DEPOSIT GENERAL payable to a certain Leovigilda D. Dizon in the amount of $1,000.00.

In the
BPI vs. Intermediate Appellate Court application, Garcia indicated that the amount was to be charged to Dollar
GR# L-66826, August 19, 1988 Savings Acct. No. 25-4109, the savings account of the Zshornacks; the
charges for commission, documentary stamp tax and others totalling P17.46
Facts: were to be charged to Current Acct. No. 210465-29, again, the current
Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar account of the Zshornacks. There was no indication of the name of the
savings account and a peso current account. An application for a dollar drat purchaser of the dollar draft.
was accomplished by Virgillo Garcia branch manager of COMTRUST
payable to a certain Leovigilda Dizon. In the PPLICtion, Garcia indicated On the same date, October 27,1975, COMTRUST, under the signature of
that the amount was to be charged to the dolar savings account of the Virgilio V. Garcia, issued a check payable to the order of Leovigilda D. Dizon
Zshornacks. There wasa no indication of the name of the purchaser of the in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York,
dollar draft. Comtrust issued a check payable to the order of Dizon. When with an indication that it was to be charged to Dollar Savings Acct. No. 25-
Zshornack noticed the withdrawal from his account, he demanded an 4109.
explainaiton from the bank. In its answer, Comtrust claimed that the peso
value of the withdrawal was given to Atty. Ernesto Zshornack, brother of When Zshornack noticed the withdrawal of US$1,000.00 from his account,
Rizaldy. When he encashed with COMTRUST a cashiers check for P8450 he demanded an explanation from the bank. In answer, COMTRUST
issued by the manila banking corporation payable to Ernesto. claimed that the peso value of the withdrawal was given to Atty. Ernesto
Issue: Whether the contract between petitioner and respondent bank is a Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto)
deposit? encashed with COMTRUST a cashier's check for P8,450.00 issued by the
Held: The document which embodies the contract states that the Manila Banking Corporation payable to Ernesto.
US$3,000.00 was received by the bank for safekeeping. The subsequent
acts of the parties also show that the intent of the parties was really for the Upon consideration of the foregoing facts, this Court finds no reason to
bank to safely keep the dollars and to return it to Zshornack at a later time. disturb the ruling of both the trial court and the Appellate Court on the first
Thus, Zshornack demanded the return of the money on May 10, 1976, or cause of action. Petitioner must be held liable for the unauthorized
over five months later. withdrawal of US$1,000.00 from private respondent's dollar account.
The above arrangement is that contract defined under Article 1962, New
Civil Code, which reads: In its desperate attempt to justify its act of withdrawing from its depositor's
Art. 1962. A deposit is constituted from the moment a person receives a savings account, the bank has adopted inconsistent theories. First, it still
thing belonging to another, with the obligation of safely keeping it and of maintains that the peso value of the amount withdrawn was given to Atty.
returning the same. If the safekeeping of the thing delivered is not the Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's
principal purpose of the contract, there is no deposit but some other Check. At the same time, the bank claims that the withdrawal was made
contract. pursuant to an agreement where Zshornack allegedly authorized the bank
to withdraw from his dollar savings account such amount which, when
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the
converted to pesos, would be needed to fund his peso current account. If
Court of First Instance of Rizal — Caloocan City a complaint against
indeed the peso equivalent of the amount withdrawn from the dollar account
COMTRUST alleging four causes of action. Except for the third cause of
was credited to the peso current account, why did the bank still have to pay
action, the CFI ruled in favor of Zshornack. The bank appealed to the
Ernesto?
Intermediate Appellate Court which modified the CFI decision absolving the
bank from liability on the fourth cause of action. The pertinent portions of the
At any rate, both explanations are unavailing. With regard to the first
judgment, as modified, read:
explanation, petitioner bank has not shown how the transaction involving
the cashier's check is related to the transaction involving the dollar draft in
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The
two transactions appear entirely independent of each other. Moreover,
1. Ordering the defendant COMTRUST to restore to the dollar
Ernesto Zshornack, Jr., possesses a personality distinct and separate from
savings account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of
Rizaldy Zshornack. Payment made to Ernesto cannot be considered
October 27, 1975 to earn interest together with the remaining balance of the
payment to Rizaldy.
said account at the rate fixed by the bank for dollar deposits under Central
Bank Circular 343;
As to the second explanation, even if we assume that there was such an
agreement, the evidence do not show that the withdrawal was made
2. Ordering defendant COMTRUST to return to the plaintiff the
pursuant to it. Instead, the record reveals that the amount withdrawn was
amount of U.S. $3,000.00 immediately upon the finality of this decision,
used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund
without interest for the reason that the said amount was merely held in
the current account of the Zshornacks. There is no proof whatsoever that
custody for safekeeping, but was not actually deposited with the defendant
peso Current Account No. 210-465-29 was ever credited with the peso
COMTRUST because being cash currency, it cannot by law be deposited
equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar
with plaintiffs dollar account and defendant's only obligation is to return the
Savings Account No. 25-4109.
same to plaintiff upon demand;
2. As for the second cause of action, the complaint filed with the trial
xxx xxx xxx
court alleged that on December 8, 1975, Zshornack entrusted to
COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as
5. Ordering defendant COMTRUST to pay plaintiff in the amount of
greenbacks) for safekeeping, and that the agreement was embodied in a
P8,000.00 as damages in the concept of litigation expenses and attorney's
document, a copy of which was attached to and made part of the complaint.
fees suffered by plaintiff as a result of the failure of the defendant bank to
The document reads:
restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return
to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Makati Cable Address:
Costs against defendant COMTRUST.
Philippines "COMTRUST"
SO ORDERED. [Rollo, pp. 47-48.]
COMMERCIAL BANK AND TRUST COMPANY of the Philippines
Quezon City Branch
Undaunted, the bank comes to this Court praying that it be totally absolved
from any liability to Zshornack. The latter not having appealed the Court of
December 8, 1975
Appeals decision, the issues facing this Court are limited to the bank's
liability with regard to the first and second causes of action and its liability
MR. RIZALDY T. ZSHORNACK
for damages.
&/OR MRS SHIRLEY E. ZSHORNACK
1. We first consider the first cause of action, On the dates material to
Sir/Madam:
this case, Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in
COMTRUST, Quezon City Branch, a dollar savings account and a peso
We acknowledged (sic) having received from you today the sum of US
current account.
DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
On October 27, 1975, an application for a dollar draft was accomplished by
Received by:
Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City,
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused
to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to
Zshornack's peso current account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under
oath the authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed
delivered to the bank US $3,000 for safekeeping. When he requested the
return of the money on May 10, 1976, COMTRUST explained that the sum
was disposed of in this manner: US$2,000.00 was sold on December 29,
1975 and the peso proceeds amounting to P14,920.00 were deposited to
Zshornack's current account per deposit slip accomplished by Garcia; the
remaining US$1,000.00 was sold on February 3, 1976 and the peso
proceeds amounting to P8,350.00 were deposited to his current account per
deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to
Zshornack's current account at prevailing conversion rates, BPI now posits
another ground to defeat private respondent's claim. It now argues that the
contract embodied in the document is the contract of depositum (as defined
in Article 1962, New Civil Code), which banks do not enter into. The bank
alleges that Garcia exceeded his powers when he entered into the
transaction. Hence, it is claimed, the bank cannot be liable under the
contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point
which arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed
by COMTRUST, a copy of which document was attached to the complaint.
In short, the second cause of action was based on an actionable document.
It was therefore incumbent upon the bank to specifically deny under oath
the due execution of the document, as prescribed under Rule 8, Section 8, if
it desired: (1) to question the authority of Garcia to bind the corporation; and
(2) to deny its capacity to enter into such contract. [See, E.B. Merchant v.
International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer
denying the due execution of the document in question, or questioning the
authority of Garcia to bind the bank, or denying the bank's capacity to enter
into the contract, was ever filed. Hence, the bank is deemed to have
admitted not only Garcia's authority, but also the bank's power, to enter into
the contract in question.
In the past, this Court had occasion to explain the reason behind this
procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think,
be readily appreciated. In dealing with corporations the public at large is
bound to rely to a large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority, any person, not
having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the agent to
exercise that authority and thereby held him out as a person competent to
bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he
assumes to exercise is frequently known to very few, and the proof of it
usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable, in a case where an officer of a
corporation has made a contract in its name, that the corporation should be
required, if it denies his authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the agent's authority is
contested; and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and
approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646
(1918).]
Petitioner's argument must also be rejected for another reason. The
practical effect of absolving a corporation from liability every time an officer
enters into a contract which is beyond corporate powers, even without the
proper allegation or proof that the corporation has not authorized nor ratified
the officer's act, is to cast corporations in so perfect a mold that
transgressions and wrongs by such artificial beings become impossible
[Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a
very plain truism but to say that such bodies have no power or capacity to
err is to impute to them an excellence which does not belong to any created
existence with which we are acquainted. The distinction between power and
right is no more to be lost sight of in respect to artificial than in respect to
natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its
legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00
was received by the bank for safekeeping. The subsequent acts of the
parties also show that the intent of the parties was really for the bank to
safely keep the dollars and to return it to Zshornack at a later time, Thus,
Zshornack demanded the return of the money on May 10, 1976, or over five
months later.
The above arrangement is that contract defined under Article 1962, New
Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.
Note that the object of the contract between Zshornack and COMTRUST
was foreign exchange. Hence, the transaction was covered by Central Bank
Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions,
promulgated on December 9, 1949, which was in force at the time the
parties entered into the transaction involved in this case. The circular
provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in
them of whatever nature, including, where applicable their exportation and
importation, shall NOT be effected, except with respect to deposit accounts
included in sub-paragraphs (b) and (c) of this paragraph, when such deposit
accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with
banks or banking institutions located in the Philippines, including money,
checks, drafts, bullions bank drafts, deposit accounts (demand, time and
savings), all debts, indebtedness or obligations, financial brokers and
investment houses, notes, debentures, stocks, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person,
firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation residing or located within the
Philippines;
(b) Any and all assets of the kinds included and/or described in
subparagraph (a) above, whether or not held through, in, or with banks or
banking institutions, and existent within the Philippines, which belong to any
person, firm, partnership, association, branch office, agency, company or
other unincorporated body or corporation not residing or located within the
Philippines;
(c) Any and all assets existent within the Philippines including money,
checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations,
financial securities commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security expressed
in foreign currencies, or if payable abroad, irrespective of the currency in
which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the
Central Bank by those authorized to deal in foreign exchange. All receipts of
foreign exchange by any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation shall
be sold to the authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign exchange. Any
person, firm, partnership, association, branch office, agency, company or
other unincorporated body or corporation, residing or located within the
Philippines, who acquires on and after the date of this Circular foreign
exchange shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full value, nor
delay taking ownership thereof except as such delay is customary;
Provided, further, That within one day upon taking ownership, or receiving
payment, of foreign exchange the aforementioned persons and entities shall
sell such foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and
any person, firm or corporation, foreign or domestic, who being bound to the
observance thereof, or of such other rules, regulations or directives as may
hereafter be issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall be subject to the
penal sanctions provided in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular
No. 281, Regulations on Foreign Exchange, promulgated on November 26,
1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm,
company or corporation shall be sold to authorized agents of the Central
Bank by the recipients within one business day following the receipt of such
foreign exchange. Any resident person, firm, company or corporation
residing or located within the Philippines, who acquires foreign exchange
shall not, unless authorized by the Central Bank, dispose of such foreign
exchange in whole or in part, nor receive less than its full value, nor delay
taking ownership thereof except as such delay is customary; Provided, That,
within one business day upon taking ownership or receiving payment of
foreign exchange the aforementioned persons and entities shall sell such
foreign exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show
that they intended the bank to safekeep the foreign exchange, and return it
later to Zshornack, who alleged in his complaint that he is a Philippine
resident. The parties did not intended to sell the US dollars to the Central
Bank within one business day from receipt. Otherwise, the contract of
depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the
Central Bank within one business day from receipt, is a transaction which is
not authorized by CB Circular No. 20, it must be considered as one which
falls under the general class of prohibited transactions. Hence, pursuant to
Article 5 of the Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, it affords
neither of the parties a cause of action against the other. "When the nullity
proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they
shall have no cause of action against each other. . ." [Art. 1411, New Civil
Code.] The only remedy is one on behalf of the State to prosecute the
parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of
action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as
damages in the concept of litigation expenses and attorney's fees to be
reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner
is ordered to restore to the dollar savings account of private respondent the
amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate
fixed by the bank for dollar savings deposits. Petitioner is further ordered to
pay private respondent the amount of P8,000.00 as damages. The other
causes of action of private respondent are ordered dismissed.
SO ORDERED.
DEPOSIT VOLUNTARY
Rogers vs. Smith (10 Phil. 317, G.R. No. 4347, March 9, 1908)
FACTS:
Plaintiff Jose Rogers (Rogers) brought this action in the CFI city of Manila
upon the following document:(the subject document of the case), no. 148.
$12,000.00
The sum of pesos twelve thousand has been deposited with us, received
from Jose Rogers, which sum we will pay on the last day of the six, months
after the presentation of this document to the order of Mr. "Jose Rogers"
Manila, February 17, 1876.
The said sum of twelve thousand pesos shall bear interest at the rate of
eight per centum (8%) per annum from this date, February 17, 1876.
SMITH, BELL & CO.
When this document was delivered by the defendants SMITH, BELL & CO.
to Rogers, 12,000 pesos in silver were worth more than 12,000 pesos in
gold"
The only question in the case is, whether upon these documents Rogers is
entitled to recover 12,000 pesos or 24,000 pesos. CFI held that he was
entitled to recover only 12,000 pesos. Rogers has appealed. Rogers
delivered to Smith, in consideration of the execution of the document,
12,000 in gold.
Soon thereafter Rogers moved to Barcelona and has since resided there.
Smith remitted the interest to him every three months at the rate of 8% per
cent per annum until the 30th day of January, 1888.,when they notified him
that thereafter the interest would be 6 per cent. Rogers accepted this
reduction and interest and that rate was remitted to him by Smith until the
10th day of February, 1904. This interest was remitted in silver; that is to
say, every three months the Smith took 180 pesos in silver and with it
bought exchange on Barcelona or other European point converted into
pesetas. Rogers received these payments in silver without any protest
whatever until the 10th day of February, 1904.
In his letter of that date, he called the attention of the Smith to the fact that
by the new American law in force in the Philippines the gold standard had
been introduced and that by reason thereof he was entitled to receive his
interest in gold, in view of the fact that when he delivered the money to the
Smith in 1876, he delivered it in gold coin.
In another letter of the 15th of December, 1904, he expressly refers to the
act of Congress of March 2, 1903, and to the subsequent proclamations of
the Governor General relating to coinage. Rogers claims that having paid to
Smith 12,000 pesos in gold coin, he is now entitled to receive from them the
value of 12,000 pesos in gold coin; that is to say, 24,000 pesos in silver. It is
necessary to determine in the first place the nature of the contract
evidenced by the document of the 17th of February, 1876.
ISSUE:
WON the document is an evidence of an ordinary loan which created
between the Rogers and the Smith the simple relation of debtor and
creditor?
HELD:
The document is an evidence of ordinary loan.
Rogers repeatedly calls it a deposit, that is, that the ownership of the
particular coin which was delivered by him to Smith did not pass to Smith
but remained in him and that Smith was bound to return to him the identical
coin which they had received. It is apparent that no such claim could be
maintained in view of that part of the instrument which provides for the
payment of interest. But while not a deposit in the strict sense of the word,
the document evidences what is known as an “irregular deposit".
The plaintiff brought this action in the Court of First Instance of the city of
Manila upon the following document:
No. 1418. $12,000.
The sum of pesos twelve thousand has been deposited with us, received
from Jose Rogers, which sum we will pay on the last day of the six months
after the presentation of this document, to the order of Mr. Jose Rogers.
Manila, February 17, 1876.
SMITH, BELL & CO.
The said sum of twelve thousand pesos shall bear interest at the rate of
eight per centum (8%) per annum from this date, February 17, 1876.
SMITH, BELL & CO.
When this document was delivered by the defendants to the plaintiff the
former delivered to the latter the following letter:

MANILA, 17 February, 1876.
JOSE ROGERS, Esq., Present.
DEAR SIR: We have this day signed a receipt (quedan No. 1418) in your
favor for twelve thousand dollars, deposited in our hands, at interest of 8%
per annum, commencing from to-day.
This interest will be paid to your order every three months, either in Manila
or in London, as you may wish.
If at any time you should desire to receive said deposit of twelve thousand
dollars in London it will be paid to you, or your order, by Messrs. Smith,
Wood and Co., of that place, after two months' notice, and on presentation
of said receipt or quedan No. 1418.
We are, dear sir, yours, truly,
SMITH, BELL & CO.
The only question in the case is, whether upon these documents the plaintiff
is entitled to recover 12,000 pesos or 24,000 pesos. The court below held
that he was entitled to recover only 12,000 pesos, and the defendants
having deposited that amount in court, judgment was ordered in their favor,
from which judgment the plaintiff has appealed.
The facts in the case are disputed. When this document was delivered
12,000 pesos in silver were worth more than 12,000 pesos in gold. the
plaintiff delivered to the defendants in consideration of the execution of the
document 12,000 in gold. Soon thereafter the plaintiff removed to Barcelona
and has since resided there. The defendants remitted the interest to him
every three months at the rate of 8 per cent per annum until the 30th day of
January, 1888, when they notified him that thereafter the interest would be 6
per cent. The plaintiff accepted this reduction and interest at that rate was
remitted to him by the defendants until the 10th of February, 1904. This
interest was remitted in silver; that is to say, every three months the
defendants took 180 pesos in silver and with it bought exchange on
Barcelona or other European point converted into pesetas. The plaintiff
received this payments in silver without any protest whatever until the 10th
day of February, 1904. He then, in his letter of that date, called the attention
of the defendants to the fact that by the new American law in force in the
Philippines the gold standard had been introduced and that by reason
thereof he was entitled to receive his interest in gold, in view of the fact that
when he delivered the money to the defendants in 1876 he delivered it in
gold coin. In another letter of the 15th of December, 1904, he expressly
refers to the act of Congress of March 2, 1903, and to the subsequent
proclamations of the Governor-General relating to coinage. These are
practically all the fat in the case, and the claim of the plaintiff is that, having
paid to the defendants 12,000 pesos in gold coin, he is now entitled to
receive from them the value of 12,000 pesos in gold coin; that is to say,
24,000 pesos in silver.
It is necessary to determine in the first place the nature of the contract
evidenced by the document of the 17th of February, 1876.
The important, and to our minds decisive, question in the case is, whether
or not this document is evidence of an ordinary loan which created between
the plaintiff and the defendants the simple relation of debtor and creditor.
The appellant in his brief repeatedly calls it a deposit, but we do not
understand that he claims that it is or ever was a deposit in the technical
sense of the term; that is, that he ownership of the particular coin which was
delivered by him to Smith, Bell & Co. did not pass to Smith, Bell & Co. but
remained in him and that Smith, Bell & Co. was bound to return to him the
identical coin which they had received. It is apparent that no such claim
could be maintained in view of that part of the instrument which provides for
the payment of interest.
It is claimed, however, by the appellant, that while not a deposit in the strict
sense of the word, the document evidences what is known as an "irregular
deposit." The parties agree that the case must be decided in this respect in
view of the legislation in force prior to the adoption of the Civil Code, and the
appellant says that the definition of an irregular deposit is found in Law II,
Title III of the Fifth Partida. Manresa, in his Commentaries on the Civil Code
(vol. 11, p. 664), states that there are three points of difference between a
loan and an irregular deposit. The first difference which he points out
consists in the fact that in an irregular deposit the only benefit is that which
accrues to the depositor, while in loan the essential cause for the
transaction is the necessity of the borrower. The contract in question does
not fulfill this requirement of an irregular deposit. It is very apparent that is
was not for the sole benefit of Rogers. It, like any other loan of money, was
for the benefit of both parties. The benefit which Smith, Bell & Co. received
was the use of the money; the benefit which Rogers received was the
interest of his money. In the letter which Smith, Bell & Co. on the 30th of
June, 1888, notified the plaintiff of the reduction of the interest, they said:
"We call your attention to this matter in order that you may if you think best
employ your money in some other place."
Nor does the contract in question fulfill the third requisite indicated by
Manresa, which is, in an irregular deposit, the depositor can demand the
return of the article at any time, while a lender is bound by the provisions of
the contract and can not seek restitution until the time for payment, as
provided in the contract, has arisen. It is apparent from the terms of this
document that the plaintiff could not demand his money at any time. He was
bound to give notice of his desire for its return and then to wait for six
months before he could insist upon payment.
The second difference which exists, according to Manresa, between an
irregular deposit and a loan lies in the fact that in an irregular deposit the
depositor has a preference over other creditors in the distribution of the
debtor's property. That this preference may exist and the transaction be still
a loan, appears from the decision of the supreme court of Spain of the 8th
of April, 1881. The court there said:
Whereas, although the irregular deposit is considered as mutual, with
respect to the repayment between the depositor and the depositary,
notwithstanding this, the latter retains the original status of personal creditor
and is simply privileged, in concurrence with other creditors against the
former, and he must be paid after the mortgage creditors and before the
creditors whose right appears only by written instruments, in accordance
with Law XII, Title XIV, fifth Partida.
It is apparent, therefore, that this document does not state those requisites
which are essential to an irregular deposit.
But even if it did, it seems that the appellant's contention could not be
sustained. He claims that in accordance with said Law II, title III, Fifth
Partida, the defendants are bound to return to him the same kind of money
which was received. That law is in part as follows:
And the ownership of the thing given in deposit is not transferred to the one
who receives the same; but, should the thing be one of those which can be
counted, weighed, or measured, if, when receiving it, the same were given
by count, weight, or measure, then the ownership would be transferred to
him. Yet he would be obliged to return the same thing, or the same quantity,
or another similar to the one received, to him who gave it to him in deposit.
An examination, however, of Law II, Title I, of the Fifth Partida, which relates
to loans, will show that the obligation of the borrower in such case is stated
in almost exactly the same words. That law is in part as follows:
A man may loan to another any of the things mentioned in the last law which
are susceptible of being counted, weighed, or measured. And this is
understood with regard to things belonging to him who lends them, or which
are loaned by another by authority of his principal; provided, however, that
once the thing is in the possession of him who secures the loan, he may
dispose of it as though it were his own. But he must return to the owner of
the thing equal amount of the same kind and quality, although the creditor
should not specify either of the conditions.
The supreme court of Spain in the judgment of the 27th of October, 1868,
speaking of the obligation of the borrower in such case, says:
Whereas the principle in Laws I and II of Title I of the Fifth Partida,
according to which the borrower, acquires ownership of the thing and is
bound to return an equal amount of the same kind and quality, have special
application to cases relating to loans of money or its equivalent; whereas
the thing loaned not being in such cases what properly constitutes the
material or the object of deposit, as happens with other perishable things,
but rather the value that the coins or the paper money represents, the
obligation of the depository in this kind of contracts is to return the sum or
amount therein expressed, whatever may have been the increase or
depreciation suffered by the specific kind of coin or paper, unless the
contrary be stipulated.
It seems clear from these citations that the document in question is
evidence of an ordinary loan and created between the plaintiff and
defendants the relation of debtor and creditor. The two judgments of the
supreme court of Spain cited by the appellant in his brief have no bearing
upon the question. In that of the 9th of July, 1889, it appeared that the Bank
of Havana returned to the plaintiff the same kind of money which it had
received from him. The other judgment, of the 7th of February, 1891, simply
held that a servant who had left her money with her master and had taken a
written obligation from him to pay the same was not, in the distribution of his
property, entitled to preference over other creditors on the ground that her
debt was for personal labor.
It having been determined that the contract between the parties created the
common relation of debtor and creditor, the case is easily resolved. Section
3 of the act of Congress of March 2, 1903, entitled "An act to establish a
standard of value and to provide for a coinage system in the Philippine
Islands," is as follows:
That the silver Philippine pesos authorized by this act shall be legal tender
in the Philippine Islands for all debts, public and private, unless otherwise
specifically provided by contract: Provided, That debts contracted prior to
the thirty-first day of December, nineteen hundred and three, may be paid in
the legal tender currency of said Islands existing at the time of the making of
said contracts, unless otherwise expressly provided by contract.
That this case falls within the terms of this section is very clear. The debt in
question is a private debt, calling for the payment of 12,000 pesos. This
section authorizes the payment of that debt in the Philippine pesos
authorized by the act. That the act applies as well to debts created prior to
its passage as to those created after, appears from the proviso. The effect
of that proviso is to give the debtor and not the creditor the option as to the
kind of money with which the debt shall be paid.
The only possible way to avoid the application of this section to the case at
bar is by saying that Congress had no power to pass the act and that sa to
debts created prior to its passage it is therefore null and void. That the act
can not be declared void on this ground is well settled by the decisions of
the Supreme Court of the United States. (Legal Tender Cases, 12 Wall.,
457; Dooley vs. Smith, 13 Wall., 604; Railroad Company vs. Johnson, 15
Wall., 195;; Maryland vs. Railroad Company, 22 Wall., 105 and Julliard vs.
Greenman, 110 U. S., 421.) In the first four of those cases it was held that
debts created when the only legal-tender money was gold and silver could
be paid in paper money issued by the Government and which had no
intrinsic value.
The appellant in his brief discusses at length the meaning of the word
"dollars." We do not see how such a discussion is material. The contract
provides for the payment of "pesos," not "dollars." It is very evident that the
contract was not changed nor intended to be changed by the use of the
word "dollars" in the letter of February 17, 1876. That in English houses
especially the word "dollars" was, until very recently, used to indicate pesos
of local currency, whether Mexican, Spanish, or Hongkong, is well known.
In conclusion it may be said that the plaintiff, in 1876, delivered to the
defendants the cheapest kind of money then in use. If he had desired to be
repaid in the same money which he delivered, he should have so provided
expressly in the contract. He had a perfect right to do so, and if he had done
so he could now, by reason of the provisions of the said act of Congress,
demand payment in gold.
That the plaintiff's protest in 1904 was based entirely upon his construction
of this act of Congress admits of no doubt; that he delivered that by the
terms of the contract, without the act of Congress, Smith, Bell & Co. had the
right to pay him in silver is beyond question. This belief is shown not only by
his letters of protest which expressly refer to the act of Congress as the
basis of his claim but also by his conduct during more than twenty-five years
in receiving interest in silver without a sign of protest. That he would have
received the principal also in silver had the defendants tendered it to him at
any time prior to 1903 is also free from doubt. In making his protest in 1904
he evidently believed that the act of Congress required the payment of the
12,000 pesos in gold and that he thereby has acquired additional rights. His
construction of the act is, as we have seen, wrong.
The judgment of the court below is affirmed, with the costs of this instance
against the appellant. So ordered.
Angel Javellana v Jose Lim, et al; GR 4015, 24 August 1908 En banc,
Torres, J.
Facts:
(1) On 26 May 1897, Jose and others executed a document in favor of
Angel, wherein it stated that they had received a sum of PhP 2,600.86 as a
“deposit” without interest from the latter. The document also stipulated that
they would return the same amount jointly and severally on 20 January
1898.
(2) Upon the stipulated due date, however, Jose and others asked for an
extension to pay and bound themselves to pay 15% interest per annum on
the amount of their indebtedness, to which the Angel acceded. Despite
the extension, Jose and others still failed to pay the full amount of their
indebtedness. Consequently, this prompted Angel to file a civil action before
the CFI of Iloilo. The CFI of Iloilo subsequently ruled in favor of Angel to
recover the amount due plus the payment of 15% interest per
annum.
Issue:Whether or not the contract executed by Angel and Jose and others
was that of a deposit.
Ruling:No, the contract executed by Angel and Jose and others was not a
deposit. Instead, it was a contract of simple loan or mutuum.
Ratio:
(1) It must be understood that Jose and others were lawfully authorized to
make use of the amount deposited, which they have done as subsequently
shown when they asked for an extension of the time for the return thereof.
They were conscious that they had used, for their own profit and gain, the
money which they apparently received as a “deposit”. Moreover, they
engaged to pay interest to Angel from the stipulated date until the time when
the refund should have been made.
(2) Where money, consisting of coins of legal tender, is deposited with a
person and the latter is authorized by the depositor to use and dispose of
the same, the agreement is not a contract of deposit, but a loan. Moreover,
Article 1768 of the old Civil Code (now Article 1978 of the New Civil Code)
provides that when the depository has per-mission to make use of the thing
deposited, the contract loses the character of a de- posit and becomes a
loan or bailment.
(3) A subsequent agreement between the parties as to interest on the
amount said to have been deposited, because the same could not be
returned at the time fixed therefore, does not constitute a renewal of an
agreement of deposit, but it is the best evidence that the original contract
entered into between them was for a loan under the guise of a deposit.
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of
October, 1906, with the Court of First Instance of Iloilo, praying that the
defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly
and severally pay the sum of P2,686.58, with interest thereon at the rate of
15 per cent per annum from the 20th of January, 1898, until full payment
should be made, deducting from the amount of interest due the sum of
P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was
amended on the 10th of January, 1907; it was then alleged, on the 26th of
May, 1897, the defendants executed and subscribed a document in favor of
the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the
sum of two thousand six hundred and eighty-six cents of pesos fuertes,
which we will return to the said gentleman, jointly and severally, on the 20th
of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose Lim. —
Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff
for an extension of time for the payment thereof, building themselves to pay
interest at the rate of 15 per cent on the amount of their indebtedness, to
which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid
on account of interest due the sum of P1,000 pesos, with the exception of
either capital or interest, had thereby been subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of
January, 1907, the defendants answered the original complaint before its
amendment, setting forth that they acknowledged the facts stated in Nos. 1
and 2 of the complaint; that they admitted the statements of the plaintiff
relative to the payment of 1,102.16 pesos made on the 15th of November,
1902, not, however, as payment of interest on the amount stated in the
foregoing document, but on account of the principal, and denied that there
had been any agreement as to an extension of the time for payment and the
payment of interest at the rate of 15 per cent per annum as alleged in
paragraph 3 of the complaint, and also denied all the other statements
contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff
sums which, together with the P1,102.16 acknowledged in the complaint,
aggregated the total sum of P5,602.16, and that, deducting therefrom the
total sum of P2,686.58 stated in the document transcribed in the complaint,
the plaintiff still owed the defendants P2,915.58; therefore, they asked that
judgment be entered absolving them, and sentencing the plaintiff to pay
them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together
with an account book having been made of record, the court below
rendered judgment on the 15th of January, 1907, in favor of the plaintiff for
the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial.
This motion was overruled and was also excepted to by them; the bill of
exceptions presented by the appellants having been approved, the same
was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which they
were jointly and severally obliged to return on a certain date fixed in the
document; but that, nevertheless, when the document appearing as Exhibits
2, written in the Visayan dialect and followed by a translation into Spanish
was executed, it was acknowledged, at the date thereof, the 15th of
November, 1902, that the amount deposited had not yet been returned to
the creditor, whereby he was subjected to losses and damages amounting
to 830 pesos since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum, from the aforesaid date of
January 20, and that the 1,000 pesos paid to the depositor on the 15th of
May, 1900, according to the receipt issued by him to the debtors, would be
included, and that the said rate of interest would obtain until the debtors on
the 20th of May, 1897, it is called a deposit consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the
one received by them. For this reason it must be understood that the
debtors were lawfully authorized to make use of the amount deposited,
which they have done, as subsequent shown when asking for an extension
of the time for the return thereof, inasmuch as, acknowledging that they
have subjected the letter, their creditor, to losses and damages for not
complying with what had been stipulated, and being conscious that they had
used, for their own profit and gain, the money that they received apparently
as a deposit, they engaged to pay interest to the creditor from the date
named until the time when the refund should be made. Such conduct on the
part of the debtors is unquestionable evidence that the transaction entered
into between the interested parties was not a deposit, but a real contract of
loan.
Article 1767 of the Civil Code provides that —
The depository can not make use of the thing deposited without the express
permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that —
When the depository has permission to make use of the thing deposited, the
contract loses the character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, 1898, Jose Lim went to the office
of the creditor asking for an extension of one year, in view of the fact the
money was scare, and because neither himself nor the other defendant
were able to return the amount deposited, for which reason he agreed to
pay interest at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount deposited, he
having made use of the same in his business and for his own profit; and the
creditor, by granting them the extension, evidently confirmed the express
permission previously given to use and dispose of the amount stated as
having bee deposited, which, in accordance with the loan, to all intents and
purposes gratuitously, until the 20th of January, 1898, and from that dated
with interest at 15 per cent per annum until its full payment, deducting from
the total amount of interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document
(Exhibit 2) executed in the presence of three witnesses on the 15th of
November, 1902, by Ceferino Domingo Lim on behalf of himself and the
former, nevertheless, the said document has not been contested as false,
either by a criminal or by a civil proceeding, nor has any doubt been cast
upon the authenticity of the signatures of the witnesses who attested the
execution of the same; and from the evidence in the case one is sufficiently
convinced that the said Jose Lim was perfectly aware of and authorized his
joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on
account thereof, and to execute the aforesaid document No. 2. A true
ratification of the original document of deposit was thus made, and not the
least proof is shown in the record that Jose Lim had ever paid the whole or
any part of the capital stated in the original document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000
pesos appears as fully established, such is not the case with the
defendant's counterclaim for P5,602.16, because the existence and
certainty of said indebtedness imputed to the plaintiff has not been proven,
and the defendants, who call themselves creditors for the said amount have
not proven in a satisfactory manner that the plaintiff had received partial
payments on account of the same; the latter alleges with good reason, that
they should produce the receipts which he may have issued, and which he
did issue whenever they paid him any money on account. The plaintiffs
allegation that the two amounts of 400 and 1,200 pesos, referred to in
documents marked "C" and "D" offered in evidence by the defendants, had
been received from Ceferino Domingo Lim on account of other debts of his,
has not been contradicted, and the fact that in the original complaint the
sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only
payment made on account of interest on the amount deposited according to
documents No. 2 and letter "B" above referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be
inferred that there was no renewal of the contract deposited converted into
a loan, because, as has already been stated, the defendants received said
amount by virtue of real loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still exists,
and it has not been shown or proven in the proceedings that the creditor
had released Joe Lim from complying with his obligation in order that he
should not be sued for or sentenced to pay the amount of capital and
interest together with his codebtor, Ceferino Domingo Lim, because the
record offers satisfactory evidence against the pretension of Jose Lim, and it
further appears that document No. 2 was executed by the other debtor,
Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it has
also been proven that Jose Lim, being fully aware that his debt had not yet
been settled, took steps to secure an extension of the time for payment, and
consented to pay interest in return for the concession requested from the
creditor.
In view of the foregoing, and adopting the findings in the judgment appealed
from, it is our opinion that the same should be and is hereby affirmed with
the costs of this instance against the appellant, provided that the interest
agreed upon shall be paid until the complete liquidation of the debt. So
ordered.
SILVESTRA BARON, plaintiff-appellant, vs.PABLO DAVID, defendant-
appellant.
And
GUILLERMO BARON, plaintiff-appellant, vs.PABLO DAVID, defendant-
appellant.
FACTS:
- The defendant owns a rice mill, which was well patronized by the
rice growers of the vicinity.
- On January 17, 1921, a fire occurred that destroyed the mill and
its contents, and it was some time before the mill could be rebuilt and put in
operation again.
- Silvestra Baron (P1) and Guillermo Baron (P2) each filed an
action for the recovery of the value of palay from the defendant (D), alleged
that:
o The palay have been sold by both plaintiffs to the D in the year
1920
o Palay was delivered to D at his special request, with a promise of
compensation at the highest price per cavan
- D claims that the palay was deposited subject to future withdrawal
by the depositors or to some future sale, which was never effected. D also
contended that in order for the plaintiffs to recover, it is necessary that they
should be able to establish that the plaintiffs' palay was delivered in the
character of a sale, and that if, on the contrary, the defendant should prove
that the delivery was made in the character of deposit, the defendant should
be absolved.
ISSUE: WoN there was deposit
SC: NO
- Art. 1978. When the depositary has permission to use the thing
deposited, the contract loses the concept of a deposit and becomes a loan
or commodatum, except where safekeeping is still the principal purpose of
the contract. The permission shall not be presumed, and its existence must
be proved.
- The case does not depend precisely upon this explicit alternative;
for even supposing that the palay may have been delivered in the character
of deposit, subject to future sale or withdrawal at plaintiffs' election,
nevertheless if it was understood that the defendant might mill the palay and
he has in fact appropriated it to his own use, he is of course bound to
account for its value.
- In this connection we wholly reject the defendant's pretense that
the palay delivered by the plaintiffs or any part of it was actually consumed
in the fire of January, 1921. Nor is the liability of the defendant in any wise
affected by the circumstance that, by a custom prevailing among rice millers
in this country, persons placing palay with them without special agreement
as to price are at liberty to withdraw it later, proper allowance being made
for storage and shrinkage, a thing that is sometimes done, though rarely.
****************
These two actions were instituted in the Court of First Instance of the
Province of Pampanga by the respective plaintiffs, Silvestra Baron and
Guillermo Baron, for the purpose of recovering from the defendant, Pablo
David, the value of palay alleged to have been sold by the plaintiffs to the
defendant in the year 1920. Owing to the fact that the defendant is the same
in both cases and that the two cases depend in part upon the same facts,
the cases were heard together in the trial court and determined in a single
opinion. The same course will accordingly be followed here.
In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave
judgment for her to recover of the defendant the sum of P5,238.51, with
costs. From this judgment both the plaintiff and the defendant appealed.
In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court
gave judgment for him to recover of the defendant the sum of P5,734.60,
with costs, from which judgment both the plaintiff and the defendant also
appealed. In the same case the defendant interposed a counterclaim in
which he asked credit for the sum of P2,800 which he had advanced to the
plaintiff Guillermo Baron on various occasions. This credit was admitted by
the plaintiff and allowed by the trial court. But the defendant also interposed
a cross-action against Guillermo Baron in which the defendant claimed
compensation for damages alleged to have Ben suffered by him by reason
of the alleged malicious and false statements made by the plaintiff against
the defendant in suing out an attachment against the defendant's property
soon after the institution of the action. In the same cross-action the
defendant also sought compensation for damages incident to the shutting
down of the defendant's rice mill for the period of one hundred seventy days
during which the above-mentioned attachment was in force. The trial judge
disallowed these claims for damages, and from this feature of the decision
the defendant appealed. We are therefore confronted with five distinct
appeals in this record.
Prior to January 17, 1921, the defendant Pablo David has been engaged in
running a rice mill in the municipality of Magalang, in the Province of
Pampanga, a mill which was well patronized by the rice growers of the
vicinity and almost constantly running. On the date stated a fire occurred
that destroyed the mill and its contents, and it was some time before the mill
could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in
the first of the actions before us, is an aunt of the defendant; while
Guillermo Baron, the plaintiff in the other action; is his uncle. In the months
of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in
the defendant's mill; and this, in connection with some that she took over
from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During
approximately the same period Guillermo Baron placed other 1,865 cavans
and 43 kilos of palay in the mill. No compensation has ever been received
by Silvestra Baron upon account of the palay delivered by Guillermo Baron,
he has received from the defendant advancements amounting to P2,800;
but apart from this he has not been compensated. Both the plaintiffs claim
that the palay which was delivered by them to the defendant was sold to the
defendant; while the defendant, on the other hand, claims that the palay
was deposited subject to future withdrawal by the depositors or subject to
some future sale which was never effected. He therefore supposes himself
to be relieved from all responsibility by virtue of the fire of January 17, 1921,
already mentioned.
The plaintiff further say that their palay was delivered to the defendant at his
special request, coupled with a promise on his part to pay for the same at
the highest price per cavan at which palay would sell during the year 1920;
and they say that in August of that year the defendant promised to pay them
severally the price of P8.40 per cavan, which was about the top of the
market for the season, provided they would wait for payment until
December. The trial judge found that no such promise had been given; and
the incredulity of the court upon this point seems to us to be justified. A
careful examination of the proof, however, leads us to the conclusion that
the plaintiffs did, some time in the early part of August, 1920, make demand
upon the defendant for a settlement, which he evaded or postponed leaving
the exact amount due to the plaintiffs undetermined.
It should be stated that the palay in question was place by the plaintiffs in
the defendant's mill with the understanding that the defendant was at liberty
to convert it into rice and dispose of it at his pleasure. The mill was actively
running during the entire season, and as palay was daily coming in from
many customers and as rice was being constantly shipped by the defendant
to Manila, or other rice markets, it was impossible to keep the plaintiffs'
palay segregated. In fact the defendant admits that the plaintiffs' palay was
mixed with that of others. In view of the nature of the defendant's activities
and the way in which the palay was handled in the defendant's mill, it is
quite certain that all of the plaintiffs' palay, which was put in before June 1,
1920, been milled and disposed of long prior to the fire of January 17, 1921.
Furthermore, the proof shows that when the fire occurred there could not
have been more than about 360 cavans of palay in the mill, none of which
by any reasonable probability could have been any part of the palay
delivered by the plaintiffs. Considering the fact that the defendant had thus
milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it
result that he is bound to account for its value, and his liability was not
extinguished by the occurence of the fire. In the briefs before us it seems to
have been assumed by the opposing attorneys that in order for the plaintiffs
to recover, it is necessary that they should be able to establish that the
plaintiffs' palay was delivered in the character of a sale, and that if, on the
contrary, the defendant should prove that the delivery was made in the
character of deposit, the defendant should be absolved. But the case does
not depend precisely upon this explicit alternative; for even supposing that
the palay may have been delivered in the character of deposit, subject to
future sale or withdrawal at plaintiffs' election, nevertheless if it was
understood that the defendant might mill the palay and he has in fact
appropriated it to his own use, he is of course bound to account for its
value. Under article 1768 of the Civil Code, when the depository has
permission to make use of the thing deposited, the contract loses the
character of mere deposit and becomes a loan or a commodatum; and of
course by appropriating the thing, the bailee becomes responsible for its
value. In this connection we wholly reject the defendant's pretense that the
palay delivered by the plaintiffs or any part of it was actually consumed in
the fire of January, 1921. Nor is the liability of the defendant in any wise
affected by the circumstance that, by a custom prevailing among rice millers
in this country, persons placing palay with them without special agreement
as to price are at liberty to withdraw it later, proper allowance being made
for storage and shrinkage, a thing that is sometimes done, though rarely.
In view of what has been said it becomes necessary to discover the price
which the defendant should be required to pay for the plaintiffs' palay. Upon
this point the trial judge fixed upon P6.15 per cavan; and although we are
not exactly in agreement with him as to the propriety of the method by which
he arrived at this figure, we are nevertheless of the opinion that, all things
considered, the result is approximately correct. It appears that the price of
palay during the months of April, May, and June, 1920, had been
excessively high in the Philippine Islands and even prior to that period the
Government of the Philippine Islands had been attempting to hold the price
in check by executive regulation. The highest point was touched in this
season was apparently about P8.50 per cavan, but the market began to sag
in May or June and presently entered upon a precipitate decline. As we
have already stated, the plaintiffs made demand upon the defendant for
settlement in the early part of August; and, so far as we are able to judge
from the proof, the price of P6.15 per cavan, fixed by the trial court, is about
the price at which the defendant should be required to settle as of that date.
It was the date of the demand of the plaintiffs for settlement that determined
the price to be paid by the defendant, and this is true whether the palay was
delivered in the character of sale with price undetermined or in the character
of deposit subject to use by the defendant. It results that the plaintiffs are
respectively entitle to recover the value of the palay which they had placed
with the defendant during the period referred to, with interest from the date
of the filing of their several complaints.
As already stated, the trial court found that at the time of the fire there were
about 360 cavans of palay in the mill and that this palay was destroyed. His
Honor assumed that this was part of the palay delivered by the plaintiffs,
and he held that the defendant should be credited with said amount. His
Honor therefore deducted from the claims of the plaintiffs their respective
proportionate shares of this amount of palay. We are unable to see the
propriety of this feature of the decision. There were many customers of the
defendant's rice mill who had placed their palay with the defendant under
the same conditions as the plaintiffs, and nothing can be more certain than
that the palay which was burned did not belong to the plaintiffs. That palay
without a doubt had long been sold and marketed. The assignments of error
of each of the plaintiffs-appellants in which this feature of the decision is
attacked are therefore well taken; and the appealed judgments must be
modified by eliminating the deductions which the trial court allowed from the
plaintiffs' claims.
The trial judge also allowed a deduction from the claim of the plaintiff
Guillermo Baron of 167 cavans of palay, as indicated in Exhibit 12, 13, 14,
and 16. This was also erroneous. These exhibits relate to transactions that
occurred nearly two years after the transactions with which we are here
concerned, and they were offered in evidence merely to show the character
of subsequent transactions between the parties, it appearing that at the time
said exhibits came into existence the defendant had reconstructed his mill
and that business relations with Guillermo Baron had been resumed. The
transactions shown by these exhibits (which relate to palay withdrawn by
the plaintiff from the defendant's mill) were not made the subject of
controversy in either the complaint or the cross-complaint of the defendant
in the second case. They therefore should not have been taken into account
as a credit in favor of the defendant. Said credit must therefore be likewise
of course be without prejudice to any proper adjustment of the rights of the
parties with respect to these subsequent transactions that they have
heretofore or may hereafter effect.
The preceding discussion disposes of all vital contentions relative to the
liability of the defendant upon the causes of action stated in the complaints.
We proceed therefore now to consider the question of the liability of the
plaintiff Guillermo Baron upon the cross-complaint of Pablo David in case R.
G. No. 26949. In this cross-action the defendant seek, as the stated in the
third paragraph of this opinion, to recover damages for the wrongful suing
out of an attachment by the plaintiff and the levy of the same upon the
defendant's rice mill. It appears that about two and one-half months after
said action was begun, the plaintiff, Guillermo Baron, asked for an
attachment to be issued against the property of the defendant; and to
procure the issuance of said writ the plaintiff made affidavit to the effect that
the defendant was disposing, or attempting the plaintiff. Upon this affidavit
an attachment was issued as prayed, and on March 27, 1924, it was levied
upon the defendant's rice mill, and other property, real and personal.
Upon attaching the property the sheriff closed the mill and placed it in the
care of a deputy. Operations were not resumed until September 13, 1924,
when the attachment was dissolved by an order of the court and the
defendant was permitted to resume control. At the time the attachment was
levied there were, in the bodega, more than 20,000 cavans of palay
belonging to persons who held receipts therefor; and in order to get this
grain away from the sheriff, twenty-four of the depositors found it necessary
to submit third-party claims to the sheriff. When these claims were put in the
sheriff notified the plaintiff that a bond in the amount of P50,000 must be
given, otherwise the grain would be released. The plaintiff, being unable or
unwilling to give this bond, the sheriff surrendered the palay to the
claimants; but the attachment on the rice mill was maintained until
September 13, as above stated, covering a period of one hundred seventy
days during which the mill was idle. The ground upon which the attachment
was based, as set forth in the plaintiff's affidavit was that the defendant was
disposing or attempting to dispose of his property for the purpose of
defrauding the plaintiff. That this allegation was false is clearly apparent,
and not a word of proof has been submitted in support of the assertion. On
the contrary, the defendant testified that at the time this attachment was
secured he was solvent and could have paid his indebtedness to the plaintiff
if judgment had been rendered against him in ordinary course. His financial
conditions was of course well known to the plaintiff, who is his uncle. The
defendant also states that he had not conveyed away any of his property,
nor had intended to do so, for the purpose of defrauding the plaintiff. We
have before us therefore a case of a baseless attachment, recklessly sued
out upon a false affidavit and levied upon the defendant's property to his
great and needless damage. That the act of the plaintiff in suing out the writ
was wholly unjustifiable is perhaps also indicated in the circumstance that
the attachment was finally dissolved upon the motion of the plaintiff himself.
The defendant testified that his mill was accustomed to clean from 400 to
450 cavans of palay per day, producing 225 cavans of rice of 57 kilos each.
The price charged for cleaning each cavan rice was 30 centavos. The
defendant also stated that the expense of running the mill per day was from
P18 to P25, and that the net profit per day on the mill was more than P40.
As the mill was not accustomed to run on Sundays and holiday, we estimate
that the defendant lost the profit that would have been earned on not less
than one hundred forty work days. Figuring his profits at P40 per day, which
would appear to be a conservative estimate, the actual net loss resulting
from his failure to operate the mill during the time stated could not have
been less than P5,600. The reasonableness of these figures is also
indicated in the fact that the twenty-four customers who intervened with
third-party claims took out of the camarin 20,000 cavans of palay, practically
all of which, in the ordinary course of events, would have been milled in this
plant by the defendant. And of course other grain would have found its way
to this mill if it had remained open during the one hundred forty days when it
was closed.
