippine
Currency.

xxx

Liability of surety on this bond will expire on November 7, 1998 and said bond will be cancelled
five days after its expiration, unless surety is notified of any existing obligations thereunder.45

Thus, respondent SICI, in turn, undertook to guarantee the assignment of leasehold rights; and
bound itself to be liable to petitioner in case of PMRDCs failure to assign the leasehold rights in
an amount not exceeding P12,755,139.85. This undertaking, however, was to expire on
November 7, 1998.

It must be stressed that the principal obligation guaranteed by the surety bond is the assignment
of the leasehold rights of PMRDC to petitioner over the subject spaces. Petitioner made a formal
demand on November 3, 1998 for PMRDC to perform the obligation, but the latter defaulted. As
such, PMRDCs liability as principal arose. Consequently, respondents liability as surety
likewise arose. Respondent therefore cannot claim that its obligation arose only upon the
maturity of the subject loans. To sustain this contention would mean that respondent cannot be
held liable under the surety bond, because if demand is made after the maturity dates of the loans
December 19 and 31, 1998 it could again assert that its liability had expired on November 7,
1998.

Suretyship arises upon the solidary binding of a person (deemed the surety) with the principal
debtor, for the purpose of fulfilling an obligation.46 A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged as touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable.47 Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct, primary and absolute, or
equivalent to that of a regular party to the undertaking.48

Notwithstanding the timeliness of the demand on respondent, the latter cannot be held liable in
the instant case. Indeed, the liability of respondent arose the moment PMRDC failed to assign its
leasehold rights; and the demand on respondent was made prior to the expiration of the surety
bond. However, an examination of the terms of the surety bond clearly shows that respondent
guaranteed the assignment of the leasehold rights, not the payment of a particular sum of money
owed by PMRDC to petitioner. The principal obligation therefore is the assignment of the
leasehold right, and the accessory obligation is the surety agreement.

The Court notes, however, that respondent is a stranger to the contract of loan between petitioner
and PMRDC; it cannot thus be held liable for an obligation which it did not undertake to perform
or at least to guarantee. It is basic that the parties are bound by the terms of their contract which
is the law between them. The extent of a suretys liability is determined by the language of the
suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the
contract.49 Contracts have the force of law between the parties who are free to stipulate any
matter not contrary to law, morals, good customs, public order or public policy.50 If the terms of
a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.51

Since respondents undertaking under the surety bond was to guarantee the assignment of
leasehold rights, the security of the principal debt, its obligation cannot extend to the payment of
the principal obligation; to do so would mean going beyond the terms of the contract.

The records show that in her demand letters dated November 3 and 6, 1998, petitioner made
formal demands on both PMRDC and respondent for the assignment of PMRDCs leasehold
right. However, in her complaint in Civil Case No. 99-1051 where the present case arose,
petitioner prayed for the payment of the principal debt, not the assignment of PMRDCs
leasehold rights. The pertinent portion of the complaint reads:

WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this court render[s]
judgment in favor of plaintiff and against defendants as follows:

1. Ordering defendant PMRDC to pay plaintiff the sums of:

xxx

2. Declaring defendant Stronghold solidarily liable and ordering it to pay plaintiff the
sum of x x x. (Emphasis supplied)52

It thus shows that petitioner was enforcing her right to collect the debt, rather than her right to
secure it through the assignment of the leasehold right. Respondent is being made solidarily
liable for the payment of such debt which obviously is beyond its undertaking under the surety
bond.

In sum, respondents liability on the bond arose from the time PMRDC failed to comply with its
obligation to assign its leasehold rights over the subject properties as security for the payment of
her debt covered by the promissory notes, not on the maturity of the loan. However, respondent
cannot be held liable to make such payment for the following reasons: (1) its undertaking under
the surety bond was merely to guarantee the assignment of PMRDCs leasehold rights and not
the payment of the principal obligation; and (2) petitioner, in instituting the instant case, is
seeking to enforce her right to collect the principal debt rather than enforce the security.

IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED. The Decision of
the Court of Appeals dated May 7, 2004, and its Resolution dated November 16, 2004, are
AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 110086 July 19, 1999

PARAMOUNT INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS and DAGUPAN ELECTRIC CORPORATION, respondents.

YNARES-SANTIAGO, J.:

Before this Court is a petition for review on certiorari assailing the Decision of the Court of Appeals dated April 30, 1993 in CA-G.R. CV No.
11970 which dismissed petitioner Paramount Insurance Corporation's (PARAMOUNT) appeal, thereby affirming the decision of the court a
quo finding petitioner liable on its injunction bond.

McAdore Finance and Investment, Inc. (McADORE) was the owner and operator of the McAdore International Palace Hotel in Dagupan City.
Private respondent Dagupan Electric Corporation (DECORP), on the other hand, was the grantee of a franchise to operate and maintain
electric services in the province of Pangasinan, including Dagupan City.

On February 2, 1978, McADORE and DECORP entered into a contract whereby DECORP shall provide electric power to McADORE's Hotel.
During the term of their contract for power service, DECORP noticed discrepancies between the actual monthly billings and the estimated
monthly billings of McADORE. Upon inspection, it was discovered that the terminal in the transformers connected to the meter had been
interchanged resulting in the slow rotation of the meter. Consequently, DECORP issued a corrected bill but McADORE refused to pay. As a
result of McADORE's failure and continued refusal to pay the corrected electric bills, DECORP disconnected power supply to the hotel on
November 27, 1978.

Aggrieved, McADORE commenced a suit against DECORP for damages with prayer for a writ of preliminary injunction. McADORE posted
injunction bonds from several sureties, one of which was herein petitioner PARAMOUNT, which issued an injunction bond on July 7, 1980
with a face amount of P500,000.00. Accordingly, a writ of preliminary injunction was issued wherein DECORP was ordered to continue
supplying electric power to the hotel and restrained from further disconnecting it.

After due hearing, the Regional Trial Court of Quezon City, Branch 106, rendered judgment in favor of DECORP, the dispositive portion of
which reads:

WHEREFORE, there being preponderance of evidence, the court hereby dismisses the amended complaint. Further,
the court rescinds the service contract between the parties, and orders McAdore to pay Decorp the following:

1. Actual damages consisting of total arrearages for electric services rendered from February 1978 to January 1983, in
the sum of P3,834,489.62, plus interest at the legal rate, computed from the date of demand until full payment;

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

3. Exemplary damages in the sum of P400,000.00;

4. Attorney's fees in the sum of P100,000.00; and

5. Costs of the suit.

While this case was under litigation, the court issued a number of restraining orders or injunctions. During these
incidents, McAdore filed the following bonds: Policy No. 8022709 by Paramount Insurance Corporation for
P500,000.00; No. 00007 and No. 00008 by Sentinel Insurance Company, Inc. for P100,000.00 and P50,000.00; and
No. 1213 by the Travelers Multi-Indemnity Corporation for P225,000.00.
 Pursuant to the dispositive portion of this decision, the court holds that these bonding companies are jointly and
severally liable with McAdore to the extent of the value of their bonds, to pay the damages adjudged to
Decorp.1wphi1.nt

Send this decision to: plaintiffs counsel Atty. Pagapong; defendant's counsel Atty. Vera Cruz; and to each of the
bondsman.

It is so ordered. 1

McADORE did not appeal the above decision. PARAMOUNT, however, appealed to the Court of Appeals
assigning the following errors, to wit:

I. APPELLANT SURETY WAS NOT GRANTED DUE PROCESS NOR GIVEN ITS DAY
IN COURT.

II. APPELLANTS SURETY BOND, BEING AN INJUNCTION OR TEMPORARY

RESTRAINING ORDER BOND, THE MANDATORY PROCEDURE IN SEC. 20, RULE
57, IN RELATION TO SEC 9, RULE 58, RULES OF COURT WAS NOT OBSERVED IN
THIS CASE;

III. NO EVIDENCE NOR PROOF HAD BEEN PRESENTED TO SHOW THAT HEREIN
APPELLANT SURETY BOND SHOULD BE HELD LIABLE FOR TOTAL DAMAGES AS
ADJUDGED IN THE CHALLENGED DECISION. 2

In essence, PARAMOUNT contended that it was not given its day in court because it was not notified by
DECORP of its intention to present evidence of damages against its injunction bond, as mandated by
Sec. 9 of Rule 58, in relation to Sec. 20 of Rule 57 of the Revised Rules of Court.

The Court of Appeals was not convinced with petitioner's contentions. On April 30, 1993, it affirmed the
decision of the trial court.

In the instant petition, PARAMOUNT seeks to reverse and set aside the decision of the Court of Appeals
on the following assignment of errors:

FIRSTLY, THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT

NOTICE TO PETITIONER AND ITS PRESENCE THROUGH COUNSEL IN ONE
HEARING WHERE NO EVIDENCE IN SUPPORT OF THE DAMAGES GUARANTEED
BY PETITIONER'S BOND RENDERS THE NEED FOR ANOTHER HEARING ON THAT
MATTER A SUPERFLUITY.

SECONDLY, THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE

DECISION OF THE COURT A QUO THAT PETITIONER IS JOINTLY AND SEVERALLY
LIABLE WITH McADORE TO THE EXTENT OF ITS BOND, WHICH DECISION IS NOT
SUPPORTED BY THE EVIDENCE. 3

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

In its Comment, DECORP claims that PARAMOUNT participated in the proceedings and was given its
day in court. This is evidenced by the "Notice of Hearing" dated February 26, 1985 addressed to the three
sureties. In fact, at the hearing on March 22, 1985, PARAMOUNT was in attendance represented by Atty.
Nonito Q. Cordero. Likewise, PARAMOUNT was notified of the next hearing scheduled for April 26, 1985.
DECORP further stressed that the hearing on April 26, 1985 proceeded as scheduled without any
comment, objection, opposition or reservation from PARAMOUNT.

The core issue to be resolved here is whether or not petitioner Paramount Insurance Corporation was
denied due process when the trial court found the injunction bond it issued in favor of McADORE liable to
DECORP. Stated otherwise, was there sufficient evidence to establish the liability of the petitioner on its
injunction bond?

The petition is devoid of merit.

Petitioner's submissions necessitates going into the nature of an injunction as well as over the procedure
in claiming, ascertaining and awarding damages upon the injunction bond.

Injunction is an extraordinary remedy calculated to preserve the status quo of things and to prevent actual
or threatened acts violative of the rules of equity and good conscience as would consequently afford an
injured party a cause of action resulting from the failure of the law to provide for an adequate or complete
relief. 6 A preliminary injunction is an order granted at any stage of an action or proceeding prior to the
judgment or final order, requiring a party or a court, agency or a person to refrain from a particular act or
acts. It may also require the performance of a particular act or acts, in which case it shall be known as a
preliminary mandatory injunction. 7 Its sole purpose is not to correct a wrong of the past, in the sense of
redress for injury already sustained, but to prevent further injury. 8

A preliminary injunction or temporary restraining order may be granted only when, among others, the
applicant, unless exempted by the court, files with the court where the action or proceeding is pending, a
bond executed to the party or person enjoined, in an amount to be fixed by the court, to the effect that the
applicant will pay such party or person all damages which he may sustain by reason of the injunction or
temporary restraining order if the court should finally decide that the applicant was not entitled thereto.
Upon approval of the requisite bond, a writ of preliminary injunction shall be issued. 9 At the trial, the
amount of damages to be awarded to either party, upon the bond of the adverse party, shall be claimed,
ascertained, and awarded under the same procedure prescribed in Section 20 of Rule 57. 10

Rule 57, Section 20, of the 1997 Rules of Civil Procedure, which is similarly applicable to preliminary
injunction, pertinently provides:

Sec. 20. Claim for damages on account of improper, irregular or excessive attachment.
An application for damages on account of improper, irregular or excessive attachment
must be filed before the trial or before appeal is perfected or before the judgment
becomes executory, with due notice to the attaching obligee or his surety or sureties,
setting forth the facts showing his right to damages and the amount thereof. Such
damages may be awarded only after proper hearing and shall be included in the
judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the
attachment was issued, he must claim damages sustained during the pendency of the
appeal by filing an application in the appellate court with notice to the party in whose
favor the attachment was issued or his surety or sureties, before the judgment of the
 appellate court becomes executory. The appellate court may allow the application to be
heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was
issued from recovering in the same action the damages awarded to him from any
property of the attaching obligee not exempt from execution should the bond or deposit
given by the latter be insufficient or fail to fully satisfy the award. ( mutatis mutandis ).