But this is not all. When the attachment was dissolved and the mill again
opened, the defendant found that his customers had become scattered and
could not be easily gotten back. So slow, indeed, was his patronage in
returning that during the remainder of the year 1924 the defendant was able
to mill scarcely more than the grain belonging to himself and his brothers;
and even after the next season opened many of his old customers did not
return. Several of these individuals, testifying as witnesses in this case,
stated that, owing to the unpleasant experience which they had in getting
back their grain from the sheriff to the mill of the defendant, though they had
previously had much confidence in him.
As against the defendant's proof showing the facts above stated the plaintiff
submitted no evidence whatever. We are therefore constrained to hold that
the defendant was damaged by the attachment to the extent of P5,600, in
profits lost by the closure of the mill, and to the extent of P1,400 for injury to
the good-will of his business, making a total of P7,000. For this amount the
defendant must recover judgment on his cross-complaint.
The trial court, in dismissing the defendant's cross-complaint for damages
resulting from the wrongful suing out of the attachment, suggested that the
closure of the rice mill was a mere act of the sheriff for which the plaintiff
was not responsible and that the defendant might have been permitted by
the sheriff to continue running the mill if he had applied to the sheriff for
permission to operate it. This singular suggestion will not bear a moment's
criticism. It was of course the duty of the sheriff, in levying the attachment,
to take the attached property into his possession, and the closure of the mill
was a natural, and even necessary, consequence of the attachment. For the
damage thus inflicted upon the defendant the plaintiff is undoubtedly
responsible.
One feature of the cross-complaint consist in the claim of the defendant
(cross-complaint) for the sum of P20,000 as damages caused to the
defendant by the false and alleged malicious statements contained in the
affidavit upon which the attachment was procured. The additional sum of
P5,000 is also claimed as exemplary damages. It is clear that with respect
to these damages the cross-action cannot be maintained, for the reason
that the affidavit in question was used in course of a legal proceeding for the
purpose of obtaining a legal remedy, and it is therefore privileged. But
though the affidavit is not actionable as a libelous publication, this fact in no
obstacle to the maintenance of an action to recover the damage resulting
from the levy of the attachment.
Before closing this opinion a word should be said upon the point raised in
the first assignment of error of Pablo David as defendant in case R. G. No.
26949. In this connection it appears that the deposition of Guillermo Baron
was presented in court as evidence and was admitted as an exhibit, without
being actually read to the court. It is supposed in the assignment of error
now under consideration that the deposition is not available as evidence to
the plaintiff because it was not actually read out in court. This connection is
not well founded. It is true that in section 364 of the Code of Civil Procedure
it is said that a deposition, once taken, may be read by either party and will
then be deemed the evidence of the party reading it. The use of the word
"read" in this section finds its explanation of course in the American practice
of trying cases for the most part before juries. When a case is thus tried the
actual reading of the deposition is necessary in order that the jurymen may
become acquainted with its contents. But in courts of equity, and in all
courts where judges have the evidence before them for perusal at their
pleasure, it is not necessary that the deposition should be actually read
when presented as evidence.
From what has been said it result that judgment of the court below must be
modified with respect to the amounts recoverable by the respective plaintiffs
in the two actions R. G. Nos. 26948 and 26949 and must be reversed in
respect to the disposition of the cross-complaint interposed by the
defendant in case R. G. No. 26949, with the following result: In case R. G.
No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the
sum of P6,227.24, with interest from November 21, 1923, the date of the
filing of her complaint, and with costs. In case R. G. No. 26949 the plaintiff
Guillermo Baron will recover of the defendant Pablo David the sum of
P8,669.75, with interest from January 9, 1924. In the same case the
defendant Pablo David, as plaintiff in the cross-complaint, will recover of
Guillermo Baron the sum of P7,000, without costs. So ordered.
Compania Agricola de Ultramar v. Nepomuceno
55 Phil. 283, November 14, 1930
FACTS:
On March 17, 1927, the registered partnerships, Mariano Velasco & Co.,
Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were
declared insolvent by the Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar
filed a claim against one of the insolvents Mariano Velasco & Co., claiming
the sum of P10,000, with the agreed interest thereon at the rate of 6 per
cent per annum from April 5, 1918, until its full payment was a deposit with
said Mariano Velasco & Co. and asked the court to declare it a preferred
claim.
The assignee of the insolvency answered the claim by interposing a
general denial. On September 23, 1929, the court rendered a decision
declaring that the alleged deposit was a preferred claim for the sum
mentioned, with interest at 6 per cent per annum from April 5, 1918, until
paid. From this decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de Ultramar
consisted of a receipt in writing, and the testimony of Jose Velasco who was
manager of Mariano Velasco & Co. at the time the note was executed. The
receipt reads as follows:
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar" the sum of ten
thousand Philippine pesos as a deposit at the interest of six per cent
annually, for the term of three months from date.
In witness thereof, I sign the present.
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his signature on the receipt
was authentic and that he received the said sum of P10,000 from the
appellee and deposited it with the bank in the current account of Mariano
Velasco & Co.
ISSUE: Whether or not the contract between Mariano Velasco & Co., Inc
and Compania Agricola de Ultramar was a contract of deposit.
RULING:
The Supreme Court ruled that the CFI erred in finding that the claim of the
appellee should be considered a deposit.
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing deposited without the
express permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that —
"When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and becomes a loan
or bailment."
"The permission not be presumed, and its existence must be proven.
It was sufficiently shown that the ten thousand pesos delivered by the
appellee to Mariano Velasco & Co. cannot de regarded as a technical
deposit. But the appellee argues that it is at least an "irregular deposit." This
argument is, we think, sufficiently answered in the case of Rogers vs. Smith,
Bell & Co. (10 Phil., 319). There this court said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664),
states that there are three points of difference between a loan and an
irregular deposit. The first difference which he points out consists in the fact
that in an irregular deposit the only benefit is that which accrues to the
depositor, while in a loan the essential cause for the transaction is the
necessity of the borrower. The contract in question does not fulfill this
requirement of an irregular deposit. It is very apparent that it was not for the
sole benefit of Rogers. It, like any other loan of money, was for the benefit of
both parties. The benefit which Smith, Bell & Co. received was the use of
the money; the benefit which Rogers received was the interest on his
money. In the letter in which Smith, Bell & Co. on the 30th of June, 1888,
notified the plaintiff of the reduction of the interest, they said: "We call your
attention to this matter in order that you may if you think best employ your
money in some other place."
Nor does the contract in question fulfill the third requisite indicated by
Manresa, which is, that in an irregular deposit, the depositor can demand
the return of the article at any time, while a lender is bound by the provisions
of the contract and cannot seek restitution until the time for payment, as
provided in the contract, has arisen. It is apparent from the terms of this
documents that the plaintiff could not demand his money at any time. He
was bound to give notice of his desire for its return and then to wait for six
months before he could insist upon payment.
In the present case the transaction in question was clearly not for the
sole benefit of the Compania Agricola de Ultramar; it was evidently for the
benefit of both parties. Neither could the alleged depositor demand payment
until the expiration of the term of three months.
It appears from the record that on March 17, 1927, the registered
partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and
Mariano Velasco & Co., Inc., were, on petition of the creditors, declared
insolvent by the Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a
claim against one of the insolvents Mariano Velasco & Co., claiming the
sum of P10,000, with the agreed interest thereon at the rate of 6 per cent
per annum from April 5, 1918, until its full payment was a deposit with said
Mariano Velasco & Co. and asked the court to declare it a preferred claim.
The assignee of the insolvency answered the claim by interposing a general
denial. The claim was thereupon referred by the court to a Commissioner to
receive the evidence, and on September 23, 1929, the court rendered a
decision declaring that the alleged deposit was a preferred claim for the sum
mentioned, with interest at 6 per cent per annum from April 5, 1918, until
paid. From this decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de Ultramar
consisted of a receipt in writing, and the testimony of Jose Velasco who was
manager of Mariano Velasco & Co. at the time the note was executed. The
receipt reads as follow (translation):
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar" the sum of ten
thousand Philippine pesos as a deposit at the interest of six per cent
annually, for the term of three months from date.
In witness thereof, I sign the present.
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his signature on the receipt was
authentic and that he received the said sum of P10,000 from the appellee
and deposited it with the bank in the current account of Mariano Velasco &
Co.
In our opinion the court below erred in finding that the claim of the appellee
should be considered a deposit and a preferred claim. In the case of
Gavieres vs. De Tavera (1 Phil., 17), very similar to the present case, this
court held that the transaction therein involved was a loan and not a
deposit. The facts of the case were that in 1859 Ignacia de Gorricho
delivered P3,000 to Felix Pardo de Tavera. The agreement between them
read as follows (translation):
Received of Señorita Ignacia de Gorricho the sum of 3,000 pesos, gold
(3,000 pesos), as a deposit payable on two months' notice in advance, with
interest at 6 percent per annum with a hypothecation of the goods now
owned by me or which may be owned hereafter, as security of the payment.
In witness whereof I sign in Binondo, January 31, 1859.
FELIX PARDO DE TAVERA
After the death of both parties, Gavieres, as plaintiff and successor in
interest of the deceased Ignacia de Gorricho, brought the action against
Trinidad H. Pardo de Tavera, the successor in interest of the deceased Felix
Pardo de Tavera, for the collection of the sum of P1,423.75, the remaining
portion of the 3,000 pesos. The plaintiff Gavieres alleged that the money
was delivered to Felix Pardo de Tavera as a deposit, but the defendant
insisted that the agreement above quoted was not a contract of deposit but
one of loan. This court said:
Although in the document in question a deposit is spoken of, nevertheless
from an examination of the entire document it clearly appears that the
contract was a loan and that such was the intention of the parties. It is
unnecessary to recur to the cannons of interpretation to arrive at this
conclusion. The obligation of the depository to pay interest at the rate of 6
per cent to the depositor suffices to cause the obligation to be considered as
a loan and makes it likewise evident that it was the intention of the parties
that the depository should have the right to make use of the amount
deposited, since it was stipulated that the amount could be collected after
notice of two months in advance. Such being the case, the contract lost the
character of a deposit and acquired that of a loan. (Art. 1768, Civil Code.)
In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through
Justice Torres said:
Authority from the court having been previously obtained, the complaint was
amended on the 10th of January, 1907; it was then alleged, that on the 26th
of May, 1897, the defendants executed and subscribed a document in favor
of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the
sum of two thousand six hundred and eighty-six pesos and fifty-eight cents
of pesos fuertes, which we will return to the said gentleman, jointly and
severally on the 20th of January, 1898. — Jaro, 26th of May 1879. —
Signed: JOSE LIM. — Signed: CEFERINO DOMINGO LIM.
That, when the obligation became due, the defendants begged the plaintiff
for an extension of time for the payment thereof binding themselves to pay
interest at the rate of 15 per cent on the amount of their indebtedness, to
which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid
on account of interest due the sum of 1,000 pesos, with the exception of
which they had not paid any other sum on account of either capital or
interest, notwithstanding the requests made by the plaintiff, who had thereby
been subjected to loss and damages.
xxx xxx xxx
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which they
were jointly and severally obliged to return on a certain date fixed in the
document; but that, nevertheless, when the document appearing as Exhibit
2, written in the Visayan dialect and followed by a translation into Spanish
was executed, it was acknowledged, at the date thereof, the 15th of
November, 1902 that the amount deposited had not yet been returned to the
creditor, whereby he was subjected to losses and damages amounting to
830 pesos since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum from the aforesaid date of
January 20, and that the 1,000 pesos paid to the depositor on the 15th of
May, 1900, according to the receipt issued by him to the debtors, would be
included, and that the said rate of interest would obtain until the debtors
paid the creditor the said amount in full. In this second document the
contract between the parties, which is a real loan of money with interest,
appears perfectly defined, notwithstanding the fact that in the original
document executed by the debtors on the 26th of May, 1897, it is called a
deposit; so that when they bound themselves jointly and severally to refund
the sum of 2,686.58 pesos to the depositor, Javellana, they did not engage
to return the same coins received and of which the amount deposited
consisted, and they could have accomplished the return agreed upon by the
delivery of a sum equal to the one received by them. For this reason it must
be understood that the debtors were lawfully authorized to make use of the
amount deposited, which they have done, as subsequently shown when
asking for an extension of the time for the return thereof, inasmuch as,
acknowledging that they have subjected the lender, their creditor, to losses
and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that
they received apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund should be
made. Such conduct on the part of the debtors is unquestionable evidence
that the transaction entered in to between the interested parties was not a
deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing deposited without the express
permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that —
"When the depository has permission to make use of the thing deposited,
the contract loses the character of a deposit and becomes a loan or
bailment."
"The permission not be presumed, and its existence must be proven."
xxx xxx xxx
Moreover, for the reasons above set forth it may, as a matter of course, be
inferred that there was no renewal of the contract of deposit converted into
a loan, because, as has already been stated, the defendants received said
amount by virtue of a real loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.lawphil.net
The two cases quoted are sufficient to show that the ten thousand pesos
delivered by the appellee to Mariano Velasco & Co. cannot de regarded as
a technical deposit. But the appellee argues that it is at least an "irregular
deposit." This argument is, we think, sufficiently answered in the case of
Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states
that there are three points of difference between a loan and an irregular
deposit. The first difference which he points out consists in the fact that in
an irregular deposit the only benefit is that which accrues to the depositor,
while in a loan the essential cause for the transaction is the necessity of the
borrower. The contract in question does not fulfill this requirement of an
irregular deposit. It is very apparent that it was not for the sole benefit of
Rogers. It, like any other loan of money, was for the benefit of both parties.
The benefit which Smith, Bell & Co. received was the use of the money; the
benefit which Rogers received was the interest on his money. In the letter in
which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the
reduction of the interest, they said: "We call your attention to this matter in
order that you may if you think best employ your money in some other
place."
Nor does the contract in question fulfill the third requisite indicated by
Manresa, which is, that in an irregular deposit, the depositor can demand
the return of the article at any time, while a lender is bound by the provisions
of the contract and cannot seek restitution until the time for payment, as
provided in the contract, has arisen. It is apparent from the terms of this
documents that the plaintiff could not demand his money at any time. He
was bound to give notice of his desire for its return and then to wait for six
months before he could insist upon payment.
In the present case the transaction in question was clearly not for the sole
benefit of the Compania Agricola de Ultramar; it was evidently for the benefit
of both parties. Neither could the alleged depositor demand payment until
the expiration of the term of three months.
For the reasons stated, the appealed judgment is reversed, and we hold
that the transaction in question must be regarded as a loan, without
preference. Without costs. So ordered.
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS vs. THE CITY FISCAL OF MANILA, HON. JOSE B.
FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT
DAVID, G.R. No. L-60033 April 4, 1984
FACTS:
Clemente David invested with the Nation Savings and Loan Association,
Inc. (NSLA) from March 20, 1979 to march 1981the following:
o Nine deposits with a sum total of P1,145,546.20;
o Joint Savings account with his sister, Denise Kuhne, P13,531.94;
o Time deposit, US$10,000.00;
o US$15,000.00 under a receipt and guarantee of payment;
o US$50,000.00 under a receipt dated June 8, 1980 (jointly with Denise
Kuhne.)
However, On March 21, 1981, NSLA was placed under receivership by the
Central Bank. Hence, David filed claims for his investments and those of his
sister. On July 22, 1981, David received a report from the Central Bank that
only P305,821.92 of those investments were entered in the records of
NSLA. Thereafter, David demanded for the remaining balances of his
investments but Guingona Jr., who was then NSLA President, paid only
P200,000.00.
On December 23,1981, private respondent David filed an action charging
the directors and officers of NSLA with estafa for misappropriating the
balance of the investments, at the same time violating Central Bank Circular
No. 364 and related Central Bank regulations on foreign exchange
transactions;
The NSLA officers, Martin and Santos, filed a joint counter-affidavit in which
they stated the following:
Due to insufficiency of bank funds, David’s investments were treated as
special- accounts with interest above the legal rate, and was recorded in
separate confidential documents only a portion of which were to be reported
because David did not want the Australian government to tax his total
earnings (nor) to know his total investments; that all transactions with David
were recorded except the sum of US$15,000.00 which was a personal loan
of Santos;
David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar
account because NSLA did not have one;
that a draft of US$30,000.00 was placed in the name of one Paz Roces
because of a pending transaction with her;
Moreover, the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits;
After NSLA was placed under receivership, Martin executed a promissory
note in David's favor and caused the transfer to him of a nine and on behalf
(9 1/2) carat diamond ring with a net value of P510,000.00; And that the
liabilities of NSLA to David were civil in nature.
On the other hand, Guingona, Jr., filed a counter-affidavit alleging that he
had resigned as NSLA president in March 1978, or prior to those
transactions, but assumed thereafter a portion of the liabilities of NSLA as
per David’s insistence by binding himself to pay David the sums of
P668.307.01 and US$37,500.00 in stated installments through Promissory
Note dated June 17, 1981 secured with mortgages over two (2) parcels of
land in which it was provided that the mortgage over one (1) parcel shall be
cancelled upon payment of one-half of the obligation to David. Guingona, Jr.
further alleged that he paid P200,000.00 and tendered another P300,000.00
which David refused to accept. Hence, a Civil Case was filed by Guingona
to effect the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages.
At the inception of the preliminary investigation, The NSLO officers moved
to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated,
but was denied.
But, after the presentation of David's principal witness, petitioners filed the
instant petition because:
(a) the production of the Promisory Notes, Banker's Acceptance, Certificates
of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans.
(b) David's principal witness allegedly testified that the duplicate originals of
the aforesaid instruments of indebtedness were all on file with NSLA,
contrary to David's claim that some of his investments were not record.
ISSUE: Whether or not the transactions between David and NSLA were
simple loans which are civil in nature, and not estafa.
RULING:
There is merit in the contention of the petitioners that their liability is civil in
nature and therefore, public respondents have no jurisdiction over the
charge of estafa. It must be pointed out that when private respondent David
invested his money with the aforesaid bank, the contract that was perfected
was a contract of simple loan or mutuum and not a contract of deposit.
Thus, Article 1980 of the New Civil Code provides that: Article 1980. Fixed,
savings, and current deposits of-money in banks and similar institutions
shall be governed by the provisions concerning simple loan.
This Court also declared in the recent case of Serrano vs. Central Bank of
the Philippines (96 SCRA 102 [1980]) that: Bank deposits are in the nature
of irregular deposits. They are really 'loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or current are to be treated
as loans and are to be covered by the law on loans (Art. 1980 Civil Code
Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits,
are loans to a bank because it can use the same. The petitioner here in
making time deposits that earn interests will respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor.
The respondent Bank was in turn a debtor of petitioner. Failure of the
respondent Bank to honor the time deposit is failure to pay its obligation as
a debtor and not a breach of trust arising from a depositary's failure to return
the subject matter of the deposit.
Hence, the relationship between the private respondent and the NSLA is
that of creditor and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection of the contract
and it can make use of the amount deposited for its banking operations,
such as to pay interests on deposits and to pay withdrawals. While the Bank
has the obligation to return the amount deposited, it has, however, no
obligation to return or deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited will not constitute estafa
through misappropriation punishable under Article 315, par. l(b) of the
Revised Penal Code, but it will only give rise to civil liability over which the
public respondents have no- jurisdiction.
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any
incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners
Guingona and Martin assumed the obligation of the bank to private
respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it
may however, prevent the rise of criminal liability as long as it occurs prior to
the filing of the criminal information in court. In the case at bar, there is no
dispute that petitioners Guingona and Martin executed a promissory note on
June 17, 1981 assuming the obligation of the bank to private respondent
David; while the criminal complaint for estafa was filed on December 23,
1981 with the Office of the City Fiscal. Hence, it is clear that novation
occurred long before the filing of the criminal complaint with the Office of the
City Fiscal. Consequently, as aforestated, any incipient criminal liability
would be avoided but there will still be a civil liability on the part of
petitioners Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of CB
Circular No. 364 and other related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the amount of
US$75,000.00 without authority from the Central Bank. They contend
however, that the US dollars intended by respondent David for deposit were
all converted into Philippine currency before acceptance and deposit into
Nation Savings and Loan Association.
In conclusion, considering that the liability of the petitioners is purely civil in
nature and that there is no clear showing that they engaged in foreign
exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work
great injustice to petitioners and would render meaningless the proper
administration of justice.
This is a petition for prohibition and injunction with a prayer for the
immediate issuance of restraining order and/or writ of preliminary injunction
filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on
the same date, a temporary restraining order was duly issued ordering the
respondents, their officers, agents, representatives and/or person or
persons acting upon their (respondents') orders or in their place or stead to
refrain from proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On
January 24, 1983, private respondent Clement David filed a motion to lift
restraining order which was denied in the resolution of this Court dated May
18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit
public respondents from proceeding with the preliminary investigation of I.S.
No. 81-31938, in which petitioners were charged by private respondent
Clement David, with estafa and violation of Central Bank Circular No. 364
and related regulations regarding foreign exchange transactions principally,
on the ground of lack of jurisdiction in that the allegations of the charged, as
well as the testimony of private respondent's principal witness and the
evidence through said witness, showed that petitioners' obligation is civil in
nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by
the Solicitor General in its Comment dated June 28,1982, as follows:têñ.
£îhqwâ£
On December 23,1981, private respondent David filed I.S. No. 81-31938 in
the Office of the City Fiscal of Manila, which case was assigned to
respondent Lota for preliminary investigation (Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan
Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet,
Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and
one John Doe) with estafa and violation of Central Bank Circular No. 364
and related Central Bank regulations on foreign exchange transactions,
allegedly committed as follows (Petition, Annex "A"):têñ.£îhqwâ£
"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments by
Robert Marshall an Australian national who was allegedly a close associate
of petitioner Guingona Jr., then NSLA President, petitioner Martin, then
NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA
General Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David received a
report from the Central Bank that only P305,821.92 of those investments
were entered in the records of NSLA; that, therefore, the respondents in I.S.
No. 81-31938 misappropriated the balance of the investments, at the same
time violating Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after demands, petitioner
Guingona Jr. paid only P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex'
B') in which they stated the following.têñ.£îhqwâ£
"That Martin became President of NSLA in March 1978 (after the
resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that because
NSLA was urgently in need of funds and at David's insistence, his
investments were treated as special- accounts with interest above the legal
rate, an recorded in separate confidential documents only a portion of which
were to be reported because he did not want the Australian government to
tax his total earnings (nor) to know his total investments; that all
transactions with David were recorded except the sum of US$15,000.00
which was a personal loan of Santos; that David's check for US$50,000.00
was cleared through Guingona, Jr.'s dollar account because NSLA did not
have one, that a draft of US$30,000.00 was placed in the name of one Paz
Roces because of a pending transaction with her; that the Philippine
Deposit Insurance Corporation had already reimbursed David within the
legal limits; that majority of the stockholders of NSLA had filed Special
Proceedings No. 82-1695 in the Court of First Instance to contest its
(NSLA's) closure; that after NSLA was placed under receivership, Martin
executed a promissory note in David's favor and caused the transfer to him
of a nine and on behalf (9 1/2) carat diamond ring with a net value of
P510,000.00; and, that the liabilities of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated
the following:têñ.£îhqwâ£
"That he had no hand whatsoever in the transactions between David and
NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he placed
his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona,
Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured
payment of those amounts with second mortgages over two (2) parcels of
land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in
which it was provided that the mortgage over one (1) parcel shall be
cancelled upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which
David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-
33865 in the Court of First Instance of Rizal at Quezon City, to effect the
release of the mortgage over one (1) of the two parcels of land conveyed to
David under second mortgages."
At the inception of the preliminary investigation before respondent Lota,
petitioners moved to dismiss the charges against them for lack of jurisdiction
because David's claims allegedly comprised a purely civil obligation which
was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the
instant petition because: (a) the production of the Promisory Notes,
Banker's Acceptance, Certificates of Time Deposits and Savings Account
allegedly showed that the transactions between David and NSLA were
simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal
witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative
remedies because to do so would be futile (Petition, p. 9) [pp. 153-157,
rec.].
As correctly pointed out by the Solicitor General, the sole issue for
resolution is whether public respondents acted without jurisdiction when
they investigated the charges (estafa and violation of CB Circular No. 364
and related regulations regarding foreign exchange transactions) subject
matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in
nature and therefore, public respondents have no jurisdiction over the
charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the
Office of the City Fiscal of Manila by private respondent David against
petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos,
together with one Robert Marshall and the other directors of the Nation
Savings and Loan Association, will show that from March 20, 1979 to
March, 1981, private respondent David, together with his sister, Denise
Kuhne, invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings
account deposits covered by passbook nos. 6-632 and 29-742, or a total of
P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent
David, together with his sister, made investments in the aforesaid bank in
the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed
under receivership on March 21, 1981, petitioners Guingona and Martin,
upon the request of private respondent David, assumed the obligation of the
bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an
indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of
indebtedness assumed appears to be bigger than the original claim
because of the added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to
divide the said indebtedness, and petitioner Guingona executed another
promissory note antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25,
rec.). The aforesaid promissory notes were executed as a result of deposits
made by Clement David and Denise Kuhne with the Nation Savings and
Loan Association.
Furthermore, the various pleadings and documents filed by private
respondent David, before this Court indisputably show that he has indeed
invested his money on time and savings deposits with the Nation Savings
and Loan Association.
It must be pointed out that when private respondent David invested his
money on nine. and savings deposits with the aforesaid bank, the contract
that was perfected was a contract of simple loan or mutuum and not a
contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in banks
and similar institutions shall be governed by the provisions concerning
simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119
[1975], We said:têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are hat true deposits. are considered simple
loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re
Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang
Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries
Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil.
443)."
This Court also declared in the recent case of Serrano vs. Central Bank of
the Philippines (96 SCRA 102 [1980]) that:têñ.£îhqwâ£
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank because it can use
the same. The petitioner here in making time deposits that earn interests will
respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time
deposit is failure to pay its obligation as a debtor and not a breach of trust
arising from a depositary's failure to return the subject matter of the deposit
(Emphasis supplied).
Hence, the relationship between the private respondent and the Nation
Savings and Loan Association is that of creditor and debtor; consequently,
the ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount deposited
for its banking operations, such as to pay interests on deposits and to pay
withdrawals. While the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation punishable
under Article 315, par. l(b) of the Revised Penal Code, but it will only give
rise to civil liability over which the public respondents have no- jurisdiction.
WE have already laid down the rule that:têñ.£îhqwâ£
In order that a person can be convicted under the above-quoted provision, it
must be proven that he has the obligation to deliver or return the some
money, goods or personal property that he received Petitioners had no such
obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly as stated
in criminal complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.têñ.£îhqwâ£
"Art. 1933. — By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time- and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall he paid in which case
the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned while
in simple loan, ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple loan
(mutuum), as contrasted to commodatum the borrower acquires ownership
of the money, goods or personal property borrowed Being the owner, the
borrower can dispose of the thing borrowed (Article 248, Civil Code) and his
act will not be considered misappropriation thereof' (Yam vs. Malik, 94
SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any
incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners
Guingona and Martin assumed the obligation of the bank to private
respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it
may however, prevent the rise of criminal liability as long as it occurs prior to
the filing of the criminal information in court. Thus, in Gonzales vs. Serrano (
25 SCRA 64, 69 [1968]) We held that:têñ.£îhqwâ£
As pointed out in People vs. Nery, novation prior to the filing of the criminal
information — as in the case at bar — may convert the relation between the
parties into an ordinary creditor-debtor relation, and place the complainant
in estoppel to insist on the original transaction or "cast doubt on the true
nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA
578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10
SCRA 244 [1964] ), declaring that:têñ.£îhqwâ£
The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the
original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against
the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz.
2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent the
rise of criminal habihty or to cast doubt on the true nature of the original
basic transaction, whether or not it was such that its breach would not give
rise to penal responsibility, as when money loaned is made to appear as a
deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil.
581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin
executed a promissory note on June 17, 1981 assuming the obligation of
the bank to private respondent David; while the criminal complaint for estafa
was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it
is clear that novation occurred long before the filing of the criminal complaint
with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be
avoided but there will still be a civil liability on the part of petitioners
Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of
Central Bank Circular No. 364 and other related regulations regarding
foreign exchange transactions by accepting foreign currency deposit in the
amount of US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent David for
deposit were all converted into Philippine currency before acceptance and
deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was
about to make a deposit of bank draft issued in his name in the amount of
US$50,000.00 with the Nation Savings and Loan Association, the same had
to be cleared first and converted into Philippine currency. Accordingly, the
bank draft was endorsed by respondent David to petitioner Guingona, who
in turn deposited it to his dollar account with the Security Bank and Trust
Company. Petitioner Guingona merely accommodated the request of the
Nation Savings and loan Association in order to clear the bank draft through
his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the same in
order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into
Philippine pesos before they were accepted and deposited in Nation
Savings and Loan Association, because the bank is presumed to have
followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in the
absence of a clear and convincing evidence to the contrary (see paragraphs
p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of
herein petitioners despite the fact that it was raised. in petitioners' reply filed
on May 7, 1982 to private respondent's comment and in the July 27, 1982
reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to
the conclusion that the US$75,000.00 were really converted into Philippine
currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case,
respondent David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in
nature and that there is no clear showing that they engaged in foreign
exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work
great injustice to petitioners and would render meaningless the proper
administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject
of prohibition and injunction, this court has recognized the resort to the
extraordinary writs of prohibition and injunction in extreme cases, thus:têñ.
£îhqwâ£
On the issue of whether a writ of injunction can restrain the proceedings in
Criminal Case No. 3140, the general rule is that "ordinarily, criminal
prosecution may not be blocked by court prohibition or injunction."
Exceptions, however, are allowed in the following instances:têñ.£îhqwâ£
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive
and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is
unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta,
Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25
SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622
[1966]), We held that:
The writs of certiorari and prohibition, as extraordinary legal remedies, are in
the ultimate analysis, intended to annul void proceedings; to prevent the
unlawful and oppressive exercise of legal authority and to provide for a fair
and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47
Phil. 385, We took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due time from the
order complained of, our action in the premises being based on the public
welfare policy the advancement of public policy. In Dimayuga vs. Fajardo,
43 Phil. 304, We also admitted a petition to restrain the prosecution of
certain chiropractors although, if convicted, they could have appealed. We
gave due course to their petition for the orderly administration of justice and
to avoid possible oppression by the strong arm of the law. And in Arevalo vs.
Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial
court's action admitting an amended information was sustained despite the
availability of appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE
TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE
PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.
CA Agro-Industrial vs CA
G.R. No. 90027 March 3, 1993
Facts
• Petitioner (through its President) purchased 2 parcels of land from
spouses Pugao for P350 K with a downpayment of P75 K.
• Per agreement, the land titles will be transferred upon full
payment and will be placed in a safety deposit box (SBDB) of any bank.
Moreover, the same could be withdrawn only upon the joint signatures of a
representative of the Petitioner and the Pugaos upon full payment of the
purchase price.
• Thereafter, Petitioner and spouses placed the titles in SDB of
Respondent Security Bank and signed a lease contract which substantially
states that the Bank will not assume liability for the contents of the SDB.
• Subsequently, 2 renter's keys were given to the renters — one to
the Petitioner and the other to the Pugaos. A guard key remained in the
possession of the Respondent Bank. The SDB can only be opened using
these 2 keys simultaneously.
• Afterwards, a certain Mrs. Ramos offered to buy from the
Petitioner the 2 lots that would yield a profit of P285K.
• Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. Thus, Petitioner
with the spouses went to Respondent Bank to retrieve the titles.
• However, when opened in the presence of the Bank's
representative, the SDB yielded no such certificates.
• Because of the delay in the reconstitution of the title, Mrs. Ramos
withdrew her earlier offer to purchase the lots; as a consequence, the
Petitioner allegedly failed to realize the expected profit of P285K.
• Hence, Petitioner filed a complaint for damages against
Respondent Bank.
• Lower courts ruled in favour of Respondent Bank. Thus, this
petition.
Issues:
1. Whether or not the disputed contract is an ordinary contract of
lease?
2. Whether or not the provisions of the cited contract are valid?
3. Whether or not Respondent Bank is liable for damages?
Ruling:
1. No. SC ruled that it is a special kind of deposit because:
• the full and absolute possession and control of the SDB was not
given to the joint renters — the Petitioner and the Pugaos.
• The guard key of the box remained with the Respondent Bank;
without this key, neither of the renters could open the box and vice versa.
• In this case, the said key had a duplicate which was made so that
both renters could have access to the box.
• Moreover, the renting out of the SDBs is not independent from,
but related to or in conjunction with, the principal function of a contract of
deposit the receiving in custody of funds, documents and other valuable
objects for safekeeping.
2. NO. SC opined that it is void.
• Generally, the Civil Code provides that the depositary
(Respondent Bank) would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the
agreement.
• In the absence of any stipulation, the diligence of a good father of
a family is to be observed.
• Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence
or delay would be void for being contrary to law and public policy (which is
present in the disputed contract)
• Said provisions are inconsistent with the Respondent Bank's
responsibility as a depositary under Section 72(a) of the General Banking
Act.
3. NO. SC ruled that:
• no competent proof was presented to show that Respondent
Bank was aware of the private agreement between the Petitioner and the
Pugaos that the Land titles were withdrawable from the SDB only upon
both parties' joint signatures,
• and that no evidence was submitted to reveal that the loss of the
certificates of title was due to the fraud or negligence of the Respondent
Bank.
Is the contractual relation between a commercial bank and another party in
a contract of rent of a safety deposit box with respect to its contents placed
by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the
spouses Ramon and Paula Pugao entered into an agreement whereby the
former purchased from the latter two (2) parcels of land for a consideration
of P350,625.00. Of this amount, P75,725.00 was paid as downpayment
while the balance was covered by three (3) postdated checks. Among the
terms and conditions of the agreement embodied in a Memorandum of True
and Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that
the owner's copies of the certificates of titles thereto, Transfer Certificates of
Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit
box of any bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the Pugaos upon full
payment of the purchase price. Petitioner, through Sergio Aguirre, and the
Pugaos then rented Safety Deposit Box No. 1448 of private respondent
Security Bank and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this purpose, both
signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:
13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith.1
After the execution of the contract, two (2) renter's keys were given to the
renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A
guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for
the renter's key, and can be opened only with the use of both keys.
Petitioner claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the
petitioner the two (2) lots at a price of P225.00 per square meter which, as
petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. In view thereof, Aguirre, accompanied
by the Pugaos, then proceeded to the respondent Bank on 4 October 1979
to open the safety deposit box and get the certificates of title. However,
when opened in the presence of the Bank's representative, the box yielded
no such certificates. Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the expected
profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint2 for damages against the respondent Bank with the Court of First
Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed
the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that the
petitioner has no cause of action because of paragraphs 13 and 14 of the
contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles
contained in the box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well as attorney's fees
in the amount of P20,000.00. Petitioner subsequently filed an answer to the
counterclaim.4
In due course, the trial court, now designated as Branch 161 of the Regional
Trial Court (RTC) of Pasig, Metro Manila, rendered a decision5 adverse to
the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff
to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as
attorney's fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for
the loss of the certificates of title. The court declared that the said provisions
are binding on the parties.
Its motion for reconsideration7 having been denied, petitioner appealed
from the adverse decision to the respondent Court of Appeals which
docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the
respondent Court to reverse the challenged decision because the trial court
erred in (a) absolving the respondent Bank from liability from the loss, (b)
not declaring as null and void, for being contrary to law, public order and
public policy, the provisions in the contract for lease of the safety deposit
box absolving the Bank from any liability for loss, (c) not concluding that in
this jurisdiction, as well as under American jurisprudence, the liability of the
Bank is settled and (d) awarding attorney's fees to the Bank and denying
the petitioner's prayer for nominal and exemplary damages and attorney's
fees.8
In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the
appealed decision principally on the theory that the contract (Exhibit "2")
executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were
given control over the safety deposit box and its contents while the Bank
retained no right to open the said box because it had neither the possession
nor control over it and its contents. As such, the contract is governed by
Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain, and for a period
which may be definite or indefinite. However, no lease for more than ninety-
nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the owner of the
property loses his control over the property leased during the period of the
contract — and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter when it
becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any
duty to maintain the contents of the box. The stipulation absolving the
defendant-appellee from liability is in accordance with the nature of the
contract of lease and cannot be regarded as contrary to law, public order
and public policy." 12 The appellate court was quick to add, however, that
under the contract of lease of the safety deposit box, respondent Bank is
not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is
forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:
8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent
Court's Resolution of 28 August 1989, 15 petitioner took this recourse under
Rule 45 of the Rules of Court and urges Us to review and set aside the
respondent Court's ruling. Petitioner avers that both the respondent Court
and the trial court (a) did not properly and legally apply the correct law in
this case, (b) acted with grave abuse of discretion or in excess of jurisdiction
amounting to lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of this
Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial
court's decision, the brief submitted to the respondent Court and the motion
to reconsider the latter's decision. In a nutshell, petitioner maintains that
regardless of nomenclature, the contract for the rent of the safety deposit
box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book
IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable
for the loss of the certificates of title pursuant to Article 1972 of the said
Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it,
when required, to the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases
a safe-deposit box or safe and the lessee takes possession of the box or
safe and places therein his securities or other valuables, the relation of
bailee and bail or is created between the parties to the transaction as to
such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall
know, the character or description of the property which is deposited in such
safe-deposit box or safe does not change that relation. That access to the
contents of the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be used in
connection with one retained by the lessor) does not operate to alter the
foregoing rule. The argument that there is not, in such a case, a delivery of
exclusive possession and control to the deposit company, and that therefore
the situation is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as possession
must be either in the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the company is,
by the nature of the contract, given absolute control of access to the
property, and the depositor cannot gain access thereto without the consent
and active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for
the rental of a bank safety deposit box in consideration of a fixed amount at
stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned
contract are contrary to law and public policy and should be declared null
and void. In support thereof, it cites Article 1306 of the Civil Code which
provides that parties to a contract may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to
the petition and required the parties to simultaneously submit their
respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the
safety deposit box is not an ordinary contract of lease as defined in Article
1643 of the Civil Code. However, We do not fully subscribe to its view that
the same is a contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit; 19 the contract in the case at bar is
a special kind of deposit. It cannot be characterized as an ordinary contract
of lease under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box.
On the other hand, the respondent Bank could not likewise open the box
without the renter's key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not
apply. Neither could Article 1975, also relied upon by the respondent Court,
be invoked as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of certificates,
bonds, securities or instruments which earn interest if such documents are
kept in a rented safety deposit box. It is clear that the depositary cannot
open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the
petitioner that under the latter, the prevailing rule is that the relation between
a bank renting out safe-deposit boxes and its customer with respect to the
contents of the box is that of a bail or and bailee, the bailment being for hire
and mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in
question might be more properly characterized as that of landlord and
tenant, or lessor and lessee. It has also been suggested that it should be
characterized as that of licensor and licensee. The relation between a bank,
safe-deposit company, or storage company, and the renter of a safe-deposit
box therein, is often described as contractual, express or implied, oral or
written, in whole or in part. But there is apparently no jurisdiction in which
any rule other than that applicable to bailments governs questions of the
liability and rights of the parties in respect of loss of the contents of safe-
deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out
safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in
the United States has been adopted. Section 72 of the General Banking Act
23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in
this Act, banking institutions other than building and loan associations may
perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section as depositories or as agents. . . . 24 (emphasis
supplied)
Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into orally or in
writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto
may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title
I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 26 In the absence of any
stipulation prescribing the degree of diligence required, that of a good father
of a family is to be observed. 27 Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to
law and public policy. In the instant case, petitioner maintains that conditions
13 and 14 of the questioned contract of lease of the safety deposit box,
which read:
13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent
with the respondent Bank's responsibility as a depositary under Section
72(a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be admitted to
any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents of the box since in fact,
the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to the
said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a
safe-deposit company, the parties, since the relation is a contractual one,
may by special contract define their respective duties or provide for
increasing or limiting the liability of the deposit company, provided such
contract is not in violation of law or public policy. It must clearly appear that
there actually was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of
doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents
by its own fraud or negligence or that of its agents or servants, and if a
provision of the contract may be construed as an attempt to do so, it will be
held ineffective for the purpose. Although it has been held that the lessor of
a safe-deposit box cannot limit its liability for loss of the contents thereof
through its own negligence, the view has been taken that such a lessor may
limits its liability to some extent by agreement or stipulation. 30 (citations
omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at,
that is, that the petition should be dismissed, but on grounds quite different
from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court
of Appeals, be based on or proceed from a characterization of the impugned
contract as a contract of lease, but rather on the fact that no competent
proof was presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that the
certificates of title were withdrawable from the safety deposit box only upon
both parties' joint signatures, and that no evidence was submitted to reveal
that the loss of the certificates of title was due to the fraud or negligence of
the respondent Bank. This in turn flows from this Court's determination that
the contract involved was one of deposit. Since both the petitioner and the
Pugaos agreed that each should have one (1) renter's key, it was obvious
that either of them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the
complaint and no bad faith on its part had been established, the trial court
erred in condemning the petitioner to pay the respondent Bank attorney's
fees. To this extent, the Decision (dispositive portion) of public respondent
Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the
award for attorney's fees from the 4 July 1989 Decision of the respondent
Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between
the parties in a contract of lease of safety deposit boxes, the dispositive
portion of the said Decision is hereby AFFIRMED and the instant Petition for
Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 102970 May 13, 1993LUZAN SIA,vs.COURT OF APPEALS and
SECURITY BANK and TRUST COMPANY,respondents.
FACTS: The plaintiff rented on March 22, 1985 the Safety Deposit Box No.
54 of the defendant bank at its Binondo Branch wherein he placed his
collection of stamps. The said safety deposit box leased by the plaintiff was
at the bottom or at the lowest level of the safety deposit boxes of the
defendant bank .During the floods that took place, floodwater entered into
the defendant bank's premises, seeped into the safety deposit box leased
by the plaintiff and caused, according to the plaintiff, damage to his stamps
collection. The defendant bank rejected the plaintiff's claim for
compensation for his damaged stamps collection, so, the plaintiff instituted
an action for damages against the defendant bank.
ISSUE: Whether it was a grave error or an abuse of discretion on the part of
the respondent court when it ruled that respondent SBTC did not fail to
exercise the required diligence in maintaining the safety deposit box
RULING: Note that the primary function is still found within the parameters
of a contract of deposit,i.e., the receiving in custody of funds, documents
and other valuable objects for safekeeping. The renting out of the safety
deposit boxes is not independent from, but related to or in conjunction with,
this principal function. A contract of deposit may be entered into orally or in
writing (Art. 1969, Civil Code] and, pursuant to Article 1306of the Civil Code,
the parties thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. Accordingly, the
depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement [Art.
1170,id.]. In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed
[Art.1173,id.]. Hence, any stipulation exempting the depositary from any
liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public
policy. Inthe instant case, petitioner maintains that conditions 13 and l4 of
the questioned contract of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the safe and it has neither
the possession nor control of the same.
"14. The bank has no interest whatsoever in said contents, except as herein
expressly provided, and it assumes absolutely no liability in connection
therewith."
are void as they are contrary to law and public policy.
Public respondent further postulates that SBTC cannot be held responsible
for the destruction or loss of the stamp collection because the flooding was
a fortuitous event and there was no showing of SBTC's participation in the
aggravation of the loss or injury. Both the law and authority cited are clear
enough and require no further elucidation. Unfortunately, however, the
public respondent failed to consider that in the instant case, as correctly
held by the trial court, SBTC was guilty of negligence. thus comes to the
succor of the petitioner. The destruction or loss of the stamp collection
which was, in the language of the trial court, the "product of 27 years of
patience and diligence" caused the petitioner pecuniary loss; hence, he
must be compensated therefor.
The Decision of public respondent Court of Appeals in CA-G.R. CV No.
26737, promulgated on 21 August 1991,1 reversing and setting aside the
Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial
Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs.
SECURITY BANK and TRUST CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for damages arising out of the
destruction or loss of the stamp collection of the plaintiff (petitioner herein)
contained in Safety Deposit Box No. 54 which had been rented from the
defendant pursuant to a contract denominated as a Lease Agreement. 3
Judgment therein was rendered in favor of the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiff and against the defendant, Security Bank & Trust Company,
ordering the defendant bank to pay the plaintiff the sum of —
a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as
actual damages;
b) One Hundred Thousand Pesos (P100,000.00), Philippine
Currency, as moral damages; and
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as
attorney's fees and legal expenses.
The counterclaim set up by the defendant are hereby dismissed for lack of
merit.
No costs.
SO ORDERED.4
The antecedent facts of the present controversy are summarized by the
public respondent in its challenged decision as follows:
The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the
defendant bank at its Binondo Branch located at the Fookien Times
Building, Soler St., Binondo, Manila wherein he placed his collection of
stamps. The said safety deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit boxes of the defendant
bank at its aforesaid Binondo Branch.
During the floods that took place in 1985 and 1986, floodwater entered into
the defendant bank's premises, seeped into the safety deposit box leased
by the plaintiff and caused, according to the plaintiff, damage to his stamps
collection. The defendant bank rejected the plaintiff's claim for
compensation for his damaged stamps collection, so, the plaintiff instituted
an action for damages against the defendant bank.
The defendant bank denied liability for the damaged stamps collection of
the plaintiff on the basis of the "Rules and Regulations Governing the Lease
of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs 9 and
13, which reads (sic):
"9. The liability of the Bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the safe by any person
other than the Renter, his authorized agent or legal representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents of the safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith."
The defendant bank also contended that its contract with the plaintiff over
safety deposit box No. 54 was one of lease and not of deposit and,
therefore, governed by the lease agreement (Exhs. "A", "L") which should
be the applicable law; that the destruction of the plaintiff's stamps collection
was due to a calamity beyond obligation on its part to notify the plaintiff
about the floodwaters that inundated its premises at Binondo branch which
allegedly seeped into the safety deposit box leased to the plaintiff.
The trial court then directed that an ocular inspection on (sic) the contents of
the safety deposit box be conducted, which was done on December 8, 1988
by its clerk of court in the presence of the parties and their counsels. A
report thereon was then submitted on December 12, 1988 (Records, p. 98-
A) and confirmed in open court by both parties thru counsel during the
hearing on the same date (Ibid., p. 102) stating:
"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia
and the Acting Branch Manager Jimmy B. Ynion in the presence of the
undersigned, plaintiff's and defendant's counsel. Said Safety Box when
opened contains two albums of different sizes and thickness, length and
width and a tin box with printed word 'Tai Ping Shiang Roast Pork in pieces
with Chinese designs and character."
Condition of the above-stated Items —
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in length, 8 inches in
width and 3/4 in thick. The leaves of the album are attached to every page
and cannot be lifted without destroying it, hence the stamps contained
therein are no longer visible.
2. The second album measure 12 1/2 inches in length, 9 3/4 in width
1 inch thick. Some of its pages can still be lifted. The stamps therein can still
be distinguished but beyond restoration. Others have lost its original form.
3. The tin box is rusty inside. It contains an album with several
pieces of papers stuck up to the cover of the box. The condition of the
album is the second abovementioned album."5
The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as
SBTC, appealed the trial court's decision to the public respondent Court of
Appeals. The appeal was docketed as CA-G.R. CV No. 26737.
In urging the public respondent to reverse the decision of the trial court,
SBTC contended that the latter erred in (a) holding that the lease
agreement is a contract of adhesion; (b) finding that the defendant had
failed to exercise the required diligence expected of a bank in maintaining
the safety deposit box; (c) awarding to the plaintiff actual damages in the
amount of P20,000.00, moral damages in the amount of P100,000.00 and
attorney's fees and legal expenses in the amount of P5,000.00; and (d)
dismissing the counterclaim.
On 21 August 1991, the respondent promulgated its decision the dispositive
portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED and
instead the appellee's complaint is hereby DISMISSED. The appellant
bank's counterclaim is likewise DISMISSED. No costs.6
In reversing the trial court's decision and absolving SBTC from liability, the
public respondent found and ruled that:
a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" )
constitutes the terms and conditions of the contract of lease which the
appellee (now petitioner) had voluntarily and knowingly executed with
SBTC;
b) the contract entered into by the parties regarding Safe Deposit
Box No. 54 was not a contract of deposit wherein the bank became a
depositary of the subject stamp collection; hence, as contended by SBTC,
the provisions of Book IV, Title XII of the Civil Code on deposits do not
apply;
c) The following provisions of the questioned lease agreement of the
safety deposit box limiting SBTC's liability:
9. The liability of the bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the Safe by any person
other than the Renter, his authorized agent or legal representative.
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith.
are valid since said stipulations are not contrary to law, morals, good
customs, public order or public policy; and
d) there is no concrete evidence to show that SBTC failed to
exercise the required diligence in maintaining the safety deposit box; what
was proven was that the floods of 1985 and 1986, which were beyond the
control of SBTC, caused the damage to the stamp collection; said floods
were fortuitous events which SBTC should not be held liable for since it was
not shown to have participated in the aggravation of the damage to the
stamp collection; on the contrary, it offered its services to secure the
assistance of an expert in order to save most of the stamps, but the
appellee refused; appellee must then bear the lose under the principle of
"res perit domino."
Unsuccessful in his bid to have the above decision reconsidered by the
public respondent, 7 petitioner filed the instant petition wherein he contends
that:
I rule in American jurisprudence — that the relation between a bank renting
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE
PART OF THE RESPONDENT COURT WHEN IT RULED THAT
RESPONDENT SBTC DID NOT FAIL TO EXERCISE THE REQUIRED
DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF THE
PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST
(sic) PROVING THE CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING
PRIVATE RESPONDENT FROM ANY LIABILITY WHATSOEVER BY
REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE
AGREEMENT (EXHS. "A" AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING
THE AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL
DAMAGES, INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN
FAVOR OF THE PETITIONER.8
We subsequently gave due course the petition and required both parties to
submit their respective memoranda, which they complied with.9
Petitioner insists that the trial court correctly ruled that SBTC had failed "to
exercise the required diligence expected of a bank maintaining such safety
deposit box . . . in the light of the environmental circumstance of said safety
deposit box after the floods of 1985 and 1986." He argues that such a
conclusion is supported by the evidence on record, to wit: SBTC was fully
cognizant of the exact location of the safety deposit box in question; it knew
that the premises were inundated by floodwaters in 1985 and 1986 and
considering that the bank is guarded twenty-four (24) hours a day , it is safe
to conclude that it was also aware of the inundation of the premises where
the safety deposit box was located; despite such knowledge, however, it
never bothered to inform the petitioner of the flooding or take any
appropriate measures to insure the safety and good maintenance of the
safety deposit box in question.
SBTC does not squarely dispute these facts; rather, it relies on the rule that
findings of facts of the Court of Appeals, when supported by substantial
exidence, are not reviewable on appeal by certiorari. 10
The foregoing rule is, of course, subject to certain exceptions such as when
there exists a disparity between the factual findings and conclusions of the
Court of Appeals and the trial court. 11 Such a disparity obtains in the
present case.
As We see it, SBTC's theory, which was upheld by the public respondent, is
that the "Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A
and "1") is just that — a contract of lease — and not a contract of deposit,
and that paragraphs 9 and 13 thereof, which expressly limit the bank's
liability as follows:
9. The liability of the bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the Safe by any person
other than the Renter, his autliorized agent or legal representative;
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith. 12
are valid and binding upon the parties. In the challenged decision, the public
respondent further avers that even without such a limitation of liability, SBTC
should still be absolved from any responsibility for the damage sustained by
the petitioner as it appears that such damage was occasioned by a
fortuitous event and that the respondent bank was free from any
participation in the aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently, this Court
finds the petition to be impressed with merit.
In the recent case CA Agro-Industrial Development Corp. vs. Court of
Appeals, 13 this Court explicitly rejected the contention that a contract for
the use of a safety deposit box is a contract of lease governed by Title VII,
Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a
contract of deposit to be strictly governed by the Civil Code provision on
deposit; 14 it is, as We declared, a special kind of deposit. The prevailing
out safe deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment for hire and mutual benefit 15
— has been adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions to rent out
safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in
the United States has been adopted. Section 72 of the General Banking Act
[R.A. 337, as amended] pertinently provides:
"Sec. 72. In addition to the operations specifically authorized elsewhere in
this Act, banking institutions other than building and loan associations may
perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section as depositories or as agents. . . ."(emphasis supplied)
Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into orally or in
writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil
Code, the parties thereto may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the
case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement [Art.
1170, id.]. In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed [Art.
1173, id.]. Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence
or delay would be void for being contrary to law and public policy. In the
instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the safe and it has
neither the possession nor control of the same.
"14. The bank has no interest whatsoever in said contents, except as
herein expressly provided, and it assumes absolutely no liability in
connection therewith."
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent
with the respondent Bank's responsibility as a depositary under Section 72
(a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be admitted to
any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it."
Furthermore condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents of the box since in fact,
the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to the
said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a customer of a
safe-deposit company, the parties, since the relation is a contractual one,
may by special contract define their respective duties or provide for
increasing or limiting the liability of the deposit company, provided such
contract is not in violation of law or public policy. It must clearly appear that
there actually was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of
doubtful meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud or
negligence or that, of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a safe-deposit
box cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limit its liability
to some extent by agreement or stipulation ."[10 AM JUR 2d., 466].
(citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease
of Safety Deposit Box in CA Agro-Industrial Development Corp. are
strikingly similar to condition No. 13 in the instant case. On the other hand,
both condition No. 8 in CA Agro-Industrial Development Corp. and condition
No. 9 in the present case limit the scope of the exercise of due diligence by
the banks involved to merely seeing to it that only the renter, his authorized
agent or his legal representative should open or have access to the safety
deposit box. In short, in all other situations, it would seem that SBTC is not
bound to exercise diligence of any kind at all. Assayed in the light of Our
aforementioned pronouncements in CA Agro-lndustrial Development Corp.,
it is not at all difficult to conclude that both conditions No. 9 and No. 13 of
the "Lease Agreement" covering the safety deposit box in question (Exhibits
"A" and "1") must be stricken down for being contrary to law and public
policy as they are meant to exempt SBTC from any liability for damage, loss
or destruction of the contents of the safety deposit box which may arise from
its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot
take refuge under the said conditions.
Public respondent further postulates that SBTC cannot be held responsible
for the destruction or loss of the stamp collection because the flooding was
a fortuitous event and there was no showing of SBTC's participation in the
aggravation of the loss or injury. It states:
Article 1174 of the Civil Code provides:
"Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.'
In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada
Española 17 says: "In a legal sense and, consequently, also in relation to
contracts, a "caso fortuito" prevents (sic) 18 the following essential
characteristics: (1) the cause of the unforeseen ands unexpected
occurrence, or of the failure of the debtor to comply with his obligation, must
be independent of the human will; (2) it must be impossible to foresee the
event which constitutes the "caso fortuito," or if it can be foreseen, it must
be impossible to avoid; (3) the occurrence must be such as to render it
impossible for one debtor to fulfill his obligation in a normal manner; and (4)
the obligor must be free from any participation in the aggravation of the
injury resulting to the creditor." (cited in Servando vs. Phil., Steam
Navigation Co., supra). 19
Here, the unforeseen or unexpected inundating floods were independent of
the will of the appellant bank and the latter was not shown to have
participated in aggravating damage (sic) to the stamps collection of the
appellee. In fact, the appellant bank offered its services to secure the
assistance of an expert to save most of the then good stamps but the
appelle refused and let (sic) these recoverable stamps inside the safety
deposit box until they were ruined. 20
Both the law and authority cited are clear enough and require no further
elucidation. Unfortunately, however, the public respondent failed to consider
that in the instant case, as correctly held by the trial court, SBTC was guilty
of negligence. The facts constituting negligence are enumerated in the
petition and have been summarized in this ponencia. SBTC's negligence
aggravated the injury or damage to the stamp collection. SBTC was aware
of the floods of 1985 and 1986; it also knew that the floodwaters inundated
the room where Safe Deposit Box No. 54 was located. In view thereof, it
should have lost no time in notifying the petitioner in order that the box
could have been opened to retrieve the stamps, thus saving the same from
further deterioration and loss. In this respect, it failed to exercise the
reasonable care and prudence expected of a good father of a family,
thereby becoming a party to the aggravation of the injury or loss.
Accordingly, the aforementioned fourth characteristic of a fortuitous event is
absent Article 1170 of the Civil Code, which reads:
Those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages,
thus comes to the succor of the petitioner. The destruction or loss of the
stamp collection which was, in the language of the trial court, the "product of
27 years of patience and diligence" 21 caused the petitioner pecuniary loss;
hence, he must be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's award of
moral damages. Since the relationship between the petitioner and SBTC is
based on a contract, either of them may be held liable for moral damages
for breach thereof only if said party had acted fraudulently or in bad faith. 22
There is here no proof of fraud or bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The challenged
Decision and Resolution of the public respondent Court of Appeals of 21
August 1991 and 21 November 1991, respectively, in CA-G.R. CV No.
26737, are hereby SET ASIDE and the Decision of 19 February 1990 of
Branch 47 of the Regional Trial Court of Manila in Civil Case No. 87-42601
is hereby REINSTATED in full, except as to the award of moral damages
which is hereby set aside.
Costs against the private respondent.
SO ORDERED.
BANK OF THE PHILIPPINE ISLANDS VS. COURT OF APPEALS
232 SCRA302
G.R. NO. 104612
MAY 10, 1994
FACTS: Private respondents Eastern Plywood Corporation and Benigno Lim
as officer of the corporation, had an “AND/OR” joint account with
Commercial Bank and Trust Co (CBTC), the predecessor-in-interest of
petitioner Bank of the Philippine Islands. Lim withdraw funds from such
account and used it to open a joint checking account (an “AND” account)
with Mariano Velasco. When Velasco died in 1977, said joint checking
account had P662,522.87. By virtue of an Indemnity Undertaking executed
by Lim and as President and General Manager of Eastern withdrew one half
of this amount and deposited it to one of the accounts of Eastern with
CBTC.
Eastern obtained a loan of P73,000.00 from CBTC which was not secured.
However, Eastern and CBTC executed a Holdout Agreement providing that
the loan was secured by the “Holdout of the C/A No. 2310-001-42” referring
to the joint checking account of Velasco and Lim.
Meanwhile, a judicial settlement of the estate of Velasco ordered the
withdrawal of the balance of the account of Velasco and Lim.
Asserting that the Holdout Agreement provides for the security of the loan
obtained by Eastern and that it is the duty of CBTC to debit the account of
respondents to set off the amount of P73,000 covered by the promissory
note, BPI filed the instant petition for recovery. Private respondents Eastern
and Lim, however, assert that the amount deposited in the joint account of
Velasco and Lim came from Eastern and therefore rightfully belong to
Eastern and/or Lim. Since the Holdout Agreement covers the loan of
P73,000, then petitioner can only hold that amount against the joint
checking account and must return the rest.
ISSUE: Whether BPI can demand the payment of the loan despite the
existence of the Holdout Agreement and whether BPI is still liable to the
private respondents on the account subject of the withdrawal by the heirs of
Velasco.
RULING: Yes, for both issues. Regarding the first, the Holdout Agreement
conferred on CBTC the power, not the duty, to set off the loan from the
account subject of the Agreement. When BPI demanded payment of the
loan from Eastern, it exercised its right to collect payment based on the
promissory note, and disregarded its option under the Holdout Agreement.
Therefore, its demand was in the correct order.
Regarding the second issue, BPI was the debtor and Eastern was the
creditor with respect to the joint checking account. Therefore, BPI was
obliged to return the amount of the said account only to the creditor. When it
allowed the withdrawal of the balance of the account by the heirs of
Velasco, it made the payment to the wrong party. The law provides that
payment made by the debtor to the wrong party does not extinguish its
obligation to the creditor who is without fault or negligence. Therefore, BPI
was still liable to the true creditor, Eastern.
The petitioner urges us to review and set aside the amended Decision1 of 6
March 1992 of respondent Court of Appeals in CA- G.R. CV No. 25739
which modified the Decision of 15 November 1990 of Branch 19 of the
Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled
Bank of the Philippine Islands (successor-in-interest of Commercial Bank
and Trust Company) versus Eastern Plywood Corporation and Benigno D.
Lim. The Court of Appeals had affirmed the dismissal of the complaint but
had granted the defendants' counterclaim for P331,261.44 which represents
the outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following
facts were duly established:
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least
one joint bank account ("and/or" account) with the Commercial Bank and
Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the
Philippine Islands (BPI). Sometime in March 1975, a joint checking account
("and" account) with Lim in the amount of P120,000.00 was opened by
Mariano Velasco with funds withdrawn from the account of Eastern and/or
Lim. Various amounts were later deposited or withdrawn from the joint
account of Velasco and Lim. The money therein was placed in the money
market.
Velasco died on 7 April 1977. At the time of his death, the outstanding
balance of the account stood at P662,522.87. On 5 May 1977, by virtue of
an Indemnity Undertaking executed by Lim for himself and as President and
General Manager of Eastern, 2 one-half of this amount was provisionally
released and transferred to one of the bank accounts of Eastern with CBTC.
3
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from
CBTC as "Additional Working Capital," evidenced by the "Disclosure
Statement on Loan/Credit Transaction" (Disclosure Statement) signed by
CBTC through its branch manager, Ceferino Jimenez, and Eastern, through
Lim, as its President and General Manager. 4 The loan was payable on
demand with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note
for P73,000.00 payable on demand to the order of CBTC with interest at
14% per annum. 5 The note was signed by Lim both in his own capacity and
as President and General Manager of Eastern. No reference to any security
for the loan appears on the note. In the Disclosure Statement, the box with
the printed word "UNSECURED" was marked with "X" — meaning
unsecured, while the line with the words "this loan is wholly/partly secured
by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No.
2310-001-42," which refers to the joint account of Velasco and Lim with a
balance of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled
"Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated
that "as security for the Loan [Lim and Eastern] have offered [CBTC] and
the latter accepts a holdout on said [Current Account No. 2310-011-42 in the
joint names of Lim and Velasco] to the full extent of their alleged interests
therein as these may appear as a result of final and definitive judicial action
or a settlement between and among the contesting parties thereto." 7
Paragraph 02 of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when
and if their alleged interests in the Account Balance shall have been
established with finality, ample and sufficient power as shall be necessary to
retain said Account Balance and enable Comtrust to apply the Account
Balance for the purpose of liquidating the Loan in respect of principal and/or
accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to
declare the loan payable on demand at any time, nor shall the existence
hereof and the non-resolution of the dispute between the contending parties
in respect of entitlement to the Account Balance, preclude Comtrust from
instituting an action for recovery against Eastply and/or Mr. Lim in the event
the Loan is declared due and payable and Eastply and/or Mr. Lim shall
default in payment of all obligations and liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate was filed with
Branch 152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano
Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole
balance of P331,261.44 in the aforesaid joint account of Velasco and Lim
was being claimed as part of Velasco's estate. On 9 September 1986, the
intestate court granted the urgent motion of the heirs of Velasco to withdraw
the deposit under the joint account of Lim and Velasco and authorized the
heirs to divide among themselves the amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987,
BPI filed with the RTC of Manila a complaint against Lim and Eastern
demanding payment of the promissory note for P73,000.00. The complaint
was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of
the said court, then presided over by Judge Wenceslao M. Polo. Defendants
Lim and Eastern, in turn, filed a counterclaim against BPI for the return of
the balance in the disputed account subject of the Holdout Agreement and
the interests thereon after deducting the amount due on the promissory
note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make
out its case. Furthermore, it ruled that "the promissory note in question is
subject to the 'hold-out' agreement," 10 and that based on this agreement,
"it was the duty of plaintiff Bank [BPI] to debit the account of the defendants
under the promissory note to set off the loan even though the same has no
fixed maturity." 11 As to the defendants' counterclaim, the trial court,
recognizing the fact that the entire amount in question had been withdrawn
by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc.
No. 8959, denied it because the "said claim cannot be awarded without
disturbing the resolution" of the intestate court. 12
Both parties appealed from the said decision to the Court of Appeals. Their
appeal was docketed as CA-G.R. CV No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the
decision of the trial court. It, however, failed to rule on the defendants'
(private respondents') partial appeal from the trial court's denial of their
counterclaim. Upon their motion for reconsideration, the Court of Appeals
promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled
that the settlement of Velasco's estate had nothing to do with the claim of
the defendants for the return of the balance of their account with CBTC/BPI
as they were not privy to that case, and that the defendants, as depositors
of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have
protected the defendants' interest in Sp. Proc. No. 8959 when the said
account was claimed by Velasco's estate. It then ordered BPI "to pay
defendants the amount of P331,261.44 representing the outstanding
balance in the bank account of defendants." 14
On 22 April 1992, BPI filed the instant petition alleging therein that the
Holdout Agreement in question was subject to a suspensive condition stated
therein, viz., that the "P331,261.44 shall become a security for respondent
Lim's promissory note only if respondents' Lim and Eastern Plywood
Corporation's interests to that amount are established as a result of a final
and definitive judicial action or a settlement between and among the
contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals
erred in affirming the trial court's decision dismissing the complaint on the
ground that it was the duty of CBTC to debit the account of the defendants
to set off the amount of P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition"
argument of the petitioner. They interpret the findings of both the trial and
appellate courts that the money deposited in the joint account of Velasco
and Lim came from Eastern and Lim's own account as a finding that the
money deposited in the joint account of Lim and Velasco "rightfully
belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And
because the latter are the rightful owners of the money in question, the
suspensive condition does not find any application in this case and the bank
had the duty to set off this deposit with the loan. They add that the ruling of
the lower court that they own the disputed amount is the final and definitive
judicial action required by the Holdout Agreement; hence, the petitioner can
only hold the amount of P73,000.00 representing the security required for
the note and must return the rest. 16
The petitioner filed a Reply to the aforesaid Comment. The private
respondents filed a Rejoinder thereto.
We gave due course to the petition and required the parties to submit
simultaneously their memoranda.
The key issues in this case are whether BPI can demand payment of the
loan of P73,000.00 despite the existence of the Holdout Agreement and
whether BPI is still liable to the private respondents on the account subject
of the Holdout Agreement after its withdrawal by the heirs of Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00.
On its face, the note is an unconditional promise to pay the said amount,
and as stated by the respondent Court of Appeals, "[t]here is no question
that the promissory note is a negotiable instrument." 17 It further correctly
ruled that BPI was not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement
could have operated as a valid transfer to make BPI a holder in due course.
It acquired the note from CBTC by the contract of merger or sale between
the two banks. BPI, therefore, took the note subject to the Holdout
Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the
Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI
as its successor-in-interest, had every right to demand that Eastern and Lim
settle their liability under the promissory note. It cannot be compelled to
retain and apply the deposit in Lim and Velasco's joint account to the
payment of the note. What the agreement conferred on CBTC was a power,
not a duty. Generally, a bank is under no duty or obligation to make the
application. 18 To apply the deposit to the payment of a loan is a privilege, a
right of set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that
notwithstanding the agreement, CBTC was not in any way precluded from
demanding payment from Eastern and from instituting an action to recover
payment of the loan. What it provides is an alternative, not an exclusive,
method of enforcing its claim on the note. When it demanded payment of
the debt directly from Eastern and Lim, BPI had opted not to exercise its
right to apply part of the deposit subject of the Holdout Agreement to the
payment of the promissory note for P73,000.00. Its suit for the enforcement
of the note was then in order and it was error for the trial court to dismiss it
on the theory that it was set off by an equivalent portion in C/A No. 2310-
001-42 which BPI should have debited. The Court of Appeals also erred in
affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
The Court of Appeals correctly decided on the counterclaim. The
counterclaim of Eastern and Lim for the return of the P331,261.44 20 was
equivalent to a demand that they be allowed to withdraw their deposit with
the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed,
savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan." In Serrano vs.
Central Bank of the Philippines, 21 we held that bank deposits are in the
nature of irregular deposits; they are really loans because they earn
interest. The relationship then between a depositor and a bank is one of
creditor and debtor. The deposit under the questioned account was an
ordinary bank deposit; hence, it was payable on demand of the depositor.
22
The account was proved and established to belong to Eastern even if it was
deposited in the names of Lim and Velasco. As the real creditor of the bank,
Eastern has the right to withdraw it or to demand payment thereof. BPI
cannot be relieved of its duty to pay Eastern simply because it already
allowed the heirs of Velasco to withdraw the whole balance of the account.
The petitioner should not have allowed such withdrawal because it had
admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account. As early as 12 May 1979, CBTC was notified by
the Corporate Secretary of Eastern that the deposit in the joint account of
Velasco and Lim was being claimed by them and that one-half was being
claimed by the heirs of Velasco.23
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the
heirs of Velasco to withdraw the account. BPI was not specifically ordered to
release the account to the said heirs; hence, it was under no judicial
compulsion to do so. The authorization given to the heirs of Velasco cannot
be construed as a final determination or adjudication that the account
belonged to Velasco. We have ruled that when the ownership of a particular
property is disputed, the determination by a probate court of whether that
property is included in the estate of a deceased is merely provisional in
character and cannot be the subject of execution. 24
Because the ownership of the deposit remained undetermined, BPI, as the
debtor with respect thereto, had no right to pay to persons other than those
in whose favor the obligation was constituted or whose right or authority to
receive payment is indisputable. The payment of the money deposited with
BPI that will extinguish its obligation to the creditor-depositor is payment to
the person of the creditor or to one authorized by him or by the law to
receive it. 25 Payment made by the debtor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or negligence,
even if the debtor acted in utmost good faith and by mistake as to the
person of the creditor, or through error induced by fraud of a third person.
26 The payment then by BPI to the heirs of Velasco, even if done in good
faith, did not extinguish its obligation to the true depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint
is reversed and set aside. The award on the counterclaim is sustained
subject to a modification of the interest.
WHEREFORE, the instant petition is partly GRANTED. The challenged
amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As
modified:
(1) Private respondents are ordered to pay the petitioner the
promissory note for P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to the date
of the filing of the complaint, computed from that date until payment
pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents
shall bear interest at the rate of 12% per annum computed from the filing of
the counterclaim.
No pronouncement as to costs.
SO ORDERED.
Reyes vs. Court of Appeals G.R. No. 118492, August 15, 2001
The degree of extraordinary diligence applies only to cases where banks act
under their fiduciary capacity, that is, as depositary of the deposits of their
depositors. But the same higher degree of diligence is not expected to be
exerted by banks in commercial transactions that do not involve their
fiduciary relationship with their depositors.
Facts: Godofredo, Casheir of the Philippine Racing Club (PCRI), went to
respondent bank to apply for a demand draft in the amount AU$1,610.00
payable to the order of the 20th Asian Racing Conference Secretariat of
Sydney, Australia. He was attended to by respondent bank’s assistant
cashier, Mr. Yasis, who at first denied the application for the reason that
respondent bank did not have an Australian dollar account in any bank in
Sydney. Godofredo asked if there could be a way for respondent bank to
accommodate PRCI’s urgent need to remit Australian dollars to Sydney.
Yasis of respondent bank then informed Godofredo of a roundabout way of
effecting the requested remittance to Sydney thus: the respondent bank
would draw a demand draft against Westpac Bank in Sydney, Australia
(Westpac-Sydney) and have the latter reimburse itself from the U.S. dollar
account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-
New York).
However, upon due presentment of the foreign exchange demand draft, the
same was dishonored, with the notice of dishonor stating that there is “No
account held with Westpac.” Meanwhile, Wespac-New York sent a cable to
respondent bank informing the latter that its dollar account in the sum of
AU$ 1,610.00 was debited. In response to PRCI’s complaint about the
dishonor of the said foreign exchange demand draft, respondent bank
informed Westpac-Sydney of the issuance of the said demand draft, drawn
against the Wespac-Sydney and informing the latter to be reimbursed from
the respondent bank’s dollar account in Westpac-New York. The respondent
bank on the same day likewise informed Wespac-New York requesting the
latter to honor the reimbursement claim of Wespac-Sydney. Upon its second
presentment for payment, the demand draft was again dishonored by
Westpac-Sydney for the same reason, that is, that the respondent bank has
no deposit dollar account with the drawee Wespac-Sydney. Gregorio Reyes
and Consuelo Puyat-Reyes arrived in Sydney on a separate date and both
were humiliated and embarrassed in the presence of international audience
after being denied registration of the conference secretariat since the
foreign exchange draft was dishonored. Petitioners were only able to attend
the conference after promising to pay in cash instead which they fulfilled
Issue: Whether or not respondent bank is liable for damages due to the
dishonor of the foreign exchange demand drafts.
Held: Yes. The evidence also shows that the respondent bank exercised
that degree of diligence expected of an ordinary prudent person under the
circumstances obtaining; the respondent bank advised Westpac-New York
to honor the reimbursement claim of Westpac-Sydney and to debit the dollar
accountof respondent bank with the former. The degree of diligence
required of banks, is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is concerned. In
other words banks are duty bound to treat the deposit accounts of their
depositors with the highest degree of care. But the said ruling applies only
to cases where banks act under their fiduciary capacity, that is, as
depositary of the deposits of their depositors. But the same higher degree of
diligence is not expected to be exerted by banks in commercial transactions
that do not involve their fiduciary relationship with their depositors. The case
at bar does not involve the handling of petitioners’ deposit, if any, with the
respondent bank. Instead, the relationship involved was that of a buyer and
seller.
Before us is a petition for review of the Decision[1] dated July 22, 1994 and
Resolution[2] dated December 29, 1994 of the Court of Appeals[3] affirming
with modification the Decision[4] dated November 12, 1992 of the Regional
Trial Court of Makati, Metro Manila, Branch 64, which dismissed the
complaint for damages of petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes against respondent Far East Bank and Trust
Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to be held in
September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc.
(PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner
Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer,
and director of PRCI, sent Godofredo Reyes, the clubs chief cashier, to the
respondent bank to apply for a foreign exchange demand draft in Australian
dollars.
Godofredo went to respondent banks Buendia Branch in Makati City to
apply for a demand draft in the amount One Thousand Six Hundred Ten
Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian
Racing Conference Secretariat of Sydney, Australia. He was attended to by
respondent banks assistant cashier, Mr. Yasis, who at first denied the
application for the reason that respondent bank did not have an Australian
dollar account in any bank in Sydney. Godofredo asked if there could be a
way for respondent bank to accommodate PRCIs urgent need to remit
Australian dollars to Sydney. Yasis of respondent bank then informed
Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft against
Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) and have
the latter reimburse itself from the U.S. dollar account of the respondent in
Westpac Bank in New York, U.S.A (Westpac-New York for brevity). This
arrangement has been customarily resorted to since the 1960s and the
procedure has proven to be problem-free. PRCI and the petitioner Gregorio
H. Reyes, acting through Godofredo, agreed to this arrangement or
approach in order to effect the urgent transfer of Australian dollars payable
to the Secretariat of the 20th Asian Racing Conference.
On July 28, 1988, the respondent bank approved the said application of
PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in
the sum applied for, that is, One Thousand Six Hundred Ten Australian
Dollars (AU$1,610.00), payable to the order of the 20th Asian Racing
Conference Secretariat of Sydney, Australia, and addressed to Westpac-
Sydney as the drawee bank.
On August 10, 1988, upon due presentment of the foreign exchange
demand draft, denominated as FXDD No. 209968, the same was
dishonored, with the notice of dishonor stating the following: xxx No account
held with Westpac. Meanwhile, on August 16, 1988, Westpac-New York
sent a cable to respondent bank informing the latter that its dollar account in
the sum of One Thousand Six Hundred Ten Australian Dollars
(AU$1,610.00) was debited. On August 19, 1988, in response to PRCIs
complaint about the dishonor of the said foreign exchange demand draft,
respondent bank informed Westpac-Sydney of the issuance of the said
demand draft FXDD No. 209968, drawn against the Westpac-Sydney and
informing the latter to be reimbursed from the respondent banks dollar
account in Westpac-New York. The respondent bank on the same day
likewise informed Westpac-New York requesting the latter to honor the
reimbursement claim of Westpac-Sydney. On September 14, 1988, upon its
second presentment for payment, FXDD No. 209968 was again dishonored
by Westpac-Sydney for the same reason, that is, that the respondent bank
has no deposit dollar account with the drawee Westpac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners
spouses Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to
attend the said racing conference. When petitioner Gregorio H. Reyes
arrived in Sydney in the morning of September 18, 1988, he went directly to
the lobby of Hotel Regent Sydney to register as a conference delegate. At
the registration desk, in the presence of other delegates from various
member countries, he was told by a lady member of the conference
secretariat that he could not register because the foreign exchange demand
draft for his registration fee had been dishonored for the second time. A
discussion ensued in the presence and within the hearing of many
delegates who were also registering. Feeling terribly embarrassed and
humiliated, petitioner Gregorio H. Reyes asked the lady member of the
conference secretariat that he be shown the subject foreign exchange
demand draft that had been dishonored as well as the covering letter after
which he promised that he would pay the registration fees in cash. In the
meantime he demanded that he be given his name plate and conference kit.
The lady member of the conference secretariat relented and gave him his
name plate and conference kit. It was only two (2) days later, or on
September 20, 1988, that he was given the dishonored demand draft and a
covering letter. It was then that he actually paid in cash the registration fees
as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes
arrived in Sydney. She too was embarrassed and humiliated at the
registration desk of the conference secretariat when she was told in the
presence and within the hearing of other delegates that she could not be
registered due to the dishonor of the subject foreign exchange demand
draft. She felt herself trembling and unable to look at the people around her.
Fortunately, she saw her husband coming toward her. He saved the
situation for her by telling the secretariat member that he had already
arranged for the payment of the registration fees in cash once he was
shown the dishonored demand draft. Only then was petitioner Puyat-Reyes
given her name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a
member of the House of Representatives representing the lone
Congressional District of Makati, Metro Manila. She has been an officer of
the Manila Banking Corporation and was cited by Archbishop Jaime
Cardinal Sin as the top lady banker of the year in connection with her
conferment of the Pro-Ecclesia et Pontifice Award. She has also been
awarded a plaque of appreciation from the Philippine Tuberculosis Society
for her extraordinary service as the Societys campaign chairman for the
ninth (9th) consecutive year.
On November 23, 1988, the petitioners filed in the Regional Trial Court of
Makati, Metro Manila, a complaint for damages, docketed as Civil Case No.
88-2468, against the respondent bank due to the dishonor of the said
foreign exchange demand draft issued by the respondent bank. The
petitioners claim that as a result of the dishonor of the said demand draft,
they were exposed to unnecessary shock, social humiliation, and deep
mental anguish in a foreign country, and in the presence of an international
audience.
On November 12, 1992, the trial court rendered judgment in favor of the
defendant (respondent bank) and against the plaintiffs (herein petitioners),
the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the defendant,
dismissing plaintiffs complaint, and ordering plaintiffs to pay to defendant,
on its counterclaim, the amount of P50,000.00, as reasonable attorneys
fees. Costs against the plaintiff.
SO ORDERED.[5]
The petitioners appealed the decision of the trial court to the Court of
Appeals. On July 22, 1994, the appellate court affirmed the decision of the
trial court but in effect deleted the award of attorneys fees to the defendant
(herein respondent bank) and the pronouncement as to the costs. The
decretal portion of the decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar as it dismisses
plaintiffs complaint, is hereby AFFIRMED, but is hereby REVERSED and
SET ASIDE in all other respect. No special pronouncement as to costs.
SO ORDERED.[6]
According to the appellate court, there is no basis to hold the respondent
bank liable for damages for the reason that it exerted every effort for the
subject foreign exchange demand draft to be honored. The appellate court
found and declared that:
xxx xxx xxx
Thus, the Bank had every reason to believe that the transaction finally went
through smoothly, considering that its New York account had been debited
and that there was no miscommunication between it and Westpac-New
York. SWIFT is a world wide association used by almost all banks and is
known to be the most reliable mode of communication in the international
banking business. Besides, the above procedure, with the Bank as drawer
and Westpac-Sydney as drawee, and with Westpac-New York as the
reimbursement Bank had been in place since 1960s and there was no
reason for the Bank to suspect that this particular demand draft would not
be honored by Westpac-Sydney.
From the evidence, it appears that the root cause of the miscommunications
of the Banks SWIFT message is the erroneous decoding on the part of
Westpac-Sydney of the Banks SWIFT message as an MT799 format.
However, a closer look at the Banks Exhs. 6 and 7 would show that despite
what appears to be an asterisk written over the figure before 99, the figure
can still be distinctly seen as a number 1 and not number 7, to the effect
that Westpac-Sydney was responsible for the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the misleading on the part of
the Westpac-Sydney of the numbers 1 to 7, since Exhs. 6 and 7 are just
documentary copies of the cable message sent to Westpac-Sydney. Hence,
if there was mistake committed by Westpac-Sydney in decoding the cable
message which caused the Banks message to be sent to the wrong
department, the mistake was Westpacs, not the Banks. The Bank had done
what an ordinary prudent person is required to do in the particular situation,
although appellants expect the Bank to have done more. The Bank having
done everything necessary or usual in the ordinary course of banking
transaction, it cannot be held liable for any embarrassment and
corresponding damage that appellants may have incurred.[7]
xxx xxx xxx
Hence, this petition, anchored on the following assignment of errors:
I of respondent bank with the former. As soon as the demand draft was
THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE
RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE
STANDARD OF DILIGENCE OF AN ORDINARY PRUDENT PERSON
WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY
LAW UPON THE BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING
PRIVATE RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT
THAT THE DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF
PRIVATE RESPONDENTS WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING
THAT AS SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE
DISHONOR OF THE DEMAND DRAFT WAS DUE TO PRIVATE
RESPONDENTS NEGLIGENCE AND NOT THE DRAWEE BANK.[8]
The petitioners contend that due to the fiduciary nature of the relationship
between the respondent bank and its clients, the respondent bank should
have exercised a higher degree of diligence than that expected of an
ordinary prudent person in the handling of its affairs as in the case at bar.
The appellate court, according to petitioners, erred in applying the standard
of diligence of an ordinary prudent person only. Petitioners also claim that
the respondent bank violated Section 61 of the Negotiable Instruments
Law[9] which provides the warranty of a drawer that xxx on due
presentment, the instrument will be accepted or paid, or both, according to
its tenor xxx. Thus, the petitioners argue that respondent bank should be
held liable for damages for violation of this warranty. The petitioners pray
this Court to re-examine the facts to cite certain instances of negligence.
It is our view and we hold that there is no reversible error in the decision of
the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides that (T)he
petition (for review) shall raise only questions of law which must be distinctly
set forth. Thus, we have ruled that factual findings of the Court of Appeals
are conclusive on the parties and not reviewable by this Court and they
carry even more weight when the Court of Appeals affirms the factual
findings of the trial court.[10]
The courts a quo found that respondent bank did not misrepresent that it
was maintaining a deposit account with Westpac-Sydney. Respondent
banks assistant cashier explained to Godofredo Reyes, representating
PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian
dollars would be effected through Westpac-New York where the respondent
bank has a dollar account to Westpac-Sydney where the subject foreign
exchange demand draft (FXDD No. 209968) could be encashed by the
payee, the 20th Asian Racing Conference Secretatriat. PRCI and its Vice-
President for finance, petitioner Gregorio H. Reyes, through their said
representative, agreed to that arrangement or procedure. In other words,
the petitioners are estopped from denying the said arrangement or
procedure. Similar arrangements have been a long standing practice in
banking to facilitate international commercial transactions. In fact, the
SWIFT cable message sent by respondent bank to the drawee bank,
Westpac-Sydney, stated that it may claim reimbursement from its New York
branch, Westpac-New York where respondent bank has a deposit dollar
account.
The facts as found by the courts a quo show that respondent bank did not
cause an erroneous transmittal of its SWIFT cable message to Westpac-
Sydney. It was the erroneous decoding of the cable message on the part of
Westpac-Sydney that caused the dishonor of the subject foreign exchange
demand draft. An employee of Westpac-Sydney in Sydney, Australia
mistakenly read the printed figures in the SWIFT cable message of
respondent bank as MT799 instead of as MT199. As a result, Westpac-
Sydney construed the said cable message as a format for a letter of credit,
and not for a demand draft. The appellate court correctly found that the
figure before 99 can still be distinctly seen as a number 1 and not number 7.
Indeed, the line of a 7 is in a slanting position while the line of a 1 is in a
horizontal position. Thus, the number 1 in MT199 cannot be construed as 7.
[11]
The evidence also shows that the respondent bank exercised that degree of
diligence expected of an ordinary prudent person under the circumstances
obtaining. Prior to the first dishonor of the subject foreign exchange demand
draft, the respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the dollar account[12]
dishonored, the respondent bank, thinking that the problem was with the
reimbursement and without any idea that it was due to miscommunication,
re-confirmed the authority of Westpac-New York to debit its dollar account
for the purpose of reimbursing Westpac-Sydney.[13] Respondent bank also
sent two (2) more cable messages to Westpac-New York inquiring why the
demand draft was not honored.[14]
With these established facts, we now determine the degree of diligence that
banks are required to exert in their commercial dealings. In Philippine Bank
of Commerce v. Court of Appeals[15] upholding a long standing doctrine, we
ruled that the degree of diligence required of banks, is more than that of a
good father of a family where the fiduciary nature of their relationship with
their depositors is concerned. In other words banks are duty bound to treat
the deposit accounts of their depositors with the highest degree of care. But
the said ruling applies only to cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of their depositors. But the
same higher degree of diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary relationship with
their depositors.
Considering the foregoing, the respondent bank was not required to exert
more than the diligence of a good father of a family in regard to the sale and
issuance of the subject foreign exchange demand draft. The case at bar
does not involve the handling of petitioners deposit, if any, with the
respondent bank. Instead, the relationship involved was that of a buyer and
seller, that is, between the respondent bank as the seller of the subject
foreign exchange demand draft, and PRCI as the buyer of the same, with
the 20th Asian Racing Conference Secretariat in Sydney, Australia as the
payee thereof. As earlier mentioned, the said foreign exchange demand
draft was intended for the payment of the registration fees of the petitioners
as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.
The evidence shows that the respondent bank did everything within its
power to prevent the dishonor of the subject foreign exchange demand
draft. The erroneous reading of its cable message to Westpac-Sydney by an
employee of the latter could not have been foreseen by the respondent
bank. Being unaware that its employee erroneously read the said cable
message, Westpac-Sydney merely stated that the respondent bank has no
deposit account with it to cover for the amount of One Thousand Six
Hundred Ten Australian Dollar (AU$1610.00) indicated in the foreign
exchange demand draft. Thus, the respondent bank had the impression that
Westpac-New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that respondent bank
has a sufficient deposit dollar account with Westpac-New York. That was the
reason why the respondent bank had to re-confirm and repeatedly notify
Westpac-New York to debit its (respondent banks) deposit dollar account
with it and to transfer or credit the corresponding amount to Westpac-
Sydney to cover the amount of the said demand draft.
In view of all the foregoing, and considering that the dishonor of the subject
foreign exchange demand draft is not attributable to any fault of the
respondent bank, whereas the petitioners appeared to be under estoppel as
earlier mentioned, it is no longer necessary to discuss the alleged
application of Section 61 of the Negotiable Instruments Law to the case at
bar. In any event, it was established that the respondent bank acted in good
faith and that it did not cause the embarrassment of the petitioners in
Sydney, Australia. Hence, the Court of Appeals did not commit any
reversable error in its challenged decision.
WHEREFORE, the petition is hereby DENIED, and the assailed decision of
the Court of Appeals is AFFIRMED. Costs against the petitioners.
SO ORDERED.
CHAN v MACEDA
Bonifacio Maceda Jr, obtained a 7.3M loan from DBP for the construction of
his New Gran Hotel Project.
Maceda then had a construction contract with Moreman Builders. Maceda
bought construction materials and equipments which Moreman deposited in
the warehouse of Wilson and Liliy Chan free of charge.
Due to Moreman’s failure to complete the project, Maceda filed a case for
rescission and damages against them. RTC ruled in favor of Maceda. While
pending appeal in CA, Maceda demanded from the Chan’s the deposited
materials but Chan said that these materials had already been withdrawn by
Moreman in 1977.
Thus, Maceda now filed a an action for damages and preliminary
attachment against the Chan’s. After four years, the RTC dismissed the
case for failure to prosecute. Five years after, a motion for reconsideration
was filed but was denied by RTC. On appeal, the RTC granted the MFR.
Chan filed a motion to dismiss, while Maceda filed a motion to declare Chan
in default.
RTC declared Chan in default. CA affirmed the decision. Thus on the RTC,
Maceda presented his witnesses to show that indeed bags of cement were
deposited in the warehouse of Chan. RTC then ruled in favor of Maceda.
RTC stated that since the bags were stored by Moreman builders without
any lien or encumbrance, Chan was duty bound to release it. CA affirmed in
toto the decision of the RTC.
ISSUE:
1.) WON procedural infirmities should have been a ground to dismiss
the case
2.) WON there was a contract of deposit
HELD/RATIO:
1.) Yes. The original MFR was filed 5 years after the decision, thus
far beyond the 15 day reglementary period. This is a gross error
on the part of the trial court.
2.) No. In a contract of deposit, the burden of proof on proving the
contract is on the plaintiff. In the case at hand, the record is bereft
of any contract of deposit between the parties. The delivery
receipts presented also lack probative value so as to prove the
existence of the contract for they are unsigned and not duly
authenticated by Moreman or by Maceda. Moreover, Maceda lso
failed to prove that there were construction materials and
equipment in petitioners' warehouse at the time he made a
demand for their return
In relation to the claim of damages, actual damages must be proven with a
reasonable degree of certainty, which in this case, Maceda failed to present.
A judgment of default does not automatically imply admission by the
defendant of the facts and causes of action of the plaintiff. The Rules of
Court require the latter to adduce evidence in support of his allegations as
an indispensable condition before final judgment could be given in his favor.
[1] The trial judge has to evaluate the allegations with the highest degree of
objectivity and certainty. He may sustain an allegation for which the plaintiff
has adduced sufficient evidence, otherwise, he has to reject it. In the case
at bar, judicial review is imperative to avert the award of damages that is
unreasonable and without evidentiary support.
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, is the Decision[2] dated June 17, 1999 of the
Court of Appeals in CA-G.R. CV No. 57323, entitled Bonifacio S. Maceda,
Jr. versus Joseph Chan, et. al., affirming in toto the Decision[3] dated
December 26, 1996 of the Regional Trial Court, Branch 160, Pasig City, in
Civil Case No. 53044.
The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a
P7.3 million loan from the Development Bank of the Philippines for the
construction of his New Gran Hotel Project in Tacloban City.
Thereafter, on September 29, 1976, respondent entered into a building
construction contract with Moreman Builders Co., Inc., (Moreman). They
agreed that the construction would be finished not later than December 22,
1977.
Respondent purchased various construction materials and equipment in
Manila. Moreman, in turn, deposited them in the warehouse of Wilson and
Lily Chan, herein petitioners. The deposit was free of charge.
Unfortunately, Moreman failed to finish the construction of the hotel at the
stipulated time. Hence, on February 1, 1978, respondent filed with the then
Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila,
an action for rescission and damages against Moreman, docketed as Civil
Case No. 113498.
On November 28, 1978, the CFI rendered its Decision[4] rescinding the
contract between Moreman and respondent and awarding to the latter P
445,000.00 as actual, moral and liquidated damages; P20,000.00
representing the increase in the construction materials; and P35,000.00 as
attorneys fees. Moreman interposed an appeal to the Court of Appeals but
the same was dismissed on March 7, 1989 for being dilatory. He elevated
the case to this Court via a petition for review on certiorari. In a Decision[5]
dated February 21, 1990, we denied the petition. On April 23, 1990,[6] an
Entry of Judgment was issued.
Meanwhile, during the pendency of the case, respondent ordered
petitioners to return to him the construction materials and equipment which
Moreman deposited in their warehouse. Petitioners, however, told them that
Moreman withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the Regional Trial
Court, Branch 160, Pasig City, an action for damages with an application for
a writ of preliminary attachment against petitioners,[7] docketed as Civil
Case No. 53044.
In the meantime, on October 30, 1986, respondent was appointed Judge of
the Regional Trial Court, Branch 12, San Jose Antique.[8]
On August 25, 1989, or after almost four (4) years, the trial court dismissed
respondents complaint for his failure to prosecute and for lack of interest.[9]
On September 6, 1994, or five years thereafter, respondent filed a motion
for reconsideration, but the same was denied in the Order dated September
9, 1994 because of the failure of respondent and his counsel to appear on
the scheduled hearing.[10]
On October 14, 1994, respondent filed a second motion for reconsideration.
This time, the motion was granted and the case was ordered reinstated on
January 10, 1995, or ten (10) years from the time the action was originally
filed.[11] Thereafter, summons, together with the copies of the complaint
and its annexes, were served on petitioners.
On March 2, 1995, counsel for petitioners filed a motion to dismiss on
several grounds.[12] Respondent, on the other hand, moved to declare
petitioners in default on the ground that their motion to dismiss was filed out
of time and that it did not contain any notice of hearing.[13]
On April 27, 1995, the trial court issued an order declaring petitioners in
default.[14]
Petitioners filed with the Court of Appeals a petition for certiorari[15] to annul
the trial courts order of default, but the same was dismissed in its Order[16]
dated August 31, 1995. The case reached this Court, and in a Resolution
dated October 25, 1995,[17] we affirmed the assailed order of the Court of
Appeals. On November 29, 1995,[18] the corresponding Entry of Judgment
was issued.
Thus, upon the return of the records to the RTC, Branch 160, Pasig City,
respondent was allowed to present his evidence ex-parte.
Upon motion of respondent, which was granted by the trial court in its Order
dated April 29, 1996,[19] the depositions of his witnesses, namely, Leonardo
Conge, Alfredo Maceda and Engr. Damiano Nadera were taken in the
Metropolitan Trial Court in Cities, Branch 2, Tacloban City.[20] Deponent
Leonardo Conge, a labor contractor, testified that on December 14 up to
December 24, 1977, he was contracted by petitioner Lily Chan to get bags
of cement from the New Gran Hotel construction site and to store the same
into the latters warehouse in Tacloban City. Aside from those bags of
cement, deponent also hauled about 400 bundles of steel bars from the
same construction site, upon order of petitioners. Corresponding delivery
receipts were presented and marked as Exhibits A, A-1,A-2,A-3 and A-4.[21]
Deponent Alfredo Maceda testified that he was respondents Disbursement
and Payroll Officer who supervised the construction and kept inventory of
the properties of the New Gran Hotel. While conducting the inventory on
November 23, 1977, he found that the approximate total value of the
materials stored in petitioners warehouse was P214,310.00. This amount
was accordingly reflected in the certification signed by Mario Ramos, store
clerk and representative of Moreman who was present during the inventory.
[22]
Deponent Damiano Nadera testified on the current cost of the architectural
and structural requirements needed to complete the construction of the New
Gran Hotel.[23]
On December 26, 1996, the trial court rendered a decision in favor of
respondent, thus:
WHEREFORE, foregoing considered, judgment is hereby rendered ordering
defendants to jointly and severally pay plaintiff:
1) P1,930,000.00 as actual damages;
2) P2,549,000.00 as actual damages;
3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and
attorneys fees of P50,000.00 and to pay the costs.
SO ORDERED.
The trial court ratiocinated as follows:
The inventory of other materials, aside from the steel bars and cement is
found highly reliable based on first, the affidavit of Arthur Edralin dated
September 15, 1979, personnel officer of Moreman Builders that he was
assigned with others to guard the warehouse; (Exhs. M & O); secondly, the
inventory (Exh. C) dated November 23, 1977 shows (sic) deposit of
assorted materials; thirdly, that there were items in the warehouse as of
February 3, 1978 as shown in the balance sheet of Moremans stock clerk
Jose Cedilla.
Plaintiff is entitled to payment of damages for the overhauling of materials
from the construction site by Lily Chan without the knowledge and consent
of its owner. Article 20 of the Civil Code provides:
Art. 20. Every person who contrary to law, willfully or negligently caused
damage to another, shall indemnify the latter for the same.
As to the materials stored inside the bodega of defendant Wilson Chan, the
inventory (Exh. C) show (sic), that the same were owned by the New Gran
Hotel. Said materials were stored by Moreman Builders Co., Inc. since it
was attested to by the warehouseman as without any lien or encumbrances,
the defendants are duty bound to release it. Article 21 of the Civil Code
provides:
Art. 21. Any person who willfully caused loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
Plaintiff is entitled to payment of actual damages based on the inventory as
of November 23, 1977 amounting to P1,930,080.00 (Exhs. Q & Q-1). The
inventory was signed by the agent Moreman Builders Corporation and
defendants.
Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400
bundles of steel bars totaling P2,549,000.00 (Exhs. S & S-1; Exhs. B & B-3).
Defendants should pay plaintiff moral damages of P150,000.00; exemplary
damages of P50,000.00 and attorneys fees of P50,000.00 and to pay the
costs.