The above rule comes into play when the plaintiff-applicant for injunction fails to sustain his action, and
the defendant is thereby granted the right to proceed against the bond posted by the former. In the case
at bench, the trial court dismissed McADORE's action for damages with prayer for writ of preliminary
injunction and eventually adjudged the payment of actual, moral, and exemplary damages against
plaintiff-applicant. Consequently, private respondent DECORP can proceed against the injunction bond
posted by plaintiff-applicant to recover the damages occasioned by the issuance by the trial court of the
writ of injunction.

In order for the injunction bond to become answerable for the above-described damages, the following
requisites must concur: 11

1. The application for damages must be filed in the same case where the bond was
issued;

2. Such application for damages must be filed before the entry of judgment; and

3. After hearing with notice to the surety.

The records of this case reveal that during its pendency in the trial court, DECORP filed its Answer raising
compulsory counterclaims for rescission of contract, moral damages, exemplary damages, attorney's fees
and litigation expenses. 12 During the trial, Atty. Nonito Cordero appeared 13 as counsel for petitioner.
PARAMOUNT as well as the other sureties were properly notified of the hearing and given their day in
court. Specifically, notice was sent to Atty. Cordero of the hearing on April 27, 1985, which was set for the
purpose of determining the liability of the sureties. The counterclaims for damages of DECORP were
proven at the trial and yet PARAMOUNT did not exert any effort to controvert the evidence presented by
DECORP. Given these circumstances, PARAMOUNT cannot hide under the cloak of non-liability on its
injunction bond on the mere expediency that it was deprived of due process. It bears stressing that what
the law abhors is not the absence of previous notice but rather the absolute lack of opportunity to
ventilate a party's side. 14 In other words, petitioner cannot successfully invoke denial of due process
where it was given the chance to be heard. As aptly held by the Court of Appeals, viz.:

The records of the case disclose that during the trial of the case, PARAMOUNT was
present and represented by its counsel Atty. Nonito Q. Cordero as shown in the trial
court's order dated March 22, 1985 (Annex "A" of Appellee's Brief). In the said order,
PARAMOUNT was duly notified of the next hearing which was scheduled on April 26,
1985. Evidently, PARAMOUNT was well-apprised of the next hearing and it cannot feign
lack of notice. Having been given an opportunity to be heard during the main hearing for
the matter of damages, PARAMOUNT therefore, cannot bewail that it was not given an
opportunity to be heard upon denial of its motion to cancel its injunction bond. Of what
use, therefore, is there to conduct another hearing when the issue of damages has been
the subject of the main action of which PARAMOUNT had been duly notified? A new
notice and hearing prescribed by Sec. 20, Rule 57, is therefore a repetition and a
superfluity.

Moreover, PARAMOUNT has only itself to blame when it did not make any opposition or
objection during the hearing for the reception of DECORP's evidence. Having manifested
 its desire to cancel its bond, it should have asked for a deferment of hearing on
DECORP's evidence but PARAMOUNT did not do anything of this sort. Only when an
adverse judgment was rendered by the trial court against its principal McAdore did it
whimper a denial of procedural due process. 15

On the same point, PARAMOUNT argues that contrary to the ruling of the Court of Appeals, there is a
need for a separate hearing for the purpose of presenting evidence on the alleged damages claimed by
DECORP on petitioner's injunction bond. PARAMOUNT contends that a separate hearing is needed as
no evidence dealing with DECORP's claim for damages on petitioner's bond was presented during the
hearing wherein petitioner's counsel attended nor in the next hearing wherein petitioner was notified but
failed to attend. Since no hearing was held for the purpose of establishing its liability on the injunction
bond, PARAMOUNT concludes that it is released from its obligation as surety.

Contrary to petitioner's thesis, it is neither mandatory nor fatal that there should be a separate hearing in
order that damages upon the bond can be claimed, ascertained and awarded, as can be gleaned from a
cursory reading of the provisions of Rule 57, Section 20. This Court agrees with the appellate court's
ruling that:

Jurisprudential findings laid down the doctrine that a final adjudication that the applicant
is not entitled to the injunction does not suffice to make the surety liable. It is necessary,
in addition, that the surety be accorded due process, that is, that it be given an
opportunity to be heard on the question of its solidary liability for damages arising from a
wrongful injunction order. Withal, the fact that the matter of damages was among the
issues tried during the hearings on the merits will not render unnecessary or superfluous
a summary hearing to determine the extent of a surety's liability unless of course, the
surety had been impleaded as a party, or otherwise earlier notified and given opportunity
to be present and ventilate its side on the matter during the trial.

16
The exception under the doctrinal ruling above noted is extant in the case at bar.

What is necessary only is for the attaching party and his surety or sureties to be duly notified and given
the opportunity to be heard. In the case at bench, this Court accords due respect to the factual finding of
the Court of Appeals that "PARAMOUNT was present and represented by its counsel Atty. Nonito Q.
Cordero as shown in the trial court's order dated March 22, 1985 . . .." 17

As stated, PARAMOUNT also argues that assuming it is liable on its injunction bond, its liability should be
limited only to the amount of damages accruing from the time the injunction bond was issued until the
termination of the case, and not from the time the suit was commenced. In short, it claims that the
injunction bond is prospective and not retroactive in application.

This Court does not agree. Rule 58, Section 4(b), provides that a bond is executed in favor of the party
enjoined to answer for all damages which he may sustain by reason of the injunction. This Court already
had occasion to rule on this matter in Mendoza v. Cruz, 18 where it held that "(t)he injunction bond is
intended as a security for damages in case it is finally decided that the injunction ought not to have been
granted. It is designed to cover all damages which the party enjoined can possibly suffer. Its principal
purpose is to protect the enjoined party against loss or damage by reason of an injunction." No distinction
was made as to when the damages should have been incurred.

Moreover, when petitioner issued its injunction bond in favor of DECORP, it was done with the full
knowledge of the relevant facts obtaining in the controversy between DECORP and McADORE. At the
time the injunction bond was issued, DECORP was already claiming arrears in electric bills and damages
from McADORE.
It bears stressing that McADORE was found liable to pay actual damages, moral damages, exemplary
damages, attorney's fees and costs of the suit. To argue therefore that PARAMOUNT is only liable on its
injunction bond from the time of its issuance and not from the time the suit was commenced is
preposterous if not absurd. Indeed, it would be impossible to determine the reckoning point when moral
damages, exemplary damages, attorney's fees and costs of the suit were supposed to have been
incurred. Consequently, it can be safely deduced that the bond answers for any and all damages arising
from the injunction, regardless of whether it was sustained before or after the filing of the injunction bond.

PARAMOUNT further maintains that it is liable to pay actual damages only. 19 However, Rule 58, Section
4(b), clearly provides that the injunction bond is answerable for all damages. "The bond insures with all
practicable certainty that the defendant may sustain no ultimate loss in the event that the injunction could
finally be dissolved. Consequently, the bond may obligate the bondsmen to account to the defendant in
the injunction suit for all: (1) such damages; (2) costs and damages; (3) costs, damages and reasonable
attorney's fees as shall be incurred or sustained by the person enjoined in case it is determined that the
injunction was wrongfully issued." 20 Thus, PARAMOUNT is liable, jointly and severally, for actual
damages, moral damages, exemplary damages, attorney's fees and costs of the suit, to the extent of the
amount of the bond.

Be that as it may, a scrutiny of petitioner's Indemnity Agreement 21 with McADORE shows that the former
agreed "to become surety" for the stated amount "in favor of Dagupan Electric Corp." It should be noted
that McADORE was already in arrears starting from June 1979 22 up to the time it entered into an
Indemnity Agreement with PARAMOUNT on July 17, 1980.

It may not be amiss to point out that by the contract of suretyship, it is not for the obligee to see to it that
the principal pays the debt or fulfills she contract, but for the surety to see to it that the principal pay or
perform. 23 The purpose of the injunction bond is to protect the defendant against loss or damage by
reason of the injunction in case the court finally decides that the plaintiff was not entitled to it, and the
bond is usually conditioned accordingly. Thus, the bondsmen are obligated to account to the defendant in
the injunction suit for all damages, or costs and reasonable counsel's fees, incurred or sustained by the
latter in case it is determined that the injunction was wrongfully issued. 24

The posting of a bond in connection with a preliminary injunction (or attachment under Rule 57, or
receivership under Rule 59, or seizure or delivery of personal property under Rule 60) does not operate to
relieve the party obtaining an injunction from any and all responsibility for the damages that the writ may
thereby cause. It merely gives additional protection to the party against whom the injunction is directed. It
gives the latter a right of recourse against either the applicant or his surety, or against both. 25 In the same
manner, when petitioner PARAMOUNT issued the bond in favor of its principal, it undertook to assume all
the damages that may be suffered after finding that the principal is not entitled to the relief being sought.

WHEREFORE, based on the foregoing, the instant petition is DENIED. The decision of the Court of
Appeals dated April 30, 1993 in CA-G.R. CV No. 11970 is AFFIRMED, With costs.1wphi1.nt

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 156571 July 9, 2008

INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME

ASSURANCE CORPORATION, Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF CUSTOMS,
Respondent.

DECISION

BRION, J.:

Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court
filed by Intra-Strata Assurance Corporation (Intra-Strata) and Philippine Home Assurance
Corporation (PhilHome), collectively referred to as "petitioners."

The petition seeks to set aside the decision dated November 26, 2002 of the Court of Appeals1
(CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in
Civil Case No. 83-15071.2 In its ruling, the RTC found the petitioners liable as sureties for the
customs duties, internal revenue taxes, and other charges due on the importations made by the
importer, Grand Textile Manufacturing Corporation (Grand Textile).3

BACKGROUND FACTS

Grand Textile is a local manufacturing corporation. In 1974, it imported from different countries
various articles such as dyestuffs, spare parts for textile machinery, polyester filament yarn,
textile auxiliary chemicals, trans open type reciprocating compressor, and trevira filament.
Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse
No. 462. As computed by the Bureau of Customs, the customs duties, internal revenue taxes, and
other charges due on the importations amounted to P2,363,147.00. To secure the payment of
these obligations pursuant to Section 1904 of the Tariff and Customs Code (Code),4 Intra-Strata
and PhilHome each issued general warehousing bonds in favor of the Bureau of Customs. These
bonds, the terms of which are fully quoted below, commonly provide that the goods shall be
withdrawn from the bonded warehouse "on payment of the legal customs duties, internal
revenue, and other charges to which they shall then be subject."5

Without payment of the taxes, customs duties, and charges due and for purposes of domestic
consumption, Grand Textile withdrew the imported goods from storage.6 The Bureau of Customs
demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata
and PhilHome as sureties. All three failed to pay. The government responded on January 14,
1983 by filing a collection suit against the parties with the RTC of Manila.

LOWER COURT DECISIONS

After hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer)
and the petitioners (as sureties) liable for the taxes, duties, and charges due on the imported
articles. The dispositive portion of this decision states: 7

WHEREFORE, premises considered, the Court RESOLVES directing:

(1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of
P2,363,174.00, plus interests at the legal rate from the filing of the Complaint until fully
paid;

(2) the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly and
severally, with defendant Grand, the sum of P2,319,211.00 plus interest from the filing of
the Complaint until fully paid; and the defendant Philippine Home Assurance
Corporation to pay plaintiff the sum of P43,936.00 plus interests to be computed from the
filing of the Complaint until fully paid;

(3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and
PhilHome; and

(4) all the defendants to pay the costs of suit.

SO ORDERED.

The CA fully affirmed the RTC decision in its decision dated November 26, 2002. From this CA
decision, the petitioners now come before this Court through a petition for review on certiorari
alleging that the CA decided the presented legal questions in a way not in accord with the law
and with the applicable jurisprudence.

ASSIGNED ERRORS

The petitioners present the following points as the conclusions the CA should have made:

1. that they were released from their obligations under their bonds when Grand Textile
withdrew the imported goods without payment of taxes, duties, and other charges; and

2. that their non-involvement in the active handling of the warehoused items from the
time they were stored up to their withdrawals substantially increased the risks they
assumed under the bonds they issued, thereby releasing them from liabilities under these
bonds.8
In their arguments, they essentially pose the legal issue of whether the withdrawal of the stored
goods, wares, and merchandise without notice to them as sureties released them from any
liability for the duties, taxes, and charges they committed to pay under the bonds they issued.
They additionally posit that they should be released from any liability because the Bureau of
Customs, through the fault or negligence of its employees, allowed the withdrawal of the goods
without the payment of the duties, taxes, and other charges due.

The respondent, through the Solicitor General, maintains the opposite view.

THE COURTS RULING

We find no merit in the petition and consequently affirm the CA decision.

Nature of the Suretys Obligations

Section 175 of the Insurance Code defines a contract of suretyship as an agreement whereby a
party called the surety guarantees the performance by another party called the principal or
obligor of an obligation or undertaking in favor of another party called the obligee, and includes
among its various species bonds such as those issued pursuant to Section 1904 of the Code.9
Significantly, "pertinent provisions of the Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the provisions of a contract of
suretyship."10 By its very nature under the terms of the laws regulating suretyship, the liability of
the surety is joint and several but limited to the amount of the bond, and its terms are determined
strictly by the terms of the contract of suretyship in relation to the principal contract between the
obligor and the obligee.11

The definition and characteristics of a suretyship bring into focus the fact that a surety agreement
is an accessory contract that introduces a third party element in the fulfillment of the principal
obligation that an obligor owes an obligee. In short, there are effectively two (2) contracts
involved when a surety agreement comes into play a principal contract and an accessory
contract of suretyship. Under the accessory contract, the surety becomes directly, primarily, and
equally bound with the principal as the original promissor although he possesses no direct or
personal interest over the latters obligations and does not receive any benefit therefrom.12

The Bonds Under Consideration

That the bonds under consideration are surety bonds (and hence are governed by the above laws
and rules) is not disputed; the petitioners merely assert that they should not be liable for the
reasons summarized above. Two elements, both affecting the suretyship agreement, are material
in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement;
the terms of the suretyship agreement constitute the second.

A feature of the petitioners bonds, not stated expressly in the bonds themselves but one that is
true in every contract, is that applicable laws form part of and are read into the contract without
need for any express reference. This feature proceeds from Article 1306 of the Civil Code
pursuant to which we had occasion to rule:
It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that
it is unfettered. They may, according to Article 1306 of the Civil Code "establish such
stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are
not contrary to law, morals, good customs, public order, or public policy." The law thus sets
limits. It is a fundamental requirement that the contract entered into must be in accordance
with, and not repugnant to, an applicable statute. Its terms are embodied therein. The
contracting parties need not repeat them. They do not even have to be referred to. Every
contract thus contains not only what has been explicitly stipulated but also the statutory
provisions that have any bearing on the matter."13

Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of
the Tariff and Customs Code which provide that:

Sec 101. Imported Items Subject to Duty All articles when imported from any foreign country
into the Philippines shall be subject to duty upon such importation even though previously
exported from the Philippines, except as otherwise specifically provided for in this Code or in
clear laws.

xxxx

Sec. 1204. Liability of Importer for Duties Unless relieved by laws or regulations, the liability
for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due
from the importer to the government which can be discharged only by payment in full of all
duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles
imported which may be enforced which such articles are in custody or subject to the control of
the government.

The obligation to pay, principally by the importer, is shared by the latter with a willing third
party under a suretyship agreement under Section 1904 of the Code which itself provides:

Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond
After articles declared in the entry of warehousing shall have been examined and the duties,
taxes, and other charges shall have been determined, the Collector shall require from the
importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the
amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles
within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes,
and other charges to which the articles shall then be subject and upon compliance with all legal
requirements regarding their importation.

We point these out to stress the legal basis for the submission of the petitioners bonds and the
conditions attaching to these bonds. As heretofore mentioned, there is, firstly, a principal
obligation belonging to the importer-obligor as provided under Section 101; secondly, there is an
accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a
surety agreement, directly, primarily, and equally bind them to the obligee to pay the obligors
obligation.
The second element to consider in a suretyship agreement relates to the terms of the bonds
themselves, under the rule that the terms of the suretyship are determined by the suretyship
contract itself.14 The General Warehousing Bond15 that is at the core of the present dispute
provides:

KNOW ALL MEN BY THESE PRESENTS:

That I/we GRAND TEXTILE MANUFACTURING CORPORATION Km. 21, Marilao,

Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic
corporation duly organized and existing under and by virtue of the laws of the Philippines, as
Surety, are held and firmly bound unto the Republic of the Philippines, in the sum of PESOS
TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the
Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and
assigns, jointly and severally, firmly by these presents:

WHEREAS, the above-bounden Principal will from time to time make application to make entry
for storing in customs-internal revenue bonded warehouse certain goods, wares, and
merchandise, subject to customs duties and special import tax or internal revenue taxes or both;

WHEREAS, the above principal in making application for storing merchandise in customs-
internal revenue bonded warehouse as above stated, will file this in his name as principal, which
bond shall be approved by the Collector of Customs or his Deputy; and

WHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts
of the principal done in accordance with the terms of this bond.

NOW THEREFORE, the condition of this obligation is such that if within six (6) months from
the date of arrival of the importing vessel in any case, the goods, wares, and merchandise shall be
regularly and lawfully withdrawn from public stores or bonded warehouse on payment of the
legal customs duties, internal revenue taxes, and other charges to which they shall then be
subject; or if at any time within six (6) months from the said date of arrival, or within nine (9)
months if the time is extended for a period of three (3) months, as provided in Section 1903 of
the Tariff and Customs Code of the Philippines, said importation shall be so withdrawn for
consumption, then the above obligation shall be void, otherwise, to remain in full force and
effect.

Obligations hereunder may only be accepted during the calendar year 1974 and the right to
reserve by the corresponding Collector of Customs to refuse to accept further liabilities under
this general bond, whenever, in his opinion, conditions warrant doing so.

IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20th day of
September, 1974 at Makati, Rizal, Philippines.

Considered in relation with the underlying laws that are deemed read into these bonds, it is at
once clear that the bonds shall subsist that is, "shall remain in full force and effect" unless the
imported articles are "regularly and lawfully withdrawn. . .on payment of the legal customs
duties, internal revenue taxes, and other charges to which they shall be subject." Fully fleshed
out, the obligation to pay the duties, taxes, and other charges primarily rested on the principal
Grand Textile; it was allowed to warehouse the imported articles without need for prior payment
of the amounts due, conditioned on the filing of a bond that shall remain in full force and effect
until the payment of the duties, taxes, and charges due. Under these terms, the fact that a
withdrawal has been made and its circumstances are not material to the sureties liability, except
to signal both the principals default and the elevation to a due and demandable status of the
sureties solidary obligation to pay. Under the bonds plain terms, this solidary obligation
subsists for as long as the amounts due on the importations have not been paid. Thus, it is
completely erroneous for the petitioners to say that they were released from their obligations
under their bond when Grand Textile withdrew the imported goods without payment of taxes,
duties, and charges. From a commonsensical perspective, it may well be asked: why else would
the law require a surety when such surety would be bound only if the withdrawal would be
regular due to the payment of the required duties, taxes, and other charges?

We note in this regard the rule that a surety is released from its obligation when there is a
material alteration of the contract in connection with which the bond is given, such as a change
which imposes a new obligation on the promising party, or which takes away some obligation
already imposed, or one which changes the legal effect of the original contract and not merely its
form. A surety, however, is not released by a change in the contract which does not have the
effect of making its obligation more onerous.16

We find under the facts of this case no significant or material alteration in the principal contract
between the government and the importer, nor in the obligation that the petitioners assumed as
sureties. Specifically, the petitioners never assumed, nor were any additional obligation imposed,
due to any modification of the terms of importation and the obligations thereunder. The
obligation, and one that never varied, is on the part of the importer, to pay the customs duties,
taxes, and charges due on the importation, and on the part of the sureties, to be solidarily bound
to the payment of the amounts due on the imported goods upon their withdrawal or upon
expiration of the given terms. The petitioners lack of consent to the withdrawal of the goods, if
this is their complaint, is a matter between them and the principal Grand Textile; it is a matter
outside the concern of government whose interest as creditor-obligee in the importation
transaction is the payment by the importer-obligor of the duties, taxes, and charges due before
the importation process is concluded. With respect to the sureties who are there as third parties to
ensure that the amounts due are paid, the creditor-obligee's active concern is to enforce the
sureties solidary obligation that has become due and demandable. This matter is further and
more fully explored below.

The Need for Notice to Bondsmen

To support the conclusion that they should be released from the bonds they issued, the petitioners
argue that upon the issuance and acceptance of the bonds, they became direct parties to the
bonded transaction entitled to participate and actively intervene, as sureties, in the handling of
the imported articles; that, as sureties, they are entitled to notice of any act of the bond obligee
and of the bond principal that would affect the risks secured by the bond; and that otherwise, the
door becomes wide open for possible fraudulent conspiracy between the bond obligee and
principal to defraud the surety.17

In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship,
particularly the fact that two types of relationships are involved, that is, the underlying principal
relationship between the creditor (government) and the debtor (importer), and the accessory
surety relationship whereby the surety binds itself, for a consideration paid by the debtor, to be
jointly and solidarily liable to the creditor for the debtors default. The creditor in this latter
relationship accepts the suretys solidary undertaking to pay if the debtor does not pay.18 Such
acceptance, however, does not change in any material way the creditors relationship with the
principal debtor nor does it make the surety an active party to the principal creditor-debtor
relationship. The contract of surety simply gives rise to an obligation on the part of the surety in
relation with the creditor and is a one-way relationship for the benefit of the latter.19

In other words, the surety does not, by reason of the surety agreement, earn the right to intervene
in the principal creditor-debtor relationship; its role becomes alive only upon the debtors
default, at which time it can be directly held liable by the creditor for payment as a solidary
obligor. A surety contract is made principally for the benefit of the creditor-obligee and this is
ensured by the solidary nature of the sureties undertaking.20 Under these terms, the surety is not
entitled as a rule to a separate notice of default,21 nor to the benefit of excussion,22 and may be
sued separately or together with the principal debtor.23 The words of this Court in Palmares v.
CA24 are worth noting:

Demand on the surety is not necessary before bringing the suit against them. On this point, it
may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice
of the principals default. Inasmuch as the creditor owes no duty of active diligence to take care
of the interest of the surety, his mere failure to voluntarily give information to the surety of the
default of the principal cannot have the effect of discharging the surety. The surety is bound to
take notice of the principals default and to perform the obligation. He cannot complain that the
creditor has not notified him in the absence of a special agreement to that effect in the contract of
suretyship.

Significantly, nowhere in the petitioners bonds does it state that prior notice is required to fix
the sureties liabilities. Without such express requirement, the creditors right to enforce payment
cannot be denied as the petitioners became bound as soon as Grand Textile, the principal debtor,
defaulted. Thus, the filing of the collection suit was sufficient notice to the sureties of their
principals default.

The petitioners reliance on Visayan Surety and Insurance Corporation v. Pascual25 and Aguasin
v. Velasquez26 does not appear to us to be well taken as these cases do not squarely apply to the
present case. These cases relate to bonds issued as a requirement for the issuance of writs of
replevin. The Rules of Court expressly require that before damages can be claimed against such
bonds, notice must be given to the sureties to bind them to the award of damages. No such
requirement is evident in this case as neither the Tariff and Customs Code nor the issued bonds
require prior notice to sureties.
The petitioners argument focusing on the additional risks they incur if they cannot intervene in
the handling of the warehoused articles must perforce fail in light of what we have said above
regarding the nature of their obligation as sureties and the relationships among the parties where
a surety agreement exists. We add that the petitioners have effectively waived as against the
creditor (the government) any such claim in light of the provision of the bond that "the surety
hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in
accordance with the terms of this bond."27 Any such claim including those arising from the
withdrawal of the warehoused articles without the payment of the requisite duties, taxes and
charges is for the principal and the sureties to thresh out between or among themselves.