The claim of defendant for payment of damages with respect to the
materials appearing in the balance sheets as of February 3, 1978 in the
amount of P3,286,690.00, not having been established with enough
preponderance of evidence cannot be given weight.[24]
Petitioners then elevated the case to the Court of Appeals, docketed as CA-
G.R. CV No. 57323. On June 17, 1999, the Appellate Court rendered the
assailed Decision[25] affirming in toto the trial courts judgment, ratiocinating
as follows:
Moreover, although the prayer in the complaint did not specify the amount of
damages sought, the same was satisfactorily proved during the trial. For
damages to be awarded, it is essential that the claimant satisfactorily prove
during the trial the existence of the factual basis thereof and its causal
connection with the adverse partys act (PAL, Inc. vs. NLRC, 259 SCRA 459.
In sustaining appellees claim for damages, the court a quo held as follows:
The Court finds the contention of plaintiff that materials and equipment of
plaintiff were stored in the warehouse of defendants and admitted by
defendants in the certification issued to Sheriff Borja. x x x
Evidence further revealed that assorted materials owned by the New Gran
Hotel (Exh. C) were deposited in the bodega of defendant Wilson Chan with
a total market value of P1,930,000.00, current price.
The inventory of other materials, aside from the steel bars and cement, is
highly reliable based on first, the affidavit of Arthur Edralin dated September
15, 1979, personnel officer of Moreman Builders; that he was assigned, with
others to guard the warehouse (Exhs. M & O); secondly, the inventory (Exh.
C) November 23, 1977 shows deposit of assorted materials; thirdly, that
there were items in the warehouse as of February 3, 1978, as shown in the
balance sheet of Moremans stock clerk, Jose Cedilla (pp. 60-61, Rollo).
The Court affirms the above findings.
Well settled is the rule that absent any proper reason to depart from the
rule, factual conclusions reached by the trial court are not to be disturbed
(People vs. Dupali, 230 SCRA 62). Hence, in the absence of any showing
that serious and substantial errors were committed by the lower court in the
appraisal of the evidence, the trial judges assessment of the credibility of
the witnesses is accorded great weight and respect (People vs. Jain, 254
SCRA 686). And, there being absolutely nothing on record to show that the
court a quo overlooked, disregarded, or misinterpreted facts of weight and
significance, its factual findings and conclusions must be given great weight
and should not be disturbed on appeal.
WHEREFORE, being in accord with law and evidence, the appealed
decision is hereby AFFIRMED in toto.
Hence, this petition for review on certiorari anchored on the following
grounds:
I
The Court of Appeals acted with grave abuse of discretion and under a
misapprehension of the law and the facts when it affirmed in toto the award
of actual damages made by the trial court in favor of respondent in this
case.
II
The awards of moral and exemplary damages of the trial court to
respondent in this case and affirmed in toto by the Court of Appeals are
unwarranted by the evidence presented by respondent at the ex parte
hearing of this case and should, therefore, be eliminated or at least
reduced.
III
The award of attorneys fees by the trial court to respondent in this case and
affirmed by the Court of Appeals should be deleted because of the failure of
the trial court to state the legal and factual basis of such award.
Petitioners contend inter alia that the actual damages claimed by
respondent in the present case were already awarded to him in Civil Case
No. 113498[26] and hence, cannot be recovered by him again. Even
assuming that respondent is entitled to damages, he can not recover
P4,479,000.00 which is eleven (11) times more than the total actual
damages of P365,000.00 awarded to him in Civil Case No. 113498.[27]
In his comment on the petition, respondent maintains that petitioners, as
depositaries under the law, have both the fiduciary and extraordinary
obligations not only to safely keep the construction material deposited, but
also to return them with all their products, accessories and accessions,
pursuant to Articles 1972,[28] 1979,[29] 1983,[30] and 1988[31] of the Civil
Code. Considering that petitioners duty to return the construction materials
in question has already become impossible, it is only proper that the prices
of those construction materials in 1996 should be the basis of the award of
actual damages. This is the only way to fulfill the duty to return
contemplated in the applicable laws.[32] Respondent further claims that
petitioners must bear the increase in market prices from 1977 to 1996
because liability for fraud includes all damages which may be reasonably
attributed to the non-performance of the obligation. Lastly, respondent
insists that there can be no double recovery because in Civil Case No.
113498,[33] the parties were respondent himself and Moreman and the
cause of action was the rescission of their building contract. In the present
case, however, the parties are respondent and petitioners and the cause of
action between them is for recovery of damages arising from petitioners
failure to return the construction materials and equipment.
Obviously, petitioners assigned errors call for a review of the lower courts
findings of fact.
Succinct is the rule that this Court is not a trier of facts and does not
normally undertake the re-examination of the evidence submitted by the
contending parties during the trial of the case considering that findings of
fact of the Court of Appeals are generally binding and conclusive on this
Court.[34] The jurisdiction of this Court in a petition for review on certiorari is
limited to reviewing only errors of law,[35] not of fact, unless it is shown,
inter alia, that: (1) the conclusion is a finding grounded on speculations,
surmises or conjectures; (2) the inference is manifestly mistaken, absurd
and impossible; (3) there is grave abuse of discretion; (4) the judgment is
based on misapprehension of facts; (5) the findings of fact are conflicting;
and (6) the Court of Appeals, in making its findings went beyond the issues
of the case and the same is contrary to the admission of both parties.[36]
Petitioners submit that this case is an exception to the general rule since
both the trial court and the Court of Appeals based their judgments on
misapprehension of facts.
We agree.
At the outset, the case should have been dismissed outright by the trial
court because of patent procedural infirmities. It bears stressing that the
case was originally filed on December 11, 1985. Four (4) years thereafter, or
on August 25, 1989, the case was dismissed for respondents failure to
prosecute. Five (5) years after, or on September 6, 1994, respondent filed
his motion for reconsideration. From here, the trial court already erred in its
ruling because it should have dismissed the motion for reconsideration
outright as it was filed far beyond the fifteen-day reglementary period.[37]
Worse, when respondent filed his second motion for reconsideration on
October 14, 1994, a prohibited pleading,[38] the trial court still granted the
same and reinstated the case on January 10, 1995. This is a glaring gross
procedural error committed by both the trial court and the Court of Appeals.
Even without such serious procedural flaw, the case should also be
dismissed for utter lack of merit.
It must be stressed that respondents claim for damages is based on
petitioners failure to return or to release to him the construction materials
and equipment deposited by Moreman to their warehouse. Hence, the
essential issues to be resolved are: (1) Has respondent presented proof that
the construction materials and equipment were actually in petitioners
warehouse when he asked that the same be turned over to him? (2) If so,
does respondent have the right to demand the release of the said materials
and equipment or claim for damages?
Under Article 1311 of the Civil Code, contracts are binding upon the parties
(and their assigns and heirs) who execute them. When there is no privity of
contract, there is likewise no obligation or liability to speak about and thus
no cause of action arises. Specifically, in an action against the depositary,
the burden is on the plaintiff to prove the bailment or deposit and the
performance of conditions precedent to the right of action.[39] A depositary
is obliged to return the thing to the depositor, or to his heirs or successors,
or to the person who may have been designated in the contract. [40]
In the present case, the record is bereft of any contract of deposit, oral or
written, between petitioners and respondent. If at all, it was only between
petitioners and Moreman. And granting arguendo that there was indeed a
contract of deposit between petitioners and Moreman, it is still incumbent
upon respondent to prove its existence and that it was executed in his favor.
However, respondent miserably failed to do so. The only pieces of evidence
respondent presented to prove the contract of deposit were the delivery
receipts.[41] Significantly, they are unsigned and not duly received or
authenticated by either Moreman, petitioners or respondent or any of their
authorized representatives. Hence, those delivery receipts have no
probative value at all. While our laws grant a person the remedial right to
prosecute or institute a civil action against another for the enforcement or
protection of a right, or the prevention or redress of a wrong,[42] every
cause of action ex-contractu must be founded upon a contract, oral or
written, express or implied.
Moreover, respondent also failed to prove that there were construction
materials and equipment in petitioners warehouse at the time he made a
demand for their return.
Considering that respondent failed to prove (1) the existence of any contract
of deposit between him and petitioners, nor between the latter and
Moreman in his favor, and (2) that there were construction materials in
petitioners warehouse at the time of respondents demand to return the
same, we hold that petitioners have no corresponding obligation or liability
to respondent with respect to those construction materials.
Anent the issue of damages, petitioners are still not liable because, as
expressly provided for in Article 2199 of the Civil Code,[43] actual or
compensatory damages cannot be presumed, but must be proved with
reasonable degree of certainty. A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount of damages, but must
depend upon competent proof that they have been suffered by the injured
party and on the best obtainable evidence of the actual amount thereof. It
must point out specific facts which could afford a basis for measuring
whatever compensatory or actual damages are borne.[44]
Considering our findings that there was no contract of deposit between
petitioners and respondent or Moreman and that actually there were no
more construction materials or equipment in petitioners warehouse when
respondent made a demand for their return, we hold that he has no right
whatsoever to claim for damages.
As we stressed in the beginning, a judgment of default does not
automatically imply admission by the defendant of plaintiffs causes of
action. Here, the trial court merely adopted respondents allegations in his
complaint and evidence without evaluating them with the highest degree of
objectivity and certainty.
WHEREFORE, the petition is GRANTED. The challenged Decision of the
Court of Appeals dated June 17, 1999 is REVERSED and SET ASIDE.
Costs against respondent.
SO ORDERED.
Sebastian Siga-an, petitioner, vs. Alicia Villanueva, respondent.
Facts: Respondent filed a complaint for sum of money against petitioner.
Respondent claimed that petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00 of which the loan agreement
was not reduced in writing and there was no stipulation as to the payment of
interest for the loan. Respondent issued a check worth P500,000.00 to
petitioner as partial payment of the loan. She then issued another check in
the amount of P200,000.00 to petitioner as payment of the remaining
balance of the loan of which the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as
interest, petitioner pestered her to pay additional interest and threatened to
block or disapprove her transactions with the PNO if she would not comply
with his demand. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but
was told that it was not necessary as there was mutual trust and confidence
between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00.
The RTC rendered a Decision holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should
refund the excess amount to the former. It ratiocinated that respondent’s
obligation was only to pay the loaned amount of P540,000.00, and that the
alleged interests due should not be included in the computation of
respondent’s total monetary debt because there was no agreement between
them regarding payment of interest. It concluded that since respondent
made an excess payment to petitioner in the amount of P660,000.00
through mistake, petitioner should return the said amount to respondent
pursuant to the principle of solutio indebiti. Also, petitioner should pay moral
damages for the sleepless nights and wounded feelings experienced by
respondent. Further, petitioner should pay exemplary damages by way of
example or correction for the public good, plus attorney’s fees and costs of
suit.
Issue: (1) Whether or not interest was due to petitioner; and (2) whether the
principle of solutio indebiti applies to the case at bar.
Ruling: (1) No. Compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan
and no interest was due on the loan because there was no written
agreement as regards payment of interest. Article 1956 of the Civil Code,
which refers to monetary interest, specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary interest is
allowed only if: (1) there was an express stipulation for the payment of
interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment
of monetary interest. Thus, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law.
(2) Petitioner cannot be compelled to return the alleged excess amount paid
by respondent as interest. Under Article 1960 of the Civil Code, if the
borrower of loan pays interest when there has been no stipulation therefor,
the provisions of the Civil Code concerning solutio indebiti shall be applied.
Article 2154 of the Civil Code explains the principle of solutio indebiti. Said
provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to
return it arises. In such a case, a creditor-debtor relationship is created
under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the
person who has no right to receive such payment becomes obligated to
return the same. The quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself unjustly at the expense of
another. The principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and (2) the payment
is made through mistake, and not through liberality or some other cause.
We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her transactions with the
PNO if she would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of exemplary damages
is appropriate so as to deter petitioner and other lenders from committing
similar and other serious wrongdoings.
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules
of Court seeking to set aside the Decision,2 dated 16 December 2005, and
Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the
Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-
0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum
of money against petitioner Sebastian Siga-an before the Las Pinas City
Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-
0068. Respondent alleged that she was a businesswoman engaged in
supplying office materials and equipments to the Philippine Navy Office
(PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military
officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her
inside the PNO and offered to loan her the amount of ₱540,000.00. Since
she needed capital for her business transactions with the PNO, she
accepted petitioner’s proposal. The loan agreement was not reduced in
writing. Also, there was no stipulation as to the payment of interest for the
loan.6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to
petitioner as partial payment of the loan. On 31 October 1993, she issued
another check in the amount of ₱200,000.00 to petitioner as payment of the
remaining balance of the loan. Petitioner told her that since she paid a total
amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess
amount of ₱160,000.00 would be applied as interest for the loan. Not
satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with his demand. As all
her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO, and fearing that petitioner might block or unduly
influence the payment of her vouchers in the PNO, she conceded. Thus,
she paid additional amounts in cash and checks as interests for the loan.
She asked petitioner for receipt for the payments but petitioner told her that
it was not necessary as there was mutual trust and confidence between
them. According to her computation, the total amount she paid to petitioner
for the loan and interest accumulated to ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying
interest on the loan despite absence of agreement to that effect. Her lawyer
told her that petitioner could not validly collect interest on the loan because
there was no agreement between her and petitioner regarding payment of
interest. Since she paid petitioner a total amount of ₱1,200,000.00 for the
₱540,000.00 worth of loan, and upon being advised by her lawyer that she
made overpayment to petitioner, she sent a demand letter to petitioner
asking for the return of the excess amount of ₱660,000.00. Petitioner,
despite receipt of the demand letter, ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) ₱660,000.00 plus legal interest from the time of demand; (2)
₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary damages;
and (4) an amount equivalent to 25% of ₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked
him if he could grant her a loan, as she needed money to finance her
business venture with the PNO. At first, he was reluctant to deal with
respondent, because the latter had a spotty record as a supplier of the
PNO. However, since respondent was an acquaintance of his officemate, he
agreed to grant her a loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As
respondent had been able to pay the previous loan in full, he agreed to
grant her another loan. Later, respondent requested him to restructure the
payment of the loan because she could not give full payment on the due
date. He acceded to her request. Thereafter, respondent pleaded for
another restructuring of the payment of the loan. This time he rejected her
plea. Thus, respondent proposed to execute a promissory note wherein she
would acknowledge her obligation to him, inclusive of interest, and that she
would issue several postdated checks to guarantee the payment of her
obligation. Upon his approval of respondent’s request for restructuring of the
loan, respondent executed a promissory note dated 12 September 1994
wherein she admitted having borrowed an amount of ₱1,240,000.00,
inclusive of interest, from petitioner and that she would pay said amount in
March 1995. Respondent also issued to him six postdated checks
amounting to ₱1,240,000.00 as guarantee of compliance with her
obligation. Subsequently, he presented the six checks for encashment but
only one check was honored. He demanded that respondent settle her
obligation, but the latter failed to do so. Hence, he filed criminal cases for
Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against
respondent. The cases were assigned to the Metropolitan Trial Court of
Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent
admitted in the latter’s promissory note that her monetary obligation as of 12
September 1994 amounted to ₱1,240,000.00 inclusive of interests. He
argued that respondent was already estopped from complaining that she
should not have paid any interest, because she was given several times to
settle her obligation but failed to do so. He maintained that to rule in favor of
respondent is tantamount to concluding that the loan was given interest-
free. Based on the foregoing averments, he asked the RTC to dismiss
respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and
that the latter should refund the excess amount to the former. It ratiocinated
that respondent’s obligation was only to pay the loaned amount of
₱540,000.00, and that the alleged interests due should not be included in
the computation of respondent’s total monetary debt because there was no
agreement between them regarding payment of interest. It concluded that
since respondent made an excess payment to petitioner in the amount of
₱660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the
sleepless nights and wounded feelings experienced by respondent. Further,
petitioner should pay exemplary damages by way of example or correction
for the public good, plus attorney’s fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is
paid in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as
exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
₱660,000.00 as attorney’s fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the
appellate court promulgated its Decision affirming in toto the RTC Decision,
thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby
DENIED and the assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision
but this was denied.16 Hence, petitioner lodged the instant petition before
us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of
money. This is referred to as monetary interest. Interest may also be
imposed by law or by courts as penalty or indemnity for damages. This is
called compensatory interest.18 The right to interest arises only by virtue of
a contract or by virtue of damages for delay or failure to pay the principal
loan on which interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest,20
specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. As can be gleaned from the foregoing
provision, payment of monetary interest is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for
the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is
prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of
interest for the loan. Neither was there convincing proof of written
agreement between the two regarding the payment of interest. Respondent
testified that although she accepted petitioner’s offer of loan amounting to
₱540,000.00, there was, nonetheless, no verbal or written agreement for
her to pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September
199423 wherein respondent purportedly admitted owing petitioner "capital
and interest." Respondent, however, explained that it was petitioner who
made a promissory note and she was told to copy it in her own handwriting;
that all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO; that petitioner threatened to
disapprove her transactions with the PNO if she would not pay interest; that
being unaware of the law on interest and fearing that petitioner would make
good of his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own handwriting;
and that such was the same promissory note presented by petitioner as
alleged proof of their written agreement on interest.24 Petitioner did not
rebut the foregoing testimony. It is evident that respondent did not really
consent to the payment of interest for the loan and that she was merely
tricked and coerced by petitioner to pay interest. Hence, it cannot be
gainfully said that such promissory note pertains to an express stipulation of
interest or written agreement of interest on the loan between petitioner and
respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest
on the loan; that the agreed 7% rate of interest was duly admitted by
respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed
against respondent; that despite such judicial admission by respondent, the
RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held
that no interest was due him since the agreement on interest was not
reduced in writing; that the application of Article 1956 of the Civil Code
should not be absolute, and an exception to the application of such
provision should be made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that it would be unfair
to allow respondent to pay only the loan when the latter very well knew and
even admitted in the Batas Pambansa Blg. 22 cases that there was an
agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did
not make a ruling therein that petitioner and respondent agreed on the
payment of interest at the rate of 7% for the loan. The RTC clearly stated
that although petitioner and respondent entered into a valid oral contract of
loan amounting to ₱540,000.00, they, nonetheless, never intended the
payment of interest thereon.26 While the Court of Appeals mentioned in its
Decision that it concurred in the RTC’s ruling that petitioner and respondent
agreed on a certain rate of interest as regards the loan, we consider this as
merely an inadvertence because, as earlier elucidated, both the RTC and
the Court of Appeals ruled that petitioner is not entitled to the payment of
interest on the loan. The rule is that factual findings of the trial court deserve
great weight and respect especially when affirmed by the appellate court.27
We found no compelling reason to disturb the ruling of both courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas
Pambansa Blg. 22 cases that they had agreed on the payment of interest at
the rate of 7% deserves scant consideration. In the said case, respondent
merely testified that after paying the total amount of loan, petitioner ordered
her to pay interest.28 Respondent did not categorically declare in the same
case that she and respondent made an express stipulation in writing as
regards payment of interest at the rate of 7%. As earlier discussed,
monetary interest is due only if there was an express stipulation in writing
for the payment of interest.
There are instances in which an interest may be imposed even in the
absence of express stipulation, verbal or written, regarding payment of
interest. Article 2209 of the Civil Code states that if the obligation consists in
the payment of a sum of money, and the debtor incurs delay, a legal interest
of 12% per annum may be imposed as indemnity for damages if no
stipulation on the payment of interest was agreed upon. Likewise, Article
2212 of the Civil Code provides that interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent
on this point.
All the same, the interest under these two instances may be imposed only
as a penalty or damages for breach of contractual obligations. It cannot be
charged as a compensation for the use or forbearance of money. In other
words, the two instances apply only to compensatory interest and not to
monetary interest.29 The case at bar involves petitioner’s claim for
monetary interest.
Further, said compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the
loan. Also, as earlier found, no interest was due on the loan because there
was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of
solutio indebiti does not apply to the instant case. Thus, he cannot be
compelled to return the alleged excess amount paid by respondent as
interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if
something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case,
a creditor-debtor relationship is created under a quasi-contract whereby the
payor becomes the creditor who then has the right to demand the return of
payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of
solutio indebiti harks back to the ancient principle that no one shall enrich
himself unjustly at the expense of another.31 The principle of solutio indebiti
applies where (1) a payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received
the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.32 We have held that the principle of
solutio indebiti applies in case of erroneous payment of undue interest.33
It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because there was
no express stipulation in writing to that effect. There was no binding relation
between petitioner and respondent as regards the payment of interest. The
payment was clearly a mistake. Since petitioner received something when
there was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to ₱540,000.00
from petitioner.34 Respondent issued two checks with a total worth of
₱700,000.00 in favor of petitioner as payment of the loan.35 These checks
were subsequently encashed by petitioner.36 Obviously, there was an
excess of ₱160,000.00 in the payment for the loan. Petitioner claims that
the excess of ₱160,000.00 serves as interest on the loan to which he was
entitled. Aside from issuing the said two checks, respondent also paid cash
in the total amount of ₱175,000.00 to petitioner as interest.37 Although no
receipts reflecting the same were presented because petitioner refused to
issue such to respondent, petitioner, nonetheless, admitted in his Reply-
Affidavit38 in the Batas Pambansa Blg. 22 cases that respondent paid him a
total amount of ₱175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party
as to a relevant fact may be given in evidence against him. Aside from the
amounts of ₱160,000.00 and ₱175,000.00 paid as interest, no other proof
of additional payment as interest was presented by respondent. Since we
have previously found that petitioner is not entitled to payment of interest
and that the principle of solutio indebiti applies to the instant case, petitioner
should return to respondent the excess amount of ₱160,000.00 and
₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of
Appeals should be reduced from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five
dishonored checks to petitioner. Nonetheless, respondent’s conviction
therein does not affect our ruling in the instant case. The two checks,
subject matter of this case, totaling ₱700,000.00 which respondent claimed
as payment of the ₱540,000.00 worth of loan, were not among the five
checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan
by reason of the interest which the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be
recovered if the party underwent physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. Respondent testified that she
experienced sleepless nights and wounded feelings when petitioner refused
to return the amount paid as interest despite her repeated demands. Hence,
the award of moral damages is justified. However, its corresponding amount
of ₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant
and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according
to the circumstances of each case. This discretion is limited by the principle
that the amount awarded should not be palpably excessive as to indicate
that it was the result of prejudice or corruption on the part of the trial
court.40 To our mind, the amount of ₱150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her transactions with the
PNO if she would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of exemplary damages
is appropriate. The amount of ₱50,000.00 imposed as exemplary damages
by the RTC and the Court is fitting so as to deter petitioner and other
lenders from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must
state the factual, legal or equitable justification for awarding the same.42 In
the case under consideration, the RTC stated in its Decision that the award
of attorney’s fees equivalent to 25% of the amount paid as interest by
respondent to petitioner is reasonable and moderate considering the extent
of work rendered by respondent’s lawyer in the instant case and the fact
that it dragged on for several years.43 Further, respondent testified that she
agreed to compensate her lawyer handling the instant case such amount.44
The award, therefore, of attorney’s fees and its amount equivalent to 25% of
the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal
interest on the amount refundable to respondent computed from 3 March
1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that 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 rate of
6% per annum. We further declared that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction, this interim period being
deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of
solutio indebiti and not from a loan or forbearance of money. Thus, an
interest of 6% per annum should be imposed on the amount to be refunded
as well as on the damages awarded and on the attorney’s fees, to be
computed from the time of the extra-judicial demand on 3 March 1998,46 up
to the finality of this Decision. In addition, the interest shall become 12% per
annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No.
71814, dated 16 December 2005, is hereby AFFIRMED with the following
MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable amount of
interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(₱150,000.00); (3) an interest of 6% per annum is imposed on the
₱335,000.00, on the damages awarded and on the attorney’s fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to
the finality of this Decision; and (4) an interest of 12% per annum is also
imposed from the finality of this Decision up to its satisfaction. Costs against
petitioner.
SO ORDERED.
METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK
CORPORATION) V. BA FINANCE CORPORATION and MALAYAN
INSURANCE CO. INC.
[G.R. No. 179952, Dec. 4, 2009] (607 SCRA 620)
FACTS:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance
Corporation (BA Finance) a loan to secure which, he mortgaged his car to
respondent BA Finance. Bitanga thus had the mortgaged car insured by
respondent Malayan Insurance Co., Inc. (Malayan Insurance). The car was
stolen. On Bitangas claim, Malayan Insurance issued a check payable to
the order of B.A. Finance Corporation and Lamberto Bitanga for P224,500,
drawn against China Banking Corporation (China Bank). The check was
crossed with the notation For Deposit Payees Account Only.
Without the indorsement or authority of his co-payee BA Finance,
Bitanga deposited the check to his account with the Asianbank Corporation
(Asianbank), now merged with petitioner Metropolitan Bank and Trust
Company (Metrobank). Bitanga subsequently withdrew the entire proceeds
of the check.
 In the meantime, Bitangas loan became past due, but despite
demands, he failed to settle it. BA Finance thereupon demanded the
payment of the value of the check from Asianbank but to no avail, prompting
it to file a complaint for sum of money and damages against Asianbank and
Bitanga alleging that, inter alia, it is entitled to the entire proceeds of the
check.
On the issue of whether or not BA Finance has a cause of action,
Metrobank contends that Bitanga is authorized to indorse the check as the
drawer names him as one of the payees. Moreover, his signature is not a
forgery nor has he or anyone forged the signature of the representative of
BA Finance Corporation. No unauthorized indorsement appears on the
check. Absent the indispensable fact of forgery or unauthorized
indorsement, the payee may not recover from the collecting bank.
ISSUE 1:
Whether BA Finance has a cause of action against Metrobank even
if the subject check had not been delivered to BA Finance by the issuer
itself?
HELD:
YES. Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees
or indorsees who are not partners, all must indorse unless the one indorsing
has authority to indorse for the others.
Bitanga alone endorsed the crossed check, and petitioner allowed
the deposit and release of the proceeds thereof, despite the absence of
authority of Bitangas co-payee BA Finance to endorse it on its behalf.
Petitioners argument that since there was neither forgery, nor unauthorized
indorsement because Bitanga was a co-payee in the subject check, the
dictum in Associated Bank v. CA does not apply in the present case fails.
The payment of an instrument over a missing indorsement is the equivalent
of payment on a forged indorsement or an unauthorized indorsement in
itself in the case of joint payees.
Accordingly, one who credits the proceeds of a check to the account
of the indorsing payee is liable in conversion to the non-indorsing payee for
the entire amount of the check.
ISSUE 2:
Is Metrobank liable to BA Finance for the full value of the check,
under the Negotiable Instruments Law?
HELD:
YES. Section 68 of the Negotiable Instruments Law instructs that
joint payees who indorse are deemed to indorse jointly and severally. When
the maker dishonors the instrument, the holder thereof can turn to those
secondarily liable the indorser for recovery.
A collecting bank, Asianbank in this case, where a check is
deposited and which indorses the check upon presentment with the drawee
bank, is an indorser. his is because in indorsing a check to the drawee bank,
a collecting bank stamps the back of the check with the phrase all prior
endorsements and/or lack of endorsement guaranteed and, for all intents
and purposes, treats the check as a negotiable instrument, hence, assumes
the warranty of an indorser.
Petitioner, as the collecting bank or last indorser, generally suffers
the loss because it has the duty to ascertain the genuineness of all prior
indorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of prior indorsements.
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance
Corporation (BA Finance) a P329,280[1] loan to secure which, he
mortgaged his car to respondent BA Finance.[2] The mortgage contained
the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause the
property(ies) hereinabove mortgaged to be insured against loss or damage
by accident, theft and fire for a period of one year from date hereof with an
insurance company or companies acceptable to the MORTGAGEE in an
amount not less than the outstanding balance of mortgage obligations and
that he/it will make all loss, if any, under such policy or policies, payable to
the MORTGAGEE or its assigns as its interest may appear x x x.[3]
(emphasis and underscoring supplied)
Bitanga thus had the mortgaged car insured by respondent Malayan
Insurance Co., Inc. (Malayan Insurance)[4] which issued a policy stipulating
that, inter alia,
Loss, if any shall be payable to BA FINANCE CORP. as its interest may
appear. It is hereby expressly understood that this policy or any renewal
thereof, shall not be cancelled without prior notification and conformity by
BA FINANCE CORPORATION.[5] (emphasis and underscoring supplied)
The car was stolen. On Bitangas claim, Malayan Insurance issued a check
payable to the order of B.A. Finance Corporation and Lamberto Bitanga for
P224,500, drawn against China Banking Corporation (China Bank). The
check was crossed with the notation For Deposit Payees Account Only.[6]
Without the indorsement or authority of his co-payee BA Finance, Bitanga
deposited the check to his account with the Asianbank Corporation
(Asianbank), now merged with herein petitioner Metropolitan Bank and Trust
Company (Metrobank). Bitanga subsequently withdrew the entire proceeds
of the check.
In the meantime, Bitangas loan became past due, but despite demands, he
failed to settle it.
BA Finance eventually learned of the loss of the car and of Malayan
Insurances issuance of a crossed check payable to it and Bitanga, and of
Bitangas depositing it in his account at Asianbank and withdrawing the
entire proceeds thereof.
BA Finance thereupon demanded the payment of the value of the check
from Asianbank[7] but to no avail, prompting it to file a complaint before the
Regional Trial Court (RTC) of Makati for sum of money and damages
against Asianbank and Bitanga,[8] alleging that, inter alia, it is entitled to the
entire proceeds of the check.
In its Answer with Counterclaim,[9] Asianbank alleged that BA Finance
instituted [the] complaint in bad faith to coerce [it] into paying the whole
amount of the CHECK knowing fully well that its rightful claim, if any, is
against Malayan [Insurance].[10]
Asianbank thereafter filed a cross-claim against Bitanga,[11] alleging that he
fraudulently induced its personnel to release to him the full amount of the
check; and that on being later informed that the entire amount of the check
did not belong to Bitanga, it took steps to get in touch with him but he had
changed residence without leaving any forwarding address.[12]
And Asianbank filed a third-party complaint against Malayan Insurance,[13]
alleging that Malayan Insurance was grossly negligent in issuing the check
payable to both Bitanga and BA Finance and delivering it to Bitanga without
the consent of BA Finance.[14]
Bitanga was declared in default in Asianbanks cross-claim.[15]
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy
to the contract between BA Finance and Bitanga, and noting the claim of
Malayan Insurance that it is its policy to issue checks to both the insured
and the financing company, held that Malayan Insurance cannot be faulted
for negligence for issuing the check payable to both BA Finance and
Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to
deposit the check to his account and to withdraw the proceeds thereof,
without his co-payee BA Finance having either indorsed it or authorized him
to indorse it in its behalf,[16] found Asianbank and Bitanga jointly and
severally liable to BA Finance following Section 41 of the Negotiable
Instruments Law and Associated Bank v. Court of Appeals.[17]
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby rendered ordering
defendants Asian Bank Corporation and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of
P224,500.00 with interest thereon at the rate of 12% from September 25,
1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary
damages; P20,000.00 as actual damages; P30,000.00 as attorneys fee;
and
3) To pay the costs of suit.
Asianbanks and Bitangas [sic] counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff against third-party
defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is
ordered to pay Malayan attorneys fee of P50,000.00 and a per appearance
fee of P500.00.
On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga
is ordered to pay the former the amounts the latter is ordered to pay the
plaintiff in Nos. 1, 2 and 3 above-mentioned.
SO ORDERED.[18] (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted
the following issues for consideration:
3.01.1.1 Whether BA Finance has a cause of action against
Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of action, may it
claim from Asianbank more than one-half of the value of the check
considering that it is a mere co-payee or joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual and
exemplary damages for wrongfully bringing the case to court.
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of
any sum of money which this Honorable Court may award to BA Finance in
this case.[19] (underscoring supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it has no legal
right and title to the check considering that the check was not delivered to
BA Finance. Hence, BA Finance is not a holder thereof under the Negotiable
Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no
privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering
that, as the intermediary between the payee and the drawee Chinabank, it
merely acted on the instructions of drawee Chinabank to pay the amount of
the check to Bitanga, hence, the consequent damage to BA Finance was
due to the negligence of Chinabank.
D. Malayans act of issuing and delivering the check solely to Bitanga in
violation of the loss payee clause in the Policy, is the proximate cause of the
alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his
proportionate interest on the check as it is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of
unjust enrichment or solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary damages.
[20] (underscoring supplied)
The appellate court, summarizing the errors attributed to the trial court by
Asianbank to be whetherBA Finance has a cause of action against [it] even
if the subject check had not been delivered toBA Finance by the issuer itself,
held in the affirmative and accordingly affirmed the trial courts decision but
deleted the award of P20,000 as actual damages.[21]
Hence, the present Petition for Review on Certiorari[22] filed by Metrobank
(hereafter petitioner) to which Asianbank was, as earlier stated, merged,
faulting the appellate court
I. x x x in applying the case of Associated Bank v. Court of
Appeals, in the absence of factual similarity and of the legal relationships
necessary for the application of the desirable shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the
payee has no cause of action against the collecting bank absent delivery to
him must be applied.
III. x x x in finding that all the elements of a cause of action by
BA Finance Corporation against Asianbank Corporation are present.
IV. x x x in finding that Article 1208 of the Civil Code is not
applicable.
V. x x x in awarding of exemplary damages even in the
absence of moral, temperate, liquidated or compensatory damages and a
finding of fact that Asianbank acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbanks counterclaim and Third Party
complaint [against Malayan Insurance].[23] (italics in the original;
underscoring supplied)
Petitioner proffers the following arguments against the application of
Associated Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case has provided a
speedier remedy for the payee to recover from erring collecting banks
despite the absence of delivery of the negotiable instrument. However, the
application of the rule demands careful consideration of the factual settings
and issues raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is the
existence of forgery or unauthorized indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer
names him as one of the payees. Moreover, his signature is not a forgery
nor has he or anyone forged the signature of the representative of BA
Finance Corporation. No unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the
desirable shortcut rule cannot be applied,[24] (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing
has authority to indorse for the others. (emphasis and underscoring
supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the
deposit and release of the proceeds thereof, despite the absence of
authority of Bitangas co-payee BA Finance to endorse it on its behalf.[25]
Denying any irregularity in accepting the check, petitioner maintains that it
followed normal banking procedure. The testimony of Imelda Cruz,
Asianbanks then accounting head, shows otherwise, however, viz:
Q Now, could you be familiar with a particular policy of the bank with respect
to checks with joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this
transaction?
A The bank policy and procedure regarding the joint checks. Once it is
deposited to a single account, we are not accepting joint checks for single
account, depositing to a single account (sic).
Q What happened to the bank employee who allowed this particular
transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is
liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to accept joint
checks to a [single] account, so we mean that personnel would be held
liable in the sense that (sic) once it is withdrawn or encashed, it will not be
allowed.
Q In your experience, have you encountered any bank employee who was
subjected to disciplinary action by not following bank policies?
A The one that happened in that case, since I really dont know who that
personnel is, he is no longer connected with the bank.
Q What about in general, do you know of any disciplinary action, Madam
witness?
A Since theres a negligence on the part of the bank personnel, it will be a
ground for his separation [from] the bank.[26] (emphasis, italics and
underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of
the check in Bitangas account.
Petitioners argument that since there was neither forgery, nor unauthorized
indorsement because Bitanga was a co-payee in the subject check, the
dictum in Associated Bank v. CA does not apply in the present case fails.
The payment of an instrument over a missing indorsement is the equivalent
of payment on a forged indorsement[27] or an unauthorized indorsement in
itself in the case of joint payees.[28]
Clearly, petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of Bitanga,
ostensibly ignoring the fact that the check did not, it bears repeating, carry
the indorsement of BA Finance.[29]
As has been repeatedly emphasized, the banking business is imbued with
public interest such that the highest degree of diligence and highest
standards of integrity and performance are expected of banks in order to
maintain the trust and confidence of the public in general in the banking
sector.[30] Undoubtedly, BA Finance has a cause of action against
petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance should only be
one-half of the amount covered by the check as there is no indication in the
check that Bitanga and BA Finance are solidary creditors to thus make them
presumptively joint creditors under Articles 1207 and 1208 of the Civil Code
which respectively provide:
Art. 1207. The concurrence of two or more creditors or of two or more
debtors in one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestations. There is a solidary liability
only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity.
Art. 1208. If from the law, or the nature or wording of the obligations to
which the preceding article refers to the contrary does not appear, the credit
or debt shall be presumed to be divided into as many equal shares as there
are creditors or debtors, the debts or credits being considered distinct from
one another, subject to the Rules of Court governing the multiplicity of suits.
Petitioners argument is flawed.
The provisions of the Negotiable Instruments Law and underlying
jurisprudential teachings on the black-letter law provide definitive
justification for petitioners full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is
deposited and which indorses the check upon presentment with the drawee
bank, is an indorser.[31] This is because in indorsing a check to the drawee
bank, a collecting bank stamps the back of the check with the phrase all
prior endorsements and/or lack of endorsement guaranteed[32] and, for all
intents and purposes, treats the check as a negotiable instrument, hence,
assumes the warranty of an indorser.[33] Without Asianbanks warranty, the
drawee bank (China Bank in this case) would not have paid the value of the
subject check.
Petitioner, as the collecting bank or last indorser, generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
indorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of prior indorsements.[34]
Accordingly, one who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for the
entire amount of the check.[35]
It bears noting that in petitioners cross-claim against Bitanga, the trial court
ordered Bitanga to return to petitioner the entire value of the check ─
P224,500.00 ─ with interest as well as damages and cost of suit. Petitioner
never questioned this aspect of the trial courts disposition, yet it now prays
for the modification of its liability to BA Finance to only one-half of said
amount. To pander to petitioners supplication would certainly amount to
unjust enrichment at BA Finances expense. Petitioners remedywhich is the
reimbursement for the full amount of the check from the perpetrator of the
irregularity lies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to the present
case as these are completely irrelevant. The drawer, Malayan Insurance in
this case, issued the check to answer for an underlying contractual
obligation (payment of insurance proceeds). The obligation is merely
reflected in the instrument and whether the payees would jointly share in the
proceeds or not is beside the point.
Moreover, granting petitioners appeal for partial liability would run counter to
the existing principles on the liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments Law which instructs
that joint payees who indorse are deemed to indorse jointly and severally.
[36] Recall that when the maker dishonors the instrument, the holder thereof
can turn to those secondarily liable the indorser for recovery.[37] And since
the law explicitly mandates a solidary liability on the part of the joint payees
who indorse the instrument, the holder thereof (assuming the check was
further negotiated) can turn to either Bitanga or BA Finance for full
recompense.
Respecting petitioners challenge to the award by the appellate court of
exemplary damages to BA Finance, the same fails. Contrary to petitioners
claim that no moral, temperate, liquidated or compensatory damages were
awarded by the trial court,[38] the RTC did in fact award compensatory or
actual damages of P224,500, the value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendo that compensatory
damages had been awarded, the same contravened Article 2232 of the Civil
Code which provides that in contracts or quasi-contracts, the court may
award exemplary damages only if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner
concludes, there was no finding that it acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner,[39] it is not liable for exemplary
damages.
The argument fails. To reiterate, petitioners liability is based not on contract
or quasi-contract but on quasi-delict since there is no pre-existing
contractual relation between the parties.[40] Article 2231 of the Civil Code,
which provides that in quasi-delict, exemplary damages may be granted if
the defendant acted with gross negligence, thus applies. For gross
negligence implies a want or absence of or failure to exercise even slight
care or diligence, or the entire absence of care,[41] evincing a thoughtless
disregard of consequences without exerting any effort to avoid them.[42]
x x x The law allows the grant of exemplary damages to set an example for
the public good. The business of a bank is affected with public interest; thus
it makes a sworn profession of diligence and meticulousness in giving
irreproachable service. For this reason, the bank should guard against in
injury attributable to negligence or bad faith on its part. The award of
exemplary damages is proper as a warning to [the petitioner] and all
concerned not to recklessly disregard their obligation to exercise the highest
and strictest diligence in serving their depositors.[43] (Italics and
underscoring supplied)
As for the dismissal by the appellate court of petitioners third-party
complaint against Malayan Insurance, the same is well-taken. Petitioner
based its third-party complaint on Malayan Insurances alleged gross
negligence in issuing the check payable to both BA Finance and Bitanga,
despite the stipulation in the mortgage and in the insurance policy that
liability for loss shall be payable to BA Finance.[44] Malayan Insurance
countered, however, that it
x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto
Bitanga in compliance with the decision in the case of Lamberto Bitanga
versus Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati
Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R.
no. 101964, April 8, 1992 x x x.[45] (underscoring supplied)
It is noted that Malayan Insurance, which stated that it was a matter of
company policy to issue checks in the name of the insured and the financing
company, presented a witness to rebut its supposed negligence. [46]
Perforce, it thus wrote a crossed check with joint payees so as to serve
warning that the check was issued for a definite purpose.[47] Petitioner
never ever disputed these assertions.
The Court takes exception, however, to the appellate courts affirmance of
the trial courts grant of legal interest of 12% per annum on the value of the
check. For the obligation in this case did not arise out of a loan or
forbearance of money, goods or credit. While Article 1980 of the Civil Code
provides that:
Fixed savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan,
said provision does not find application in this case since the nature of the
relationship between BA Finance and petitioner is one of agency whereby
petitioner, as collecting bank, is to collect for BA Finance the corresponding
proceeds from the check.[48] Not being a loan or forbearance of money, the
interest should be 6% per annum computed from the date of extrajudicial
demand on September 25, 1992 until finality of judgment; and 12% per
annum from finality of judgment until payment, conformably with Eastern
Shipping Lines, Inc. v. Court of Appeals.[49]
WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is
AFFIRMED with MODIFICATION in that the rate of interest on the judgment
obligation of P224,500 should be 6% per annum, computed from the time of
extrajudicial demand on September 25, 1992 until its full payment before
finality of judgment; thereafter, if the amount adjudged remains unpaid, the
interest rate shall be 12% per annum computed from the time the judgment
becomes final and executory until fully satisfied.
Costs against petitioner. SO ORDERED.
DEPOSIT NECESSARY
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM
VS. THE COURT OF APPEALS and MAURICE McLOUGHLIN,
G.R. No. 126780
FACTS
Respondent McLoughlin would always stay at Tropicana Hotel every time
he is here in the Philippines and would rent a safety deposit box. The safety
deposit box could only be opened through the use of 2 keys, one of which is
given to the registered guest, and the other remaining in the possession of
the management of the hotel.McLoughlin allegedly placed the following in
his safety deposit box – 2 envelopes containing S Dollars, one envelope
containing Australian Dollars, Letters, credit cards, bankbooks and a
checkbook.On 12 December 1987, before leaving for a brief trip,
McLoughlin took some items from the safety box which includes the ff:
envelope containing Five Thousand US Dollars (US$5,000.00), the other
envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his
passports and his credit cards. The other items were left in the deposit box.
Upon arrival, he found out that a few dollars were missing and the jewelry
he bought was likewise missing.Eventually, he confronted Lainez and
Paiyam who admitted that Tan opened the safety deposit box with the key
assigned to him. McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen McLouglin’s key and
was able to open the safety deposit box with the assistance of Lopez,
Paiyam and Lainez. Lopez also told McLoughlin that Tan stole the key
assigned to McLouglin while the latter was asleep.McLoughlin insisted that it
must be the hotel who must assume responsibility for the loss he suffered.
Lopez refused to accept responsibility relying on the conditions for renting
the safety Deposit box entitled “Undertaking For the Use of Safety Deposit
Box”
ISSUE
WON the “Undertaking for the Use of Safety Deposit Box” admittedly
executed by private respondent is null and void.
HELD
YES Article 2003 was incorporated in the New Civil Code as an expression
of public policy precisely to apply to situations such as that presented in this
case. The hotel business like the common carrier’s business is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not
only lodging for hotel guests and security to their persons and belongings.
The twin duty constitutes the essence of the business. The law in turn does
not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called “undertakings” that ordinarily appear in prepared
forms imposed by hotel keepers on guests for their signature.In an early
case (De Los Santos v. Tan Khey), CA ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they
be actually delivered to the innkeepers or their employees. It is enough that
such effects are within the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the missing items are taken
without the guest’s knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the
“undertaking” manifestly contravene Article 2003, CC for they allow
Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever. Evidently,
the undertaking was intended to bar any claim against Tropicana for any
loss of the contents of the safety deposit box whether or not negligence was
incurred by Tropicana or its employees. The New Civil Code is explicit that
the responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers, except as it may
proceed from any force majeure.
The primary question of interest before this Court is the only legal issue in
the case: It is whether a hotel may evade liability for the loss of items left
with it for safekeeping by its guests, by having these guests execute written
waivers holding the establishment or its employees free from blame for such
loss in light of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision[1] dated 19
October 1995 of the Court of Appeals which affirmed the Decision[2] dated
16 December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila,
finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez
(Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages
in an action filed by Maurice McLoughlin (McLoughlin) for the loss of his
American and Australian dollars deposited in the safety deposit box of
Tropicana Copacabana Apartment Hotel, owned and operated by YHT
Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist,
used to stay at Sheraton Hotel during his trips to the Philippines prior to
1984 when he met Tan. Tan befriended McLoughlin by showing him around,
introducing him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts for the
children and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton Hotel to
Tropicana where Lainez, Payam and Danilo Lopez were employed. Lopez
served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlins booking at the Tropicana where he started staying during his
trips to the Philippines from December 1984 to September 1987.[3]
On 30 October 1987, McLoughlin arrived from Australia and registered with
Tropicana. He rented a safety deposit box as it was his practice to rent a
safety deposit box every time he registered at Tropicana in previous trips.
As a tourist, McLoughlin was aware of the procedure observed by Tropicana
relative to its safety deposit boxes. The safety deposit box could only be
opened through the use of two keys, one of which is given to the registered
guest, and the other remaining in the possession of the management of the
hotel. When a registered guest wished to open his safety deposit box, he
alone could personally request the management who then would assign one
of its employees to accompany the guest and assist him in opening the
safety deposit box with the two keys.[4]
McLoughlin allegedly placed the following in his safety deposit box: Fifteen
Thousand US Dollars (US$15,000.00) which he placed in two envelopes,
one envelope containing Ten Thousand US Dollars (US$10,000.00) and the
other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand
Australian Dollars (AUS$10,000.00) which he also placed in another
envelope; two (2) other envelopes containing letters and credit cards; two
(2) bankbooks; and a checkbook, arranged side by side inside the safety
deposit box.[5]
On 12 December 1987, before leaving for a brief trip to Hongkong,
McLoughlin opened his safety deposit box with his key and with the key of
the management and took therefrom the envelope containing Five
Thousand US Dollars (US$5,000.00), the envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00), his passports and his credit
cards.[6] McLoughlin left the other items in the box as he did not check out
of his room at the Tropicana during his short visit to Hongkong. When he
arrived in Hongkong, he opened the envelope which contained Five
Thousand US Dollars (US$5,000.00) and discovered upon counting that
only Three Thousand US Dollars (US$3,000.00) were enclosed therein.[7]
Since he had no idea whether somebody else had tampered with his safety
deposit box, he thought that it was just a result of bad accounting since he
did not spend anything from that envelope.[8]
After returning to Manila, he checked out of Tropicana on 18 December
1987 and left for Australia. When he arrived in Australia, he discovered that
the envelope with Ten Thousand US Dollars (US$10,000.00) was short of
Five Thousand US Dollars (US$5,000). He also noticed that the jewelry
which he bought in Hongkong and stored in the safety deposit box upon his
return to Tropicana was likewise missing, except for a diamond bracelet.[9]
When McLoughlin came back to the Philippines on 4 April 1988, he asked
Lainez if some money and/or jewelry which he had lost were found and
returned to her or to the management. However, Lainez told him that no one
in the hotel found such things and none were turned over to the
management. He again registered at Tropicana and rented a safety deposit
box. He placed therein one (1) envelope containing Fifteen Thousand US
Dollars (US$15,000.00), another envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00) and other envelopes containing his
traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the
envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two
Thousand US Dollars (US$2,000.00) were missing and in the envelope
previously containing Ten Thousand Australian Dollars (AUS$10,000.00),
Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were
missing.[10]
When McLoughlin discovered the loss, he immediately confronted Lainez
and Payam who admitted that Tan opened the safety deposit box with the
key assigned to him.[11] McLoughlin went up to his room where Tan was
staying and confronted her. Tan admitted that she had stolen McLoughlins
key and was able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez.[12] Lopez also told McLoughlin that Tan stole
the key assigned to McLoughlin while the latter was asleep.[13]
McLoughlin requested the management for an investigation of the incident.
Lopez got in touch with Tan and arranged for a meeting with the police and
McLoughlin. When the police did not arrive, Lopez and Tan went to the room
of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5,
1988.[14]
Lopez requested Tan to sign the promissory note which the latter did and
Lopez also signed as a witness. Despite the execution of promissory note
by Tan, McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety deposit box
entitled Undertaking For the Use Of Safety Deposit Box,[15] specifically
paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT
HOTEL from any liability arising from any loss in the contents and/or use of
the said deposit box for any cause whatsoever, including but not limited to
the presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA
APARTMENT HOTEL upon giving up the use of the box.[16]
On 17 May 1988, McLoughlin went back to Australia and he consulted his
lawyers as to the validity of the abovementioned stipulations. They opined
that the stipulations are void for being violative of universal hotel practices
and customs. His lawyers prepared a letter dated 30 May 1988 which was
signed by McLoughlin and sent to President Corazon Aquino.[17] The Office
of the President referred the letter to the Department of Justice (DOJ) which
forwarded the same to the Western Police District (WPD).[18]
After receiving a copy of the indorsement in Australia, McLoughlin came to
the Philippines and registered again as a hotel guest of Tropicana.
McLoughlin went to Malacaňang to follow up on his letter but he was
instructed to go to the DOJ. The DOJ directed him to proceed to the WPD
for documentation. But McLoughlin went back to Australia as he had an
urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and
came back to the Philippines to follow up on his letter to the President but
he failed to obtain any concrete assistance.[19]
McLoughlin left again for Australia and upon his return to the Philippines on
25 August 1989 to pursue his claims against petitioners, the WPD
conducted an investigation which resulted in the preparation of an affidavit
which was forwarded to the Manila City Fiscals Office. Said affidavit became
the basis of preliminary investigation. However, McLoughlin left again for
Australia without receiving the notice of the hearing on 24 November 1989.
Thus, the case at the Fiscals Office was dismissed for failure to prosecute.
Mcloughlin requested the reinstatement of the criminal charge for theft. In
the meantime, McLoughlin and his lawyers wrote letters of demand to those
having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at
Malate, Manila. Meetings were held between McLoughlin and his lawyer
which resulted to the filing of a complaint for damages on 3 December 1990
against YHT Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlins money which was discovered on
16 April 1988. After filing the complaint, McLoughlin left again for Australia to
attend to an urgent business matter. Tan and Lopez, however, were not
served with summons, and trial proceeded with only Lainez, Payam and
YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had
previously allowed and assisted Tan to open the safety deposit box,
McLoughlin filed an Amended/Supplemental Complaint[20] dated 10 June
1991 which included another incident of loss of money and jewelry in the
safety deposit box rented by McLoughlin in the same hotel which took place
prior to 16 April 1988.[21] The trial court admitted the
Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country
to attend to urgent business in Australia, and while staying in the Philippines
to attend the hearing, he incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia, Meralco power
expenses, and expenses for food and maintenance, among others.[22]
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered
by this Court in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of
US$11,400.00 or its equivalent in Philippine Currency of P342,000.00, more
or less, and the sum of AUS$4,500.00 or its equivalent in Philippine
Currency of P99,000.00, or a total of P441,000.00, more or less, with 12%
interest from April 16 1988 until said amount has been paid to plaintiff (Item
1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of
P3,674,238.00 as actual and consequential damages arising from the loss
of his Australian and American dollars and jewelries complained against and
in prosecuting his claim and rights administratively and judicially (Items II,
III, IV, V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P500,000.00 as moral damages (Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P350,000.00 as exemplary damages (Item XI, Exh. CC);
5. And ordering defendants, jointly and severally, to pay litigation expenses
in the sum of P200,000.00 (Item XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P200,000.00 as attorneys fees, and a fee of P3,000.00 for every
appearance; and
7. Plus costs of suit.
SO ORDERED.[23]
The trial court found that McLoughlins allegations as to the fact of loss and
as to the amount of money he lost were sufficiently shown by his direct and
straightforward manner of testifying in court and found him to be credible
and worthy of belief as it was established that McLoughlins money, kept in
Tropicanas safety deposit box, was taken by Tan without McLoughlins
consent. The taking was effected through the use of the master key which
was in the possession of the management. Payam and Lainez allowed Tan
to use the master key without authority from McLoughlin. The trial court
added that if McLoughlin had not lost his dollars, he would not have gone
through the trouble and personal inconvenience of seeking aid and
assistance from the Office of the President, DOJ, police authorities and the
City Fiscals Office in his desire to recover his losses from the hotel
management and Tan.[24]
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and
jewelry worth approximately One Thousand Two Hundred US Dollars
(US$1,200.00) which allegedly occurred during his stay at Tropicana
previous to 4 April 1988, no claim was made by McLoughlin for such losses
in his complaint dated 21 November 1990 because he was not sure how
they were lost and who the responsible persons were. But considering the
admission of the defendants in their pre-trial brief that on three previous
occasions they allowed Tan to open the box, the trial court opined that it was
logical and reasonable to presume that his personal assets consisting of
Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan
from the safety deposit box without McLoughlins consent through the
cooperation of Payam and Lainez.[25]
The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and
were therefore liable to answer for the losses incurred by McLoughlin.[26]
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking
For The Use Of Safety Deposit Box are not valid for being contrary to the
express mandate of Article 2003 of the New Civil Code and against public
policy.[27] Thus, there being fraud or wanton conduct on the part of
defendants, they should be responsible for all damages which may be
attributed to the non-performance of their contractual obligations.[28]
The Court of Appeals affirmed the disquisitions made by the lower court
except as to the amount of damages awarded. The decretal text of the
appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby
AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee
the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and
AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney
[sic] to Manila and back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to
Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to
Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation
from the residence to Sidney [sic] Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power
expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food
and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.[29]
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court
in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a)
whether the appellate courts conclusion on the alleged prior existence and
subsequent loss of the subject money and jewelry is supported by the
evidence on record; (b) whether the finding of gross negligence on the part
of petitioners in the performance of their duties as innkeepers is supported
by the evidence on record; (c) whether the Undertaking For The Use of
Safety Deposit Box admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well
as the amounts thereof, are proper under the circumstances.[30]
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of
questions of law and any peripheral factual question addressed to this Court
is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the
fact of prior existence of the dollars and the jewelry which had been lost
while deposited in the safety deposit boxes of Tropicana, the basis of the
trial court and the appellate court being the sole testimony of McLoughlin as
to the contents thereof. Likewise, petitioners dispute the finding of gross
negligence on their part as not supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as
affirmed by the appellate court that the fact of loss was established by the
credible testimony in open court by McLoughlin. Such findings are factual
and therefore beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin
while testifying which reflected the veracity of the facts testified to by him.
On this score, we give full credence to the appreciation of testimonial
evidence by the trial court especially if what is at issue is the credibility of
the witness. The oft-repeated principle is that where the credibility of a
witness is an issue, the established rule is that great respect is accorded to
the evaluation of the credibility of witnesses by the trial court.[31] The trial
court is in the best position to assess the credibility of witnesses and their
testimonies because of its unique opportunity to observe the witnesses
firsthand and note their demeanor, conduct and attitude under grilling
examination.[32]
We are also not impressed by petitioners argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not
supported by evidence. The evidence reveals that two keys are required to
open the safety deposit boxes of Tropicana. One key is assigned to the
guest while the other remains in the possession of the management. If the
guest desires to open his safety deposit box, he must request the
management for the other key to open the same. In other words, the guest
alone cannot open the safety deposit box without the assistance of the
management or its employees. With more reason that access to the safety
deposit box should be denied if the one requesting for the opening of the
safety deposit box is a stranger. Thus, in case of loss of any item deposited
in the safety deposit box, it is inevitable to conclude that the management
had at least a hand in the consummation of the taking, unless the reason for
the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management when the loss
took place. In fact, they even admitted that they assisted Tan on three
separate occasions in opening McLoughlins safety deposit box.[33] This
only proves that Tropicana had prior knowledge that a person aside from the
registered guest had access to the safety deposit box. Yet the management
failed to notify McLoughlin of the incident and waited for him to discover the
taking before it disclosed the matter to him. Therefore, Tropicana should be
held responsible for the damage suffered by McLoughlin by reason of the
negligence of its employees.
The management should have guarded against the occurrence of this
incident considering that Payam admitted in open court that she assisted
Tan three times in opening the safety deposit box of McLoughlin at around
6:30 A.M. to 7:30 A.M. while the latter was still asleep.[34] In light of the
circumstances surrounding this case, it is undeniable that without the
acquiescence of the employees of Tropicana to the opening of the safety
deposit box, the loss of McLoughlins money could and should have been
avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him
most of the time. The evidence on record, however, is bereft of any showing
that McLoughlin introduced Tan to the management as his wife. Such an
inference from the act of McLoughlin will not exculpate the petitioners from
liability in the absence of any showing that he made the management
believe that Tan was his wife or was duly authorized to have access to the
safety deposit box. Mere close companionship and intimacy are not enough
to warrant such conclusion considering that what is involved in the instant
case is the very safety of McLoughlins deposit. If only petitioners exercised
due diligence in taking care of McLoughlins safety deposit box, they should
have confronted him as to his relationship with Tan considering that the
latter had been observed opening McLoughlins safety deposit box a number
of times at the early hours of the morning. Tans acts should have prompted
the management to investigate her relationship with McLoughlin. Then,
petitioners would have exercised due diligence required of them. Failure to
do so warrants the conclusion that the management had been remiss in
complying with the obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of
their obligations, are guilty of negligence, are liable for damages. As to who
shall bear the burden of paying damages, Article 2180, paragraph (4) of the
same Code provides that the owners and managers of an establishment or
enterprise are likewise responsible for damages caused by their employees
in the service of the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that if an employee is
found negligent, it is presumed that the employer was negligent in selecting
and/or supervising him for it is hard for the victim to prove the negligence of
such employer.[35] Thus, given the fact that the loss of McLoughlins money
was consummated through the negligence of Tropicanas employees in
allowing Tan to open the safety deposit box without the guests consent, both
the assisting employees and YHT Realty Corporation itself, as owner and
operator of Tropicana, should be held solidarily liable pursuant to Article
2193.[36]
The issue of whether the Undertaking For The Use of Safety Deposit Box
executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition. Notably, both the trial court and the
appellate court found the same to be null and void. We find no reason to
reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in Articles 1998 to 2001[37] is
suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of
public policy precisely to apply to situations such as that presented in this
case. The hotel business like the common carriers business is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not
only lodging for hotel guests and security to their persons and belongings.
The twin duty constitutes the essence of the business. The law in turn does
not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called undertakings that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
In an early case,[38] the Court of Appeals through its then Presiding Justice
(later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their
employees. It is enough that such effects are within the hotel or inn.[39]
With greater reason should the liability of the hotelkeeper be enforced when
the missing items are taken without the guests knowledge and consent from
a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article
2003 of the New Civil Code for they allow Tropicana to be released from
liability arising from any loss in the contents and/or use of the safety deposit
box for any cause whatsoever.[40] Evidently, the undertaking was intended
to bar any claim against Tropicana for any loss of the contents of the safety
deposit box whether or not negligence was incurred by Tropicana or its
employees. The New Civil Code is explicit that the responsibility of the
hotel-keeper shall extend to loss of, or injury to, the personal property of the
guests even if caused by servants or employees of the keepers of hotels or
inns as well as by strangers, except as it may proceed from any force
majeure.[41] It is the loss through force majeure that may spare the hotel-
keeper from liability. In the case at bar, there is no showing that the act of
the thief or robber was done with the use of arms or through an irresistible
force to qualify the same as force majeure.[42]
Petitioners likewise anchor their defense on Article 2002[43] which exempts
the hotel-keeper from liability if the loss is due to the acts of his guest, his
family, or visitors. Even a cursory reading of the provision would lead us to
reject petitioners contention. The justification they raise would render
nugatory the public interest sought to be protected by the provision. What if
the negligence of the employer or its employees facilitated the
consummation of a crime committed by the registered guests relatives or
visitor? Should the law exculpate the hotel from liability since the loss was
due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the
loss. A depositary is not responsible for the loss of goods by theft, unless his
actionable negligence contributes to the loss.[44]
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two
keys are necessary to open the safety deposit box. Without the assistance
of hotel employees, the loss would not have occurred. Thus, Tropicana was
guilty of concurrent negligence in allowing Tan, who was not the registered
guest, to open the safety deposit box of McLoughlin, even assuming that
the latter was also guilty of negligence in allowing another person to use his
key. To rule otherwise would result in undermining the safety of the safety
deposit boxes in hotels for the management will be given imprimatur to
allow any person, under the pretense of being a family member or a visitor
of the guest, to have access to the safety deposit box without fear of any
liability that will attach thereafter in case such person turns out to be a
complete stranger. This will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy with the guests relatives and
visitors.
Petitioners contend that McLoughlins case was mounted on the theory of
contract, but the trial court and the appellate court upheld the grant of the
claims of the latter on the basis of tort.[45] There is nothing anomalous in
how the lower courts decided the controversy for this Court has pronounced
a jurisprudential rule that tort liability can exist even if there are already
contractual relations. The act that breaks the contract may also be tort.[46]
As to damages awarded to McLoughlin, we see no reason to modify the
amounts awarded by the appellate court for the same were based on facts
and law. It is within the province of lower courts to settle factual issues such
as the proper amount of damages awarded and such finding is binding upon
this Court especially if sufficiently proven by evidence and not
unconscionable or excessive. Thus, the appellate court correctly awarded
McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand
Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at
the time of payment,[47] being the amounts duly proven by evidence.[48]
The alleged loss that took place prior to 16 April 1988 was not considered
since the amounts alleged to have been taken were not sufficiently
established by evidence. The appellate court also correctly awarded the
sum of P308,880.80, representing the peso value for the air fares from
Sydney to Manila and back for a total of eleven (11) trips;[49] one-half of
P336,207.05 or P168,103.52 representing payment to Tropicana;[50] one-
half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;[51] one-half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlins residence to Sydney Airport and
from MIA to the hotel here in Manila, for the eleven (11) trips;[52] one-half of
P7,801.94 or P3,900.97 representing Meralco power expenses;[53] one-half
of P356,400.00 or P178,000.00 representing expenses for food and
maintenance.[54]
The amount of P50,000.00 for moral damages is reasonable. Although trial
courts are given discretion to determine the amount of moral damages, the
appellate court may modify or change the amount awarded when it is
palpably and scandalously excessive. Moral damages are not intended to
enrich a complainant at the expense of a defendant. They are awarded only
to enable the injured party to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone, by reason of
defendants culpable action.[55]
The awards of P10,000.00 as exemplary damages and P200,000.00
representing attorneys fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of
Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are
directed, jointly and severally, to pay private respondent the following
amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of
payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney
to Manila and back for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to
Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to
Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation
expense from McLoughlins residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power
expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food
and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.
Durban vs Pioneer Insurance and surety corporation
Facts:
On July 22, 2003, Pioneer Insurance and Surety Corporation, by right of
subrogation, filed a Complaint for Recovery of Damages against Durban
Apartments Corporation, doing business under the name and style of City
Garden Hotel, and Vicente Justimbaste
Pioneer averred that:
• it is the insurer for loss and damage of Jeffrey S. See’s [the
insured’s] 2001 Suzuki Grand Vitara in the amount of P1,175,000.00;
• on April 30, 2002, See arrived and checked in at the City Garden
Hotel in Makati corner Kalayaan Avenues, Makati City before midnight, and
See gave notice to the doorman and parking attendant of the said hotel,
Justimbaste, about his Vitara when he entrusted its ignition key to the latter.
Justimbaste issued a valet parking customer claim stub to See, parked the
Vitara at the Equitable PCI Bank parking area, and placed the ignition key
inside a safety key box while See proceeded to the hotel lobby to check in.
The Equitable PCI Bank parking area became an annex of City Garden
Hotel when the management of the said bank allowed the parking of the
vehicles of hotel guests thereat in the evening after banking hours.
• May 1, 2002, at about 1:00 o’clock in the morning, See was
awakened in his room by [a] telephone call from the Hotel Chief Security
Officer who informed him that his Vitara was carnapped while it was parked
unattended at the parking area of Equitable PCI Bank along Makati Avenue
between the hours of 12:00 [a.m.] and 1:00 [a.m.];
• See went to see the Hotel Chief Security Officer, thereafter
reported the incident to the Operations Division of the Makati City Police
Anti-Carnapping Unit,
• the Vitara has not yet been recovered since July 23, 2002 as
evidenced by a Certification of Non- Recovery issued by the PNP TMG;
• Pioneer paid the P1,163,250.00 money claim of See and
mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss of the
Vitara;
• the Vitara was lost due to the negligence of Durban Apartments
and Justimbaste because it was discovered during the investigation that this
was the second time that a similar incident of carnapping happened in the
valet parking service of Durban Apartments and no necessary precautions
were taken to prevent its repetition;
• Durban Apartments was wanting in due diligence in the selection
and supervision of its employees particularly defendant Justimbaste;
• and defendant Justimbaste and Durban Apartments failed and
refused to pay its valid, just, and lawful claim despite written demands.
The RTC rendered its decision in favor of the respondent:
WHEREFORE, judgment is hereby rendered ordering [petitioner Durban
Apartments Corporation] to pay [respondent Pioneer Insurance and Surety
Corporation] the sum of P1,163,250.00 with legal interest thereon from July
22, 2003 until the obligation is fully paid and attorney’s fees and litigation
expenses amounting to P120,000.00
on appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January 27,
2006 of the RTC, Branch 66, Makati City in Civil Case No. 03-857 is hereby
AFFIRMED insofar as it holds [petitioner] Durban Apartments Corporation
solely liable to [respondent] Pioneer Insurance and Surety Corporation for
the loss of Jeffrey See’s Suzuki Grand Vitara.
Issue:
whether petitioner is liable to respondent for the loss of See’s vehicle.
Ruling:
Yes.
In this case, respondent substantiated the allegations in its complaint, i.e., a
contract of necessary deposit existed between the insured See and
petitioner. On this score, we find no error in the following disquisition of the
appellate court:
[The] records also reveal that upon arrival at the City Garden Hotel, See
gave notice to the doorman and parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he entrusted its ignition key to the latter.
x x x Justimbaste issued a valet parking customer claim stub to See, parked
the Vitara at the Equitable PCI Bank parking area, and placed the ignition
key inside a safety key box while See proceeded to the hotel lobby to check
in. The Equitable PCI Bank parking area became an annex of City Garden
Hotel when the management of the said bank allowed the parking of the
vehicles of hotel guests thereat in the evening after banking hours.[11]
Article 1962, in relation to Article 1998, of the Civil Code defines a
contract of deposit and a necessary deposit made by persons in hotels or
inns:
Art. 1962. A deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See
deposited his vehicle for safekeeping with petitioner, through the latter’s
employee, Justimbaste. In turn, Justimbaste issued a claim stub to See.
Thus, the contract of deposit was perfected from See’s delivery, when he
handed over to Justimbaste the keys to his vehicle, which Justimbaste
received with the obligation of safely keeping and returning it. Ultimately,
petitioner is liable for the loss of See’s vehicle.
For review is the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV
No. 86869, which affirmed the decision[2] of the Regional Trial Court (RTC),
Branch 66, Makati City, in Civil Case No. 03-857, holding petitioner Durban
Apartments Corporation solely liable to respondent Pioneer Insurance and
Surety Corporation for the loss of Jeffrey Sees (Sees) vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x
x x, by right of subrogation, filed [with the RTC of Makati City] a Complaint
for Recovery of Damages against [petitioner] Durban Apartments
Corporation, doing business under the name and style of City Garden Hotel,
and [defendant before the RTC] Vicente Justimbaste x x x. [Respondent
averred] that: it is the insurer for loss and damage of Jeffrey S. Sees [the
insureds] 2001 Suzuki Grand Vitara x x x with Plate No. XBH-510 under
Policy No. MC-CV-HO-01-0003846-00-D in the amount of P1,175,000.00;
on April 30, 2002, See arrived and checked in at the City Garden Hotel in
Makati corner Kalayaan Avenues, Makati City before midnight, and its
parking attendant, defendant x x x Justimbaste got the key to said Vitara
from See to park it[. O]n May 1, 2002, at about 1:00 oclock in the morning,
See was awakened in his room by [a] telephone call from the Hotel Chief
Security Officer who informed him that his Vitara was carnapped while it
was parked unattended at the parking area of Equitable PCI Bank along
Makati Avenue between the hours of 12:00 [a.m.] and 1:00 [a.m.]; See went
to see the Hotel Chief Security Officer, thereafter reported the incident to the
Operations Division of the Makati City Police Anti-Carnapping Unit, and a
flash alarm was issued; the Makati City Police Anti-Carnapping Unit
investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x and
defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to the
police investigator, and filed a Complaint Sheet with the PNP Traffic
Management Group in Camp Crame, Quezon City; the Vitara has not yet
been recovered since July 23, 2002 as evidenced by a Certification of Non-
Recovery issued by the PNP TMG; it paid the P1,163,250.00 money claim
of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the
loss of the Vitara; the Vitara was lost due to the negligence of [petitioner]
Durban Apartments and [defendant] Justimbaste because it was discovered
during the investigation that this was the second time that a similar incident
of carnapping happened in the valet parking service of [petitioner] Durban
Apartments and no necessary precautions were taken to prevent its
repetition; [petitioner] Durban Apartments was wanting in due diligence in
the selection and supervision of its employees particularly defendant x x x
Justimbaste; and defendant x x x Justimbaste and [petitioner] Durban
Apartments failed and refused to pay its valid, just, and lawful claim despite
written demands.
Upon service of Summons, [petitioner] Durban Apartments and [defendant]
Justimbaste filed their Answer with Compulsory Counterclaim alleging that:
See did not check in at its hotel, on the contrary, he was a guest of a certain
Ching Montero x x x; defendant x x x Justimbaste did not get the ignition key
of Sees Vitara, on the contrary, it was See who requested a parking
attendant to park the Vitara at any available parking space, and it was
parked at the Equitable Bank parking area, which was within Sees view,
while he and Montero were waiting in front of the hotel; they made a written
denial of the demand of [respondent] Pioneer Insurance for want of legal
basis; valet parking services are provided by the hotel for the convenience
of its customers looking for a parking space near the hotel premises; it is a
special privilege that it gave to Montero and See; it does not include
responsibility for any losses or damages to motor vehicles and its
accessories in the parking area; and the same holds true even if it was See
himself who parked his Vitara within the premises of the hotel as evidenced
by the valet parking customers claim stub issued to him; the carnapper was
able to open the Vitara without using the key given earlier to the parking
attendant and subsequently turned over to See after the Vitara was stolen;
defendant x x x Justimbaste saw the Vitara speeding away from the place
where it was parked; he tried to run after it, and blocked its possible path
but to no avail; and See was duly and immediately informed of the
carnapping of his Vitara; the matter was reported to the nearest police
precinct; and defendant x x x Justimbaste, and Horlador submitted
themselves to police investigation.
During the pre-trial conference on November 28, 2003, counsel for
[respondent] Pioneer Insurance was present. Atty. Monina Lee x x x,
counsel of record of [petitioner] Durban Apartments and Justimbaste was
absent, instead, a certain Atty. Nestor Mejia appeared for [petitioner] Durban
Apartments and Justimbaste, but did not file their pre-trial brief.
On November 5, 2004, the lower court granted the motion of [respondent]
Pioneer Insurance, despite the opposition of [petitioner] Durban Apartments
and Justimbaste, and allowed [respondent] Pioneer Insurance to present its
evidence ex parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the evening, he drove
his Vitara and stopped in front of City Garden Hotel in Makati Avenue,
Makati City; a parking attendant, whom he had later known to be defendant
x x x Justimbaste, approached and asked for his ignition key, told him that
the latter would park the Vitara for him in front of the hotel, and issued him a
valet parking customers claim stub; he and Montero, thereafter, checked in
at the said hotel; on May 1, 2002, at around 1:00 in the morning, the Hotel
Security Officer whom he later knew to be Horlador called his attention to
the fact that his Vitara was carnapped while it was parked at the parking lot
of Equitable PCI Bank which is in front of the hotel; his Vitara was insured
with [respondent] Pioneer Insurance; he together with Horlador and
defendant x x x Justimbaste went to Precinct 19 of the Makati City Police to
report the carnapping incident, and a police officer came accompanied them
to the Anti-Carnapping Unit of the said station for investigation, taking of
their sworn statements, and flashing of a voice alarm; he likewise reported
the said incident in PNP TMG in Camp Crame where another alarm was
issued; he filed his claim with [respondent] Pioneer Insurance, and a
representative of the latter, who is also an adjuster of Vesper Insurance
Adjusters-Appraisers [Vesper], investigated the incident; and [respondent]
Pioneer Insurance required him to sign a Release of Claim and Subrogation
Receipt, and finally paid him the sum of P1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer
Insurance tasked, among others, with the receipt of claims and documents
from the insured, investigation of the said claim, inspection of damages,
taking of pictures of insured unit, and monitoring of the processing of the
claim until its payment; he monitored the processing of Sees claim when the
latter reported the incident to [respondent] Pioneer Insurance; [respondent]
Pioneer Insurance assigned the case to Vesper who verified Sees report,
conducted an investigation, obtained the necessary documents for the
processing of the claim, and tendered a settlement check to See; they
evaluated the case upon receipt of the subrogation documents and the
adjusters report, and eventually recommended for its settlement for the sum
of P1,163,250.00 which was accepted by See; the matter was referred and
forwarded to their counsel, R.B. Sarajan & Associates, who prepared and
sent demand letters to [petitioner] Durban Apartments and [defendant]
Justimbaste, who did not pay [respondent] Pioneer Insurance
notwithstanding their receipt of the demand letters; and the services of R.B.
Sarajan & Associates were engaged, for P100,000.00 as attorneys fees
plus P3,000.00 per court appearance, to prosecute the claims of
[respondent] Pioneer Insurance against [petitioner] Durban Apartments and
Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper; [respondent]
Pioneer Insurance assigned to Vesper the investigation of Sees case, and
he was the one actually assigned to investigate it; he conducted his
investigation of the matter by interviewing See, going to the City Garden
Hotel, required subrogation documents from See, and verified the
authenticity of the same; he learned that it is the standard procedure of the
said hotel as regards its valet parking service to assist their guests as soon
as they get to the lobby entrance, park the cars for their guests, and place
the ignition keys in their safety key box; considering that the hotel has only
twelve (12) available parking slots, it has an agreement with Equitable PCI
Bank permitting the hotel to use the parking space of the bank at night; he
also learned that a Hyundai Starex van was carnapped at the said place
barely a month before the occurrence of this incident because Liberty
Insurance assigned the said incident to Vespers, and Horlador and
defendant x x x Justimbaste admitted the occurrence of the same in their
sworn statements before the Anti-Carnapping Unit of the Makati City Police;
upon verification with the PNP TMG [Unit] in Camp Crame, he learned that
Sees Vitara has not yet been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle Sees claim for
P1,045,750.00; See contested the recommendation of Vesper by reasoning
out that the 10% depreciation should not be applied in this case considering
the fact that the Vitara was used for barely eight (8) months prior to its loss;
and [respondent] Pioneer Insurance acceded to Sees contention, tendered
the sum of P1,163,250.00 as settlement, the former accepted it, and signed
a release of claim and subrogation receipt.
The lower court denied the Motion to Admit Pre-Trial Brief and Motion for
Reconsideration field by [petitioner] Durban Apartments and Justimbaste in
its Orders dated May 4, 2005 and October 20, 2005, respectively, for being
devoid of merit.[3]
Thereafter, on January 27, 2006, the RTC rendered a decision, disposing,
as follows:
WHEREFORE, judgment is hereby rendered ordering [petitioner Durban
Apartments Corporation] to pay [respondent Pioneer Insurance and Surety
Corporation] the sum of P1,163,250.00 with legal interest thereon from July
22, 2003 until the obligation is fully paid and attorneys fees and litigation
expenses amounting to P120,000.00.
SO ORDERED.[4]
On appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January 27, 2006
of the RTC, Branch 66, Makati City in Civil Case No. 03-857 is hereby
AFFIRMED insofar as it holds [petitioner] Durban Apartments Corporation
solely liable to [respondent] Pioneer Insurance and Surety Corporation for
the loss of Jeffrey Sees Suzuki Grand Vitara.
SO ORDERED.[5]
Hence, this recourse by petitioner.
The issues for our resolution are:
1. Whether the lower courts erred in declaring petitioner as in default for
failure to appear at the pre-trial conference and to file a pre-trial brief;
2. Corollary thereto, whether the trial court correctly allowed respondent to
present evidence ex-parte;
3. Whether petitioner is liable to respondent for attorneys fees in the amount
of P120,000.00; and
4. Ultimately, whether petitioner is liable to respondent for the loss of Sees
vehicle.
The petition must fail.
We are in complete accord with the common ruling of the lower courts that
petitioner was in default for failure to appear at the pre-trial conference and
to file a pre-trial brief, and thus, correctly allowed respondent to present
evidence ex-parte. Likewise, the lower courts did not err in holding petitioner
liable for the loss of Sees vehicle.
Well-entrenched in jurisprudence is the rule that factual findings of the trial
court, especially when affirmed by the appellate court, are accorded the
highest degree of respect and are considered conclusive between the
parties.[6] A review of such findings by this Court is not warranted except
upon a showing of highly meritorious circumstances, such as: (1) when the
findings of a trial court are grounded entirely on speculation, surmises, or
conjectures; (2) when a lower courts inference from its factual findings is
manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the findings of the appellate
court go beyond the issues of the case, or fail to notice certain relevant facts
which, if properly considered, will justify a different conclusion; (5) when
there is a misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which they are
based, are premised on the absence of evidence, or are contradicted by
evidence on record.[7] None of the foregoing exceptions permitting a
reversal of the assailed decision exists in this instance.
Petitioner urges us, however, that strong [and] compelling reason[s] such as
the prevention of miscarriage of justice warrant a suspension of the rules
and excuse its and its counsels non-appearance during the pre-trial
conference and their failure to file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for equivocation; appearance
of parties and their counsel at the pre-trial conference, along with the filing
of a corresponding pre-trial brief, is mandatory, nay, their duty. Thus, Section
4 and Section 6 thereof provide:
SEC. 4. Appearance of parties.It shall be the duty of the parties and their
counsel to appear at the pre-trial. The non-appearance of a party may be
excused only if a valid cause is shown therefor or if a representative shall
appear in his behalf fully authorized in writing to enter into an amicable
settlement, to submit to alternative modes of dispute resolution, and to enter
into stipulations or admissions of facts and documents.
SEC. 6. Pre-trial brief.The parties shall file with the court and serve on the
adverse party, in such manner as shall ensure their receipt thereof at least
three (3) days before the date of the pre-trial, their respective pre-trial briefs
which shall contain, among others:
xxxx
Failure to file the pre-trial brief shall have the same effect as failure to
appear at the pre-trial.
Contrary to the foregoing rules, petitioner and its counsel of record were not
present at the scheduled pre-trial conference. Worse, they did not file a pre-
trial brief. Their non-appearance cannot be excused as Section 4, in relation
to Section 6, allows only two exceptions: (1) a valid excuse; and (2)
appearance of a representative on behalf of a party who is fully authorized
in writing to enter into an amicable settlement, to submit to alternative
modes of dispute resolution, and to enter into stipulations or admissions of
facts and documents.
Petitioner is adamant and harps on the fact that November 28, 2003 was
merely the first scheduled date for the pre-trial conference, and a certain
Atty. Mejia appeared on its behalf. However, its assertion is belied by its
own admission that, on said date, this Atty. Mejia did not have in his
possession the Special Power of Attorney issued by petitioners Board of
Directors.
As pointed out by the CA, petitioner, through Atty. Lee, received the notice
of pre-trial on October 27, 2003, thirty-two (32) days prior to the scheduled
conference. In that span of time, Atty. Lee, who was charged with the duty of
notifying petitioner of the scheduled pre-trial conference,[8] petitioner, and
Atty. Mejia should have discussed which lawyer would appear at the pre-trial
conference with petitioner, armed with the appropriate authority
therefor. Sadly, petitioner failed to comply with not just one rule; it also did
not proffer a reason why it likewise failed to file a pre-trial brief. In all,
petitioner has not shown any persuasive reason why it should be exempt
from abiding by the rules.
The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial
brief and with only his bare allegation that he is counsel for petitioner, was
correctly rejected by the trial court. Accordingly, the trial court, as affirmed
by the appellate court, did not err in allowing respondent to present
evidence ex-parte.
Former Chief Justice Andres R. Narvasas words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory, and has been
so since January 1, 1964. Yet to this day its place in the scheme of things is
not fully appreciated, and it receives but perfunctory treatment in many
courts. Some courts consider it a mere technicality, serving no useful
purpose save perhaps, occasionally to furnish ground for non-suiting the
plaintiff, or declaring a defendant in default, or, wistfully, to bring about a
compromise. The pre-trial device is not thus put to full use. Hence, it has
failed in the main to accomplish the chief objective for it: the simplification,
abbreviation and expedition of the trial, if not indeed its dispensation. This is
a great pity, because the objective is attainable, and with not much difficulty,
if the device were more intelligently and extensively handled.
xxxx
Consistently with the mandatory character of the pre-trial, the Rules oblige
not only the lawyers but the parties as well to appear for this purpose before
the Court, and when a party fails to appear at a pre-trial conference (he)
may be non-suited or considered as in default. The obligation to appear
denotes not simply the personal appearance, or the mere physical
presentation by a party of ones self, but connotes as importantly,
preparedness to go into the different subject assigned by law to a pre-trial.
And in those instances where a party may not himself be present at the pre-
trial, and another person substitutes for him, or his lawyer undertakes to
appear not only as an attorney but in substitution of the clients person, it is
imperative for that representative of the lawyer to have special authority to
make such substantive agreements as only the client otherwise has
capacity to make. That special authority should ordinarily be in writing or at
the very least be duly established by evidence other than the self-serving
assertion of counsel (or the proclaimed representative) himself. Without that
special authority, the lawyer or representative cannot be deemed
capacitated to appear in place of the party; hence, it will be considered that
the latter has failed to put in an appearance at all, and he [must] therefore
be non-suited or considered as in default, notwithstanding his lawyers or
delegates presence.[9]
We are not unmindful that defendants (petitioners) preclusion from
presenting evidence during trial does not automatically result in a judgment
in favor of plaintiff (respondent). The plaintiff must still substantiate the
allegations in its complaint.[10] Otherwise, it would be inutile to continue
with the plaintiffs presentation of evidence each time the defendant is
declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a
contract of necessary deposit existed between the insured See and
petitioner. On this score, we find no error in the following disquisition of the
appellate court:
[The] records also reveal that upon arrival at the City Garden Hotel, See
gave notice to the doorman and parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he entrusted its ignition key to the latter.
x x x Justimbaste issued a valet parking customer claim stub to See, parked
the Vitara at the Equitable PCI Bank parking area, and placed the ignition
key inside a safety key box while See proceeded to the hotel lobby to check
in. The Equitable PCI Bank parking area became an annex of City Garden
Hotel when the management of the said bank allowed the parking of the
vehicles of hotel guests thereat in the evening after banking hours.[11]
Article 1962, in relation to Article 1998, of the Civil Code defines a contract
of deposit and a necessary deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall
also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited
his vehicle for safekeeping with petitioner, through the latters employee,
Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the
contract of deposit was perfected from Sees delivery, when he handed over
to Justimbaste the keys to his vehicle, which Justimbaste received with the
obligation of safely keeping and returning it. Ultimately, petitioner is liable for
the loss of Sees vehicle.
Lastly, petitioner assails the lower courts award of attorneys fees to
respondent in the amount of P120,000.00. Petitioner claims that the award
is not substantiated by the evidence on record.
We disagree.
While it is a sound policy not to set a premium on the right to litigate,[12] we
find that respondent is entitled to reasonable attorneys fees. Attorneys fees
may be awarded when a party is compelled to litigate or incur expenses to
protect its interest,[13] or when the court deems it just and equitable.[14] In
this case, petitioner refused to answer for the loss of Sees vehicle, which
was deposited with it for safekeeping. This refusal constrained respondent,
the insurer of See, and subrogated to the latters right, to litigate and incur
expenses. However, we reduce the award of P120,000.00 to P60,000.00 in
view of the simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 86869 is AFFIRMED with the MODIFICATION
that the award of attorneys fees is reduced to P60,000.00. Costs against
petitioner.
SO ORDERED.
SEQUESTRATION
Los Baños Rural Bank vs Africa
Petitioner Los Baños questioned the decision of the Court of Appeals in
granting respondent Pacita Africa's application for the issuance of a writ of
preliminary injunction to restrain petitioner from proceeding with the
foreclosure and consolidation of the title over the subject property after such
property was allegedly sold to Macy Africa by forging Pacita Africa's
signature.
 Absolute Sale, Macy was able to cause the issuance of TCT No. 81519 in
Los Baños argued that they should not be enjoined from foreclosing hte her name, without the knowledge of any of herein petitioners.
property because the foreclosure sale has long been effected and since it is
a consummated act, it can no longer be restrained. Still as part of the scheme to defraud petitioners, Macy caused the
preparation of a fake TCT No. 81519 in the name of Pacita, which the
The SC held that in the instant case, the status quo was the situation of the former showed to the latter to make Pacita believe that the said title was
parties at the time of filing the Amended Complaint, at the poin where the issued in her (Pacitas) name.
property was already foreclosed. But, the last actual uncontested status that
preceeded the conroversy was when the property in dispute was still Sometime in March 1994, petitioners discovered private respondents
registered int he name of Macy Africa, petitioner not having consolidated in fraudulent act. They (petitioners) likewise came to know that the subject
its name the title thereto. property was mortgaged by Macy to the respondent bank. To protect their
interests over the subject property, petitioners lodged an action in court
Moreover, the court also held that the requisites for the issuance of a against Macy and the respondent bank for Annulment of Title, Deed of
preliminary injunction are present and established by Pacita Africa. A writ of Absolute Sale and Deed of Mortgage. The case was originally assigned to
preliminary injunction is issued to preserve the status quo ante, upon an Branch 99 of the RTC of Quezon City and docketed as Civil Case No. Q-94-
applican't showing of two important requisites; namely: (1) the right to be 20898.
protected exists prima facie, and (2) the acts sought to be enjoined are
violative of that right. It must be proven that the violation sought to be After the filing of the aforesaid case, the respondent bank in utter bad faith,
prevented would cause an irreparable injustice. foreclosed the subject property on June 11, 1996 without due notice to the
petitioners, prompting the petitioners to amend [their] complaint, this time
The issuance of the wirt of preliminary injuction would no doubt preserve the incorporating therein a prayer for the issuance of a temporary restraining
status quo. order and/or writ of preliminary injunction, to stop the respondent bank from,
among others, consolidating title to the subject property.
A writ of preliminary injunction is issued to preserve the status quo ante,
On July 2, 1997, RTC Branch 99 issued an Order granting petitioners
upon an applicants showing of two important requisite conditions; namely,
application for a temporary restraining order. Meanwhile, the respondent
(1) the right to be protected exists prima facie, and (2) the acts sought to be
bank filed its Manifestation, Opposition and Motion to Postpone dated July
enjoined are violative of that right. It must be proven that the violation
11, 1997, praying, inter alia, for the denial of petitioners application for a writ
sought to be prevented would cause an irreparable injustice.
of preliminary injunction, or in the alternative, for the cancellation of the
hearing thereon. On July 18, 1997, the aforesaid court denied the
Statement of the Case
respondent banks motion to postpone and proceeded with the hearing of
petitioners application. Thereafter, petitioners application was considered
Before us is a Petition for Review under Rule 45 of the Rules of Court,
submitted for resolution.
assailing the June 30, 2000 Decision[1] of the Court of Appeals[2] (CA) in
CA-GR SP No. 53355. The decretal portion of the Decision reads as
On July 22, 1997, the Court issued an Order granting petitioners application
follows:
for a writ of preliminary injunction to which respondent bank filed a Motion
for Reconsideration dated July 11, 1997 followed by a Motion for Inhibition
WHEREFORE, the petition is GRANTED. The Order dated April 19, 1999
on January 1, 1998 praying that Hon. Felix M. de Guzman, presiding judge
insofar as it denied the petitioners application for the issuance of a writ of
of RTC, Branch 99, inhibit himself from further trying the case. This latter
preliminary injunction, is hereby RECALLED and SET ASIDE.
motion was granted, and the case was re-raffled and assigned to Branch
220.
Let a writ of preliminary injunction issue in this case to restrain the
respondent bank from proceeding with the foreclosure and consolidation of
On April 19, 1999, RTC Branch 220, public respondent herein, issued the
the title over the subject property upon posting by petitioners of a bond in
questioned Order. [5]
the amount of Php20,000.00.[3]
Ruling of the Court of Appeals
The Order of the Regional Trial Court (RTC) of Quezon City (Branch 220),
which was reversed by the CA, reads as follows:
The CA overturned the RTC Order dated April 19, 1999, and granted the
issuance of a preliminary injunction to restrain petitioner from proceeding
WHEREFORE, premises considered, the Order of the Court dated July 22,
with the foreclosure and the consolidation of title over the subject property.
1997 is hereby recalled and set aside. The application for issuance of writ of
The CA ruled that respondents had title to and possession of the property
preliminary injunction is hereby DENIED.
and were deprived thereof by petitioner. Thus, respondents had a clear and
unmistakable right to protect their title and possession.[6]
Issues in this case having been joined, let this case be set for pre-trial on
May 28, 1999 at 8:30 o clock in the morning. Send notice of pre-trial to the
Hence, this Petition.[7]
parties and counsels.[4]
Issues
The Facts
In its Memorandum, petitioner raises the following issues for the Courts
The factual antecedents of the case are summarized by the Court of
consideration:
Appeals in this wise:
I
Petitioner Pacita Africa (Pacita for brevity) is the widow of Alberto Africa and
the rest of her co-petitioners are their children.
Whether the Court of Appeals acted with patent grave abuse of discretion in
applying the ruling in Verzosa vs. Court of Appeals, (299 SCRA 100), to the
Records disclose that sometime in June 1989, the Quezon City Hall building
instant case to justify its reversal of the 19 April 1999 Order of Branch 220 of
where the Register of Deeds was then holding office was razed by fire,
the Regional Trial Court of Quezon City in Civil Case No. Q-94-20898[;]
destroying some of its records/documents among which was the original
Transfer Certificate of Title (TCT) No. 203492 covering a parcel of land
II
situated in Diliman, Quezon City, and registered in the name of petitioner
Pacita. The aforesaid property was part of the conjugal property of petitioner
Whether the Court of Appeals acted with patent grave abuse of discretion
Pacita and her late husband Alberto Africa.
when it rationalized its decision by citing factual premises therein that are
not borne out by the records nor based on evidence and in fact contrary to
On request of Pacita, private respondent Macy Africa, the common-law wife
reality[;]
of petitioner Antonio Africa, worked for the reconstitution of the aforesaid
TCT No. 203492. The same was done and a new Transfer Certificate of
III
Title (TCT) No. RT-76140 (203492) PR-36463 was issued in the name of
Pacita Africa. While the reconstituted title was in her possession, Macy
Whether the Court of Appeals acted with patent grave abuse of discretion
allegedly forged, or caused the forgery of, Pacitas signature on a Deed of
when it ignored, disregarded and/or deviated from established jurisprudence
Absolute Sale dated December 29, 1992, purporting to transfer ownership
governing the issuance of preliminary injunction demanded by private
of the subject property to Macy. On the strength of the forged Deed of
respondents against the petitioner bank[;]
IV
Whether the Court [of] Appeals acted with patent grave abuse of discretion
when it disregarded the pertinent provisions of Section 3, Rule 58, of the
Revised Rules of Court providing for the grounds for issuance of preliminary
injunction.[8]
In sum, the issues boil down to whether the appellate court erred in issuing
a writ of preliminary injunction to stop petitioners consolidation of its title to
the subject property.
This Courts Ruling
The Petition is not meritorious; it has not shown any reversible error in the
CAs Decision.
Main Issue:
Propriety of Preliminary Injunction
Petitioner argues that respondents do not have a right to the relief
demanded, because they merely have possession of the property, as the
legal title is in the name of Macy Africa.[9] Furthermore, it claims that the
consolidation of title in its name does not constitute an invasion of a right
that is material and substantial.[10]
On the other hand, respondents maintain that they would suffer great
irreparable damage if the writ of preliminary injunction is not granted.[11]
They likewise contend that if petitioner is allowed to consolidate its title to
the subject property, they would lose their ancestral home, a loss that would
result in unnecessary and protracted proceedings involving third parties.[12]
We agree with respondents.
The grounds for the issuance of a writ of preliminary injunction are
enumerated in Rule 58, Section 3 of the Revised Rules of Court, which
reads as follows:
Sec. 3. Grounds for issuance of preliminary injunction. A preliminary
injunction may be granted when it is established;
(a)That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;
(b)That the commission, continuance or non-performance of the act or acts
complained of during the litigation would probably work injustice to the
applicant; or
(c)That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.
Injunction is a preservative remedy aimed at no other purpose than to
protect the complainants substantive rights and interests[13] during the
pendency of the principal action.[14] A preliminary injunction, as the term
itself suggests, is merely temporary.[15] It is to be resorted to only when
there is a pressing necessity to avoid injurious consequences that cannot be
remedied under any standard of compensation.[16]
Moreover, injunction, like other equitable remedies, should be issued only at
the instance of a suitor who has sufficient interest in or title to the right or the
property sought to be protected.[17] It is proper only when the plaintiff
appears to be entitled to the relief demanded in the complaint.[18] In
particular, the existence of the right and the violation thereof must appear in
the allegations of the complaint[19] and must constitute at least a prima
facie showing of a right to the final relief.[20] Thus, there are two requisite
conditions for the issuance of a preliminary injunction, namely, (1) the right
to be protected exists prima facie, and (2) the acts sought to be enjoined
are violative of that right.[21] It must be proven that the violation sought to
be prevented would cause an irreparable injustice.
Further, while a clear showing of the right is necessary, its existence need
not be conclusively established.[22] In fact, the evidence required to justify
the issuance of a writ of preliminary injunction in the hearing thereon need
not be conclusive or complete. The evidence need only be a sampling
intended merely to give the court an idea of the justification for the
preliminary injunction, pending the decision of the case on the merits.[23]
Thus, to be entitled to the writ, respondents are only required to show that
they have the ostensible right to the final relief prayed for in their Complaint.
[24]
First Requisite:
Existence of the Right
In the case at bar, we find ample justification for the issuance of a writ of
preliminary injunction.[25] Evidently, the question on whether or not
respondents possess the requisite right hinges on the prima facie existence
of their legal title to the subject property.[26] They have shown that they
have that right, and that it is directly threatened by the act sought to be
enjoined.[27]
First, as alleged in the Complaint,[28] Respondent Pacita Africa is the
registered owner of the subject property. Her ownership is evidenced by the
reconstituted Transfer Certificate of Title (TCT) No. RT-76140 (203492) PR-
36463,[29] issued by the Registry of Deeds of Quezon City. Second, the
validity of the Deed of Sale[30] dated December 29, 1992, is still in dispute
because Respondent Pacita Africa claims that her signature was forged by
the vendee, Macy Africa.[31] Third, there is doubt as to the validity of the
mortgage in favor of petitioner, because there exists on record two TCTs
covering the mortgaged property: (1) TCT No. 81519[32] registered in the
name of Pacita Africa and (2) TCT No. 81519[33] registered in the name of
Macy Africa.
If indeed the Deed of Sale is a forgery, no parcel of land was ever
transferred to the purported buyer[34] who, not being the owner, could not
have validly mortgaged the property.[35] Consequently, neither has
petitioner -- the buyer and mortgagee of the same lot -- ever acquired any
title thereto.[36] Significantly, no evidence was presented by petitioner to
controvert these allegations put forward by respondents. Clearly then, on
the basis of the evidence presented, respondents possess the right to
prevent petitioner from consolidating the title in its name. The first requisite
-- the existence of a right to be protected -- is thus present.[37]
Second Requisite:
Violation of Applicants Right
As to the second requisite, what is sought to be enjoined by respondents is
the consolidation of the title to the subject property in petitioners name. After
having discovered that the property had been mortgaged to petitioner,
respondents filed on June 12, 1994 an action for Annulment of Title, Deed of
Sale, and Mortgage to protect their rights over the property.[38] This
notwithstanding, petitioner foreclosed it on June 11, 1996.[39] To enjoin
petitioner from consolidating the title in its name, respondents then filed an
Amended Complaint,[40] praying for a writ of preliminary injunction.
Unless legally stopped, petitioner may consolidate title to the property in its
name and enjoy the unbridled freedom to dispose of it to third persons, to
the damage and prejudice of respondents.[41] What respondents stand to
lose is material and substantial.[42] They would lose their ancestral home
even without the benefit of a trial.[43] Clearly, the act sought to be enjoined
is violative of their proprietary right over the property.[44]
A writ of preliminary injunction is issued precisely to preserve threatened or
continuous irremediable injury to some of the parties before their claims can
be thoroughly studied and adjudicated.[45] Denial of the application for the
writ may make the Complaint of respondents moot and academic.