Government is Not Bound by Estoppel

As its final point, the petitioners argue that they cannot be held liable for the unpaid customs
duties, taxes, and other charges because it is the Bureau of Customs duty to ensure that the
duties and taxes are paid before the imported goods are released from its custody and they cannot
be made to pay for the error or negligence of the Bureaus employees in authorizing the unlawful
and irregular withdrawal of the goods.

It has long been a settled rule that the government is not bound by the errors committed by its
agents. Estoppel does not also lie against the government or any of its agencies arising from
unauthorized or illegal acts of public officers.28 This is particularly true in the collection of
legitimate taxes due where the collection has to be made whether or not there is error,
complicity, or plain neglect on the part of the collecting agents.29 In CIR v. CTA,30 we pointedly
said:

It is axiomatic that the government cannot and must not be estopped particularly in matters
involving taxes.lawphi1 Taxes are the lifeblood of the nation through which the government
agencies continue to operate and with which the State effects its functions for the welfare of its
constituents. Thus, it should be collected without unnecessary hindrance or delay.

We see no reason to deviate from this rule and we shall not do so now.

WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision
of the Court of Appeals. Costs against the petitioners.

SO ORDERED.

ARTURO D. BRION
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

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

ELECTRONICS *DOMESTIC BILLS *OMNIBUS CREDIT
CORPORATION [PURCHASED LINE] 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.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-33205 August 31, 1987

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners,

vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.

FERNAN, J.:

This is an appeal by certiorari involving purely questions of law from the decision
rendered by respondent judge in Civil Case No. Q-12275 entitled "Social Security
System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."

The antecedent facts, as stipulated by the parties during the trial, are as follows:

1. That on September 4, 1961, the plaintiff [herein respondent Social

Security System] and the defendants [herein petitioners] Lirag Textile
Mills, Inc. and Basilio Lirag entered into a Purchase Agreement under
which the plaintiff agreed to purchase from the said defendant preferred
shares of stock worth ONE MILLION PESOS [P1,000,000.00] subject to
the conditions set forth in such agreement;...

2. That pursuant to the Purchase Agreement of September 4, 1961, the

plaintiff, on January 31, 1962, paid the defendant Lirag Textile Mills, Inc.
the sum of FIVE HUNDRED THOUSAND PESOS [P500,000.00] for which
the said defendant issued to plaintiff 5,000 preferred shares with a par
value of one hundred pesos [P10000] per share as evidenced by stock
Certificate No. 128, ...

3. That further in pursuance of the Purchase Agreement of September 4,

1961, the plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE
UNDRED THOUSAND PESOS [P500,000.00] for which the said
defendant issued to plaintiff 5,000 preferred shares with a par value of one
hundred pesos [P100.00] per share as evidenced by Stock Certificate No.
139, ...

4. That in accordance with paragraph 3 of the Purchase Agreement of

September 4, 1961 which provides for the repurchase by the Lirag Textile
Mills, Inc. of the shares of stock at regular intervals of one year beginning
 with the 4th year following the date of issue, Stock Certificates Nos. 128
and 139 were to be repurchased by the Lirag Textile Mills, Inc. thus:

CERT. No. AMOUNT DATE OF REDEMPTION

128 P100,000.00 February 14, 1965

100,000.00 February 14, 1966

100,000.00 February 14, 1967

100,000.00 February 14, 1968

100,000.00 February 14, 1969

139 P100,000.00 July 3, 1966

100,000.00 July 3,1967

100,000.00 July 3,1968

100,000.00 July 3, 1969

100,000.00 July 3,1970

5. That to guarantee the redemption of the stocks purchased by the

plaintiff, the payment of dividends, as well as the other obligations of the
Lirag Textile Mills, Inc., defendants Basilio L. Lirag signed the Purchase
Agreement of September 4, 1961 not only as president of the defendant
corporation, but also as surety so that should the Lirag Textile Mills, Inc.
fail to perform any of its obligations in the said Purchase Agreement, the
surety shall immediately pay to the vendee the amounts then outstanding
pursuant to Condition No. 4, to wit:

To guarantee the redemption of the stocks herein

purchased, the payment of the dividends, as well as other
obligations of the VENDOR herein, the SURETY hereby
binds himself jointly and severally liable with the VENDOR
so that should the VENDOR fail to perform any of its
obligations hereunder, the SURETY shall immediately pay to
the VENDEE the amounts then outstanding. '

6. That defendant corporation failed to redeem certificates of Stock Nos.

128 and 139 by payment of the amounts mentioned in paragraph 4 above;
 7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts
and within the period set forth in paragraph 10 of the complaint; *
8. That letters of demands have been sent by the plaintiff to the defendant to redeem the foregoing stock certificates
and pay the dividends set forth in paragraph 10 of the complaint, but the Lirag Textile Mills, Inc. has not made such
redemption nor made such dividend payments;

9. That defendant Basilio L. Lirag likewise received letters of demand from the plaintiff requiring him to make good his
obligation as surety;

10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock Certificates Nos. 128 and 139
issued to plaintiff are still unredeemed and no dividends have been paid on said stock certificates;

11. That paragraph 5 of the Purchase Agreement provides that should the Lirag Textile Mills, Inc. fail to effect any of
the redemptions stipulated therein, the entire obligation shall immediately become due and demandable and the Lirag
Textile Mills, Inc., shall, furthermore, be liable to the plaintiff in an amount equivalent to twelve per cent [12%] of the
amount then outstanding as liquidated damages;

12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing certificates of stock and pay dividends
thereon were due to financial reverses, to wit:

[a] Unrestrained smuggling into the country of textiles from the United States and other countries;

[b] Unrestricted entry of supposed remmants which competed with textiles of domestic produce to
the disadvantage and economic prejudice of the latter;

[c] Scarcity of money and the unavailability of financing facilities;

[d] Payment of interest on matured loans extended to defendant corporation;

[e] Construction of the Montalban plant of the defendant corporation financed largely through
reparation benefits;

[f] Labor problems occasioned by the fact that the defendant company is financial (sic) unable to
improve, in a substantial way, the economic plight of its workers as a result of which two costly
strikes had occurred, one in 1965 and another in 1968; and

[g] The occurrence of a fire which destroyed more than 1 million worth of raw cotton, paralyzed
operations partially, increased overhead costs and wiped out any expected profits that year;

13. That it has been the policy of the plaintiff to be represented in the board of directors of the corporation or entity
which has obtained financial assistance from the System be it in terms of loans, mortgages or equity investments.
Thus, pursuant to paragraph 6 of the Purchase Agreement of September 4, 1961 which provides as follows:

The VENDEE shall be allowed to have a representative in the Board of Directors of the VENDOR
with the right to participate in the discussions and to vote therein;

14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each issued one common share of stock as
a qualifying share to their election to the Board of Directors of the Lirag Textiles Mills, Inc.;

15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their respective tenure as member of the
Board of Directors of the Lirag Textile Mills, Inc. attended the meetings of the said Board, received per diems for their
attendance therein in the same manner and in the same amount as any other member of the Board of Directors,
participated in the deliberations therein and freely exercised their right to vote in such meetings. However, the per
diems received by the SSS representative do not go to the coffers of the System but personally to the representative in
the said board of directors. 1

For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of the Purchase Agreement, the SSS filed an action for
specific performance and damages before the then Court of First Instance of Rizal, Quezon City, praying that therein defendants Lirag
Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for [1] the entire obligation of P1M which became due and demandable upon
defendants' failure to repurchase the stocks as scheduled; [21 dividends in the amount of P220,000.00; [31 liquidated damages in an amount
equivalent to twelve percent (12%) of the amount then outstanding; [4] exemplary damages in the amount of P100,000.00 and [5] attorney's
fees of P20,000.00.
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint, but were denied the relief sought. Thus, they filed their
answer with counterclaim, denying the existence of any obligation on their part to redeem the preferred stocks, on the ground that the SSS
became and still is a preferred stockholder of the corporation so that redemption of the shares purchased depended upon the financial ability
of said corporation. Insofar as defendant Basilio Lirag is concerned, it was alleged that his liability arises only if the corporation is liable and
does not perform its obligations under the Purchase Agreement. They further contended that no liability on their part has arisen because of
the financial condition of the corporation upon which such liability was made to depend, particularly the non-realization of any profit or earned
surplus. Thus, the other claims for dividends, liquidated damages and exemplary damages are allegedly without basis.

After entering into the Stipulation of Facts above-quoted, the parties filed their respective memoranda and submitted the case for decision.

The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of SSS and sentenced Lirag Textile Mills, Inc.
and Basilio L. Lirag to pay SSS jointly and severally P1,000,000.00 plus legal interest until the said amount is fully paid; P220,000.00
representing the 8% per annum dividends on the preferred shares plus legal interest up to the time of actual payment; P146,400.00 as
liquidated damages; and P10,000.00 as attorney's fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L. Lirag was dismissed.

Hence, this petition.

Petitioners assign the following errors:

1. The trial court erred in deciding that the Purchase Agreement is a debt instrument;

2. Respondent judge erred in holding petitioner corporation liable for the payment of the 8% preferred and cumulative
dividends on the preferred shares since the purchase agreement provides that said dividends shall be paid from the net
profits and earned surplus of petitioner corporation and respondent SSS has admitted that due to losses sustained
since -1964, no dividends had been and can be declared by petitioner corporation;

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

4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by way of attorney's fees;

5. Respondent judge erred in sentencing petitioners to pay interest from the time of firing the complaint u to the time of
full payment both on the P1,000,000.00 invested by respondent SSS in petitioner's corporation and on the P220,000.00
which the SSS claims as dividends due on its investments;

6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the P1,000,000.00 worth of preferred
shares purchased by respondent SSS from petitioner corporation and the 8% cumulative dividend, it appearing that
Lirag was merely a surety and not an insurer of the obligation;

7. Respondent judge erred in dismissing the counterclaim of petitioners.

The fundamental issue in this case is whether or not the Purchase Agreement entered into by petitioners and respondent SSS is a debt
instrument.

Petitioners claim that respondent SSS merely became and still is a preferred stockholder of the petitioner corporation, the redemption of the
shares purchased by said respondent being dependent upon the financial ability of petitioner corporation. Petitioner corporation, thus, has no
obligation to redeem the preferred stocks.

On the other hand, respondent SSS claims that the Purchase Agreement is a debt instrument, imposing upon the petitioners the obligation to
pay the amount owed, and creating as between them the relation of creditor and debtor, not that of a stockholder and a corporation.

We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt instrument. Its terms and conditions unmistakably show
that the parties intended the repurchase of the preferred shares on the respective scheduled dates to be an absolute obligation which does
not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest
by the fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability to do so. The
unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined
"as an obligation to pay money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they
expressly or impliedly, agree to perform in the contract. 2

A stockholder sinks or swims with the corporation and there is no obligation to return the value of his
shares by means of repurchase if the corporation incurs losses and financial reverses, much less
guarantee such repurchase through a surety.
As private respondent rightly contends, if the parties intended it [SSS] to be merely a stockholder of
petitioner corporation, it would have been sufficient that Preferred Certificates Nos. 128 and 139 were
issued in its name as the preferred certificates contained all the rights of a stockholder as well as certain
obligations on the part of petitioner corporation. However, the parties did in fact execute the Purchase
Agreement, at the same time that the petitioner corporation issued its preferred stock to the respondent
SSS. The Purchase Agreement serves to define the rights and obligations of the parties and to establish
firmly the liability of petitioners in case of breach of contract. The Certificates of Preferred Stock serve as
additional evidence of the agreement between the parties, though the precise terms and conditions
thereof must be read together with, and regarded as qualified by the terms and conditions of the
Purchase Agreement.