Furthermore, it would render ineffectual a final judgment in their favor or, at
the very least, compel them to litigate needlessly with third persons who
may have acquired an interest in the property.[46] Such a situation cannot
be countenanced.[47]
Lis Pendens
Petitioner further contends that respondents are not entitled to the relief
prayed for, because they caused a notice of lis pendens to be annotated at
the back of TCT No. 81519, registered in the name of Macy P. Africa; thus,
that notice provided ample protection of their rights and interests.[48]
We are not persuaded. A notice of lis pendens serves as an announcement
to the whole world that a particular real property is in litigation and as a
warning that those who acquire an interest in the property do so at their own
risk -- they gamble on the result of the litigation over it.[49] However, the
cancellation of such notice may be ordered by the court that has jurisdiction
over it at any given time.[50] Its continuance or removal -- like the
continuance or the removal of a preliminary attachment or injunction -- is not
contingent on the existence of a final judgment on the action and ordinarily
has no effect on the merits thereof.[51] Thus, the notice of lis pendens does
not suffice to protect herein respondents rights over the property.[52] It does
not provide complete and ample protection.
Status Quo Ante
Petitioner further claims that the RTC erred in enjoining the foreclosure sale
of the subject property.[53] It argues that the foreclosure may no longer be
enjoined, because it has long been effected since 1996.[54] We agree with
petitioner.
It is a well-entrenched rule that consummated acts can no longer be
restrained by injunction[55] whose sole objective is to preserve the status
quo until the merits of the case are fully heard.[56] Status quo is defined as
the last actual peaceful uncontested situation that precedes a controversy,
and its preservation is the office of an injunctive writ.[57]
In the instant case, the status quo was the situation of the parties at the time
of the filing of the Amended Complaint[58] with a prayer for a writ of
preliminary injunction. It was that point at which petitioner had already
foreclosed the subject property and, hence, could no longer be enjoined
from going on with the foreclosure. However, the last actual uncontested
status that preceded the controversy was when the property in dispute was
still registered in the name of Macy Africa, petitioner not having consolidated
in its name the title thereto.[59] Thus, the issuance of the writ would no
doubt preserve the status quo.[60]
We cannot rule on the allegation of petitioner that this case is a scam
perpetrated by private respondents to defraud it.[61] The truth or the falsity
of that assertion cannot be ascertained by this Court at this time. Verily, we
refrain from expressing any opinion on the merits of the case, pending a full
consideration of the evidence that would be presented by the parties.[62]
WHEREFORE, the Petition is DENIED and the assailed Decision of the
Court of Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.
TRUST RECEIPTS
Rosario Textile Mills v Home Bankers Savings and Trust Company
G.R. No. 137232 June 29, 2005
A trust receipt is a security agreement pursuant to which a bank acquires a
‘security interest’ in the goods. In Vintola vs. Insular Bank of Asia and
America, we elucidated further that “a trust receipt, therefore, is a security
agreement, pursuant to which a bank acquires a ‘security interest’ in the
goods. It secures an indebtedness and there can be no such thing as
security interest that secures no obligation.”
Facts: Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied
from Home Bankers Savings & Trust Co. for an Omnibus Credit Line for P10
million. The bank approved RTMC’s credit line but for only P8 million. The
bank notified RTMC of the grant of the said loan thru a letter dated March 2,
1989 which contains terms and conditions conformed by RTMC thru
Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement
in favor of the bank, in which he bound himself jointly and severally with
RTMC for the payment of all RTMC’s indebtedness to the bank from 1989 to
1990. RTMC availed of the credit line by making numerous drawdowns,
each drawdown being covered by a separate promissory note and trust
receipt. RTMC, represented by Yujuico, executed in favor of the bank a total
of eleven (11) promissory notes.
Yujuico contend that he should be absolved from liability. They claimed that
although the grant of the credit line and the execution of the suretyship
agreement. They alleged that the bank gave assurance that the suretyship
agreement was merely a formality under which Yujuico will not be personally
liable. He theorized that when RTMC imported the raw materials needed for
its manufacture, using the credit line, it was merely acting on behalf of the
bank, the true owner of the goods by virtue of the trust receipts.
Issue: Whether or not Yujuico is absolved from liability by the grant of the
credit line and the execution of the suretyship agreement
Held: No. Yujuico’s argument conveniently ignores the true nature of its
transaction with the bank. A trust receipt is a security agreement pursuant to
which a bank acquires a ‘security interest’ in the goods. In Vintola vs. Insular
Bank of Asia and America, we elucidated further that “a trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a
‘security interest’ in the goods. It secures an indebtedness and there can be
no such thing as security interest that secures no obligation.” In Samo vs.
People, we described a trust receipt as “a security transaction intended to
aid in financing importers and retail dealers who do not have sufficient funds
or resources to finance the importation or purchase of merchandise, and
who may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased.”
“If under the trust receipt, the bank is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the
loan feature thereof.
RTMC filed with the bank an application for a credit line in the amount of
P10 million, but only P8 million was approved. RTMC then made
withdrawals from this credit line and issued several promissory notes in
favor of the bank. In banking and commerce, a credit line is “that amount of
money or merchandise which a banker, merchant, or supplier agrees to
supply to a person on credit and generally agreed to in advance.”[3]It is the
fixed limit of credit granted by a bank, retailer, or credit card issuer to a
customer, to the full extent of which the latter may avail himself of his
dealings with the former but which he must not exceed and is usually
intended to cover a series of transactions in which case, when the
customer’s line of credit is nearly exhausted, he is expected to reduce his
indebtedness by payments before making any further drawings.
For our resolution is the petition for review on certiorari assailing the
Decision[1] of the Court of Appeals dated March 31, 1998 in CA-G.R. CV
No. 48708 and its Resolution dated January 12, 1999.
The facts of the case as found by the Court of Appeals are:
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from
Home Bankers Savings & Trust Co. for an Omnibus Credit Line for P10
million. The bank approved RTMCs credit line but for only P8 million. The
bank notified RTMC of the grant of the said loan thru a letter dated March 2,
1989 which contains terms and conditions conformed by RTMC thru
Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement
in favor of the bank, in which he bound himself jointly and severally with
RTMC for the payment of all RTMCs indebtedness to the bank from 1989 to
1990. RTMC availed of the credit line by making numerous drawdowns,
each drawdown being covered by a separate promissory note and trust
receipt. RTMC, represented by Yujuico, executed in favor of the bank a total
of eleven (11) promissory notes.
Despite the lapse of the respective due dates under the promissory notes
and notwithstanding the banks demand letters, RTMC failed to pay its loans.
Hence, on January 22, 1993, the bank filed a complaint for sum of money
against RTMC and Yujuico before the Regional Trial Court, Br. 16, Manila.
In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they
should be absolved from liability. They claimed that although the grant of the
credit line and the execution of the suretyship agreement are admitted, the
bank gave assurance that the suretyship agreement was merely a formality
under which Yujuico will not be personally liable. They argue that the
importation of raw materials under the credit line was with a grant of option
to them to turn-over to the bank the imported raw materials should these fail
to meet their manufacturing requirements. RTMC offered to make such turn-
over since the imported materials did not conform to the required
specifications. However, the bank refused to accept the same, until the
materials were destroyed by a fire which gutted down RTMCs premises.
For failure of the parties to amicably settle the case, trial on the merits
proceeded. After the trial, the Court a quo rendered a decision in favor of
the bank, the decretal part of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in
favor of plaintiff and against defendants who are ordered to pay jointly and
severally in favor of plaintiff, inclusive of stipulated 30% per annum interest
and penalty of 3% per month until fully paid, under the following promissory
notes:
90-1116 6-20-90 P737,088.25 9-18-90
(maturity)
90-1320 7-13-90 P650,000.00 10-11-90
90-1334 7-17-90 P422,500.00 10-15-90
90-1335 7-17-90 P422,500.00 10-15-90
90-1347 7-18-90 P795,000.00 10-16-90
90-1373 7-20-90 P715,900.00 10-18-90
90-1397 7-27-90 P773,500.00 10-20-90
90-1429 7-26-90 P425,750.00 10-24-90
90-1540 8-7-90 P720,984.00 11-5-90
90-1569 8-9-90 P209,433.75 11-8-90
90-0922 5-28-90 P747,780.00 8-26-90
The counterclaims of defendants are hereby DISMISSED.
SO ORDERED. (OR, p. 323; Rollo, p. 73).[2]
Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of
Appeals, contending that under the trust receipt contracts between the
parties, they merely held the goods described therein in trust for respondent
Home Bankers Savings and Trust Company (the bank) which owns the
same. Since the ownership of the goods remains with the bank, then it
should bear the loss. With the destruction of the goods by fire, petitioners
should have been relieved of any obligation to pay.
The Court of Appeals, however, affirmed the trial courts judgment, holding
that the bank is merely the holder of the security for its advance payments
to petitioners; and that the goods they purchased, through the credit line
extended by the bank, belong to them and hold said goods at their own risk.
Petitioners then filed a motion for reconsideration but this was denied by the
Appellate Court in its Resolution dated January 12, 1999.
Hence, this petition for review on certiorari ascribing to the Court of Appeals
the following errors:
I In Samo vs. People,[5] we described a trust receipt as a security transaction
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING
THAT THE ACTS OF THE PETITIONERS-DEFENDANTS WERE
TANTAMOUNT TO A VALID AND EFFECTIVE TENDER OF THE GOODS
TO THE RESPONDENT-PLAINTIFF.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE
DOCTRINE OF RES PERIT DOMINO IN THE CASE AT BAR
CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE
DEFECTIVE RAW MATERIALS BY THE PETITIONERS-DEFENDANTS TO
THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION IN
THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH
THE RESPONDENT-PLAINTIFF.
III
THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF
THE CIVIL CODE AND THE LONG-STANDING JURISPRUDENCE THAT
INTENTION OF THE PARTIES IS PRIMORDIAL IN ITS FAILURE TO
UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY
AGREEMENT WAS A MERE FORMALITY AND DID NOT INTEND TO
HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.
IV
ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS
VALID AND EFFECTIVE, THE HONORABLE COURT OF APPEALS
VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT
LIABLE UNLESS THE DEBTOR IS HIMSELF LIABLE.
V Anent the second issue, petitioner Yujuico contends that the suretyship
THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF
TRUST RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE
RESPONDENT.
The above assigned errors boil down to the following issues: (1) whether the
Court of Appeals erred in holding that petitioners are not relieved of their
obligation to pay their loan after they tried to tender the goods to the bank
which refused to accept the same, and which goods were subsequently lost
in a fire; (2) whether the Court of Appeals erred when it ruled that petitioners
are solidarily liable for the payment of their obligations to the bank; and (3)
whether the Court of Appeals violated the Trust Receipts Law.
On the first issue, petitioners theorize that when petitioner RTMC imported
the raw materials needed for its manufacture, using the credit line, it was
merely acting on behalf of the bank, the true owner of the goods by virtue of
the trust receipts. Hence, under the doctrine of res perit domino, the bank
took the risk of the loss of said raw materials. RTMCs role in the transaction
was that of end user of the raw materials and when it did not accept those
materials as they did not meet the manufacturing requirements, RTMC
made a valid and effective tender of the goods to the bank. Since the bank
refused to accept the raw materials, RTMC stored them in its warehouse.
When the warehouse and its contents were gutted by fire, petitioners
obligation to the bank was accordingly extinguished.
Petitioners stance, however, conveniently ignores the true nature of its
transaction with the bank. We recall that RTMC filed with the bank an
application for a credit line in the amount of P10 million, but only P8 million
was approved. RTMC then made withdrawals from this credit line and
issued several promissory notes in favor of the bank. In banking and
commerce, a credit line is that amount of money or merchandise which a
banker, merchant, or supplier agrees to supply to a person on credit and
generally agreed to in advance.[3] It is the fixed limit of credit granted by a
bank, retailer, or credit card issuer to a customer, to the full extent of which
the latter may avail himself of his dealings with the former but which he must
not exceed and is usually intended to cover a series of transactions in which
case, when the customers line of credit is nearly exhausted, he is expected
to reduce his indebtedness by payments before making any further
drawings.[4]
It is thus clear that the principal transaction between petitioner RTMC and
the bank is a contract of loan. RTMC used the proceeds of this loan to
purchase raw materials from a supplier abroad. In order to secure the
payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this
security arrangement. Simply stated, the trust receipts were mere securities.
intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.[6]
In Vintola vs. Insular Bank of Asia and America,[7] we elucidated further that
a trust receipt, therefore, is a security agreement, pursuant to which a bank
acquires a security interest in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation.[8]
Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a security
interest as follows:
(h) Security Interest means a property interest in goods, documents, or
instruments to secure performance of some obligation of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only.
Petitioners insistence that the ownership of the raw materials remained with
the bank is untenable. In Sia vs. People,[9] Abad vs. Court of Appeals,[10]
and PNB vs. Pineda,[11] we held that:
If under the trust receipt, the bank is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the
loan feature thereof...[12]
Thus, petitioners cannot be relieved of their obligation to pay their loan in
favor of the bank.
agreement he signed does not bind him, the same being a mere formality.
We reject petitioner Yujuicos contentions for two reasons.
First, there is no record to support his allegation that the surety agreement
is a mere formality; and
Second, as correctly held by the Court of Appeals, the Suretyship
Agreement signed by petitioner Yujuico binds him. The terms clearly show
that he agreed to pay the bank jointly and severally with RTMC. The parole
evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in
point, thus:
SEC. 9. Evidence of written agreements. When the terms of an agreement
have been reduced in writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written
agreement.
However, a party may present evidence to modify, explain, or add to the
terms of the written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors
in interest after the execution of the written agreement.
x x x.
Under this Rule, the terms of a contract are rendered conclusive upon the
parties and evidence aliunde is not admissible to vary or contradict a
complete and enforceable agreement embodied in a document.[13] We
have carefully examined the Suretyship Agreement signed by Yujuico and
found no ambiguity therein. Documents must be taken as explaining all the
terms of the agreement between the parties when there appears to be no
ambiguity in the language of said documents nor any failure to express the
true intent and agreement of the parties.[14]
As to the third and final issue At the risk of being repetitious, we stress that
the contract between the parties is a loan. What respondent bank sought to
collect as creditor was the loan it granted to petitioners. Petitioners recourse
is to sue their supplier, if indeed the materials were defective.
WHEREFORE, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are
AFFIRMED IN TOTO. Costs against petitioners.
SO ORDERED.
Land Bank of the Philippines v. Perez
ARTICLE 445. Whatever is built, planted or sown on the land of another
and the improvements or repairs made thereon belong to the owner of the
land, subject to the provisions of the following articles 358.
FACTS:
Petitioner Land Bank of the Philippines (LBP) is a government financial
institution and the official depository of the Philippines. Respondents were
officers of Asian Construction and Development Corporation (ACDC), a
corporation engaged in the construction business. In several occasions,
respondents executed in favor of Land Bank of the Philippines (LBP) trust
receipts to secure the purchase of construction materials that they will need
in their construction projects. When the trust receipts matured, ACDC failed
to return to LBP the proceeds of the construction projects or the
construction materials subject of the trust receipts. After several demands
went unheeded, LBP filed a complaint for estafa or violation of Art. 315 par.
(b) of the RPC, in relation to PD 115, against the respondent officers of
ACDC.
ISSUE:
WON the disputed transactions is a trust receipt or a loan,
HELD: TRUST RECEIPT
There are two obligations in a trust receipt transaction. The first is covered
by the provision that refers to money under the obligation to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered
by the provision referring to merchandise received under the obligation to
return it (devolvera) to the owner. Thus, under the Trust Receipts Law, intent
todefraud is presumed when (1) the entrustee fails to turn over the proceeds
of the sale of goodscovered "y the trust receipt to the entruster/ or (2) when
the entrustee fails to return the goods under trust, if they are not disposed of
in accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative the return of the proceeds of the sale or the return or
recovery of the goods! whether raw or processed. When both parties enter
into an agreement knowing that the return of the goods subject of the trust
receipt is not possible even without any fault on the part of the trustee, it is
not a trust receipt transaction penalized under section 13 of PD 115. The
only obligation actually agreed upon "y the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere loan,
where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
Article 1371 of the Civil Code provides that [i]n order to judge the intention
of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. Under this provision, we can examine the
contemporaneous actions of the parties rather than rely purely on the trust
receipts that they signed in order to understand the transaction through their
intent.
Estafa; misappropriation;Trust Receipts Law. In order that the respondents
may be validly prosecuted for estafa under Article 315, paragraph 1(b) of
the Revised Penal Code, in relation with Section 13 of the Trust Receipts
Law, the following elements must be established: (a) they received the
subject goods in trust or under the obligation to sell the same and to remit
the proceeds thereof to [the trustor], or to return the goods if not sold; (b)
they misappropriated or converted the goods and/or the proceeds of the
sale; (c) they performed such acts with abuse of confidence to the damage
and prejudice of the entrustor; and (d) demand was made on them by [the
trustor] for the remittance of the proceeds or the return of the unsold goods.
Land Bank of the Philippines v. Lamberto C. Perez, et al., G.R. No. 166884,
June 13, 2012.
Before this Court is a petition for review on certiorari,[1] under Rule 45 of the
Rules of Court, assailing the decision[2] dated January 20, 2005 of the
Court of Appeals in CA-G.R. SP No. 76588. In the assailed decision, the
Court of Appeals dismissed the criminal complaint for estafa against the
respondents, Lamberto C. Perez, Nestor C. Kun, Ma. Estelita P. Angeles-
Panlilio and Napoleon Garcia, who allegedly violated Article 315, paragraph
1(b) of the Revised Penal Code, in relation with Section 13 of Presidential
Decree No. (P.D.) 115 the Trust Receipts Law.
Petitioner Land Bank of the Philippines (LBP) is a government financial
institution and the official depository of the Philippines.[3] Respondents are
the officers and representatives of Asian Construction and Development
Corporation (ACDC), a corporation incorporated under Philippine law and
engaged in the construction business.[4]
On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. 115, against
the respondents before the City Prosecutors Office in Makati City. In the
affidavit-complaint[5] of June 7, 1999, the LBPs Account Officer for the
Account Management Development, Edna L. Juan, stated that LBP
extended a credit accommodation to ACDC through the execution of an
Omnibus Credit Line Agreement (Agreement)[6] between LBP and ACDC
on October 29, 1996. In various instances, ACDC used the Letters of
Credit/Trust Receipts Facility of the Agreement to buy construction
materials. The respondents, as officers and representatives of ACDC,
executed trust receipts[7] in connection with the construction materials, with
a total principal amount of P52,344,096.32. The trust receipts matured, but
ACDC failed to return to LBP the proceeds of the construction projects or
the construction materials subject of the trust receipts. LBP sent ACDC a
demand letter,[8] dated May 4, 1999, for the payment of its debts, including
those under the Trust Receipts Facility in the amount of P66,425,924.39.
When ACDC failed to comply with the demand letter, LBP filed the affidavit-
complaint.
The respondents filed a joint affidavit[9] wherein they stated that they signed
the trust receipt documents on or about the same time LBP and ACDC
executed the loan documents; their signatures were required by LBP for the
release of the loans. The trust receipts in this case do not contain (1) a
description of the goods placed in trust, (2) their invoice values, and (3) their
maturity dates, in violation of Section 5(a) of P.D. 115. Moreover, they
alleged that ACDC acted as a subcontractor for government projects such
as the Metro Rail Transit, the Clark Centennial Exposition and the Quezon
Power Plant in Mauban, Quezon. Its clients for the construction projects,
which were the general contractors of these projects, have not yet paid
them; thus, ACDC had yet to receive the proceeds of the materials that were
the subject of the trust receipts and were allegedly used for these
constructions. As there were no proceeds received from these clients, no
misappropriation thereof could have taken place.
On September 30, 1999, Makati Assistant City Prosecutor Amador Y.
Pineda issued a Resolution[10] dismissing the complaint. He pointed out
that the evidence presented by LBP failed to state the date when the goods
described in the letters of credit were actually released to the possession of
the respondents. Section 4 of P.D. 115 requires that the goods covered by
trust receipts be released to the possession of the entrustee after the latters
execution and delivery to the entruster of a signed trust receipt. He adds
that LBPs evidence also fails to show the date when the trust receipts were
executed since all the trust receipts are undated. Its dispositive portion
reads:
WHEREFORE, premises considered, and for insufficiency of evidence, it is
respectfully recommended that the instant complaints be dismissed, as
upon approval, the same are hereby dismissed.[11]
LBP filed a motion for reconsideration which the Makati Assistant City
Prosecutor denied in his order of January 7, 2000.[12]
On appeal, the Secretary of Justice reversed the Resolution of the Assistant
City Prosecutor. In his resolution of August 1, 2002,[13] the Secretary of
Justice pointed out that there was no question that the goods covered by
the trust receipts were received by ACDC. He likewise adopted LBPs
argument that while the subjects of the trust receipts were not mentioned in
the trust receipts, they were listed in the letters of credit referred to in the
trust receipts. He also noted that the trust receipts contained maturity dates
and clearly set out their stipulations. He further rejected the respondents
defense that ACDC failed to remit the payments to LBP due to the failure of
the clients of ACDC to pay them. The dispositive portion of the resolution
reads:
WHEREFORE, the assailed resolution is REVERSED and SET ASIDE. The
City Prosecutor of Makati City is hereby directed to file an information for
estafa under Art. 315 (1) (b) of the Revised Penal Code in relation to
Section 13, Presidential Decree No. 115 against respondents Lamberto C.
Perez, Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and Napoleon O.
Garcia and to report the action taken within ten (10) days from receipt
hereof.[14]
The respondents filed a motion for reconsideration of the resolution dated
August 1, 2002, which the Secretary of Justice denied.[15] He rejected the
respondents submission that Colinares v. Court of Appeals[16] does not
apply to the case. He explained that in Colinares, the building materials
were delivered to the accused before they applied to the bank for a loan to
pay for the merchandise; thus, the ownership of the merchandise had
already been transferred to the entrustees before the trust receipts
agreements were entered into. In the present case, the parties have already
entered into the Agreement before the construction materials were delivered
to ACDC.
Subsequently, the respondents filed a petition for review before the Court of
Appeals.
After both parties submitted their respective Memoranda, the Court of
Appeals promulgated the assailed decision of January 20, 2005.[17]
Applying the doctrine in Colinares, it ruled that this case did not involve a
trust receipt transaction, but a mere loan. It emphasized that construction
materials, the subject of the trust receipt transaction, were delivered to
ACDC even before the trust receipts were executed. It noted that LBP did
not offer proof that the goods were received by ACDC, and that the trust
receipts did not contain a description of the goods, their invoice value, the
amount of the draft to be paid, and their maturity dates. It also adopted
ACDCs argument that since no payment for the construction projects had
been received by ACDC, its officers could not have been guilty of
misappropriating any payment. The dispositive portion reads:
WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE
COURSE. The assailed Resolutions of the respondent Secretary of Justice
dated August 1, 2002 and February 17, 2003, respectively in I.S. No. 99-F-
9218-28 are hereby REVERSED and SET ASIDE.[18]
LBP now files this petition for review on certiorari, dated March 15, 2005,
raising the following error:
THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND
SET ASIDE THE RESOLUTIONS OF THE HONORABLE SECRETARY OF
JUSTICE BY APPLYING THE RULING IN THE CASE OF COLINARES V.
COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN
THE CASE AT BAR.[19]
On April 8, 2010, while the case was pending before this Court, the
respondents filed a motion to dismiss.[20] They informed the Court that LBP
had already assigned to Philippine Opportunities for Growth and Income,
Inc. all of its rights, title and interests in the loans subject of this case in a
Deed of Absolute Sale dated June 23, 2005 (attached as Annex C of the
motion). The respondents also stated that Avent Holdings Corporation, in
behalf of ACDC, had already settled ACDCs obligation to LBP on October 8,
2009. Included as Annex A in this motion was a certification[21] issued by
the Philippine Opportunities for Growth and Income, Inc., stating that it was
LBPs successor-in-interest insofar as the trust receipts in this case are
concerned and that Avent Holdings Corporation had already settled the
claims of LBP or obligations of ACDC arising from these trust receipts.
We deny this petition.
The disputed transactions are not trust receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in this manner:
Section 4. What constitutes a trust receipt transaction. A trust receipt
transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster, who
owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their
sale; or (b) to manufacture or process the goods with the purpose of
ultimate sale: Provided, That, in the case of goods delivered under trust
receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his obligation
under the trust receipt; or (c) to load, unload, ship or tranship or otherwise
deal with them in a manner preliminary or necessary to their sale[.]
There are two obligations in a trust receipt transaction. The first is covered
by the provision that refers to money under the obligation to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered
by the provision referring to merchandise received under the obligation to
return it (devolvera) to the owner. Thus, under the Trust Receipts Law,[22]
intent to defraud is presumed when (1) the entrustee fails to turn over the
proceeds of the sale of goods covered by the trust receipt to the entruster;
or (2) when the entrustee fails to return the goods under trust, if they are not
disposed of in accordance with the terms of the trust receipts.[23]
In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative the return of the proceeds of the sale or the return or
recovery of the goods, whether raw or processed.[24] When both parties
enter into an agreement knowing that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Section 13 of P.D. 115;
the only obligation actually agreed upon by the parties would be the return
of the proceeds of the sale transaction. This transaction becomes a mere
loan,[25] where the borrower is obligated to pay the bank the amount spent
for the purchase of the goods.
Article 1371 of the Civil Code provides that [i]n order to judge the intention
of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. Under this provision, we can examine the
contemporaneous actions of the parties rather than rely purely on the trust
receipts that they signed in order to understand the transaction through their
intent.
We note in this regard that at the onset of these transactions, LBP knew that
ACDC was in the construction business and that the materials that it sought
to buy under the letters of credit were to be used for the following projects:
the Metro Rail Transit Project and the Clark Centennial Exposition Project.
[26] LBP had in fact authorized the delivery of the materials on the
construction sites for these projects, as seen in the letters of credit it
attached to its complaint.[27] Clearly, they were aware of the fact that there
was no way they could recover the buildings or constructions for which the
materials subject of the alleged trust receipts had been used. Notably,
despite the allegations in the affidavit-complaint wherein LBP sought the
return of the construction materials,[28] its demand letter dated May 4, 1999
sought the payment of the balance but failed to ask, as an alternative, for
the return of the construction materials or the buildings where these
materials had been used.[29]
The fact that LBP had knowingly authorized the delivery of construction
materials to a construction site of two government projects, as well as
unspecified construction sites, repudiates the idea that LBP intended to be
the owner of those construction materials. As a government financial
institution, LBP should have been aware that the materials were to be used
for the construction of an immovable property, as well as a property of the
public domain. As an immovable property, the ownership of whatever was
constructed with those materials would presumably belong to the owner of
the land, under Article 445 of the Civil Code which provides:
Article 445. Whatever is built, planted or sown on the land of another and
the improvements or repairs made thereon, belong to the owner of the land,
subject to the provisions of the following articles.
Even if we consider the vague possibility that the materials, consisting of
cement, bolts and reinforcing steel bars, would be used for the construction
of a movable property, the ownership of these properties would still pertain
to the government and not remain with the bank as they would be classified
as property of the public domain, which is defined by the Civil Code as:
Article 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth.
In contrast with the present situation, it is fundamental in a trust receipt
transaction that the person who advanced payment for the merchandise
becomes the absolute owner of said merchandise and continues as owner
until he or she is paid in full, or if the goods had already been sold, the
proceeds should be turned over to him or to her.[30]
Thus, in concluding that the transaction was a loan and not a trust receipt,
we noted in Colinares that the industry or line of work that the borrowers
were engaged in was construction. We pointed out that the borrowers were
not importers acquiring goods for resale.[31] Indeed, goods sold in retail are
often within the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished products, these
finished products if not the raw materials or their components similarly
remain in the possession of the trustee until they are sold. But the goods
and the materials that are used for a construction project are often placed
under the control and custody of the clients employing the contractor, who
can only be compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal proceedings. The
contractors difficulty and uncertainty in claiming these materials (or the
buildings and structures which they become part of), as soon as the bank
demands them, disqualify them from being covered by trust receipt
agreements.
Based on these premises, we cannot consider the agreements between the
parties in this case to be trust receipt transactions because (1) from the
start, the parties were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which they were used;
and (2) from the moment the materials were used for the government
projects, they became public, not LBPs, property.
Since these transactions are not trust receipts, an action for estafa should
not be brought against the respondents, who are liable only for a loan. In
passing, it is useful to note that this is the threat held against borrowers that
Retired Justice Claudio Teehankee emphatically opposed in his dissent in
People v. Cuevo,[32] restated in Ong v. CA, et al.:[33]
The very definition of trust receipt x x x sustains the lower courts rationale in
dismissing the information that the contract covered by a trust receipt is
merely a secured loan. The goods imported by the small importer and retail
dealer through the banks financing remain of their own property and risk
and the old capitalist orientation of putting them in jail for estafa for non-
payment of the secured loan (granted after they had been fully investigated
by the bank as good credit risks) through the fiction of the trust receipt
device should no longer be permitted in this day and age.
As the law stands today, violations of Trust Receipts Law are criminally
punishable, but no criminal complaint for violation of Article 315, paragraph
1(b) of the Revised Penal Code, in relation with P.D. 115, should prosper
against a borrower who was not part of a genuine trust receipt transaction.
Misappropriation or abuse of confidence is absent in this case.
Even if we assume that the transactions were trust receipts, the complaint
against the respondents still should have been dismissed. The Trust
Receipts Law punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another, regardless of
whether the latter is the owner or not. The law does not singularly seek to
enforce payment of the loan, as there can be no violation of [the] right
against imprisonment for non-payment of a debt.[34]
In order that the respondents may be validly prosecuted for estafa under
Article 315, paragraph 1(b) of the Revised Penal Code,[35] in relation with
Section 13 of the Trust Receipts Law, the following elements must be
established: (a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to [the trustor],
or to return the goods if not sold; (b) they misappropriated or converted the
goods and/or the proceeds of the sale; (c) they performed such acts with
abuse of confidence to the damage and prejudice of Metrobank; and (d)
demand was made on them by [the trustor] for the remittance of the
proceeds or the return of the unsold goods.[36]
In this case, no dishonesty or abuse of confidence existed in the handling of
the construction materials.
In this case, the misappropriation could be committed should the entrustee
fail to turn over the proceeds of the sale of the goods covered by the trust
receipt transaction or fail to return the goods themselves. The respondents
could not have failed to return the proceeds since their allegations that the
clients of ACDC had not paid for the projects it had undertaken with them at
the time the case was filed had never been questioned or denied by LBP.
What can only be attributed to the respondents would be the failure to return
the goods subject of the trust receipts.
We do not likewise see any allegation in the complaint that ACDC had used
the construction materials in a manner that LBP had not authorized. As
earlier pointed out, LBP had authorized the delivery of these materials to
these project sites for which they were used. When it had done so, LBP
should have been aware that it could not possibly recover the processed
materials as they would become part of government projects, two of which
(the Metro Rail Transit Project and the Quezon Power Plant Project) had
even become part of the operations of public utilities vital to public service. It
clearly had no intention of getting these materials back; if it had, as a
primary government lending institution, it would be guilty of extreme
negligence and incompetence in not foreseeing the legal complications and
public inconvenience that would arise should it decide to claim the
materials. ACDCs failure to return these materials or their end product at the
time these trust receipts expired could not be attributed to its volition. No
bad faith, malice, negligence or breach of contract has been attributed to
ACDC, its officers or representatives. Therefore, absent any abuse of
confidence or misappropriation on the part of the respondents, the criminal
proceedings against them for estafa should not prosper.
In Metropolitan Bank,[37] we affirmed the city prosecutors dismissal of a
complaint for violation of the Trust Receipts Law. In dismissing the
complaint, we took note of the Court of Appeals finding that the bank was
interested only in collecting its money and not in the return of the goods.
Apart from the bare allegation that demand was made for the return of the
goods (raw materials that were manufactured into textiles), the bank had not
accompanied its complaint with a demand letter. In addition, there was no
evidence offered that the respondents therein had misappropriated or
misused the goods in question.
The petition should be dismissed because the OSG did not file it and the
civil liabilities have already been settled.
The proceedings before us, regarding the criminal aspect of this case,
should be dismissed as it does not appear from the records that the
complaint was filed with the participation or consent of the Office of the
Solicitor General (OSG). Section 35, Chapter 12, Title III, Book IV of the
Administrative Code of 1987 provides that:
Section 35. Powers and Functions. The Office of the Solicitor General shall
represent the Government of the Philippines, its agencies and
instrumentalities and its officials and agents in any litigation, proceedings,
investigation or matter requiring the services of lawyers. x x x It shall have
the following specific powers and functions:
(1) Represent the Government in the Supreme Court and the Court of
Appeals in all criminal proceedings; represent the Government and its
officers in the Supreme Court, the Court of Appeals and all other courts or
tribunals in all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a party.
(Emphasis provided.)
In Heirs of Federico C. Delgado v. Gonzalez,[38] we ruled that the
preliminary investigation is part of a criminal proceeding. As all criminal
proceedings before the Supreme Court and the Court of Appeals may be
brought and defended by only the Solicitor General in behalf of the Republic
of the Philippines, a criminal action brought to us by a private party alone
suffers from a fatal defect. The present petition was brought in behalf of LBP
by the Government Corporate Counsel to protect its private interests. Since
the representative of the People of the Philippines had not taken any part of
the case, it should be dismissed.
On the other hand, if we look at the mandate given to the Office of the
Government Corporate Counsel, we find that it is limited to the civil liabilities
arising from the crime, and is subject to the control and supervision of the
public prosecutor. Section 2, Rule 8 of the Rules Governing the Exercise by
the Office of the Government Corporate Counsel of its Authority, Duties and
Powers as Principal Law Office of All Government Owned or Controlled
Corporations, filed before the Office of the National Administration Register
on September 5, 2011, reads:
Section 2. Extent of legal assistance The OGCC shall represent the
complaining GOCC in all stages of the criminal proceedings. The legal
assistance extended is not limited to the preparation of appropriate sworn
statements but shall include all aspects of an effective private prosecution
including recovery of civil liability arising from the crime, subject to the
control and supervision of the public prosecutor.
Based on jurisprudence, there are two exceptions when a private party
complainant or offended party in a criminal case may file a petition with this
Court, without the intervention of the OSG: (1) when there is denial of due
process of law to the prosecution, and the State or its agents refuse to act
on the case to the prejudice of the State and the private offended party;[39]
and (2) when the private offended party questions the civil aspect of a
decision of the lower court.[40]
In this petition, LBP fails to allege any inaction or refusal to act on the part of
the OSG, tantamount to a denial of due process. No explanation appears as
to why the OSG was not a party to the case. Neither can LBP now question
the civil aspect of this decision as it had already assigned ACDCs debts to a
third person, Philippine Opportunities for Growth and Income, Inc., and the
civil liabilities appear to have already been settled by Avent Holdings
Corporation, in behalf of ACDC. These facts have not been disputed by
LBP. Therefore, we can reasonably conclude that LBP no longer has any
claims against ACDC, as regards the subject matter of this case, that would
entitle it to file a civil or criminal action.
WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005
decision of the Court of Appeals in CA-G.R. SP No. 76588. No costs.
SO ORDERED.
HUR TIN YANG vs. PEOPLE OF THE PHILIPPINES G.R. No. 195117;
August 14, 2013;
A trust receipt transaction is one where the entrustee has the obligation to
deliver to the entruster the price of the sale, or if the merchandise is not
sold, to return the merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers to money received
under the obligation involving the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the second refers to the merchandise
received under the obligation to "return" it (devolvera) to the owner. When
both parties enter into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only
obligation actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere loan,
where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
FACTS:
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged
in the construction business. On various occasions, Metropolitan Bank and
Trust Company (Metrobank), extended several commercial letters of credit
(LCs) to Supermax. These commercial LCs were used by Supermax to pay
for the delivery of several construction materials which will be used in their
construction business. Thereafter, Metrobank required petitioner, as
representative of Supermax, to sign trust receipts as security for the
construction materials and to hold those materials or the proceeds of the
sales in trust for Metrobank to the extent of the amount stated in the trust
receipts. When the trust receipts fell due and despite the receipt of a
demand letter, Supermax failed to pay or deliver the goods or proceeds to
Metrobank. Instead, Supermax requested the restructuring of the loan.
When the intended restructuring of the loan did not materialize, Metrobank
sent another demand letter. As the demands fell on deaf ears, Metrobank,
filed the instant criminal complaints against petitioner. For his defense, while
admitting signing the trust receipts, petitioner argued that said trust receipts
were demanded by Metrobank as additional security for the loans extended
to Supermax for the purchase of construction equipment and materials. In
support of this argument, petitioner presented a witness who testified that
the construction materials covered by the trust receipts were delivered way
before petitioner signed the corresponding trust receipts. Further, petitioner
argued that Metrobank knew all along that the construction materials subject
of the trust receipts were not intended for resale but for personal use of
Supermax relating to its construction business. The trial court rendered
judgment convicting accused Hur Tin Yang of the crime of estafa under
Article 315 paragraph 1 (a) of the Revised Penal Code. Petitioner appealed
to the CA. CA rendered a Decision, upholding the findings of the RTC. The
CA ruled that since the offense punished under PD 115 is in the nature of
malum prohibitum, a mere failure to deliver the proceeds of the sale or
goods, if not sold, is sufficient to justify a conviction under PD 115. Petitioner
filed a MR, but it was denied. Not satisfied, petitioner filed a petition for
review under Rule 45 of the Rules of Court.
SC dismissed the Petition on the ground that the CA committed no
reversible error in the assailed decision. Hence, petitioner filed the present
MR contending that the transactions between the parties do not constitute
trust receipt agreements but rather of simple loans.
ISSUE:
Whether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of the
RPC in relation to PD 115, even if it was sufficiently proved that the
entruster (Metrobank) knew beforehand that the goods (construction
materials) subject of the trust receipts were never intended to be sold but
only for use in the entrustee’s construction business.
HELD:
In determining the nature of a contract, courts are not bound by the title or
name given by the parties. The decisive factor in evaluating such agreement
is the intention of the parties, as shown not necessarily by the terminology
used in the contract but by their conduct, words, actions and deeds prior to,
during and immediately after executing the agreement. As such, therefore,
documentary and parol evidence may be submitted and admitted to prove
such intention. In the instant case, the factual findings of the trial and
appellate courts reveal that the dealing between petitioner and Metrobank
was not a trust receipt transaction but one of simple loan. Petitioner’s
admission ––that he signed the trust receipts on behalf of Supermax, which
failed to pay the loan or turn over the proceeds of the sale or the goods to
Metrobank upon demand ––does not conclusively prove that the transaction
was, indeed, a trust receipts transaction. In contrast to the nomenclature of
the transaction, the parties really intended a contract of loan.
This is a motion for reconsideration of our February 1, 2012 Minute
Resolution1 sustaining the July 28, 2010 Decision2 and December 20, 2010
Resolution3 of the Court of Appeals (CA) in CA-G.R. CR No. 30426, finding
petitioner Hur Tin Yang guilty beyond reasonable doubt of the crime of
Estafa under A11icle 315, paragraph 1 (b) of the Revised Penal Code (RPC)
in relation to Presidential Decree No. 115 (PD 115) or the Trust Receipts
Law.
In twenty-four (24) consolidated Informations, all dated March 15, 2002,
petitioner Hur Tin Yang was charged at the instance of the same
complainant with the crime of Estafa under Article 315, par. 1(b) of the
RPC,4 in relation to PD 115,5 docketed as Criminal Case Nos. 04-223911 to
34 and raffled to the Regional Trial Court of Manila, Branch 20. The 24
Informations––differing only as regards the alleged date of commission of
the crime, date of the trust receipts, the number of the letter of credit, the
subject goods and the amount––uniformly recite:
That on or about May 28, 1998, in the City of Manila, Philippines, the said
accused being then the authorized officer of SUPERMAX PHILIPPINES,
INC., with office address at No. 11/F, Global Tower, Gen Mascardo corner
M. Reyes St., Bangkal, Makati City, did then and there willfully, unlawfully
and feloniously defraud the METROPOLITAN BANK AND TRUST
COMPANY (METROBANK), a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines,
represented by its Officer in Charge, WINNIE M. VILLANUEVA, in the
following manner, to wit: the said accused received in trust from the said
Metropolitan Bank and Trust Company reinforcing bars valued at
P1,062,918.84 specified in the undated Trust Receipt Agreement covered
by Letter of Credit No. MG-LOC 216/98 for the purpose of holding said
merchandise/goods in trust, with obligation on the part of the accused to
turn over the proceeds of the sale thereof or if unsold, to return the goods to
the said bank within the specified period agreed upon, but herein accused
once in possession of the said merchandise/goods, far from complying with
his aforesaid obligation, failed and refused and still fails and refuses to do
so despite repeated demands made upon him to that effect and with intent
to defraud and with grave abuse of confidence and trust, misappropriated,
misapplied and converted the said merchandise/goods or the value thereof
to his own personal use and benefit, to the damage and prejudice of said
METROPOLITAN BANK AND TRUST COMPANY in the aforesaid amount
of P1,062,918.84, Philippine Currency.
Contrary to law.
Upon arraignment, petitioner pleaded “not guilty.” Thereafter, trial on the
merits then ensued.
The facts of these consolidated cases are undisputed:
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged
in the construction business. On various occasions in the month of April,
May, July, August, September, October and November 1998, Metropolitan
Bank and Trust Company (Metrobank), Magdalena Branch, Manila,
extended several commercial letters of credit (LCs) to Supermax. These
commercial LCs were used by Supermax to pay for the delivery of several
construction materials which will be used in their construction business.
Thereafter, Metrobank required petitioner, as representative and Vice-
President for Internal Affairs of Supermax, to sign twenty-four (24) trust
receipts as security for the construction materials and to hold those
materials or the proceeds of the sales in trust for Metrobank to the extent of
the amount stated in the trust receipts.
When the 24 trust receipts fell due and despite the receipt of a demand
letter dated August 15, 2000, Supermax failed to pay or deliver the goods or
proceeds to Metrobank. Instead, Supermax, through petitioner, requested
the restructuring of the loan. When the intended restructuring of the loan did
not materialize, Metrobank sent another demand letter dated October 11,
2001. As the demands fell on deaf ears, Metrobank, through its
representative, Winnie M. Villanueva, filed the instant criminal complaints
against petitioner.
For his defense, while admitting signing the trust receipts, petitioner argued
that said trust receipts were demanded by Metrobank as additional security
for the loans extended to Supermax for the purchase of construction
equipment and materials. In support of this argument, petitioner presented
as witness, Priscila Alfonso, who testified that the construction materials
covered by the trust receipts were delivered way before petitioner signed
the corresponding trust receipts.7 Further, petitioner argued that Metrobank
knew all along that the construction materials subject of the trust receipts
were not intended for resale but for personal use of Supermax relating to its
construction business.
The trial court a quo, by Judgment dated October 6, 2006, found petitioner
guilty as charged and sentenced him as follows:
His guilt having been proven and established beyond reasonable doubt, the
Court hereby renders judgment CONVICTING accused HUR TIN YANG of
the crime of estafa under Article 315 paragraph 1 (a) of the Revised Penal
Code and hereby imposes upon him the indeterminate penalty of 4 years, 2
months and 1 day of prision correccional to 20 years of reclusion temporal
and to pay Metropolitan Bank and Trust Company, Inc. the amount of
Php13,156,256.51 as civil liability and to pay cost.
SO ORDERED.
Petitioner appealed to the CA. On July 28, 2010, the appellate court
rendered a Decision, upholding the findings of the RTC that the prosecution
has satisfactorily established the guilt of petitioner beyond reasonable
doubt, including the following critical facts, to wit: (1) petitioner signing the
trust receipts agreement; (2) Supermax failing to pay the loan; and (3)
Supermax failing to turn over the proceeds of the sale or the goods to
Metrobank upon demand. Curiously, but significantly, the CA also found that
even before the execution of the trust receipts, Metrobank knew or should
have known that the subject construction materials were never intended for
resale or for the manufacture of items to be sold.10cralaw virtualaw library
The CA ruled that since the offense punished under PD 115 is in the nature
of malum prohibitum, a mere failure to deliver the proceeds of the sale or
goods, if not sold, is sufficient to justify a conviction under PD 115. The fallo
of the CA Decision reads:
WHEREFORE, in view of the foregoing premises, the appeal filed in this
case is hereby DENIED and, consequently, DISMISSED. The assailed
Decision dated October 6, 2006 of the Rregional Trial Court, Branch 20, in
the City of Manila in Criminal Cases Nos. 04223911 to 223934 is hereby
AFFIRMED.
SO ORDERED.
Petitioner filed a Motion for Reconsideration, but it was denied in a
Resolution dated December 20, 2010. Not satisfied, petitioner filed a petition
for review under Rule 45 of the Rules of Court. The Office of the Solicitor
General (OSG) filed its Comment dated November 28, 2011, stressing that
the pieces of evidence adduced from the testimony and documents
submitted before the trial court are sufficient to establish the guilt of
petitioner.
On February 1, 2012, this Court dismissed the Petition via a Minute
Resolution on the ground that the CA committed no reversible error in the
assailed July 28, 2010 Decision. Hence, petitioner filed the present Motion
for Reconsideration contending that the transactions between the parties do
not constitute trust receipt agreements but rather of simple loans.
On October 3, 2012, the OSG filed its Comment on the Motion for
Reconsideration, praying for the denial of said motion and arguing that
petitioner merely reiterated his arguments in the petition and his Motion for
Reconsideration is nothing more than a mere rehash of the matters already
thoroughly passed upon by the RTC, the CA and this Court.
The sole issue for the consideration of the Court is whether or not petitioner
is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115,
even if it was sufficiently proved that the entruster (Metrobank) knew
beforehand that the goods (construction materials) subject of the trust
receipts were never intended to be sold but only for use in the entrustee’s
construction business.
The motion for reconsideration has merit.
In determining the nature of a contract, courts are not bound by the title or
name given by the parties. The decisive factor in evaluating such agreement
is the intention of the parties, as shown not necessarily by the terminology
used in the contract but by their conduct, words, actions and deeds prior to,
during and immediately after executing the agreement. As such, therefore,
documentary and parol evidence may be submitted and admitted to prove
such intention.
In the instant case, the factual findings of the trial and appellate courts
reveal that the dealing between petitioner and Metrobank was not a trust
receipt transaction but one of simple loan. Petitioner’s admission––that he
signed the trust receipts on behalf of Supermax, which failed to pay the loan
or turn over the proceeds of the sale or the goods to Metrobank upon
demand––does not conclusively prove that the transaction was, indeed, a
trust receipts transaction. In contrast to the nomenclature of the transaction,
the parties really intended a contract of loan. This Court––in Ng v. People14
and Land Bank of the Philippines v. Perez,15 cases which are in all four
corners the same as the instant case––ruled that the fact that the entruster
bank knew even before the execution of the trust receipt agreements that
the construction materials covered were never intended by the entrustee for
resale or for the manufacture of items to be sold is sufficient to prove that
the transaction was a simple loan and not a trust receipts transaction.
The petitioner was charged with Estafa committed in what is called, under
PD 115, a “trust receipt transaction,” which is defined as:
Section 4. What constitutes a trust receipts transaction.—A trust receipt
transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster, who
owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter’s execution and delivery to the entruster of a
signed document called a “trust receipt” wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents: (a) to sell the goods or procure their
sale; or (b) to manufacture or process the goods with the purpose of
ultimate sale: Provided, That, in the case of goods delivered under trust
receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied full with his obligation
under the trust receipt; or (c) to load, unload, ship or transship or otherwise
deal with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments: (a) to sell or procure their sale or exchange; or
(b) to deliver them to a principal; or (c) to effect the consummation of some
transactions involving delivery to a depository or register; or (d) to effect
their presentation, collection or renewal.
Simply stated, a trust receipt transaction is one where the entrustee has the
obligation to deliver to the entruster the price of the sale, or if the
merchandise is not sold, to return the merchandise to the entruster. There
are, therefore, two obligations in a trust receipt transaction: the first refers to
money received under the obligation involving the duty to turn it over
(entregarla) to the owner of the merchandise sold, while the second refers
to the merchandise received under the obligation to “return” it (devolvera) to
the owner.16 A violation of any of these undertakings constitutes Estafa
defined under Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD
115, viz:
Section 13. Penalty Clause.—The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions
of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the
Revised Penal Code. x x x (Emphasis supplied.)
Nonetheless, when both parties enter into an agreement knowing fully well
that the return of the goods subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not a trust receipt transaction
penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the
RPC, as the only obligation actually agreed upon by the parties would be
the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.