The rights given by the Purchase Agreement to respondent SSS are rights not enjoyed by ordinary
stockholders. This fact could only lead to the conclusion made by the trial court that:

The aforementioned rights specially stipulated for the benefit of the plaintiff [respondent
SSS] suggest eloquently an intention on the part of the plaintiff [respondent SSS] to
facilitate a loan to the defendant corporation upon the latter's request. In order to afford
protection to the plaintiff which otherwise is provided by means of collaterals, as the
plaintiff exacts in its grants of loans in its ordinary transactions of this kind, as it is looked
upon more as a lending institution rather than as an investing agency, the purchase
agreement supplied these protective rights which would otherwise be furnished by
collaterals to the loan. Thus, the membership in the board is to have a watchdog in the
operation of the business of the corporation, so as to insure against mismanagement
which may result in losses not entirely unavoidable since payment for purposes of
redemption as well as the dividends is expressly stipulated to come from profits and/or
surplus. Such a right is never exacted by an ordinary stockholder merely investing in the
corporation. 3

Moreover, the Purchase Agreement provided that failure on the part of petitioner to repurchase the
preferred shares on the scheduled due dates renders the entire obligation due and demandable, with
petitioner in such eventuality liable to pay 12% of the then outstanding obligation as liquidated damages.
These features of the Purchase Agreement, taken collectively, clearly show the intent of the parties to be
bound therein as debtor and creditor, and not as corporation and stockholder.

Petitioners' contention that it is beyond the power and competence of petitioner corporation to redeem the
preferred shares or pay the accrued dividends due to financial reverses can not serve as legal justification
for their failure to perform under the Purchase Agreement. The Purchase Agreement constitutes the law
between the parties and obligations arising ex contractu must be fulfilled in accordance with the
stipulations. 4 Besides, it was precisely this eventuality that was sought to be avoided when respondent
SSS required a surety for the obligation.

Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner corporation's default. As
surety, Basilio L. Lirag is bound immediately to pay respondent SSS the amount then outstanding.

The obligation of a surety differs from that of a guarantor in that the surety insures the
debt, whereas the guarantor merely insures solvency of the debtor; and the surety
undertakes to pay if the principal does not pay, whereas a guarantor merely binds itself to
pay if the principal is unable to pay. 5

On the liability of petitioners to pay 8% cumulative dividend, We agree with the observation of the lower
court that the dividends stipulated by the parties served evidently as interests. 6 The amount thereof was
fixed at 8% per annum and was not made to depend upon or to fluctuate with the amount of profits or
surplus realized, a clear indication that the parties intended to give a sure and fixed earnings on the
principal loan. The fact that the dividends were supposed to be paid out of net profits and earned surplus,
of which there were none, does not excuse petitioners from the payment thereof, again for the reason that
the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends and other
obligations then outstanding.

The award of the sum of P146,400.00 in liquidated damages representing 12% of the amount then
outstanding is correct, considering that petitioners in the stipulation of facts admitted having failed to fulfill
their obligations under the Purchase Agreement. The grant of liquidated damages in the amount stated is
expressly provided for in the Purchase Agreement in case of contractual breach.

The pronouncement of the lower court for the payment of interests on both the unredeemed shares and
unpaid dividends is also in order. Per stipulation of facts, petitioners did not deny the fact of non-payment
of dividends nor their failure to purchase the preferred shares. Since these involve sums of money which
are overdue, they are bound to earn legal interest from the time of demand, in this case, judicial, i.e., the
time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase Agreement. After his
firm representation to "pay immediately to the VENDEE the amounts then outstanding" evidencing his
commitment as SURETY, he is estopped from denying the same. His signature in the agreement carries
with it the official imprimatur as petitioner corporation's president, in his personal capacity as majority
stockholder, as surety and as solidary obligor. The essence of his obligation as surety is to pay
immediately without qualification whatsoever if petitioner corporation does not pay. To have another
interpretation of petitioner Lirag's liability as surety would violate the integrity of the Purchase Agreement
as well as the clear and unmistakable intent of the parties to the same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System vs. Lirag Textile
Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto. Costs against petitioners.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 151953 June 29, 2007

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

vs.
RAFAEL ORTIGAS, JR., respondent.

DECISION

TINGA, J.:

The main contention raised in this petition is that petitioners are not under obligation to
reimburse respondent, a claim that can be easily debunked. The more perplexing question is
whether this obligation to repay is solidary, as contended by respondent and the lower courts, or
merely joint as argued by petitioners.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)1 entered into a
loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and
lend to Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms
and conditions.2 On the same day, three stockholders-officers of Falcon, namely: respondent
Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption
of Solidary Liability whereby they agreed "to assume in [their] individual capacity, solidary
liability with [Falcon] for the due and punctual payment" of the loan contracted by Falcon with
PDCP.3 In the meantime, two separate guaranties were executed to guarantee the payment of the
same loan by other stockholders and officers of Falcon, acting in their personal and individual
capacities. One Guaranty4 was executed by petitioner Salvador Escao (Escao), while the other5
by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).

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

3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake
to assume all of OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms
and conditions:

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

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

c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP
and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;

4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from
FALCON arising out of, or in connection with, their said guarantees[sic].8

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP.
It would also execute a Deed of Chattel Mortgage over its personal properties to further secure
the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the
chattel mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon did not
satisfy despite demand.9

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of
money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos,
Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas
filed together with his answer a cross-claim against his co-defendants Falcon, Escao and Silos,
and also manifested his intent to file a third-party complaint against the Scholeys and Matti.10
The cross-claim lodged against Escao and Silos was predicated on the 1982 Undertaking,
wherein they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.

Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to
terms with PDCP was Escao, who in December of 1993, entered into a compromise agreement
whereby he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned in
favor of Escao one-third (1/3) of its entire claim in the complaint against all of the other
defendants in the case.11 The compromise agreement was approved by the RTC in a Judgment12
dated 6 January 1994.

Then on 24 February 1994, Ortigas entered into his own compromise agreement13 with PDCP,
allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay
PDCP P1,300,000.00 as "full satisfaction of the PDCPs claim against Ortigas,"14 in exchange
for PDCPs release of Ortigas from any liability or claim arising from the Falcon loan agreement,
and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its claims against him.15

In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao,
Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint
against Matti and Silos,16 while he maintained his cross-claim against Escao. In 1995, Ortigas
filed a motion for Summary Judgment in his favor against Escao, Silos and Matti. On 5 October
1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas,
jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.17
The trial court ratiocinated that none of the third-party defendants disputed the 1982
Undertaking, and that "the mere denials of defendants with respect to non-compliance of Ortigas
of the terms and conditions of the Undertaking, unaccompanied by any substantial fact which
would be admissible in evidence at a hearing, are not sufficient to raise genuine issues of fact
necessary to defeat a motion for summary judgment, even if such facts were raised in the
pleadings."18 In an Order dated 7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum
to be computed from 28 February 1994.19

From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals.
Escao and Silos appealed jointly while Matti appealed by his lonesome. In a Decision20 dated
23 January 2002, the Court of Appeals dismissed the appeals and affirmed the Summary
Judgment. The appellate court found that the RTC did not err in rendering the summary
judgment since the three appellants did not effectively deny their execution of the 1982
Undertaking. The special defenses that were raised, "payment and excussion," were
characterized by the Court of Appeals as "appear[ing] to be merely sham in the light of the
pleadings and supporting documents and affidavits."21 Thus, it was concluded that there was no
genuine issue that would still require the rigors of trial, and that the appealed judgment was
decided on the bases of the undisputed and established facts of the case.

Hence, the present petition for review filed by Escao and Silos.22 Two main issues are raised.
First, petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a
document which they do not disavow and have in fact annexed to their petition. Second, on the
assumption that they are liable to Ortigas under the 1982 Undertaking, petitioners argue that they
are jointly liable only, and not solidarily. Further assuming that they are liable, petitioners also
submit that they are not liable for interest and if at all, the proper interest rate is 6% and not 12%.

Interestingly, petitioners do not challenge, whether in their petition or their memorandum before
the Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under
Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the
pleadings, supporting affidavits, depositions and admissions on file show that, except as to the
amount of damages, there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate before us
that there existed a genuine issue as to any material fact that would preclude summary judgment.
Thus, we affirm with ease the common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to
Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An examination of the
document reveals several clauses that make it clear that the agreement was brought forth by the
desire of Ortigas, Inductivo and the Scholeys to be released from their liability under the loan
agreement which release was, in turn, part of the consideration for the assignment of their shares
in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with PDCP, and that "amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES relieving OBLIGORS of any
and all liability arising from their said joint and several undertakings with FALCON."23 Most
crucial is the clause in Paragraph 3 of the Undertaking wherein petitioners "irrevocably agree
and undertake to assume all of OBLIGORs said guarantees [sic] to PDCP x x x under the
following terms and conditions."24

At the same time, it is clear that the assumption by petitioners of Ortigass "guarantees" [sic] to
PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by "any of OBLIGORS" of any demand from PDCP for the
payment of Falcons obligations with it, "any of OBLIGORS" was to immediately inform
"SURETIES" thereof so that the latter can timely take appropriate measures. Second, should
"any and/or all of OBLIGORS" be impleaded by PDCP in a suit for collection of its loan,
"SURETIES agree[d] to defend OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity,
subrogation or other relief"25 in respect to any of the claims of PDCP. Third, if any of the
"OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to]
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment."26

Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to
pay" PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the
amount of P1.3 Million as an amicable settlement of the claims posed by the bank against him.
However, the subject clause in paragraph 3(c) actually reads "[i]n the event that any of
OBLIGORS is for any reason made to pay any amount to PDCP x x x"27 As pointed out by
Ortigas, the phrase "for any reason" reasonably includes any extra-judicial settlement of
obligation such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the
phrase was incorporated in the clause to render the eventual payment adverted to therein
unlimited and unqualified.

The interpretation posed by petitioners would have held water had the Undertaking made clear
that the right of Ortigas to seek reimbursement accrued only after he had delivered payment to
PDCP as a consequence of a final and executory judgment. On the contrary, the clear intent of
the Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only after Ortigas had been subjected to a final and
executory adverse judgment.

Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause PDCP x x x to
within a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x
x x"28 In the event that Ortigas and his fellow "OBLIGORS" could not be released from their
guaranties, paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon
to make a call on its stockholders for the payment of their unpaid subscriptions and to pledge or
assign such payments to Ortigas, et al., as security for whatever amounts the latter may be held
liable under their guaranties. In addition, paragraph 1 also makes clear that nothing in the
Undertaking "shall prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic]."29

There is no argument to support petitioners position on the import of the phrase "made to pay"
in the Undertaking, other than an unduly literalist reading that is clearly inconsistent with the
thrust of the document. Under the Civil Code, the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them
taken jointly.30 Likewise applicable is the provision that if some stipulation of any contract
should admit of several meanings, it shall be understood as bearing

that import which is most adequate to render it effectual.31 As a means to effect the general intent
of the document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.

Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in
paragraph 3, as they claim. Following the general assertion in the petition that Ortigas violated
the terms of the Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount of P1.3
million without petitioners ESCANO and SILOSs knowledge and consent."32 Paragraph 3(a) of
the Undertaking does impose a requirement that any of the "OBLIGORS" shall immediately
inform "SURETIES" if they received any demand for payment of FALCONs obligations to
PDCP, but that requirement is reasoned "so that the [SURETIES] can timely take appropriate
measures"33 presumably to settle the obligation without having to burden the "OBLIGORS."
This notice requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners
that Ortigas, after already having been impleaded as a defendant in the collection suit, was
obliged under the 1982 Undertaking to notify them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.

Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption
of Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such
position, according to petitioners, could not be justified since Ortigas later voluntarily paid
PDCP the amount of P1.3 Million. Such circumstances, according to petitioners, amounted to
estoppel on the part of Ortigas.

Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to
pay PDCP was conditioned "without [Ortigass] admitting liability to plaintiff PDCP Banks
complaint, and to terminate and dismiss the said case as against Ortigas solely."34 Petitioners
profess it is "unthinkable" for Ortigas to have voluntarily paid PDCP without admitting his
liability,35 yet such contention based on assumption cannot supersede the literal terms of the
Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned
his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a
judicial claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not
being a party to such Undertaking, PDCP was not precluded by a contract from pursuing its
claim against Ortigas based on the original Assumption of Solidary Liability.