In Ng v. People, Anthony Ng, then engaged in the business of building and
fabricating telecommunication towers, applied for a credit line of PhP
3,000,000 with Asiatrust Development Bank, Inc. Prior to the approval of the
loan, Anthony Ng informed Asiatrust that the proceeds would be used for
purchasing construction materials necessary for the completion of several
steel towers he was commissioned to build by several telecommunication
companies. Asiatrust approved the loan but required Anthony Ng to sign a
trust receipt agreement. When Anthony Ng failed to pay the loan, Asiatrust
filed a criminal case for Estafa in relation to PD 115 or the Trust Receipts
Law. This Court acquitted Anthony Ng and ruled that the Trust Receipts Law
was created to “to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.” Since
Asiatrust knew that Anthony Ng was neither an importer nor retail dealer, it
should have known that the said agreement could not possibly apply to
petitioner, viz:
The true nature of a trust receipt transaction can be found in the “whereas”
clause of PD 115 which states that a trust receipt is to be utilized “as a
convenient business device to assist importers and merchants solve their
financing problems.” Obviously, the State, in enacting the law, sought to find
a way to assist importers and merchants in their financing in order to
encourage commerce in the Philippines.
[A] trust receipt is considered a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of
the merchandise imported or purchased. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of
“financing importations or financing sales.” The principle is of course not
limited in its application to financing importations, since the principle is
equally applicable to domestic transactions. Regardless of whether the
transaction is foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts mainly involved sales.
Following the precept of the law, such transactions affect situations wherein
the entruster, who owns or holds absolute title or security interests over
specified goods, documents or instruments, releases the subject goods to
the possession of the entrustee. The release of such goods to the entrustee
is conditioned upon his execution and delivery to the entruster of a trust
receipt wherein the former binds himself to hold the specific goods,
documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the obligation to turn
over to the entruster the proceeds to the extent of the amount owing to the
entruster or the goods, documents or instruments themselves if they are
unsold. x x x [T]he entruster is entitled “only to the proceeds derived from
the sale of goods released under a trust receipt to the entrustee.”
Considering that the goods in this case were never intended for sale but for
use in the fabrication of steel communication towers, the trial court erred in
ruling that the agreement is a trust receipt transaction.
xxxx
To emphasize, the Trust Receipts Law was created to “to aid in financing
importers and retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.” Since Asiatrust knew that petitioner
was neither an importer nor retail dealer, it should have known that the said
agreement could not possibly apply to petitioner.18cralaw virtualaw library
Further, in Land Bank of the Philippines v. Perez, the respondents were
officers of Asian Construction and Development Corporation (ACDC), a
corporation engaged in the construction business. On several occasions,
respondents executed in favor of Land Bank of the Philippines (LBP) trust
receipts to secure the purchase of construction materials that they will need
in their construction projects. When the trust receipts matured, ACDC failed
to return to LBP the proceeds of the construction projects or the
construction materials subject of the trust receipts. After several demands
went unheeded, LBP filed a complaint for Estafa or violation of Art. 315, par.
1(b) of the RPC, in relation to PD 115, against the respondent officers of
ACDC. This Court, like in Ng, acquitted all the respondents on the postulate
that the parties really intended a simple contract of loan and not a trust
receipts transaction, viz:
When both parties enter into an agreement knowing that the return of the
goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under
Section 13 of P.D. 115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is obligated to pay
the bank the amount spent for the purchase of the goods.
xxxx
Thus, in concluding that the transaction was a loan and not a trust receipt,
we noted in Colinares that the industry or line of work that the borrowers
were engaged in was construction. We pointed out that the borrowers were
not importers acquiring goods for resale. Indeed, goods sold in retail are
often within the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished products, these
finished products – if not the raw materials or their components – similarly
remain in the possession of the trustee until they are sold. But the goods
and the materials that are used for a construction project are often placed
under the control and custody of the clients employing the contractor, who
can only be compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal proceedings. The
contractor’s difficulty and uncertainty in claiming these materials (or the
buildings and structures which they become part of), as soon as the bank
demands them, disqualify them from being covered by trust receipt
agreements.
Since the factual milieu of Ng and Land Bank of the Philippines are in all
four corners similar to the instant case, it behooves this Court, following the
principle of stare decisis,20 to rule that the transactions in the instant case
are not trust receipts transactions but contracts of simple loan. The fact that
the entruster bank, Metrobank in this case, knew even before the execution
of the alleged trust receipt agreements that the covered construction
materials were never intended by the entrustee (petitioner) for resale or for
the manufacture of items to be sold would take the transaction between
petitioner and Metrobank outside the ambit of the Trust Receipts Law.
For reasons discussed above, the subject transactions in the instant case
are not trust receipts transactions. Thus, the consolidated complaints for
Estafa in relation to PD 115 have really no leg to stand on.
The Court’s ruling in Colinares v. Court of Appeals21 is very apt, thus:
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution
should they be unable to pay it may be unjust and inequitable. if not
reprehensible. Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks and is
prone to misinterpretation x x x.
Unfortunately, what happened in Colinares is exactly the situation in the
instant case. This reprehensible bank practice described in Colinares should
be stopped and discouraged. For this Court to give life to the constitutional
provision of non-imprisonment for nonpayment of debts,22 it is imperative
that petitioner be acquitted of the crime of Estafa under Art. 315, par. 1 (b)
ofthe RPC, in relation to PD 115.
WHEREFORE, the Resolution dated February 1, 2012, upholding theCA's
Decision dated July 28, 2010 and Resolution dated December 20, 2010 in
CA-G.R. CR No. 30426, is hereby RECONSIDERED. Petitioner Hur Tin
Yang is ACQUITTED of the charge of violating Art. 315, par. 1 (b) of the
RPC, in relation to the pertinent provision of PD 115 in Criminal Case Nos.
04-223911 to 34.
SO ORDERED.
LETTERS OF CREDIT
PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT
G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment
FACTS:
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a five-year deferred
payment plan. To effect payment for said machineries, Philippine Rayon
Mills opened a commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. Against this letter of credit, drafts were drawn
and issued by Nissho, which were all paid by the Prudential Bank through
its correspondent in Japan. Two of these drafts were accepted by Philippine
Rayon Mills while the others were not. Petitioner instituted an action for the
recovery of the sum of money it paid to Nissho as Philippine Rayon Mills
was not able to pay its obligations arising from the letter of credit.
Respondent court ruled that with regard to the ten drafts which were not
presented and accepted, no valid demand for payment can be made.
Petitioner however claims that the drafts were sight drafts which did not
require presentment for acceptance to Philippine Rayon.
ISSUE:
Whether presentment for acceptance of the drafts was indispensable to
make Philippine Rayon liable thereon.
RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It was
to the latter that the drafts were presented for payment. There was in fact
no need for acceptance as the issued drafts are sight drafts. Presentment
for acceptance is necessary only in the cases expressly provided for in
Section 143 of the Negotiable Instruments Law (NIL). The said section
provides that presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable. Obviously then, sight drafts do not require
presentment for acceptance.
Petitioner seeks to review and set aside the decision 1 of public respondent;
Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986,
in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of
Branch 9 (Quezon City) of the then Court of First Instance (now Regional
Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action
instituted by the petitioner for the recovery of a sum of money representing
the amount paid by it to the Nissho Company Ltd. of Japan for textile
machinery imported by the defendant, now private respondent, Philippine
Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-
defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the
public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered
into a contract with Nissho Co., Ltd. of Japan for the importation of textile
machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's
Folder of Exhibits, p 2). To effect payment for said machineries, the
defendant-appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were
drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in
Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these
drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendant-
appellant through its president, Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the
shipping documents to the defendant-appellant which accepted delivery of
the same. To enable the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two
sureties who, by the very terms and conditions thereof, were to be jointly
and severally liable to the Prudential Bank should the defendant-appellant
fail to pay the total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-appellant was able to take
delivery of the textile machineries and installed the same at its factory site at
69 Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation
(sic). On December 29, 1969, defendant-appellant's factory was leased by
Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid.,
p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26).
On January 5, 1974, all the textile machineries in the defendant-appellant's
factory were sold to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and
the trust receipt remained unpaid and unliquidated. Repeated formal
demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the
said trust receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed on October 3,
1974 against the defendant-appellant and Anacleto R. Chi. In their
respective answers, the defendants interposed identical special defenses,
viz., the complaint states no cause of action; if there is, the same has
prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant
Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the
amounts due under Exhibits "X" & "X-1", with interest at 6% per annum
beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive,
the same not having been accepted by defendant Philippine Rayon Mills,
Inc., plaintiff's cause of action thereon has not accrued, hence, the instant
case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed.
Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00
as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In
urging the said court to reverse or modify the decision, petitioner alleged in
its Brief that the trial court erred in (a) disregarding its right to
reimbursement from the private respondents for the entire unpaid balance
of the imported machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party payor's right
to reimbursement provided for in the second paragraph of Article 1236 of
the Civil Code and under the rule against unjust enrichment; (b) refusing to
hold Anacleto R. Chi, as the responsible officer of defendant corporation,
liable under Section 13 of P.D No 115 for the entire unpaid balance of the
imported machines covered by the bank's trust receipt (Exhibit "C"); (c)
finding that the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi
that he is at least a simple guarantor of the said trust receipt obligation; (e)
contravening, based on the assumption that Chi is a simple guarantor,
Articles 2059, 2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its
liability to pay the petitioner the amounts involved in the drafts (Exhibits "X",
"X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As
to the first and last assigned errors, it ruled that the provision on unjust
enrichment, Article 2142 of the Civil Code, applies only if there is no express
contract between the parties and there is a clear showing that the payment
is justified. In the instant case, the relationship existing between the
petitioner and Philippine Rayon is governed by specific contracts, namely
the application for letters of credit, the promissory note, the drafts and the
trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11")
which had not been presented to and were not accepted by Philippine
Rayon, petitioner was not justified in unilaterally paying the amounts stated
therein. The public respondent did not agree with the petitioner's claim that
the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10) drafts were
not presented and accepted, no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that private
respondent Chi is solidarily liable with Philippine Rayon pursuant to Section
13 of P.D. No. 115 and based on his signature on the solidary guaranty
clause at the dorsal side of the trust receipt. As to the first contention, the
public respondent ruled that the civil liability provided for in said Section 13
attaches only after conviction. As to the second, it expressed misgivings as
to whether Chi's signature on the trust receipt made the latter automatically
liable thereon because the so-called solidary guaranty clause at the dorsal
portion of the trust receipt is to be signed not by one (1) person alone, but
by two (2) persons; the last sentence of the same is incomplete and
unsigned by witnesses; and it is not acknowledged before a notary public.
Besides, even granting that it was executed and acknowledged before a
notary public, Chi cannot be held liable therefor because the records fail to
show that petitioner had either exhausted the properties of Philippine Rayon
or had resorted to all legal remedies as required in Article 2058 of the Civil
Code. As provided for under Articles 2052 and 2054 of the Civil Code, the
obligation of a guarantor is merely accessory and subsidiary, respectively.
Chi's liability would therefore arise only when the principal debtor fails to
comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public
respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant
petition on 31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT
OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL
CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO
WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION
13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE
TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the
petition after the filing of the Comment thereto by private respondent
Anacleto Chi and of the Reply to the latter by the petitioner; both parties
were also required to submit their respective memoranda which they
subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust
receipt;
3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not, whether
he may be considered a guarantor; in the latter situation, whether the case
should have been dismissed on the ground of lack of cause of action as
there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon
could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because
only these appear to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to
"X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by
Philippine Rayon was indispensable to make the latter liable thereon. We
are unable to agree with this proposition. The transaction in the case at bar
stemmed from Philippine Rayon's application for a commercial letter of
credit with the petitioner in the amount of $128,548.78 to cover the former's
contract to purchase and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial court in its Order of 6
March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of
Credit, plaintiff bank 10 was under obligation to pay through its
correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968, pursuant to
plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn,
defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank
the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said
plaintiff bank together with any accruing commercial charges, interest, etc.
pursuant to the terms and conditions stipulated in the Application and
Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person
made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the
credit. 11 Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the
bank the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. 12 In the instant case then, the
drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. —
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence
or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to
the order of the drawer; 14 this may be done in writing by the drawee in the
bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject,
drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be
payable upon acceptance unless plaintiff bank has given the Philippine
Rayon Mills Inc. time within which to pay the same. The first two drafts
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their
face (sic), and upon such acceptance should have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still
unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand.
Section 7 provides:
Sec. 7. When payable on demand. — An instrument is payable on
demand —
(a) When so it is expressed to be payable on demand, or at sight, or
on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is,
as regards the person so issuing, accepting, or indorsing it, payable on
demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment
at maturity of any accepted draft, bill of exchange or indebtedness shall not
be extinguished or modified" 17 does not, contrary to the holding of the
public respondent, contemplate prior acceptance by Philippine Rayon, but
by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts And
even if these were not sight drafts, thereby necessitating acceptance, it
would be the petitioner — and not Philippine Rayon — which had to accept
the same for the latter was not the drawee. Presentment for acceptance is
defined an the production of a bill of exchange to a drawee for acceptance.
18 The trial court and the public respondent, therefore, erred in ruling that
presentment for acceptance was an indispensable requisite for Philippine
Rayon's liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter of credit
issued by the petitioner. A different conclusion would violate the principle
upon which commercial letters of credit are founded because in such a
case, both the beneficiary and the issuer, Nissho Company Ltd. and the
petitioner, respectively, would be placed at the mercy of Philippine Rayon
even if the latter had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and purpose of a letter of
credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc.,
19 thus:
Commercial letters of credit have come into general use in international
sales transactions where much time necessarily elapses between the sale
and the receipt by a purchaser of the merchandise, during which interval
great price changes may occur. Buyers and sellers struggle for the
advantage of position. The seller is desirous of being paid as surely and as
soon as possible, realizing that the vendee at a distant point has it in his
power to reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this condition by
affording celerity and certainty of payment. Their purpose is to insure to a
seller payment of a definite amount upon presentation of documents. The
bank deals only with documents. It has nothing to do with the quality of the
merchandise. Disputes as to the merchandise shipped may arise and be
litigated later between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank when the proper
documents are presented.
The trial court and the public respondent likewise erred in disregarding the
trust receipt and in not holding that Philippine Rayon was liable thereon. In
People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by
quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer,
and thereby lends the aid of capital, of credit, or of business facilities and
agencies abroad, to the enterprise of foreign commerce. Much of this trade
could hardly be carried on by any other means, and therefore it is of the first
importance that the fundamental factor in the transaction, the banker's
advance of money and credit, should receive the amplest protection.
Accordingly, in order to secure that the banker shall be repaid at the critical
point — that is, when the imported goods finally reach the hands of the
intended vendee — the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and settled for by
his payments or acceptances in the foreign country, and he continues to
hold that title as his indispensable security until the goods are sold in the
United States and the vendee is called upon to pay for them. This security is
not an ordinary pledge by the importer to the banker, for the importer has
never owned the goods, and moreover he is not able to deliver the
possession; but the security is the complete title vested originally in the
bankers, and this characteristic of the transaction has again and again been
recognized and protected by the courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the banker is always
under the obligation to reconvey; but only after his advances have been fully
repaid and after the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust
receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as
provided by the Chattel Mortgage Law, that is, the importer becomes
absolute owner of the imported merchandise as soon an he has paid its
price. The ownership of the merchandise continues to be vested in the
owner thereof or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the importer or by his
representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took
effect on 29 January 1973, a trust receipt transaction is defined as "any
transaction by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security interests'
over certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latter's execution and delivery to
the entruster of a signed document called the "trust receipt" wherein the
entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, instruments
themselves if they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have
presumably put said machinery to good use and have profited by its
operation and/or disposition but very recent information that (sic) reached
plaintiff bank that defendants already sold the machinery covered by the
trust receipt to Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in fiduciary (sic)
capacity, defendants have willfully violated their duty to account for the
whereabouts of the machinery covered by the trust receipt or for the
proceeds of any lease, sale or other disposition of the same that they may
have made, notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any money realized
from the lease, sale, and other disposition of said machinery." 23 While
there is no specific prayer for the delivery to the petitioner by Philippine
Rayon of the proceeds of the sale of the machinery covered by the trust
receipt, such relief is covered by the general prayer for "such further and
other relief as may be just and equitable on the premises." 24 And although
it is true that the petitioner commenced a criminal action for the violation of
the Trust Receipts Law, no legal obstacle prevented it from enforcing the
civil liability arising out of the trust, receipt in a separate civil action. Under
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over
the proceeds of the sale of goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appear
in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions
of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article
33 of the Civil Code, a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the injured party in
cases of defamation, fraud and physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that
adduced by the public respondent, that private respondent Chi's signature in
the dorsal portion of the trust receipt did not bind him solidarily with
Philippine Rayon. The statement at the dorsal portion of the said trust
receipt, which petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and undertake
to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all
sums of money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or pertaining to, and/or in
any event connected with the default of and/or non-fulfillment in any respect
of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY
does not have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26

Petitioner insists that by virtue of the clear wording of the statement,
specifically the clause ". . . we jointly and severally agree and
undertake . . .," and the concluding sentence on exhaustion, Chi's liability
therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether
the mere signature of defendant-appellee Chi of (sic) the guaranty
agreement, Exhibit "C-1", will make it an actionable document. It should be
noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant.
A perusal of Exhibit "C-1" shows that it was to be signed and executed by
two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1"
was to be witnessed by two persons, but no one signed in that capacity. The
last sentence of the guaranty clause is incomplete. Furthermore, the
plaintiff-appellant also failed to have the purported guarantee clause
acknowledged before a notary public. All these show that the alleged
guaranty provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully
executed and acknowledged still defendant-appellee Chi cannot be held
liable thereunder because the records show that the plaintiff-appellant had
neither exhausted the property of the defendant-appellant nor had it
resorted to all legal remedies against the said defendant-appellant as
provided in Article 2058 of the Civil Code. The obligation of a guarantor is
merely accessory under Article 2052 of the Civil Code and subsidiary under
Article 2054 of the Civil Code. Therefore, the liability of the defendant-
appellee arises only when the principal debtor fails to comply with his
obligation. 27
Our own 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. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to its full extent against
any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust receipt,
together with the questioned solidary guaranty clause, is on a form drafted
and prepared solely by the petitioner; Chi's participation therein is limited to
the affixing of his signature thereon. It is, therefore, a contract of adhesion;
28 as such, it must be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent that this
solidary guaranty clause was effectively disregarded simply because it was
not signed and witnessed by two (2) persons and acknowledged before a
notary public. While indeed, the clause ought to have been signed by two
(2) guarantors, the fact that it was only Chi who signed the same did not
make his act an idle ceremony or render the clause totally meaningless. By
his signing, Chi became the sole guarantor. The attestation by witnesses
and the acknowledgement before a notary public are not required by law to
make a party liable on the instrument. The rule is that contracts shall be
obligatory in whatever form they may have been entered into, provided all
the essential requisites for their validity are present; however, when the law
requires that a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement is
absolute and indispensable. 30 With respect to a guaranty, 31 which is a
promise to answer for the debt or default of another, the law merely requires
that it, or some note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified. 32 While the acknowledgement of a
surety before a notary public is required to make the same a public
document, under Article 1358 of the Civil Code, a contract of guaranty does
not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the
solidary liability of Chi, namely the criminal proceedings against the latter for
the violation of P.D. No. 115. Petitioner claims that because of the said
criminal proceedings, Chi would be answerable for the civil liability arising
therefrom pursuant to Section 13 of P.D. No. 115. Public respondent
rejected this claim because such civil liability presupposes prior conviction
as can be gleaned from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The said section reads:
Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions
of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last
sentence which provides for the correct solution. It is clear that if the
violation or offense is committed by a corporation, partnership, association
or other juridical entities, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the
offense. The penalty referred to is imprisonment, the duration of which
would depend on the amount of the fraud as provided for in Article 315 of
the Revised Penal Code. The reason for this is obvious: corporations,
partnerships, associations and other juridical entities cannot be put in jail.
However, it is these entities which are made liable for the civil liability arising
from the criminal offense. This is the import of the clause "without prejudice
to the civil liabilities arising from the criminal offense." And, as We stated
earlier, since that violation of a trust receipt constitutes fraud under Article
33 of the Civil Code, petitioner was acting well within its rights in filing an
independent civil action to enforce the civil liability arising therefrom against
Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal
of the case against private respondent Chi. The trial court based the
dismissal, and the respondent Court its affirmance thereof, on the theory
that Chi is not liable on the trust receipt in any capacity — either as surety or
as guarantor — because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a simple
guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be
compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the
principal debtor, Philippine Rayon. The records fail to show that petitioner
had done so 33 Reliance is thus placed on Article 2058 of the Civil Code
which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to all
the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern Motors, Inc. vs.
Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor — not a mortgagor or
pledgor — may demand the aforementioned exhaustion, the creditor may,
prior thereto, secure a judgment against said guarantor, who shall be
entitled, however, to a deferment of the execution of said judgment against
him until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in impleading private
respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial
court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on
permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom or against
whom any right to relief in respect to or arising out of the same transaction
or series of transactions is alleged to exist, whether jointly, severally, or in
the alternative, may, except as otherwise provided in these rules, join as
plaintiffs or be joined as defendants in one complaint, where any question of
law or fact common to all such plaintiffs or to all such defendants may arise
in the action; but the court may make such orders as may be just to prevent
any plaintiff or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial
convenience and is designed to permit the joinder of plaintiffs or defendants
whenever there is a common question of law or fact. It will save the parties
unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt
plus all the accessories thereof including judicial costs; with respect to the
latter, he shall only be liable for those costs incurred after being judicially
required to pay. 36 Interest and damages, being accessories of the principal
obligation, should also be paid; these, however, shall run only from the date
of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi cannot be the same
as that to be paid by Philippine Rayon since it is only the trust receipt that is
covered by the guaranty and not the full extent of the latter's liability. All
things considered, he can be held liable for the sum of P10,000.00 as
attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the
complaint as against private respondent Chi and condemning petitioner to
pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the
other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-
G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the
then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on
the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on
the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as of 15 September
1974, with interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten
percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable
on the trust receipt and ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the date of the filing of the
complaint in Civil Case No. Q-19312 until the same is fully paid as well as
the costs and attorney's fees in the sum of P10,000.00 if the writ of
execution for the enforcement of the above awards against Philippine
Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Bank of America NT & SA v Court of Appeals and Francisco et. al G.R.
No. 105395 December 10, 1993
There would at least be three (3) parties: (a) the buyer, who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit,
which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
Facts : Bank of America received an Irrevocable Letter of Credit issued by
Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale
of plastic ropes and agricultural files. Under the letter of credit, Bank of
America acted as an advising bank and Inter-Resin Industrial Corp. (IR)
acted as the beneficiary. Upon receipt of the letter advice, Inter- Resin told
Bank of America to confirm the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the letter
of credit. Inter-Resin made a partial availment of the Letter of Credit after
presentment of the required documents to Bank of America. After
confirmation of all the documents Bank of America issued a check in favor
of IR. BA advised Bank of Ayudhya of IR’s availment under the letter of
credit and asked for the corresponding reimbursement. IR presented
documents for the second availment under the same letter of credit.
However, BA stopped the processing of such after they received a telex
from Bank of Ayudhya delaring that the LC fraudulent. BA sued IR for the
recovery of the first LC payment.
The IR contended that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under
the letter of credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft
There would at least be three (3) parties: (a) the buyer, who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit,
which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
The services of an advising (notifying) bank may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 which will lend
credence to the letter of credit issued by a lesser known issuing bank; or, of
a paying bank, which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating
bank, 18 to have the draft discounted.
Bank of America has acted independently as a negotiating bank, thus
saving Inter-Resin from the hardship of presenting the documents directly to
Bank of Ayudhya to recover payment. As a negotiating bank, Bank of
America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues
to assume a contingent liability thereon.
Furthermore, bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of America
should have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support.
**
A "fiasco," involving an irrevocable letter of credit, has found the distressed
parties coming to court as adversaries in seeking a definition of their
respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received
by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly
issued by Bank of Ayudhya, Samyaek Branch, for the account of General
Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the
sale of plastic ropes and "agricultural files," with the petitioner as advising
bank and private respondent Inter-Resin Industrial Corporation as
beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of
the foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit,
Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter
of credit confirmed. The bank did not. Reynaldo Dueñas, bank employee in
charge of letters of credit, however, explained to Atty. Tanay that there was
no need for confirmation because the letter of credit would not have been
transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial
availment under the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of polyethylene rope to
General Chemicals valued at US$1,320,600.00, the corresponding packing
list, export declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions expressed in the
letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's
Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
documentary stamps, postage and mail issuance." 1 The check was picked
up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April
1981, Bank of America wrote Bank of Ayudhya advising the latter of the
availment under the letter of credit and sought the corresponding
reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit
consisting of a packing list, bill of lading, invoices, export declaration and
bills in set, evidencing the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of credit. 3
Bank of America kept Inter-Resin informed of the developments. Sensing a
fraud, Bank of America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI
agents, who were sent to Thailand, discovered that the vans exported by
Inter-Resin did not contain ropes but plastic strips, wrappers, rags and
waste materials. Here at home, the NBI also investigated Inter-Resin's
President Francisco Trajano and Executive Vice President Barcelina Tio,
who, thereafter, were criminally charged for estafa through falsification of
commercial documents. The case, however, was eventually dismissed by
the Rizal Provincial Fiscal who found no prima facie evidence to warrant
prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the
peso equivalent of the draft for US$1,320,600.00 on the partial availment of
the now disowned letter of credit. On the other hand, Inter-Resin claimed
that not only was it entitled to retain P10,219,093.20 on its first shipment but
also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence, hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by the
BA which was careless and negligent" 5 for failing to utilize its modern
means of communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to Inter-Resin; (c)
the loading of plastic products into the vans were under strict supervision,
inspection and verification of government officers who have in their favor the
presumption of regularity in the performance of official functions; and (d)
Bank of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for estafa through
falsification of documents was dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the dishonor of the letter of
credit by Bank of Ayudhya, whether Bank of America may recover against
Inter-Resin under the draft executed in its partial availment of the letter of
credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal,
belatedly raise the issue of being only an advising bank; (b) the findings of
the trial court that the ropes have actually been shipped is binding on the
Court; and, (c) Bank of America cannot recover from Inter-Resin because
the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into
the mess, it may be well to start by recalling how, in its modern use, a letter
of credit is employed in trade transactions.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy
the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the
goods before paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by
virtue of the latter of credit, the issuing bank can authorize the seller to draw
drafts and engage to pay them upon their presentment simultaneously with
the tender of documents required by the letter of credit. 10 The buyer and
the seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment
of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in
the process secures the required shipping documents or documents of title.
To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank. The issuing bank redeems the draft
and pays cash to the seller if it finds that the documents submitted by the
seller conform with what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller
gets paid only if he delivers the documents of title over the goods, while the
buyer acquires said documents and control over the goods only after
reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory
contracts, is the engagement of the issuing bank to pay the seller of the
draft and the required shipping documents are presented to it. In turn, this
arrangement assures the seller of prompt payment, independent of any
breach of the main sales contract. By this so-called "independence
principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit, 13
which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of an
advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence
to the letter of credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed the negotiating bank, 18 to
have the draft discounted.
Being a product of international commerce, the impact of this commercial
instrument transcends national boundaries, and it is thus not uncommon to
find a dearth of national law that can adequately provide for its governance.
This country is no exception. Our own Code of Commerce basically
introduces only its concept under Articles 567-572, inclusive, thereof. It is no
wonder then why great reliance has been placed on commercial usage and
practice, which, in any case, can be justified by the universal acceptance of
the autonomy of contract rules. The rules were later developed into what is
now known as the Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce. It is by no
means a complete text by itself, for, to be sure, there are other principles,
which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have
accepted, to the extent of their pertinency, the application in our jurisdiction
of this international commercial credit regulatory set of rules. 20 In Bank of
Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P.
is justified by Article 2 of the Code of Commerce which expresses that, in
the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and customs
generally observed. We have further observed that there being no specific
provisions which govern the legal complexities arising from transactions
involving letters of credit not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the
applicability of the U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance
merely been advising bank, is outrightly rejected by Inter-Resin and is thus
sought to be discarded for having been raised only on appeal. We cannot
agree. The crucial point of dispute in this case is whether under the "letter of
credit," Bank of America has incurred any liability to the "beneficiary"
thereof, an issue that largely is dependent on the bank's participation in that
transaction; as a mere advising or notifying bank, it would not be liable, but
as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu vs.
Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues
already raised also rest on other issues not specifically presented, as long
as the latter issues bear relevance and close relation to the former and as
long as they arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just
as well. In brief, in those cases where questions not particularly raised by
the parties surface as necessary for the complete adjudication of the rights
and obligations of the parties, the interests of justice dictate that the court
should consider and resolve them. The rule that only issues or theories
raised in the initial proceedings may be taken up by a party thereto on
appeal should only refer to independent, not concomitant matters, to
support or oppose the cause of action or defense. The evil that is sought to
be avoided, i.e., surprise to the adverse party, is in reality not existent on
matters that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America
has, in fact, only been an advising, not confirming, bank, and this much is
clearly evident, among other things, by the provisions of the letter of credit
itself, the petitioner bank's letter of advice, its request for payment of
advising fee, and the admission of Inter-Resin that it has paid the same.
That Bank of America has asked Inter-Resin to submit documents required
by the letter of credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft required by
the letter of credit is to be drawn under the account of General Chemicals
(buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of
credit is an engagement of the issuing bank, not the advising bank, to pay
the draft.
No less important is that Bank of America's letter of 11 March 1981 has
expressly stated that "[t]he enclosure is solely an advise of credit opened by
the abovementioned correspondent and conveys no engagement by us." 24
This written reservation by Bank of America in limiting its obligation only to
being an advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any
obligation more than just notifying Inter-Resin of the letter of credit issued in
its favor, let alone to confirm the letter of credit. 25 The bare statement of
the bank employees, aforementioned, in responding to the inquiry made by
Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and
Bank of America's letter of advise, 26 nor can it justify the conclusion that
the bank must now assume total liability on the letter of credit. Indeed, Inter-
Resin itself cannot claim to have been all that free from fault. As the seller,
the issuance of the letter of credit should have obviously been a great
concern to it. 27 It would have, in fact, been strange if it did not, prior to the
letter of credit, enter into a contract, or negotiated at the every least, with
General Chemicals. 28 In the ordinary course of business, the perfection of
contract precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have
first checked the authenticity of the letter of credit with bank of Ayudhya, by
using advanced mode of business communications, before dispatching the
same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P.
states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any
messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising bank,
Bank of America is bound only to check the "apparent authenticity" of the
letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New
Collegiate Dictionary 30 explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out by more
rigorous examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of credit
when the corresponding draft for partial availment thereunder and the
required documents were later negotiated with it by Inter-Resin? The
answer is yes. This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating bank,
Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues
to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go after
the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of America
the right of reimbursement from the issuing bank, Bank of Ayudhya which, in
turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of
credit, however, Bank of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship
existing between a drawer and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without recourse therefore, the
negotiating bank has the ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact that the correspondent
and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a
possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the operation
of a letter of credit, the involved banks deal only with documents and not on
goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or not
Bank of Ayudhya did issue the letter of credit and whether or not the main
contract of sale that has given rise to the letter of credit has been breached,
are not relevant to this controversy. They are matters, instead, that can only
be of concern to the herein parties in an appropriate recourse against those,
who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that
petitioner Bank of America has acted merely as a notifying bank and did not
assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on
Inter-Resin's partial availment as beneficiary of the letter of credit which has
been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano
and other unidentified parties, can be made, in this instance, there being no
sufficient evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-
Resin Industrial Corporation is ordered to refund to petitioner Bank of
America NT & SA the amount of P10,219,093.20 with legal interest from the
filing of the complaint until fully paid.
No costs.
SO ORDERED.
GUARANTY – NATURE/EXTENT
Castellvi de Higgins & Higgins vs. Sellner [G.R. No. L-158025,
November 5, 1920] MALCOLM, J.
Facts:

Sellner (defendant) wrote a letter to Mcleod (Castellvi’s agent) saying that
he would bound himself to pay the
promissory note of Mining, Clarke and Maye amounting 10K + interest if not
fully paid at maturity, upon the surrender 3k shares of Keystone Mining
Company.

Plaintiffs contend that he is a surety; defendant contends that he is a
guarantor. Plaintiffs also admit that if defendant is a guarantor, articles 1830,
1831, and 1834 of the Civil Code govern.
Issue:
WON Sellner is a guarantor or surety?
Held:

Sellner is a GUARANTOR. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within fifteen days after notice
of such default and upon surrender to him of the three thousand shares of
Keystone Mining Company stock, he will assume responsibility.

Sellner was not bound with Castellvi by the same instrument executed at
the time and the same consideration, but his responsibility was secondary,
one founded on an independent collateral agreement. Neither was he
jointly and severally liable with Castellvi.

In the original Spanish of the Civil Code now in force in the Philippine
Islands, Title XIV of Book IV is entitled "De la Fianza." The Spanish word
"fianza" is translated in the Washington and Walton editions of the Civil
Code as "security." "Fianza" appears in the Fisher translation as
"suretyship." The Spanish world "fiador" is found in all of the English
translations of the Civil Code as "surety." The law of guaranty is not related
of by that name in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no distinction is
made in the Civil Code between the obligation of a surety and that of a
guarantor.
 The civil law suretyship is, accordingly, nearly synonymous with the
A surety and a guarantor are alike in that each promises to answer for the
debt or default of another. A surety and a guarantor are unlike in that the
surety assumes liability as a regular party to the undertaking, while the
liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an
original promissory; the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary; the obligation of the
guarantor is secondary.
 Mining Company stock, he will assume responsibility. Sellner is not bound
The civil law suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing between
codebtors liable in solidum is similar to the common law suretyship.
This is an action brought by plaintiffs to recover from defendant the sum of
P10,000. The brief decision of the trial court held that the suit was
premature, and absolved the defendant from the complaint, with the costs
against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C.
Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on May 31,
1915, of the following tenor:lawph!l.net
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and
assigns that if the promissory note executed the 29th day of May, 1915 by
the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally,
in your favor and due six months after date for Pesos 10,000 is not fully paid
at maturity with interest, I will, within fifteen days after notice of such default,
pay you in cash the sum of P10,000 and interest upon your surrendering to
me the three thousand shares of stock of the Keystone Mining Co. held by
you as security for the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the
determination of defendant's status in the transaction referred to. Plaintiffs
contend that he is a surety; defendant contends that he is a guarantor.
Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and
1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine
Islands, Title XIV of Book IV is entitled "De la Fianza." The Spanish word
"fianza" is translated in the Washington and Walton editions of the Civil
Code as "security." "Fianza" appears in the Fisher translation as
"suretyship." The Spanish world "fiador" is found in all of the English
translations of the Civil Code as "surety." The law of guaranty is not related
of by that name in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no distinction is
made in the Civil Code between the obligation of a surety and that of a
guarantor.
As has been done in the State of Louisiana, where, like in the Philippines,
the substantive law has a civil law origin, we feel free to supplement the
statutory law by a reference to the precepts of the law merchant.
The points of difference between a surety and a guarantor are familiar to
American authorities. A surety and a guarantor are alike in that each
promises to answer for the debt or default of another. A surety and a
guarantor are unlike in that the surety assumes liability as a regular party to
the undertaking, while the liability as a regular party to upon an independent
agreement to pay the obligation if the primary pay or fails to do so. A surety
is charged as an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the obligation
of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919],
40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley
[1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited
approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to article
1822 "By fianza (security or suretyship) one person binds himself to pay or
perform for a third person in case the latter should fail to do so." But "If the
surety binds himself in solidum with the principal debtor, the provisions of
Section fourth, Chapter third, Title first, shall be applicable." What the first
portion of the cited article provides is, consequently, seen to be somewhat
akin to the contract of guaranty, while what is last provided is practically
equivalent to the contract of suretyship. When in subsequent articles found
in section 1 of Chapter II of the title concerning fianza, the Code speaks of
the effects of suretyship between surety and creditor, it has, in comparison
with the common law, the effect of guaranty between guarantor and creditor.
common law guaranty; and the civil law relationship existing between
codebtors liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that
of a guarantor, or, to be more precise, of the fiador whose responsibility is
fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory
note is not paid at maturity, then, within fifteen days after notice of such
default and upon surrender to him of the three thousand shares of Keystone
with the principals by the same instrument executed at the same time and
on the same consideration, but his responsibility is a secondary one found
in an independent collateral agreement, Neither is Sellner jointly and
severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of error, we
hold that defendant Sellner is a guarantor within the meaning of the
provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this
conclusion. The note executed by the Keystone Mining Company matured
on November 29, 1915. Interest on the note was not accepted by the
makers until September 30, 1916. When the note became due, it is
admitted that the shares of stock used as collateral security were selling at
par; that is, they were worth pesos 30,000. Notice that the note had not
been paid was not given to and when the Keyston Mining Company stock
was worthless. Defendant, consequently, through the laches of plaintiff, has
lost possible chance to recoup, through the sale of the stock, any amount
which he might be compelled to pay as a surety or guarantor. The
"indulgence," as this word is used in the law of guaranty, of the creditors of
the principal, as evidenced by the acceptance of interest, and by failure
promptly to notify the guarantor, may thus have served to discharge the
guarantor.
For quite different reasons, which, nevertheless, arrive at the same result,
judgment is affirmed, with costs of this instance against the appellants. So
ordered.
Machetti vs. Hospicio de San Jose
Facts: By a written agreement, Machetti undertook to construct a building
for Hospicio de San Jose.One of the conditions was that Machetti obtain the
guarantee of Fidelity & Surety Co. to the amount of 12K. It was
subsequently found out that the work had not been carried out in
accordance with the specifications. Hospicio refused to pay therefore
Machetti brought an action to recover the amount.
Issue: WON the undertaking assumed by FSC that of guarantor or surety?
Held: Circumstances may be shown which convert the contract into one of
suretyship but that does not exist. It appears that the contract is the
guarantor’s separate undertaking in which the principal does not join, that it
rests on a separate consideration moving from the principal, and that
although it is written in continuation of the contract for the construction of
the building, it is collateral undertaking separate and distinct from the latter.
All these are features of a contract of guaranty.
It appears from the evidence that on July 17, 1916, one Romulo Machetti,
by a written agreement undertook to construct a building on Calle Rosario in
the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor
should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P128,800 and the following
endorsement in the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects
representing the Hospicio de San Jose and, as the work progressed,
payments were made to him from time to time upon the recommendation of
the architects, until the entire contract price, with the exception of the sum of
the P4,978.08, was paid. Subsequently it was found that the work had not
been carried out in accordance with the specifications which formed part of
the contract and that the workmanship was not of the standard required,
and the Hospicio de San Jose therefore answered the complaint and
presented a counterclaim for damages for the partial noncompliance with
the terms of the agreement abovementioned, in the total sum of P71,350.
After issue was thus joined, Machetti, on petition of his creditors, was, on
February 27, 1918, declared insolvent and on March 4, 1918, an order was
entered suspending the proceeding in the present case in accordance with
section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that
the Fidelity and Surety Company be made cross-defendant to the exclusion
of Machetti and that the proceedings be continued as to said company, but
still remain suspended as to Machetti. This motion was granted and on
February 7, 1920, the Hospicio filed a complaint against the Fidelity and
Surety Company asking for a judgement for P12,800 against the company
upon its guaranty. After trial, the Court of First Instance rendered judgment
against the Fidelity and Surety Company for P12,800 in accordance with the
complaint. The case is now before this court upon appeal by the Fidelity and
Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the
Hospicio de San Jose defendant, has been converted into an action in
which the Hospicio de San Jose is plaintiff and the Fidelity and Surety
Company, the original plaintiff's guarantor, is the defendant, Machetti having
been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an
ordinary surety. The contract of guaranty is written in the English language
and the terms employed must of course be given the signification which
ordinarily attaches to them in that language. In English the term "guarantor"
implies an undertaking of guaranty, as distinguished from suretyship. It is
very true that notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert the contract into one
of suretyship but such circumstances do not exist in the present case; on
the contrary it appear affirmatively that the contract is the guarantor's
separate undertaking in which the principal does not join, that its rests on a
separate consideration moving from the principal and that although it is
written in continuation of the contract for the construction of the building, it is
a collateral undertaking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the
guarantor only binds himself to pay if the principal cannot pay. The one is
the insurer of the debt, the other an insurer of the solvency of the debtor.
(Saint vs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman,
151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil.,
142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what
the Fidelity and Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of a fianza under the Civil Code, but
is a perfectly valid contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound itself to pay only
the event its principal, Machetti, cannot pay it follows that it cannot be
compelled to pay until it is shown that Machetti is unable to pay. Such ability
may be proven by the return of a writ of execution unsatisfied or by other
means, but is not sufficiently established by the mere fact that he has been
declared insolvent in insolvency proceedings under our statutes, in which
the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without
prejudice to such right of action as the cross-complainant, the Hospicio de
San Jose, may have after exhausting its remedy against the plaintiff
Machetti. So ordered.
THE TEXAS COMPANY (PHIL.), INC., petitioner, vs.TOMAS ALONSO
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by
the Texas Company (P.I.), Inc. in the Court of First Instance of Cebu for the
recovery of the sum of P629, unpaid balance of the account of Leonora S.
Bantug in connection with the agency contract with the Texas Company for
the faithful performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind ourselves and
each of us, in solidum, with Leonor S. Bantug the agent named in the within
and foregoing agreement, for full and complete performance of same
hereby waiving notice of non-performance by or demand upon said agent,
and the consent to any and all extensions of time for performance. Liability
under this undertaking, however, shall not exceed the sum of P2,000,
Philippine currency.
Witness the hand and seal of the undersigned affixed in the presence of two
witness, this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her failure to appear
or answer, but Tomas Alonso filed an answer setting up a general denial and
the special defenses that Leonor S. Bantug made him believe that he was
merely a co-security of one Vicente Palanca and he was never notified of
the acceptance of his bond by the Texas Company. After trial, the Court of
First Instance of Cebu rendered judgment on July 10, 1973, which was
amended on February 1, 1938, sentencing Leonor S. Bantug and Tomas
Alonso to pay jointly and severally to the Texas Company the sum of P629,
with interest at the rate of six per cent (6%) from the date of filing of the
complaint, and with proportional costs. Upon appeal by Tomas Alonso, the
Court of Appeals modified the judgment of the Court of First Instance of
Cebu in the sense that Leonor S. Bantug was held solely liable for the
payment of the aforesaid sum of P629 to the Texas Company, with the
consequent absolution of Tomas Alonso. This case is now before us on
petition for review by certiorari of the decision of the Court of Appeals. It is
contended by the petitioner that the Court of Appeals erred in holding that
there was merely an offer of guaranty on the part of the respondent, Tomas
Alonso, and that the latter cannot be held liable thereunder because he was
never notified by the Texas Company of its acceptance.
The Court of Appeals has placed reliance upon our decision in National
Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of
National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that
there was merely an offer to give bond and, as there was no acceptance of
the offer, this court refused to give effect to the bond. In the second case,
the sureties were held liable under their surety agreement which was found
to have been accepted by the creditor, and it was therein ruled that an
acceptance need not always be express or in writing. For the purpose of this
decision, it is not indispensable for us to invoke one or the other case above
cited. The Court of Appeals found as a fact, and this is conclusive in this
instance, that the bond in question was executed at the request of the
petitioner by virtue of the following clause of the agency contract:
Additional Security. — The Agent shall whenever requested by the
Company in addition to the guaranty herewith provided, furnish further
guaranty or bond, conditioned upon the Agent's faithful performance of this
contract, in such individuals of firms as joint and several sureties as shall be
satisfactory to the Company.
In view of the foregoing clause which should be the law between the parties,
it is obvious that, before a bond is accepted by the petitioner, it has to be in
such form and amount and with such sureties as shall be satisfactory
hereto; in other words, the bond is subject to petitioner's approval. The
logical implication arising from this requirement is that, if the petitioner is
satisfied with any such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest, namely, the surety or
guarantor. In this connection, we are likewise bound by the finding of the
Court of Appeals that there is no evidence in this case tending to show that
the respondent, Tomas Alonso, ever had knowledge of any act on the part of
petitioner amounting to an implied acceptance, so as to justify the
application of our decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few words
explanatory of the rule regarding the necessity of acceptance in case of
bonds. Where there is merely an offer of, or proposition for, a guaranty, or
merely a conditional guaranty in the sense that it requires action by the
creditor before the obligation becomes fixed, it does not become a binding
obligation until it is accepted and, unless there is a waiver of notice of such
acceptance is given to, or acquired by, the guarantor, or until he has notice
or knowledge that the creditor has performed the conditions and intends to
act upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec.
21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not
necessarily be express or in writing, but may be indicated by acts amounting
to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the
other hand, the transaction is not merely an offer of guaranty but amounts to
direct or unconditional promise of guaranty, unless notice of acceptance is
made a condition of the guaranty, all that is necessary to make the promise
binding is that the promise should act upon it, and notice of acceptance is
not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the
reason being that the contract of guaranty is unilateral (Visayan Surety and
Insurance Corporation vs. Laperal, G.R. No. 46515, promulgated June 14,
1940).
The decision appealed from will be, as the same is hereby, affirmed, with
costs of this instance against the petitioner. So ordered.
Estate of K.H. Hemady vs Luzon Surety Co., Inc.
FACTS:
Luzon Surety filed a claim against the estate of K.H. Hemady based on
indemnity agreements (counterbonds) subscribed by distinct principals and
by the deceased K.H. Hemady as surety (solidary guarantor). As a
contingent claim, Luzon Surety prayed for the allowance of the value of the
indemnity agreements it had executed. The lower court dismissed the claim
of Luzon Surety on the ground that “whatever losses may occur after
Hemady’s death, are not chargeable to his estate, because upon his death
he ceased to be a guarantor.”
ISSUES: What obligations are transmissible upon the death of the
decedent? Are contingent claims chargeable against the estate?
HELD: Under the present Civil Code (Article 1311), the rule is that
“Contracts take effect only as between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by provision of law.”
While in our successional system the responsibility of the heirs for the debts
of their decedent cannot exceed the value of the inheritance they receive
from him, the principle remains intact that these heirs succeed not only to
the rights of the deceased but also to his obligations. Articles 774 and 776
of the New Civil Code expressly so provide, thereby confirming Article
1311.
In Mojica v. Fernandez, the Supreme Court ruled — “Under the Civil Code
the heirs, by virtue of the rights of succession are subrogated to all the
rights and obligations of the deceased (Article 661) and can not be
regarded as third parties with respect to a contract to which the deceased
was a party, touching the estate of the deceased x x x which comes in to
their hands by right of inheritance; they take such property subject to all the
obligations resting thereon in the hands of him from whom they derive their
rights.” The third exception to the transmissibility of obligations under Article
1311 exists when they are ‘not transmissible by operation of law.’ The
provision makes reference to those cases where the law expresses that the
rights or obligations are extinguished by death, as is the case in legal
support, parental authority, usufruct, contracts for a piece of work,
partnership and agency. By contrast, the articles of the Civil Code that
regulate guaranty or suretyship contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety.
The contracts of suretyship in favor of Luzon Surety Co. not being rendered
intransmissible due to the nature of the undertaking, nor by stipulations of
the contracts themselves, nor by provision of law, his eventual liability
therefrom necessarily passed upon his death to his heirs. The contracts,
therefore, give rise to contingent claims provable against his estate. A
contingent liability of a deceased person is part and parcel of the mass of
obligations that must be paid if and when the contingent liability is converted
into a real liability. Therefore, the settlement or final liquidation of the estate
must be deferred until such time as the bonded indebtedness is paid.
Appeal by Luzon Surety Co., Inc., from an order of the Court of First
Instance of Rizal, presided by Judge Hermogenes Caluag, dismissing its
claim against the Estate of K. H. Hemady (Special Proceeding No. Q-293)
for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty
different indemnity agreements, or counter bonds, each subscribed by a
distinct principal and by the deceased K. H. Hemady, a surety solidary
guarantor) in all of them, in consideration of the Luzon Surety Co.’s of
having guaranteed, the various principals in favor of different creditors. The
twenty counterbonds, or indemnity agreements, all contained the following
stipulations:
“Premiums. – As consideration for this suretyship, the undersigned jointly
and severally, agree to pay the COMPANY the sum of ________________
(P______) pesos, Philippines Currency, in advance as premium there of for
every __________ months or fractions thereof, this ________ or any
renewal or substitution thereof is in effect.