At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic]."36 Simply put, the Undertaking did not
bar Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar
Ortigas from recovering from petitioners whatever amount he may have paid PDCP through his
own settlement. The stipulation that if Ortigas was "for any reason made to pay any amount to
PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment"37 makes it clear that petitioners remain liable to reimburse
Ortigas for the sums he paid PDCP.

We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.

Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming
that the Undertaking did not provide for express solidarity. They cite Article 1207 of the New
Civil Code, which states in part that "[t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity."

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
Undertaking, as the language used in the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the sureties (Escao group). Ortigas
points out that the Undertaking uses the word "SURETIES" although the document, in
describing the parties. It is further contended that the principal objective of the parties in
executing the Undertaking cannot be attained unless petitioners are solidarily liable "because the
total loan obligation can not be paid or settled to free or release the OBLIGORS if one or any of
the SURETIES default from their obligation in the Undertaking."39

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the
same obligation, Article 1207 of the Civil Code states that among them, "[t]here is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity." Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: "The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply indivisibility."

These Civil Code provisions establish that in case of concurrence of two or more creditors or of
two or more debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption is that the obligation
is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their obligations to the Ortigas group, or any such terms to
that effect. Hence, such obligation established in the Undertaking is presumed only to be joint.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome
the presumption of jointness of obligations. We rule and so hold that he failed to discharge such
burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in
the Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the
document. Ortigas claims that such manner of identification sufficiently establishes that the
obligation of petitioners to him was joint and solidary in nature.

The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the
statutory definition of a surety agreement, thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
[Emphasis supplied]40

As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily
with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigass argument rests solely on the solidary
nature of the obligation of the surety under Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in the Undertaking, however, this argument can
only be viable if the obligations established in the

Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first
place. That clearly is not the case here, notwithstanding the use of the nomenclature
"SURETIES" in the Undertaking.

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety
is solidarily bound by way of an ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The suretyship does bind the surety to the creditor,
inasmuch as the latter is vested with the right to proceed against the former to collect the credit in
lieu of proceeding against the principal debtor for the same obligation.41 At the same time, there
is also a legal tie created between the surety and the principal debtor to which the creditor is not
privy or party to. The moment the surety fully answers to the creditor for the obligation created
by the principal debtor, such obligation is extinguished.42 At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid, for the surety does in fact "become
subrogated to all the rights and remedies of the creditor."43

Note that Article 2047 itself specifically calls for the application of the provisions on joint and
solidary obligations to suretyship contracts.44 Article 1217 of the Civil Code thus comes into
play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of
suretyship) in favor of the one who paid (i.e., the surety).45 However, a significant distinction
still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity
signifies that the creditor can compel any one of the joint and several debtors or the surety alone
to answer for the entirety of the principal debt. The difference lies in the respective faculties of
the joint and several debtor and the surety to seek reimbursement for the sums they paid out to
the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of
the liability he assumes to pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the
fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship.
The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and
the civil law relationship existing between the co-debtors liable in solidum is similar to the
common law suretyship.46

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor "may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made." Such solidary debtor will
not be able to recover from the co-debtors the full amount already paid to the creditor, because
the right to recovery extends only to the proportional share of the other co-debtors, and not as to
the particular proportional share of the solidary debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just any proportional share, from
the principal debtor or debtors. Such right to full reimbursement falls within the other rights,
actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed
by the surety.

What is the source of this right to full reimbursement by the surety? We find the right under
Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must
be indemnified by the latter," such indemnity comprising of, among others, "the total amount of
the debt."47 Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who
pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor."48

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions
should not extend to sureties, especially in light of the qualifier in Article 2047 that the
provisions on joint and several obligations should apply to sureties. We reject that argument, and
instead adopt Dr. Tolentinos observation that "[t]he reference in the second paragraph of
[Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several
obligations, however, does not mean that suretyship is withdrawn from the applicable provisions
governing guaranty."49 For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors, for both
classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ from those granted under Article
1217 to the solidary debtor who pays, since the "indemnification" that pertains to the latter
extends "only [to] the share which corresponds to each [co-debtor]." It is for this reason that the
Court cannot accord the conclusion that because petitioners are identified in the Undertaking as
"SURETIES," they are consequently joint and severally liable to Ortigas.

In order for the conclusion espoused by Ortigas to hold, in light of the general presumption
favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti,
there is one or some of them who stand as the principal debtor to Ortigas and another as surety
who has the right to full reimbursement from the principal debtor or debtors. No suggestion is
made by the parties that such is the case, and certainly the Undertaking is not revelatory of such
intention. If the Court were to give full fruition to the use of the term "sureties" as conclusive
indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to
pay Ortigas, the necessary implication would be to lay down a corresponding set of rights and
obligations as between the "SURETIES" which petitioners and Matti did not clearly intend.

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

Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the
Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of any and all liability
arising from their said joint and several undertaking with [F]alcon," and for the "sureties" to
"irrevocably agree and undertake to assume all of obligors said guarantees to PDCP."50 We do
not doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigas
in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as solidary. Moreover, the aims adverted to by
Ortigas do not by themselves establish that the nature of the obligation requires solidarity. Even
if the liability of petitioners and Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would still be accomplished
through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking
contained no such stipulation for attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where attorneys fees are recoverable in the
absence of stipulation.

We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being
impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to
obtain the release of Ortigas and the Scholeys from their previous obligations as sureties of
Falcon, especially considering that they were already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate petitioners to work for the release of Ortigas
from his surety agreements with Falcon. Specific provisions likewise mandate the immediate
repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty agreements
from which he was ostensibly to be released through the efforts of petitioners. None of these
provisions were complied with by petitioners, and Article 2208(2) precisely allows for the
recovery of attorneys fees "[w]hen the defendants act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest."

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

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals51 set forth the rules with
respect to the manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time quantification
of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.52

Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the
rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the
computation should be reckoned from judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid
PDCP, but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party
Complaint praying that petitioners and Matti be made to reimburse him for the payments made to
PDCP. It is the filing of this Third Party Complaint on 14 March 1994 that should be considered
as the date of judicial demand from which the computation of interest should be reckoned.53
Since the RTC held that interest should be computed from 28 February 1994, the appropriate
redefinition should be made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court
dated 5 October 1995 is modified by declaring that petitioners and Joseph M. Matti are only
jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of
P1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in that
the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computed from 14
March 1994, the date of judicial demand, and not from 28 February 1994 as directed in the Order
of the lower court. The assailed rulings are affirmed in all other respects. Costs against
petitioners.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT

FIRST DIVISION

G.R. No. 145578 November 18, 2005

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners,

vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the Decision2 of the Court of Appeals dated 7 September 2000
and its Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed the ruling of
the Regional Trial Court, Makati, Branch 144 in a case for estafa under Section 13, Presidential
Decree No. 115. The Court of Appeals Resolution of 18 October 2000 denied petitioners
motion for reconsideration.

The Facts

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation ("El Oro
Corporation"). El Oro Corporation had a contract with the Philippine Army to supply the latter
with "survival bolos."

To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El
Oro Corporation, applied with respondent Bank of the Philippine Islands ("respondent bank") for
two commercial letters of credit. The letters of credit were in favor of El Oro Corporations
suppliers, Tanchaoco Manufacturing Incorporated3 ("Tanchaoco Incorporated") and Maresco
Rubber and Retreading Corporation4 ("Maresco Corporation"). Respondent bank granted
petitioners application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco
Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco Corporation.

Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of
respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV ("petitioner Jose Tupaz")
signed, in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the letter of
credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on
or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a
trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners bound
themselves to sell the goods covered by that letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not sold, on or before 8 December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.

Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made
several demands for payments but El Oro Corporation made partial payments only. On 27 June
1983 and 28 June 1983, respondent banks counsel5 and its representative6 respectively sent final
demand letters to El Oro Corporation. El Oro Corporation replied that it could not fully pay its
debt because the Armed Forces of the Philippines had delayed paying for the survival bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115
("Section 13")7 or Trust Receipts Law ("PD 115"). After preliminary investigation, the then
Makati Fiscals Office found probable cause to indict petitioners. The Makati Fiscals Office
filed the corresponding Informations (docketed as Criminal Case Nos. 8848 and 8849) with the
Regional Trial Court, Makati, on 17 January 1984 and the cases were raffled to Branch 144
("trial court") on 20 January 1984. Petitioners pleaded not guilty to the charges and trial ensued.
During the trial, respondent bank presented evidence on the civil aspect of the cases.

The Ruling of the Trial Court

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable
doubt. However, the trial court found petitioners solidarily liable with El Oro Corporation for the
balance of El Oro Corporations principal debt under the trust receipts. The dispositive portion of
the trial courts Decision provides:

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

and Petronila Tupaz based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby
ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the outstanding principal
obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at the rate of 18%
per annum; plus 10% of the total amount due as attorneys fees; P5,000.00 as expenses of
litigation; and costs of the suit.8

In holding petitioners civilly liable with El Oro Corporation, the trial court held:

[S]ince the civil action for the recovery of the civil liability is deemed impliedly instituted with
the criminal action, as in fact the prosecution thereof was actively handled by the private
prosecutor, the Court believes that the El Oro Engraver Corporation and both accused Jose C.
Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly liable to the Bank of the
Philippine Islands. The mere fact that they were unable to collect in full from the AFP and/or the
Department of National Defense the proceeds of the sale of the delivered survival bolos
manufactured from the raw materials covered by the trust receipt agreements is no valid defense
to the civil claim of the said complainant and surely could not wipe out their civil obligation.
After all, they are free to institute an action to collect the same.9

Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
"operates to extinguish [their] civil liability" and (2) at any rate, they are not personally liable for
El Oro Corporations debts.

The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The
appellate court held:

It is clear from [Section 13, PD 115] that civil liability arising from the violation of the trust
receipt agreement is distinct from the criminal liability imposed therein. In the case of Vintola vs.
Insular Bank of Asia and America, our Supreme Court held that acquittal in the estafa case (P.D.
115) is no bar to the institution of a civil action for collection. This is because in such cases, the
civil liability of the accused does not arise ex delicto but rather based ex contractu and as such is
distinct and independent from any criminal proceedings and may proceed regardless of the result
of the latter. Thus, an independent civil action to enforce the civil liability may be filed against
the corporation aside from the criminal action against the responsible officers or employees.

xxx

[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge of estafa
did not operate to extinguish their civil liability under the letter of credit-trust receipt
arrangement with plaintiff-appellee, with which they dealt both in their personal capacity and as
officers of El Oro Engraver Corporation, the letter of credit applicant and principal debtor.

Appellants argued that they cannot be held solidarily liable with their corporation, El Oro
Engraver Corporation, alleging that they executed the subject documents including the trust
receipt agreements only in their capacity as such corporate officers. They said that these
instruments are mere pro-forma and that they executed these instruments on the strength of a
board resolution of said corporation authorizing them to apply for the opening of a letter of credit
in favor of their suppliers as well as to execute the other documents necessary to accomplish the
same.

Such contention, however, is contradicted by the evidence on record. The trust receipt agreement
indicated in clear and unmistakable terms that the accused signed the same as surety for the
corporation and that they bound themselves directly and immediately liable in the event of
default with respect to the obligation under the letters of credit which were made part of the said
agreement, without need of demand. Even in the application for the letter of credit, it is likewise
clear that the undertaking of the accused is that of a surety as indicated [in] the following words:
"In consideration of your establishing the commercial letter of credit herein applied for
substantially in accordance with the foregoing, the undersigned Applicant and Surety hereby
agree, jointly and severally, to each and all stipulations, provisions and conditions on the reverse
side hereof."

xxx

Having contractually agreed to hold themselves solidarily liable with El Oro Engraver
Corporation under the subject trust receipt agreements with appellee Bank of the Philippine
Islands, herein accused-appellants may not, therefore, invoke the separate legal personality of the
said corporation to evade their civil liability under the letter of credit-trust receipt arrangement
with said appellee, notwithstanding their acquittal in the criminal cases filed against them. The
trial court thus did not err in holding the appellants solidarily liable with El Oro Engraver
Corporation for the outstanding principal obligation of P624,129.19 (as of January 23, 1992)
with the stipulated interest at the rate of 18% per annum, plus 10% of the total amount due as
attorneys fees, P5,000.00 as expenses of litigation and costs of suit.10

Hence, this petition. Petitioners contend that:

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL

LIABILITY OF PETITIONERS[;]

2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS

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

3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND

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

4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED

AND VOID.11

The Issues

The petition raises these issues:

(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts under
the trust receipts;

(2) If so

(a) whether petitioners liability is solidary with El Oro Corporation; and

(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.

The Ruling of the Court

The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification
that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust
receipt dated 30 September 1981.

On Petitioners Undertaking Under

the Trust Receipts

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

Here, the dorsal side of the trust receipts contains the following stipulation:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this

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

In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El
Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the words "Vice-Pres
Treasurer" and under petitioner Jose Tupazs signature are the words "Vice-PresOperations."
By so signing that trust receipt, petitioners did not bind themselves personally liable for El Oro
Corporations obligation. In Ong v. Court of Appeals,15 a corporate representative signed a
solidary guarantee clause in two trust receipts in his capacity as corporate representative. There,
the Court held that the corporate representative did not undertake to guarantee personally the
payment of the corporations debts, thus:

[P]etitioner did not sign in his personal capacity the solidary guarantee clause found on the
dorsal portion of the trust receipts. Petitioner placed his signature after the typewritten words
"ARMCO INDUSTRIAL CORPORATION" found at the end of the solidary guarantee clause.
Evidently, petitioner did not undertake to guaranty personally the payment of the principal and
interest of ARMAGRIs debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not
personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose Tupaz
signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did not
indicate that he was signing as El Oro Corporations Vice-President for Operations. Hence,
petitioner Jose Tupaz bound himself personally liable for El Oro Corporations debts. Not being
a party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable
under such trust receipt.

The Nature of Petitioner Jose Tupazs Liability

Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this

Trust Receipt the goods described herein, I/We, jointly and severally, agree and promise to pay
to you, on demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the
event of default and/or non-fulfillment in any respect of this undertaking on the part of the said
. I/we further agree that my/our liability in this guarantee shall
be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or
exhaust any legal remedies that you may have against the said
. Before making demand upon me/us. (Underlining
supplied; capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily
liable with El Oro Corporation for the latters debt under that trust receipt.

This is error.

In Prudential Bank v. Intermediate Appellate Court,16 the Court interpreted a substantially

identical clause17 in a trust receipt signed by a corporate officer who bound himself personally
liable for the corporations obligation. The petitioner in that case contended that the stipulation
"we jointly and severally agree and undertake" rendered the corporate officer solidarily liable
with the corporation. We dismissed this claim and held the corporate officer liable as guarantor
only. The Court further ruled that had there been more than one signatories to the trust receipt,
the solidary liability would exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause "x x x
we jointly and severally agree and undertake x x x," and the concluding sentence on exhaustion,
[respondent] Chis liability therein is solidary.

xxx
Our xxx reading of the questioned solidary guaranty clause yields no other conclusion than that
the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence
which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be exhausted was not filled up. Under Article
2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor
before he may be held liable for the obligation. Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of
surety. It, however, described the guaranty as solidary between the guarantors; this would have
been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and
undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability
existing between themselves. It does not refer to the undertaking between either one or both of
them on the one hand and the petitioner on the other with respect to the liability described under
the trust receipt. xxx

Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chis participation therein is
limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it
must be strictly construed against the party responsible for its preparation.18 (Underlining
supplied; italicization in the original)

However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts finding
that he is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment
against a guarantor. The guarantor can still demand deferment of the execution of the judgment
against him until after the assets of the principal debtor shall have been exhausted.19 Second, the
benefit of excussion may be waived.20 Under the trust receipt dated 30 September 1981,
petitioner Jose Tupaz waived excussion when he agreed that his "liability in [the] guaranty shall
be DIRECT AND IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent
bank] to take any steps or exhaust any legal remedies xxx." The clear import of this stipulation is
that petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other
accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust
receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981)
provided for payment of attorneys fees equivalent to 10% of the total amount due and an
"interest at the rate of 7% per annum, or at such other rate as the bank may fix, from the date due
until paid xxx."21 In the applications for the letters of credit, the parties stipulated that drafts
drawn under the letters of credit are subject to interest at the rate of 18% per annum.22

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

Eastern Shipping Lines, Inc. v. Court of Appeals,23 the accrued stipulated interest earns 12%
interest per annum from the time of the filing of the Informations in the Makati Regional Trial
Court on 17 January 1984. Further, the total amount due as of the date of the finality of this
Decision will earn interest at 18% per annum until fully paid since this was the stipulated rate in
the applications for the letters of credit.24

The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court used,
is no longer useful as it does not specify the amounts owing under each of the trust receipts.
Hence, in the execution of this Decision, the trial court shall compute El Oro Corporations total
liability under each of the trust receipts dated 30 September 1981 and 9 October 1981 based on
the following formula:25

TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments made26

Interest = principal x 18 % per annum x no. of years from due date27 until finality of judgment

Interest on interest = interest computed as of the filing of the complaint (17 January 1984) x 12%
x no. of years until finality of judgment

Attorneys fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an interest of 18% per annum
until fully paid.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation
v. Alfa RTW Manufacturing Corporation28 where we also ordered the trial court to compute the
amount of obligation due based on a formula substantially similar to that indicated above:

The total amount due xxx [under] the xxx contract[] xxx may be easily determined by the trial
court through a simple mathematical computation based on the formula specified above.
Mathematics is an exact science, the application of which needs no further proof from the
parties.

Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is
required in civil cases; where the court expressly declares that the liability of the accused is not
criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft, and malicious
mischief committed by certain relatives who thereby incur only civil liability (See Art. 332,
Revised Penal Code); and, where the civil liability does not arise from or is not based upon the
criminal act of which the accused was acquitted xxx.29 (Emphasis supplied)

Here, respondent bank chose not to file a separate civil action30 to recover payment under the
trust receipts. Instead, respondent bank sought to recover payment in Criminal Case Nos. 8848
and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not
extinguish his civil liability. As the Court of Appeals correctly held, his liability arose not from
the criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex
contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September
1981 in his personal capacity.

On the other Matters Petitioners Raise

Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts
under the trust receipts are not yet due and demandable. Alternatively, petitioners assail the trust
receipts as simulated. These assertions have no merit. Under the terms of the trust receipts dated
30 September 1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December
1981 and 8 December 1981, respectively.

Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial,
petitioners did not deny applying for the letters of credit and subsequently executing the trust
receipts to secure payment of the drafts drawn under the letters of credit.

WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the following
MODIFICATIONS:

1) El Oro Engraver Corporation is principally liable for the total amount due under the trust
receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial Court,
Makati, Branch 144, upon finality of this Decision, based on the formula provided above;

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

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

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 154183 August 7, 2003

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,

vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION,
KENNETH NG LI and MA. VICTORIA NG LI, respondents.

BELLOSILLO, J.:

RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line"

credit facility worth P10 million in favor of respondent First Business Paper Corporation
(FBPC). The terms and conditions of the agreement as well as the checklist of documents
necessary to open the credit line were stipulated in a "letter-advise" of the Bank dated 16 May
1993 addressed to FBPC and to its President, respondent Kenneth Ng Li.1 The "letter-advise"2
was effective upon "compliance with the documentary requirements."3

The documents essential for the credit facility and submitted for this purpose were the (a) Board
Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public,
authorizing the loan and security arrangement as well as designating the officers to negotiate and
sign for FBPC specifically stating authority to mortgage, pledge and/or assign the properties of
the corporation; (b) agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any
and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-
spouses Kenneth and Ma. Victoria Ng Li.4 The spouses Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President, respectively, of FBPC, while respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li were President and General Manager, respectively, of the
same corporation.5

It is not disputed that the credit facility as well as its terms and conditions was not cancelled or
terminated, and that there was no prior notice of such fact as required in the "letter-advise," if
any was done.

On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-spouses
Luis Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
signed the required Continuing Guaranty, which was embodied in a public document prepared
solely by respondent Bank.6 The terms of the instrument defined the contract arising therefrom
as a surety agreement and provided for the solidary liability of the signatories thereto for and in
consideration of "loans or advances" and "credit in any other manner to, or at the request or for
the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC
may incur and for which the sureties may be liable, stating that the credit facility "covers any and
all existing indebtedness of, and such other loans and credit facilities which may hereafter be
granted to FIRST BUSINESS PAPER CORPORATION." The surety also contained a de facto
acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or
other obligation" guaranteed by petitioners and respondents. So as to strengthen this security, the
Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand
on the part of respondent Bank, and gave future consent to the Bank's action to "extend or
change the time payment, and/or the manner, place or terms of payment," including renewal, of
the credit facility or any part thereof in such manner and upon such terms as the Bank may deem
proper without notice to or further assent from the sureties.

The effectivity of the Continuing Guaranty was not contingent upon any event or cause other
than the written revocation thereof with notice to the Bank that may be executed by the sureties.

On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of
credit.7 On 17 November 1993 FBPC opened thirteen (13) letters of credit and obtained loans
totaling P15,227,510.00.8 As the letters of credit were secured, FBPC through its officers
Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust
receipts over the goods allegedly purchased from the proceeds of the loans.9

On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng

Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal home.10 On 14 January
1994 the Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the
acceleration clause11 in the trust receipts of FBPC and claimed payment for P10,539,758.68 as
unpaid overdue accounts on the letters of credit plus interests and penalties within twenty-four
(24) hours from receipt thereof.12 The Bank also invoked the Continuing Guaranty executed by
petitioner-spouses Luis Toh and Vicky Tan Toh who were the only parties known to be within
national jurisdiction to answer as sureties for the credit facility of FBPC.13

On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte
application for a writ of preliminary attachment against FBPC, spouses Kenneth Ng Li and Ma.
Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of
RTC-Br. 161, Pasig City.14 Alias summonses were served upon FBPC and spouses Luis Toh and
Vicky Tan Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li who had apparently
absconded.15

Meanwhile, with the implementation of the writ of preliminary attachment resulting in the
impounding of purported properties of FBPC, the trial court was deluged with third-party claims
contesting the propriety of the attachment.16 In the end, the Bank relinquished possession of all
the attached properties to the third-party claimants except for two (2) insignificant items as it
allegedly could barely cope with the yearly premiums on the attachment bonds.17

Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they
admitted being part of FBPC from its incorporation on 29 August 1991, which was then known
as "MNL Paper, Inc.," until its corporate name was changed to "First Business Paper
Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh was designated as one
of the authorized corporate signatories for transactions in relation to FBPC's checking account
with respondent Bank.19 Meanwhile, for failing to file an answer, respondent FBPC was declared
in default.20

Petitioner-spouses however could not be certain whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.21 They could only allege that they were made to sign
papers in blank and the Continuing Guaranty could have been one of them.

Still, as petitioners asserted, it was impossible and absurd for them to have freely and
consciously executed the surety on 10 May 1993, the date appearing on its face22 since beginning
March of that year they had already divested their shares in FBPC and assigned them in favor of
respondent Kenneth Ng Li although the deeds of assignment were notarized only on 14 June
1993.23 Petitioners also contended that through FBPC Board Resolution dated 12 May 1993
petitioner Luis Toh was removed as an authorized signatory for FBPC and replaced by
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and Redentor Padilla for all the
transactions of FBPC with respondent Bank.24 They even resigned from their respective
positions in FBPC as reflected in the 12 June 1993 Secretary's Certificate submitted to the
Securities and Exchange Commission25 as petitioner Luis Toh was succeeded as Chairman by
respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of petitioner Vicky
Tan Toh as Vice-President.26

Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth
Ng Li their exclusion from the several surety agreements they had entered into with different
banks, i.e., Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust
Company, and herein respondent Bank.27 As a matter of record, these other banks executed
written surety agreements that showed respondent Kenneth Ng Li as the only surety of FBPC's
indebtedness.28

On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding
respondent FBPC liable to pay respondent Solid Bank Corporation the principal of
P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision until
fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Bank.29 The court a quo found that petitioners "voluntarily affixed their signature[s]"
on the Continuing Guaranty and were thus "at some given point in time willing to be liable under
those forms,"30 although it held that petitioners were not bound by the surety contract since the
letters of credit it was supposed to secure were opened long after petitioners had ceased to be
part of FBPC.31

The trial court described the Continuing Guaranty as effective only while petitioner-spouses
were stockholders and officers of FBPC since respondent Bank compelled petitioners to
underwrite FBPC's indebtedness as sureties without the requisite investigation of their personal
solvency and capability to undertake such risk.32 The lower court also believed that the Bank
knew of petitioners' divestment of their shares in FBPC and their subsequent resignation as
officers thereof as these facts were obvious from the numerous public documents that detailed
the changes and substitutions in the list of authorized signatories for transactions between FBPC
and the Bank, including the many trust receipts being signed by persons other than petitioners,33
as well as the designation of new FBPC officers which came to the notice of the Bank's Vice-
President Jose Chan Jr. and other officers.34

On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.35

On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as
CA-G.R. CV No. 55957.36 Petitioner-spouses did not move for reconsideration nor appeal the
finding of the trial court that they voluntarily executed the Continuing Guaranty.

The appellate court modified the Decision of the trial court and held that by signing the
Continuing Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent
Bank the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum
from finality of the judgment until completely paid.37 The Court of Appeals ratiocinated that the
provisions of the surety agreement did not "indicate that Spouses Luis and Vicky Toh x x x
signed the instrument in their capacities as Chairman of the Board and Vice-President,
respectively, of FBPC only."38 Hence, the court a quo deduced, "[a]bsent any such indication, it
was error for the trial court to have presumed that the appellees indeed signed the same not in
their personal capacities."39 The appellate court also ruled that as petitioners failed to execute any
written revocation of the Continuing Guaranty with notice to respondent Bank, the instrument
remained in full force and effect when the letters of credit were availed of by respondent
FBPC.40

Finally, the Court of Appeals rejected petitioners' argument that there were "material alterations"
in the provisions of the "letter-advise," i.e., that only domestic letters of credit were opened when
the credit facility was for importation of papers and other materials, and that marginal deposits
were not paid, contrary to the requirements stated in the "letter-advise."41 The simple response of
the appellate court to this challenge was, first, the "letter-advise" itself authorized the issuance of
domestic letters of credit, and second, the several waivers extended by petitioners in the
Continuing Guaranty, which included changing the time and manner of payment of the
indebtedness, justified the action of respondent Bank not to charge marginal deposits.42

Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's
comment, filed a lengthy Reply with Motion for Oral Argument.43 On 2 July 2002
reconsideration of the Decision was denied on the ground that no new matter was raised to
warrant the reversal or modification thereof.44 Hence, this Petition for Review.

Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due
process when it did not grant their motion for reconsideration and without "bother[ing] to
consider [their] Reply with Motion for Oral Argument." They maintain that the Continuing
Guaranty is not legally valid and binding against them for having been executed long after they
had withdrawn from FBPC. Lastly, they claim that the surety agreement has been extinguished
by the material alterations thereof and of the "letter-advise" which were allegedly brought about
by (a) the provision of an acceleration clause in the trust receipts; (b) the flight of their co-
sureties, respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit
facility despite the non-payment of marginal deposits in an amount beyond the credit limit of
P10 million pesos; (d) the inordinate delay of the Bank in demanding the payment of the
indebtedness; (e) the presence of ghost deliveries and fictitious purchases using the Bank's letters
of credit and trust receipts; (f) the extension of the due dates of the letters of credit without the
required 25% partial payment per extension; (g) the approval of another letter of credit, L/C 93-
0042, even after respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on
their previous obligations; and, (h) the unmistakable pattern of fraud.

Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have
passed upon all points raised by petitioners' Reply with Motion for Oral Argument as this
pleading formed part of the records of the appellate court. It also debunks the claim of petitioners
that they were inexperienced and ignorant parties who were taken advantage of in the Continuing
Guaranty since petitioners are astute businessmen who are very familiar with the "ins" and "outs"
of banking practice. The Bank further argues that the notarization of the Continuing Guaranty
discredits the uncorroborated assertions against the authenticity and due execution thereof, and
that the Decision of the trial court in the civil case finding the surety agreement to be valid and
binding is now res judicata for failure of petitioners to appeal therefrom. As a final point, the
Bank refers to the various waivers made by petitioner-spouses in the Continuing Guaranty to
justify the extension of the due dates of the letters of credit.

To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived them of
their right to due process when the court a quo did not address specifically and explicitly their
Reply with Motion for Oral Argument. While the Resolution of the appellate court of 2 July 2002
made no mention thereof in disposing of their arguments on reconsideration, it is presumed that
"all matters within an issue raised in a case were laid before the court and passed upon it."45 In
the absence of evidence to the contrary, we must rule that the court a quo discharged its task
properly. Moreover, a reading of the assailed Resolution clearly makes reference to a "careful
review of the records," which undeniably includes the Reply with Motion for Oral Argument,
hence there is no reason for petitioners to asseverate otherwise.

This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-
spouses as it is a public document that enjoys the presumption of authenticity and due execution.
Although petitioners as appellees may raise issues that have not been assigned as errors by
respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound by
the consistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh
"voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given
point in time willing to be liable under those forms."46 In the absence of clear, convincing and
more than preponderant evidence to the contrary, our ruling cannot be otherwise.

Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they
were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts
their contractual undertaking to such condition or eventuality. In fact the obligations assumed by
them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and
assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their commitment "shall remain in full force and
effect until written notice shall have been received by [the Bank] that it has been revoked by the
undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal
from FBPC, they could have simply terminated the agreement by serving the required notice of
revocation upon the Bank as expressly allowed therein.47 In Garcia v. Court of Appeals[48] we
ruled

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder
by immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by
his own acts effectively waived.

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so
must we also hold respondent Bank to its representations in the "letter-advise" of 16 May 1993.
Particularly, as to the extension of the due dates of the letters of credit, we cannot exclude from
the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-
advise." Fairness and justice dictate our doing so, for the Bank itself liberally applies the
provisions of cognate agreements whenever convenient to enforce its contractual rights, such as,
when it harnessed a provision in the trust receipts executed by respondent FBPC to declare its
entire indebtedness as due and demandable and thereafter to exact payment thereof from
petitioners as sureties.49 In the same manner, we cannot disregard the provisions of the "letter-
advise" in sizing up the panoply of commercial obligations between the parties herein.

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any
time, or from time to time, in [its] discretion x x x extend or change the time payment," this
provision even if understood as a waiver is confined per se to the grant of an extension and does
not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the
authority of the Bank to defer collection contemplates only authorized extensions, that is, those
that meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of
thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per
extension. This reading of the Continuing Guaranty is consistent with Philippine National Bank
v. Court of Appeals50 that any doubt on the terms and conditions of the surety agreement should
be resolved in favor of the surety.

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission
of any kind on [the Bank's] part in the premises shall in any event affect or impair this
guaranty"51 must also be read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the security contract they signed.52
Thus said, the acts or omissions of the Bank conceded by petitioners as not affecting nor
impairing the surety contract refer only to those occurring "in the premises," or those that have
been the subject of the waiver in the Continuing Guaranty, and stretch to no other. Stated
otherwise, an extension of the period for enforcing the indebtedness does not by itself bring
about the discharge of the sureties unless the extra time is not permitted within the terms of the
waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit
and the twenty-five percent (25%) consideration, in which case the illicit extension releases the
sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of
his contract, and while he is liable to the full extent thereof, his accountability is strictly limited
to that assumed by its terms.

It is admitted in the Complaint of respondent Bank before the trial court that several letters of
credit were irrevocably extended for ninety (90) days with alarmingly flawed and inadequate
consideration - the indispensable marginal deposit of fifteen percent (15%) and the twenty-five
percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the
requisite marginal deposit and security for every thirty (30) - day extension specified in the
"letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any
was done.

Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an
account officer and manager of respondent Bank and its lone witness in the civil case

Q: You extended it even if there was no marginal deposit?

A: Yes.

Q: And even if partial payment is less than 25%?

A: Yes x x x x

Q: You have repeatedly extended despite the insufficiency partial payment

requirement?

A: I would say yes.53

The foregoing extensions of the letters of credit made by respondent Bank without observing the
rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the
Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of
the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty." This act of the Bank is not mere failure or delay on its part
to demand payment after the debt has become due, as was the case in unpaid five (5) letters of
credit which the Bank did not extend, defer or put off,54 but comprises conscious, separate and
binding agreements to extend the due date, as was admitted by the Bank itself

Q: How much was supposed to be paid on 14 September 1993, the original LC of

P1,655,675.13?
 A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over,
extended it to December 13, 1993 but they made partial payment that is why we extended
it.

Q: The question to you now is how much was paid? How much is supposed to be
paid on September 14, 1993 on the basis of the original amount of P1,655,675.13?

A: Whenever this obligation becomes due and demandable except when you roll it
over so there is novation there on the original obligations55 (underscoring supplied).

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are
relieved of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.

Further, we note several suspicious circumstances that militate against the enforcement of the
Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was executed
more than thirty (30) days from the original acceptance period as required in the "letter-advise."
Thereafter, barely two (2) days after the Continuing Guaranty was signed, corporate agents of
FBPC were replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC
ensued in the month of June 1993, which the Bank did not investigate although such were made
known to it.

By the same token, there is no explanation on record for the utter worthlessness of the trust
receipts in favor of the Bank when these documents ought to have added more security to the
indebtedness of FBPC. The Bank has in fact no information whether the trust receipts were
indeed used for the purpose for which they were obtained.56 To be sure, the goods subject of the
trust receipts were not entirely lost since the security officer of respondent Bank who conducted
surveillance of FBPC even had the chance to intercept the surreptitious transfer of the items
under trust: "We saw two (2) delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out
of the compound x x x [which were] taking out the last supplies stored in the compound."57 In
addition, the attached properties of FBPC, except for two (2) of them, were perfunctorily
abandoned by respondent Bank although the bonds therefor were considerably reduced by the
trial court.58

The consequence of these omissions is to discharge the surety, petitioners herein, under Art.
2080 of the Civil Code,59 or at the very least, mitigate the liability of the surety up to the value of
the property or lien released

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at
once becomes charged with the duty of retaining such security, or maintaining such lien
in the interest of the surety, and any release or impairment of this security as a primary
resource for the payment of a debt, will discharge the surety to the extent of the value of
the property or lien released x x x x [for] there immediately arises a trust relation between
the parties, and the creditor as trustee is bound to account to the surety for the value of
the security in his hands.60
For the same reason, the grace period granted by respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five
percent (25%) partial payment as fixed in the "letter-advise." These payments are unmistakably
additional securities intended to protect both respondent Bank and the sureties in the event that
the principal debtor FBPC becomes insolvent during the extension period. Compliance with
these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted
exercise of discretion, respondent Bank bears the loss; due to its unauthorized extensions to pay
granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties
under the Continuing Guaranty.

Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the
security provided by the marginal deposit and the twenty-five percent (25%) requirement results
in the material alteration of the principal contract, i.e., the "letter-advise," and consequently
releases the surety.61 This inference was admitted by the Bank through the testimony of its lone
witness that "[w]henever this obligation becomes due and demandable, except when you roll it
over, (so) there is novation there on the original obligations." As has been said, "if the suretyship
contract was made upon the condition that the principal shall furnish the creditor additional
security, and the security being furnished under these conditions is afterwards released by the
creditor, the surety is wholly discharged, without regard to the value of the securities released,
for such a transaction amounts to an alteration of the main contract."62

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of
Appeals dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh,
holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business
Paper Corporation to pay Solid Bank Corporation the amount of P10,539,758.68 as principal
with twelve percent (12%) interest per annum until fully paid, and its Resolution of 2 July 2002
denying reconsideration thereof are REVERSED and SET ASIDE.

The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid
Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis
Toh and Vicky Tan Toh, finding First Business Paper Corporation liable to pay respondent Solid
Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum
until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Solid Bank Corporation is REINSTATED and AFFIRMED. No costs.

SO ORDERED.