Indemnity. – The undersigned, jointly and severally, agree at all times to
indemnify the COMPANY and keep it indemnified and hold and save it
harmless from and against any and all damages, losses, costs, stamps,
taxes, penalties, charges, and expenses of whatsoever kind and nature
which the COMPANY shall or may, at any time sustain or incur in
consequence of having become surety upon this bond or any extension,
renewal, substitution or alteration thereof made at the instance of the
undersigned or any of them or any order executed on behalf of the
undersigned or any of them; and to pay, reimburse and make good to the
COMPANY, its successors and assigns, all sums and amount of money
which it or its representatives shall pay or cause to be paid, or become
liable to pay, on account of the undersigned or any of them, of whatsoever
kind and nature, including 15% of the amount involved in the litigation or
other matters growing out of or connected therewith for counsel or
attorney’s fees, but in no case less than P25. It is hereby further agreed that
in case of extension or renewal of this ________ we equally bind ourselves
for the payment thereof under the same terms and conditions as above
mentioned without the necessity of executing another indemnity agreement
for the purpose and that we hereby equally waive our right to be notified of
any renewal or extension of this ________ which may be granted under this
indemnity agreement.
Interest on amount paid by the Company. – Any and all sums of money so
paid by the company shall bear interest at the rate of 12% per annum
which interest, if not paid, will be accummulated and added to the capital
quarterly order to earn the same interests as the capital and the total sum
thereof, the capital and interest, shall be paid to the COMPANY as soon as
the COMPANY shall have become liable therefore, whether it shall have
paid out such sums of money or any part thereof or not.
xxx xxx xxx
Waiver. – It is hereby agreed upon by and between the undersigned that
any question which may arise between them by reason of this document
and which has to be submitted for decision to Courts of Justice shall be
brought before the Court of competent jurisdiction in the City of Manila,
waiving for this purpose any other venue. Our right to be notified of the
acceptance and approval of this indemnity agreement is hereby likewise
waived.
xxx xxx xxx
Our Liability Hereunder. – It shall not be necessary for the COMPANY to
bring suit against the principal upon his default, or to exhaust the property of
the principal, but the liability hereunder of the undersigned indemnitor shall
be jointly and severally, a primary one, the same as that of the principal, and
shall be exigible immediately upon the occurrence of such default.” (Rec.
App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the
value of the twenty bonds it had executed in consideration of the
counterbonds, and further asked for judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemady’s
estate, the lower court, by order of September 23, 1953, dismissed the
claims of Luzon Surety Co., on two grounds: (1) that the premiums due and
cost of documentary stamps were not contemplated under the indemnity
agreements to be a part of the undertaking of the guarantor (Hemady),
since they were not liabilities incurred after the execution of the
counterbonds; and (2) that “whatever losses may occur after Hemady’s
death, are not chargeable to his estate, because upon his death he ceased
to be guarantor.”
Taking up the latter point first, since it is the one more far reaching in effects,
the reasoning of the court below ran as follows:
“The administratrix further contends that upon the death of Hemady, his
liability as a guarantor terminated, and therefore, in the absence of a
showing that a loss or damage was suffered, the claim cannot be
considered contingent. This Court believes that there is merit in this
contention and finds support in Article 2046 of the new Civil Code. It should
be noted that a new requirement has been added for a person to qualify as
a guarantor, that is: integrity. As correctly pointed out by the Administratrix,
integrity is something purely personal and is not transmissible. Upon the
death of Hemady, his integrity was not transmitted to his estate or
successors. Whatever loss therefore, may occur after Hemady’s death, are
not chargeable to his estate because upon his death he ceased to be a
guarantor.
Another clear and strong indication that the surety company has exclusively
relied on the personality, character, honesty and integrity of the now
deceased K. H. Hemady, was the fact that in the printed form of the
indemnity agreement there is a paragraph entitled ‘Security by way of first
mortgage, which was expressly waived and renounced by the security
company. The security company has not demanded from K. H. Hemady to
comply with this requirement of giving security by way of first mortgage. In
the supporting papers of the claim presented by Luzon Surety Company, no
real property was mentioned in the list of properties mortgaged which
appears at the back of the indemnity agreement.” (Rec. App., pp. 407-408).
We find this reasoning untenable. Under the present Civil Code (Article
1311), as well as under the Civil Code of 1889 (Article 1257), the rule is that
–
“Contracts take effect only as between the parties, their assigns and heirs,
except in the case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law.”
While in our successional system the responsibility of the heirs for the debts
of their decedent cannot exceed the value of the inheritance they receive
from him, the principle remains intact that these heirs succeed not only to
the rights of the deceased but also to his obligations. Articles 774 and 776
of the New Civil Code (and Articles 659 and 661 of the preceding one)
expressly so provide, thereby confirming Article 1311 already quoted.
“ART. 774. – Succession is a mode of acquisition by virtue of which the
property, rights and obligations to the extent of the value of the inheritance,
of a person are transmitted through his death to another or others either by
his will or by operation of law.”
“ART. 776. – The inheritance includes all the property, rights and obligations
of a person which are not extinguished by his death.”
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:
“Under the Civil Code the heirs, by virtue of the rights of succession are
subrogated to all the rights and obligations of the deceased (Article 661)
and can not be regarded as third parties with respect to a contract to which
the deceased was a party, touching the estate of the deceased (Barrios vs.
Dolor, 2 Phil. 44).
xxx xxx xxx
“The principle on which these decisions rest is not affected by the provisions
of the new Code of Civil Procedure, and, in accordance with that principle,
the heirs of a deceased person cannot be held to be “third persons” in
relation to any contracts touching the real estate of their decedent which
comes in to their hands by right of inheritance; they take such property
subject to all the obligations resting thereon in the hands of him from whom
they derive their rights.”
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de
Guzman vs. Salak, 91 Phil., 265)
The binding effect of contracts upon the heirs of the deceased party is not
altered by the provision in our Rules of Court that money debts of a
deceased must be liquidated and paid from his estate before the residue is
distributed among said heirs (Rule 89). The reason is that whatever
payment is thus made from the estate is ultimately a payment by the heirs
and distributees, since the amount of the paid claim in fact diminishes or
reduces the shares that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a party’s contractual rights
and obligations are transmissible to the successors. The rule is a
consequence of the progressive “depersonalization” of patrimonial rights
and duties that, as observed by Victorio Polacco, has characterized the
history of these institutions. From the Roman concept of a relation from
person to person, the obligation has evolved into a relation from patrimony
to patrimony, with the persons occupying only a representative position,
barring those rare cases where the obligation is strictly personal, i.e., is
contracted intuitu personae, in consideration of its performance by a specific
person and by no other. The transition is marked by the disappearance of
the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of
the surety or guarantor does not warrant the conclusion that his peculiar
individual qualities are contemplated as a principal inducement for the
contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady
when it accepted the latter as surety in the counterbonds? Nothing but the
reimbursement of the moneys that the Luzon Surety Co. might have to
disburse on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an obligation
to give; and to the Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or by some one else in
his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation
of the parties. Being exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be expressly
established, or at the very least, clearly inferable from the provisions of the
contract itself, and the text of the agreements sued upon nowhere indicate
that they are non-transferable.
“(b) Intransmisibilidad por pacto. – Lo general es la transmisibilidad de
darechos y obligaciones; le excepcion, la intransmisibilidad. Mientras nada
se diga en contrario impera el principio de la transmision, como elemento
natural a toda relacion juridica, salvo las personalisimas. Asi, para la no
transmision, es menester el pacto expreso, porque si no, lo convenido entre
partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos
recaen los efectos de los vinculos juridicos creados por sus antecesores, y
para evitarlo, si asi se quiere, es indespensable convension terminante en
tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir más allá de las
personas que les dieron vida, y a ejercer presion sobre los sucesores de
esa persona; cuando no se quiera esto, se impone una estipulacion
limitativa expresamente de la transmisibilidad o de cuyos tirminos
claramente se deduzca la concresion del concreto a las mismas personas
que lo otorgon.” (Scaevola, Codigo Civil, Tomo XX, p. 541-542) ( emphasis
supplied.)
Because under the law (Article 1311), a person who enters into a contract is
deemed to have contracted for himself and his heirs and assigns, it is
unnecessary for him to expressly stipulate to that effect; hence, his failure to
do so is no sign that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require bondsman Hemady to
execute a mortgage indicates nothing more than the company’s faith and
confidence in the financial stability of the surety, but not that his obligation
was strictly personal.
The third exception to the transmissibility of obligations under Article 1311
exists when they are “not transmissible by operation of law”. The provision
makes reference to those cases where the law expresses that the rights or
obligations are extinguished by death, as is the case in legal support (Article
300), parental authority (Article 327), usufruct (Article 603), contracts for a
piece of work (Article 1726), partnership (Article 1830 and agency (Article
1919). By contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect
that “one who is obliged to furnish a guarantor must present a person who
possesses integrity, capacity to bind himself, and sufficient property to
answer for the obligation which he guarantees”. It will be noted, however,
that the law requires these qualities to be present only at the time of the
perfection of the contract of guaranty. It is self-evident that once the contract
has become perfected and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the eventual liability he has
contracted; and if that be true of his capacity to bind himself, it should also
be true of his integrity, which is a quality mentioned in the article alongside
the capacity.
The foregoing concept is confirmed by the next Article 2057, that runs as
follows:
“ART. 2057. – If the guarantor should be convicted in first instance of a
crime involving dishonesty or should become insolvent, the creditor may
demand another who has all the qualifications required in the preceding
article. The case is excepted where the creditor has required and stipulated
that a specified person should be guarantor.”
From this article it should be immediately apparent that the supervening
dishonesty of the guarantor (that is to say, the disappearance of his integrity
after he has become bound) does not terminate the contract but merely
entitles the creditor to demand a replacement of the guarantor. But the step
remains optional in the creditor: it is his right, not his duty; he may waive it if
he chooses, and hold the guarantor to his bargain. Hence Article 2057 of
the present Civil Code is incompatible with the trial court’s stand that the
requirement of integrity in the guarantor or surety makes the latter’s
undertaking strictly personal, so linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon
Surety Co. not being rendered intransmissible due to the nature of the
undertaking, nor by the stipulations of the contracts themselves, nor by
provision of law, his eventual liability thereunder necessarily passed upon
his death to his heirs. The contracts, therefore, give rise to contingent claims
provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p.
437; Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
“The most common example of the contigent claim is that which arises
when a person is bound as surety or guarantor for a principal who is
insolvent or dead. Under the ordinary contract of suretyship the surety has
no claim whatever against his principal until he himself pays something by
way of satisfaction upon the obligation which is secured. When he does this,
there instantly arises in favor of the surety the right to compel the principal
to exonerate the surety. But until the surety has contributed something to
the payment of the debt, or has performed the secured obligation in whole
or in part, he has no right of action against anybody – no claim that could be
reduced to judgment. (May vs. Vann, 15 Pla., 553; Gibson vs. Mithell, 16
Pla., 519; Maxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7
Baxt. [Tenn.], 119; Ernst vs. Nou, 63 Wis., 134.)”
For defendant administratrix it is averred that the above doctrine refers to a
case where the surety files claims against the estate of the principal debtor;
and it is urged that the rule does not apply to the case before us, where the
late Hemady was a surety, not a principal debtor. The argument evinces a
superficial view of the relations between parties. If under the Gaskell ruling,
the Luzon Surety Co., as guarantor, could file a contingent claim against the
estate of the principal debtors if the latter should die, there is absolutely no
reason why it could not file such a claim against the estate of Hemady, since
Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co.
may claim from the estate of a principal debtor it may equally claim from the
estate of Hemady, since, in view of the existing solidarity, the latter does not
even enjoy the benefit of exhaustion of the assets of the principal debtor.
The foregoing ruling is of course without prejudice to the remedies of the
administratrix against the principal debtors under Articles 2071 and 2067 of
the New Civil Code.
Our conclusion is that the solidary guarantor’s liability is not extinguished by
his death, and that in such event, the Luzon Surety Co., had the right to file
against the estate a contingent claim for reimbursement. It becomes
unnecessary now to discuss the estate’s liability for premiums and stamp
taxes, because irrespective of the solution to this question, the Luzon
Surety’s claim did state a cause of action, and its dismissal was erroneous.
WHEREFORE, the order appealed from is reversed, and the records are
ordered remanded to the court of origin, with instructions to proceed in
accordance with law. Costs against the Administratrix- Appellee. So ordered.
Piczon vs. Piczon
Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon
(president of borrowing firm)bound himself as guarantor and agreed to the
use of the loan as surety cash deposit for theregistration with the SEC.
Consuelo Piczon (lending firm) brought action to recover the amount
loaned.Court ruled in favor of Consuelo Piczon and ordered Esteban Piczon
and Sosing-Lobos to pay him asguarantor the amount of the loan + interest.
Issue: WON Esteban Piczon is a surety or a guarantor?
Held: Under the terms of the contract Esteban Piczon expressly bound
himself only as guarantor. Aguaranty must express, and it would be violative
of the law to consider a party to be bound as suretywhen the very word
used in the agreement is guarantor.
Appeal from the decision of the Court of First Instance of Samar in its Civil
Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban Piczon, et
al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as
principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the
sum of P12,500.00 with 12% interest from August 6, 1964 until said principal
amount of P12,500.00 shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on August 22,
1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and defendants through
their lawyers, appeared and entered into the following agreement:
1. That defendants admit the due execution of Annexes "A" and "B"
of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds
itself to the plaintiffs for P12,500.00, the same to be paid on or before
October 31, 1967 together with the interest that this court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00
commence to run from August 6, 1964 when plaintiffs made the first
demand or from August 29, 1956 when the obligation becomes due and
demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a surety?
That the parties are hereby required to file their respective memorandum if
they so desire on or before September 15, 1967 to discuss the legal issues
and therewith the case will be considered submitted for decision.
WHEREFORE, the instant case is hereby considered submitted based on
the aforesaid facts agreed upon and upon submission of the parties of their
respective memorandum on or before September 15, 1967.
SO ORDERED.1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of
and with postal address in the municipality of Catbalogan, Province of
Samar, Philippines, in my capacity as the President of the corporation
known as the "SOSING-LOBOS and CO., INC.," as controlling stockholder,
and at the same time as guarantor for the same, do by these presents
contract a loan of Twelve Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is hereby acknowledged, from the
"Piczon and Co., Inc." another corporation, the main offices of the two
corporations being in Catbalogan, Samar, for which I undertake, bind and
agree to use the loan as surety cash deposit for registration with the
Securities and Exchange Commission of the incorporation papers relative to
the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount
with Twelve Per Cent (12%) interest per annum, commencing from the date
of execution hereof, to the "Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the Certificate of Incorporation
issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan,
Samar, Philippines, this 28th day of September, 1956.
(Sgd.) ESTEBAN PICZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted,
appellants assign the following alleged errors:
I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12%
INTEREST ON THE PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964,
ONLY, INSTEAD OF FROM SEPTEMBER 28, 1956, WHEN ANNEX "A"
WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN
PICZON AS GUARANTOR ONLY AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN
FAVOR OF THE PLAINTIFFS-APPELLANTS. (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring
appellees to pay interest at 12% only from August 6, 1964, the trial court
should have adhered to the terms of the agreement which plainly provides
that Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself
to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00)
with Twelve Per Cent (12%) interest per annum commencing from the date
of the execution hereof", Annex A, which was on September 28, 1956.
Under Article 2209 of the Civil Code "(i)f the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum." In the case at bar, the "interest
agreed upon" by the parties in Annex A was to commence from the
execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred by
the debtor which can serve as the basis for liability for interest is to that
defined in Article 1169 of the Civil Code reading thus:
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

However, the demand by the creditor shall not be necessary in order that
delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be delivered or
the service is to be rendered was a controlling motive for the establishment
of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by
the other begins.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the
article cited by appellees (which was Article 1100 of the Old Civil Code read
in relation to Art. 1101) is applicable only when the obligation is to do
something other than the payment of money. And in Firestone Tire & Rubber
Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely ruled that if the
contract stipulates from what time interest will be counted, said stipulated
time controls, and, therefore interest is payable from such time, and not
from the date of the filing of the complaint (at p. 925). Were that not the law,
there would be no basis for the provision of Article 2212 of the Civil Code
providing that "(I)nterest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point."
Incidentally, appellants would have been entitled to the benefit of this article,
had they not failed to plead the same in their complaint. Their prayer for it in
their brief is much too late. Appellees had no opportunity to meet the issue
squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be
sustained. Under the terms of the contract, Annex A, Esteban Piczon
expressly bound himself only as guarantor, and there are no circumstances
in the record from which it can be deduced that his liability could be that of a
surety. A guaranty must be express, (Article 2055, Civil Code) and it would
be violative of the law to consider a party to be bound as a surety when the
very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-
trial order, appellants accepted the express assumption of liability by
Sosing-Lobos & Co., Inc. for the payment of the obligation in question,
thereby modifying their original posture that inasmuch as that corporation
did not exist yet at the time of the agreement, Piczon necessarily must have
bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest
upon interest due from the filing of the complaint can no longer be
entertained, the same not having been made an issue in the pleadings in
the court below. We do not believe that such a substantial matter can be
deemed included in a general prayer for "any other relief just and equitable
in the premises", especially when, as in this case, the pre-trial order does
not mention it in the enumeration of the issues to be resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is modified so as
to make appellees liable for the stipulated interest of 12% per annum from
September 28, 1956, instead of August 6, 1964. In all other respects, said
judgment is affirmed. Costs against appellees.
Rizal Commercial Banking Corporation, petitioner, vs. Hon. Jose P.
Arro, Judge of the Court of First Instance of Davao,and Residoro Chua
Facts:
Private respondent Residoro Chua, with Enrique Go, Sr., executed a
comprehensive surety agreement to guaranty,above all, any existing or
future indebtedness of Davao Agricultural Industries Corporation (Daicor),
and/or induce the bank at anytime or from time to time to make loans or
advances or to extend credit to said Daicor, provided that the liability shall
not exceed ay any time Php100,000.00.A promissory note for
Php100,000.00 (for additional capital to the charcoal buy and sell and the
activated carbon importation business) was issued in favor of petitioner
RCBC payable a month after execution. This was signed by Go in his
personal capacity and in behalf of Daicor. Respondent Chua did not sign in
said promissory note. As the note was not paid despite demands, RCBC
filed a complaint for a sum of money against Daicor, Go and Chua.The
complaint against Chua was dismissed upon his motion, alleging that the
complaint states no cause of action against him as he was not a signatory to
the note and hence he cannot be held liable. This was so despite RCBC’s
opposition, invoking the comprehensive surety agreement which it holds to
cover not just the note in question but also every other indebtedness that
Daicor may incur from petitioner bank. RCBC moved for reconsideration of
the dismissal but to no avail. Hence, this petition.
Issue:
WON respondent Chua may be held liable with Go and Daicor under the
promissory note, even if he was not a signatory to it, in light of the
provisions of the comprehensive surety agreement wherein he bound
himself with Go and Daicor, as solidary debtors, to pay existing and future
debts of said corporation.
Held:
Yes, he may be held liable. Order dismissing the complaint against
respondent Chua reversed and set aside. Case remanded to court of origin
with instruction to set aside motion to dismiss and to require defendant
Chua to answer the complaint.
Ratio:
The comprehensive surety agreement executed by Chua and Go, as
president and general manager, respectively,of Daicor, was to cover existing
as well as future obligations which Daicor may incur with RCBC. This was
only subject to the proviso that their liability shall not exceed at any one time
the aggregate principal amount of Php100,000.00. (Par.1of said
agreement).
The agreement was executed to induce petitioner Bank to grant any
application for a loan Daicor would request for. According to said
agreement, the guaranty is continuing and shall remain in full force or effect
until the bank is notified of its termination.During the time the loan under the
promissory note was incurred, the agreement was still in full force and effect
and is thus covered by the latter agreement. Thus, even if Chua did not sign
the promissory note, he is still liable by virtue of the surety agreement. The
only condition necessary for him to be liable under the agreement was that
Daicor “is or may become liable as maker, endorser, acceptor or otherwise.”
The comprehensive surety agreement signed by Go and Chua was as an
accessory obligation dependent upon the principal obligation, i.e., the loan
obtained by Daicor as evidenced by the promissory note. The surety
agreement unequivocally shows that it was executed to guarantee future
debts that may be incurred by Daicor with petitioner, as allowed under NCC
Art.2053.
“A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured.”
Petition for certiorari to annul the orders of respondent judge dated October
6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the Court of First
Instance of Davao, which granted the motion filed by private respondent to
dismiss the complaint of petitioner for a sum of money, on the ground that
the complaint states no cause of action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a
manifestation and motion requesting the special civil action for certiorari be
treated as a petition for review. 1 Said manifestation and motion was noted
in the resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr.
executed a comprehensive surety agreements 3 to guaranty among others,
any existing indebtedness of Davao Agricultural Industries Corporation
(referred to therein as Borrower, and as Daicor in this decision), and/or
induce the bank at any time or from time to time thereafter, to make loans or
advances or to extend credit in other manner to, or at the request, or for the
account of the Borrower, either with or without security, and/or to purchase
on discount, or to make any loans or advances evidenced or secured by
any notes, bills, receivables, drafts, acceptances, checks or other evidences
of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable, provided that the liability shall not exceed
at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was
issued in favor of petitioner payable on June 13, 1977. Said note was
signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor.
The promissory note was not fully paid despite repeated demands; hence,
on June 30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro Chua on the ground
that the complaint states no cause of action as against him. 5 It was alleged
in the motion that he can not be held liable under the promissory note
because it was only Enrique Go, Sr. who signed the same in behalf of
Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by
virtue of the execution of the comprehensive surety agreement, private
respondent is liable because said agreement covers not merely the
promissory note subject of the complaint, but is continuing; and it
encompasses every other indebtedness the Borrower may, from time to
time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private
respondent's motion to dismiss the complaint. 7 Petitioner filed a motion for
reconsideration dated October 12, 1978 and on November 7, 1978
respondent court issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the
comprehensive surety agreement, particularly in reference to the
indebtedness evidenced by the promissory note involved in the instant case,
said comprehensive surety agreement having been signed by Enrique Go,
Sr. and private respondent, binding themselves as solidary debtors of said
corporation not only to existing obligations but to future ones. Respondent
court said that corollary to that agreement must be another instrument
evidencing the obligation in a form of a promissory note or any other
evidence of indebtedness without which the said agreement serves no
purpose; that since the promissory notes, which is primarily the basis of the
cause of action of petitioner, is not signed by private respondent, the latter
can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the
present petition was filed before this Court assigning the following as errors
committed by respondent court:
1. That the respondent court erred in dismissing the complaint
against Chua simply on the reasons that 'Chua is not a signatory to the
promissory note" of April 29, 1977, or that Chua could not be held liable on
the note under the provisions of the comprehensive surety agreement of
October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of
the Comprehensive Surety Agreement towards the conclusion that
respondent Chua is not liable on the promissory note because said note is
not conformable to the Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause
of action against respondent Chua in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable
to pay the obligation evidence by the promissory note dated April 29,1977
which he did not sign, in the light of the provisions of the comprehensive
surety agreement which petitioner and private respondent had earlier
executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly
executed by Residoro Chua and Enrique Go, Sr., President and General
Manager, respectively of Daicor, on October 19, 1976 to cover existing as
well as future obligations which Daicor may incur with the petitioner bank,
subject only to the proviso that their liability shall not exceed at any one time
the aggregate principal sum of P100,000.00. Thus, paragraph I of the
agreement provides:
For and in consideration of any existing indebtedness to you of Davao
Agricultural Industries Corporation with principal place of business and
postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called
the "Borrower), and/or in order to induce, you in your discretion, at any time
or from time to time hereafter, to make loans or advances or to extend credit
in any other manner to, or at he request or for the account of the Borrower,
either with or without security, and/or to purchase or discount or to make
any loans or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other instruments or evidences
of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser, acceptor, or
otherwise) the undersigned agrees to guarantee, and does hereby
guarantee in joint and several capacity, the punctual payment at maturity to
you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided, however,
that the liability of the undersigned shag not exceed at any one time the
aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any
application for a loan Daicor may desire to obtain from petitioner bank. The
guaranty is a continuing one which shall remain in full force and effect until
the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until
written notice shall have been received by you that it has been revoked by
the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner by Daicor,
for the purpose of having an additional capital for buying and selling coco-
shell charcoal and importation of activated carbon, 10 the comprehensive
surety agreement was admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and private respondent, even if
he did not sign the promisory note, is liable by virtue of the surety
agreement. The only condition that would make him liable thereunder is that
the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise". There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained by Daicor as evidenced
by a promissory note. What obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go and Chua bound themselves
solidarily to guaranty the punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the surety agreement was
executed to guarantee future debts which Daicor may incur with petitioner,
as is legally allowable under the Civil Code. Thus —
Article 2053. — A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured.
In view of the foregoing, the decision (which should have been a mere
"order"), dismissing the complaint is reversed and set side. The case is
remanded to the court of origin with instructions to set aside the motion to
dismiss, and to require defendant Residoro Chua to answer the complaint
after which the case shall proceed as provided by the Rules of Court. No
costs.
SO ORDERED.
Pacific Banking Corp. vs. IAC
Facts: Cecilia Regala obtained from plaintiff the issuance and use of Pacific
card credit card. Robert Regala Jr., spouse of Cecilia, executed a
“Guarantor’s Undertaking” in favor of Pacific wherein the Regala Jr., agreed
jointly and severally with Cecilia Regala, to pay Pacific upon demand and all
indebtedness, obligations, charges or liabilities due and incurred by her.
Cecilia was declared in defaultfor failure to pay 92K within the reglementary
period. Regala Jr. admitting the execution of the“Guarantor’s
Understanding” but with the understanding that his liability would be limited
to2K/month.
Issue: WON the Guarantor’s Understanding is a guaranty or suretyship?
Held: It is in substance a contract of suretyship. A contract of guaranty is
where a guarantor binds himself to pay only in case the latter should fail to
do so; while a contract of suretyship, the surety binds himself solidarily with
the principal debtor. Since Regala Jr. bound himself jointly and severally,he
is bound to pay the amount of indebtedness of his wife.
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of
the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V.
No. 02753, 1 which modified the decision of the trial court against herein
private respondent Roberto Regala, Jr., one of the defendants in the case
for sum of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellant court from
herein petitioner's brief before said court are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred
to as Celia Regala for brevity), applied for and obtained from the plaintiff the
issuance and use of Pacificard credit card (Exhs. "A", "A-l",), under the
Terms and Conditions Governing the Issuance and Use of Pacificard (Exh.
"B" and hereinafter referred to as Terms and Conditions), a copy of which
was issued to and received by the said defendant on the date of the
application and expressly agreed that the use of the Pacificard is governed
by said Terms and Conditions. On the same date, the defendant-appelant
Robert Regala, Jr., spouse of defendant Celia Regala, executed a
"Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank,
whereby the latter agreed "jointly and severally of Celia Aurora Syjuco
Regala, to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said
Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals
thereof, issued in her favor by the Pacific Banking Corporation". It was also
agreed that "any changes of or novation in the terms and conditions in
connection with the issuance or use of the Pacificard, or any extension of
time to pay such obligations, charges or liabilities shall not in any manner
release me/us from responsibility hereunder, it being understood that I fully
agree to such charges, novation or extension, and that this understanding is
a continuing one and shall subsist and bind me until the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with
accredited business establishments to honor purchases of goods and/or
services by Pacificard holders and the cost thereof to be advanced by the
plaintiff-appellee for the account of the defendant cardholder, and the latter
undertook to pay any statements of account rendered by the plaintiff-
appellee for the advances thus made within thirty (30) days from the date of
the statement, provided that any overdue account shall earn interest at the
rate of 14% per annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had purchased
goods and/or services on credit (Exh. "C", "C-l" to "C-112") under her
Pacificard, for which the plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the complaint.
In view of defendant Celia Regala's failure to settle her account for the
purchases made thru the use of the Pacificard, a written demand (Exh. "D")
was sent to the latter and also to the defendant Roberto Regala, Jr. (Exh. "
") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated
failure to settle their obligation. Defendant Celia Regala was declared in
default for her failure to file her answer within the reglementary period.
Defendant-appellant Roberto Regala, Jr., on the other hand, filed his
Answer with Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability would be limited
to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation of
evidence ex-parte as against the defendant Celia Regala was jointly held
with the trial of the case as against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and documentary evidence,
fire struck the City Hall of Manila, including the court where the instant case
was pending, as well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the instant
case were duly reconstituted. Thereafter, the case was set for pre-trial
conference with respect to the defendant-appellant Roberto Regala on
plaintiff-appellee's motion, after furnishing the latter a copy of the same. No
opposition thereto having been interposed by defendant-appellant, the trial
court set the case for pre-trial conference. Neither did said defendant-
appellant nor his counsel appear on the date scheduled by the trial court for
said conference despite due notice. Consequently, plaintiff-appellee moved
that the defendant-appellant Roberto Regala he declared as in default and
that it be allowed to present its evidence ex-parte, which motion was
granted. On July 21, 1983, plaintiff-appellee presented its evidence ex-
parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the
dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the
defendants condemning the latter, jointly and severally, to pay said plaintiff
the amount of P92,803.98, with interest thereon at 14% per annum,
compounded annually, from the time of demand on November 17, 1978 until
said principal amount is fully paid; plus 15% of the principal obligation as
and for attorney's fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of
merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the
Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment
modifying the decision of the trial court. Private respondent Roberto Regala,
Jr. was made liable only to the extent of the monthly credit limit granted to
Celia Regala, i.e., at P2,000.00 a month and only for the advances made
during the one year period of the card's effectivity counted from October 29,
1975 up to October 29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is
modified only as to appellant Roberto Regala, Jr., so as to make him liable
only for the purchases made by defendant Celia Aurora Syjuco Regala with
the use of the Pacificard from October 29, 1975 up to October 29, 1976 up
to the amount of P2,000.00 per month only, with interest from the filing of
the complaint up to the payment at the rate of 14% per annum without
pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which
the respondent appellate court denied for lack of merit on September 19,
1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends
that while the appellate court correctly recognized Celia Regala's obligation
to Pacific Banking Corp. for the purchases of goods and services with the
use of a Pacificard credit card in the total amount of P92,803.98 with 14%
interest per annum, it erred in limiting private respondent Roberto Regala,
Jr.'s liability only for purchases made by Celia Regala with the use of the
card from October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which private
respondent Roberto Regala, Jr. signed in favor of Pacific Banking
Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco
Regala to pay the Pacific Banking Corporation upon demand any and all
indebtedness, obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of the Pacificard or renewals thereof
issued in his favor by the Pacific Banking Corporation. Any changes of or
Novation in the terms and conditions in connection with the issuance or use
of said Pacificard, or any extension of time to pay such obligations, charges
or liabilities shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a continuing one and
shall subsist and bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated
"Guarantor's Undertaking," was in substance a contract of surety. As
distinguished from a contract of guaranty where the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor only in case the
latter should fail to do so, in a contract of suretyship, the surety binds
himself solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).
We need not look elsewhere to determine the nature and extent of private
respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself
jointly and severally with the debtor Celia Regala "to pay the Pacific Banking
Corporation upon demand, any and all indebtedness, obligations, charges
or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation." This undertaking was also provided as a condition in the
issuance of the Pacificard to Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and
several signature of a third party and as such, the Pacificard holder and the
guarantor assume joint and several liabilities for any and all amount arising
out of the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the
guarantor are not thereby lost by the guarantor becoming liable solidarily
and therefore a surety." It further ruled that although the surety's liability is
like that of a joint and several debtor, it does not make him the debtor but
still the guarantor (or the surety), relying on the case of Government of the
Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
Consequently, Article 2054 of the Civil Code providing for a limited liability
on the part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(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. 2 It is likewise not
disputed by the parties that the credit limit granted to Celia Regala was
P2,000.00 per month and that Celia Regala succeeded in using the card
beyond the original period of its effectivity, October 29, 1979. We do not
agree however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly
bound himself up to the extent of the debtor's (Celia) indebtedness likewise
expressly waiving any "discharge in case of any change or novation of the
terms and conditions in connection with the issuance of the Pacificard credit
card." Roberto, in fact, made his commitment as a surety a continuing one,
binding upon himself until all the liabilities of Celia Regala have been fully
paid. All these were clear under the "Guarantor's Undertaking" Roberto
signed, thus:
. . . Any changes of or novation in the terms and conditions in connection
with the issuance or use of said Pacificard, or any extension of time to pay
such obligations, charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that the undertaking is
a continuing one and shall subsist and bind me/us until all the liabilities of
the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra;
emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms
of the undertaking of future changes in the terms and conditions governing
the issuance of the credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty, a surety may
secure additional and future debts of the principal debtor the amount of
which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon,
supra is misplaced. It was held in that case that:
. . . although the defendants bound themselves in solidum, the liability of the
Surety under its bond would arise only if its co-defendants, the principal
obligor, should fail to comply with the contract. To paraphrase the ruling in
the case of Municipality of Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so dependent on that of the
principal debtor" that the Surety "is considered in law as being the same
party as the debtor in relation to whatever is adjudged, touching the
obligation of the latter"; or the liabilities of the two defendants herein "are so
interwoven and dependent as to be inseparable." Changing the expression,
if the defendants are held liable, their liability to pay the plaintiff would be
solidary, but the nature of the Surety's undertaking is such that it does not
incur liability unless and until the principal debtor is held liable.
A guarantor or surety does not incur liability unless the principal debtor is
held liable. It is in this sense that a surety, although solidarily liable with the
principal debtor, is different from the debtor. It does not mean, however, that
the surety cannot be held liable to the same extent as the principal debtor.
The nature and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship(see PCIB v. CA, L-
34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of
respondent appellate court is SET ASIDE and the decision of the trial court
is REINSTATED.
SO ORDERED.
BA Finance Corporation v. Court of Appeals, G.R. No. 94566 July 3,
1992
Under the deed of chattel mortgage, B.A. Finance Corporation was
constituted attorney-in-fact with full power and authority to file, follow-up,
prosecute, compromise or settle insurance claims; to sign execute and
deliver the corresponding papers, receipts and documents to the Insurance
Company as may be necessary to prove the claim, and to collect from the
latter the proceeds of insurance to the extent of its interests, in the event
that the mortgaged car suffers any loss or damage.
Facts: Spouses Manuel and Lilia Cuady obtained from Supercars, Inc.
bought a Ford Escort 1300, four-door sedan in installments. To secure the
faithful and prompt compliance of the obligation under the said promissory
note, the Cuady spouses constituted a chattel mortgage on the
aforementioned motor vehicle. Supercars, Inc. assigned the promissory
note, together with the chattel mortgage, to B.A. Finance Corporation. The
Cuadys made partial payment leaving an un paid balance.In addition
thereto, the Cuadys owe B.A. Finance .B.A. Finance Corporation, as the
assignee of the mortgage lien obtained the renewal of the insurance
coverage over the aforementioned motor vehicle for the with Zenith
Insurance Corporation, when the Cuadys failed to renew said insurance
coverage themselves. Under the terms and conditions of the said insurance
coverage, any loss under the policy shall be payable to the B.A. Finance
Corporation.
The motor vehicle figured in an accident and was badly damaged. The
unfortunate happening was reported to the B.A. Finance Corporation and to
the insurer, Zenith Insurance Corporation. The Cuadys asked the B.A.
Finance Corporation to consider the same as a total loss, and to claim from
the insurer the face value of the car insurance policy and apply the same to
the payment of their remaining account and give them the surplus thereof, if
any. But instead of heeding the request of the Cuadys, B.A. Finance
Corporation prevailed upon the former to just have the car repaired. Not
long thereafter, however, the car bogged down. The Cuadys wrote B.A.
Finance Corporation requesting the latter to pursue their prior instruction of
enforcing the total loss provision in the insurance coverage. When B.A.
Finance Corporation did not respond favorably to their request, the Cuadys
stopped paying their monthly installments on the promissory note. In view of
the failure of the Cuadys to pay the remaining installments on the note, B.A.
Finance Corporation sued them.
B.A. Finance Corporation contended that even if it failed to enforce the total
loss provision in the insurance policy of the motor vehicle subject of the
chattel mortgage, said failure does not operate to extinguish the unpaid
balance on the promissory note, considering that the circumstances
obtaining in the case at bar do not fall under Article 1231 of the Civil Code
relative to the modes of extinguishment of obligations.
Issue: Whether or not BA Finance ca still collect on the deficiency of the
Chattel Mortgage.
Held: In granting B.A. Finance Corporation the aforementioned powers and
prerogatives, the Cuady spouses created in the former’s favor an agency.
Thus, under Article 1884 of the Civil Code of the Philippines, B.A. Finance
Corporation is bound by its acceptance to carry out the agency, and is liable
for damages which, through its non-performance, the Cuadys, the principal
in the case at bar, may suffer; in such case, the assignee of the mortgage
agreement is bound by the same stipulation and if the assignee failed to file
and prosecute the insurance claim when the car was damaged totally, the
mortgagor is relieved from his obligation to pay as he suffered a loss
because of the failure of the mortgagee to file the claim.
Under the deed of chattel mortgage, B.A. Finance Corporation was
constituted attorney-in-fact with full power and authority to file, follow-up,
prosecute, compromise or settle insurance claims; to sign execute and
deliver the corresponding papers, receipts and documents to the Insurance
Company as may be necessary to prove the claim, and to collect from the
latter the proceeds of insurance to the extent of its interests, in the event
that the mortgaged car suffers any loss or damage.
This is a petition for review on certiorari of the decision of the respondent
appellate court which reversed the ruling of the trial court dismissing the
case against petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business under the name
Gebbs International, applied for and was granted a loan with respondent
Traders Royal Bank in the amount of P60,000.00. As security for the
payment of said loan, the Gaytano spouses executed a deed of suretyship
whereby they agreed to pay jointly and severally to respondent bank the
amount of the loan including interests, penalty and other bank charges.
In a letter dated December 5, 1980 addressed to respondent bank, Philip
Wong as credit administrator of BA Finance Corporation for and in behalf of
the latter, undertook to guarantee the loan of the Gaytano spouses. The
letter reads:
This is in reference to the application of Gebbs International for a twenty-five
(25) month term loan of 60,000.00 with your Bank.
In this connection, please be advised that we unconditionally guarantee full
payment in peso value the said accommodation (sic) upon non-payment by
subject up to a maximum amount of P60,000.00.
Hoping this would meet your requirement and expedite the early processing
of their application.
Thank you.
Very truly yours,
BA FINANCE CORPORATION
(signed)
PHILIP H. WONG
Credit Administrator
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid balance in the
amount of P85,807.25. Since the Gaytano spouses refused to pay their
obligation, respondent bank filed with the trial court complaint for sum of
money against the Gaytano spouses and petitioner corporation as
alternative defendant.
The Gaytano spouses did not present evidence for their defense. Petitioner
corporation, on the other hand, raised the defense of lack of authority of its
credit administrator to bind the corporation.
On December 12, 1988, the trial court rendered a decision the dispositive
portion of which states:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of
plaintiff and against defendants/Gaytano spouses, ordering the latter to
jointly and severally pay the plaintiff the following:
1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND
25/100 (P85,807.25), representing the total unpaid balance with
accumulated interests, penalties and bank charges as of September 22,
1987, plus interests, penalties and bank charges thereafter until the whole
obligation shall have been fully paid.
2) Attorney's fees at the stipulated rate of ten (10%) percent
computed from the total obligation; and
3) The costs of suit.
The dismissal of the case against defendant BA Finance Corporation is
hereby ordered without pronouncement as to cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed with the Court of
Appeals. On March 13, 1990, respondent appellate court rendered
judgment modifying the decision of the trial court as follows:
In view of the foregoing, the judgment is hereby rendered ordering the
defendants Gaytano spouses and alternative defendant BA Finance
Corporation, jointly and severally, to pay the plaintiff the amount of
P85,807.25 as of September 8, 1987, including interests, penalties and
other back (sic) charges thereon, until the full obligation shall have been
fully paid. No pronouncement as to costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning the following errors
committed by respondent appellate court:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RULING THAT PETITIONER IS JOINTLY AND SEVERALLY LIABLE WITH
GAYTANO SPOUSES DESPITE ITS FINDINGS THAT THE LETTER
GUARANTY (EXH. "C") IS "INVALID AT ITS INCEPTION";
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RULING THAT THE PETITIONER WAS GUILTY OF ESTOPPEL DESPITE
THE FACT THAT IT NEVER KNEW OF SUCH ALLEGED LETTER-
GUARANTY;
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
NOT RULING THAT SUCH LETTER GUARANTY (EXHIBIT "C") BEING
PATENTLY ULTRA VIRES, IS UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING RELIEF ON PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss them jointly.
Petitioner contends that the letter guaranty is ultra vires, and therefore
unenforceable; that said letter-guaranty was issued by an employee of
petitioner corporation beyond the scope of his authority since the petitioner
itself is not even empowered by its articles of incorporation and by-laws to
issue guaranties. Petitioner also submits that it is not guilty of estoppel to
make it liable under the letter-guaranty because petitioner had no
knowledge or notice of such letter-guaranty; that the allegation of Philip
Wong, credit administrator, that there was an audit was not supported by
evidence of any audit report or record of such transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that
persons dealing with an assumed agent, whether the assumed agency be a
general or special one are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature
and extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, the burden is on respondent bank to satisfactorily prove that the
credit administrator with whom they transacted acted within the authority
given to him by his principal, petitioner corporation. The only evidence
presented by respondent bank was the testimony of Philip Wong, credit
administrator, who testified that he had authority to issue guarantees as can
be deduced from the wording of the memorandum given to him by petitioner
corporation on his lending authority. The said memorandum which allegedly
authorized Wong not only to approve and grant loans but also to enter into
contracts of guaranty in behalf of the corporation, partly reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your capacity as Credit Administrator the
following lending limits:
a) P650,000.00 — Secured Loans
b) P550,000.00 — Supported Loans
c) P350,000.00 — Truck Loans/Contracts/Leases
d) P350,000.00 — Auto Loan Contracts/Leases
e) P350,000.00 — Appliance Loan Contracts
f) P350,000.00 — Unsecured Loans
Total loans and/or credits [combination of (a) thru (f) extended to any one
borrower including parents, affiliates and/or subsidiaries, should not exceed
P750,000.00. In exercising the limits aforementioned, both direct and
contingent commitments to the borrower(s) should be considered.
All loans must be within the Company's established lending guideline and
policies.
xxx xxx xxx
LEVELS OF APPROVAL
All transactions in excess of any branch's limit must be recommended to
you through the Official Credit Report for approval. If the transaction
exceeds your limit, you must concur in application before submitting it to the
Vice President, Credit Administration for approval or concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans even up to
P350,000.00 without any security requirement, which is far above the
amount subject of the guaranty in the amount of P60,000.00, nothing in the
said memorandum expressly vests on the credit administrator power to
issue guarantees. We cannot agree with respondent's contention that the
phrase "contingent commitment" set forth in the memorandum means
guarantees. It has been held that a power of attorney or authority of an
agent should not be inferred from the use of vague or general words.
Guaranty is not presumed, it must be expressed and cannot be extended
beyond its specified limits (Director v. Sing Juco, 53 Phil. 205). In one case,
where it appears that a wife gave her husband power of attorney to loan
money, this Court ruled that such fact did not authorize him to make her
liable as a surety for the payment of the debt of a third person (Bank of
Philippine Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the absence of any other
proof that he is authorized to bind petitioner in a contract of guaranty with
third persons should not be given weight. The representation of one who
acts as agent cannot by itself serve as proof of his authority to act as agent
or of the extent of his authority as agent (Velasco v. La Urbana, 58 Phil.
681). Wong's testimony that he had entered into similar transactions of
guaranty in the past for and in behalf of the petitioner, lacks credence due to
his failure to show documents or records of the alleged past transactions.
The actuation of Wong in claiming and testifying that he has the authority is
understandable. He would naturally take steps to save himself from
personal liability for damages to respondent bank considering that he had
exceeded his authority. The rule is clear that an agent who exceeds his
authority is personally liable for damages (National Power Corporation v.
National Merchandising Corporation, Nos. L-33819 and
L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that petitioner is
estopped from alleging lack of authority due to its failure to cancel or
disallow the guaranty, We find that the said conclusion has no basis in fact.
Respondent bank had not shown any evidence aside from the testimony of
the credit administrator that the disputed transaction of guaranty was in fact
entered into the official records or files of petitioner corporation, which will
show notice or knowledge on the latter's part and its consequent ratification
of the said transaction. In the absence of clear proof, it would be unfair to
hold petitioner corporation guilty of estoppel in allowing its credit
administrator to act as though the latter had power to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed decision of the
respondent appellate court dated March 13, 1990 is hereby REVERSED
and SET ASIDE and another one is rendered dismissing the complaint for
sum of money against BA Finance Corporation.
SO ORDERED.
Diño vs. Court of Appeals (1992)
FACTS:
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS),
thru its representative Uy Tiam, applied for and obtained credit
accommodations from Metrobank in the sum of Php700,000. This
was secured by Continuing Suretyships separately executed by
petitioners Norberto Uy (who agreed to payPhp300,000) and Jacinto Diño
(who bound himself liable up to Php800,000). Uy Tiam paid the obligation
under this letter of credit in 1977. UTEFS obtained another credit
accommodation in 1978, which was likewise settled before he applied
and obtained another in 1979 in the sum of Php815,600. This
sum covered UTEFS’ purchase of fertilizers from Planters Producst. Uy and
Diño did not sign the application for this credit and were not asked to
execute suretyship or guarantee. UTEFS executed a trust receipt whereby it
agreed to deliver toMetrobank the goods in the event of non-sale, and if
sold, the proceeds will be delivered to Metrobank. However, UTEFS did not
comply with its obligation. As a result, Metrobank demanded payment from
UTEFS and the sureties, Uy & Diño.The sureties refused to pay on the
ground that the obligation for which they executed the continuing
suretyship agreement has been paid. RTC ruled in favor of the petitioners,
CA affirmed.
Issue: WON petitioners are liable for payment of the 1979 transaction under
the continuing suretyship agreement they executed in 1977. Assuming that
they are,what is the extent of their liability?
The Supreme Court held that Uy & Diño are liable. The agreement they
executed in 1977 is a continuing suretyship, one which is not limited to a
single transaction but which contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes liable. The agreement
that petitioners signed expressly provided that it is a continuing guaranty
and shall be in full force and effect until written notice to the bank that it
has been revoked by the surety.
As to the2nd issue, petitioners are only liable up to the
maximum limit fixed in thecontinuing suretyship agreements
(Php800,000 for Diño and Php300,000 for Uy).The law is clear that a
guarantor may bind himself for less, but not for more thanthe principal
debtor, both as regards the amount and the onerous nature of the
conditions (Art. 2054). CA decision ordering petitioners to pay
P2,397,883.68which represents the amount due inclusive of interest and
charges, is modified.
Continuing Suretyship Agreements signed by the petitioners set off this
present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV
No. 17724 1 which reversed the 2 December 1987 Decision of Branch 45 of
the Regional Trial Court (RTC) of Manila in a collection suit entitled
"Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under
the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto
Uy Diño and Norberto Uy" and docketed as Civil Case No. 82-9303. They
likewise challenge public respondent's Resolution of 21 August 1989 2
denying their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as
follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services
(hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied
for and obtained credit accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust Company
(hereinafter referred to as METROBANK) in the sum of P700,000.00
(Original Records, p. 333). To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Diño executed separate
Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25
February 1977, in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to
the aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be
bound up to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS,
through Uy Tiam, obtained another credit accommodation from
METROBANK in 1978, which credit accommodation was fully settled before
an irrevocable letter of credit was applied for and obtained by the
abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-
15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in
the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags
Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and
obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy
Diño as they did not sign the document denominated as "Commercial Letter
of Credit and Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did METROBANK nor UTEFS
inform them that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February, 1977 shall
guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid
Planters Products the amount of P815,600.00 which payment was covered
by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original
Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and
delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979,
whereby the former acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which amounted to P815,
600.00. Being the entrusted, the former agreed to deliver to METROBANK
the entrusted goods in the event of non-sale or, if sold, the proceeds of the
sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust
receipt. As a consequence, METROBANK sent letters to the said principal
obligor and its sureties, Norberto Uy and Jacinto Uy Diño, demanding
payment of the amount due. Informed of the amount due, UTEFS made
partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied his liability
for the amount demanded and requested METROBANK to send him copies
of documents showing the source of his liability. In its reply, the bank
informed him that the source of his liability is the Continuing Suretyship
which he executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable for the 1979
credit accommodation because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation which he guaranteed
has been fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and finding
resort to extrajudicial remedies to be futile, METROBANK filed a complaint
for collection of a sum of money (P613,339.32, as of January 31, 1982,
inclusive of interest, commission penalty and bank charges) with a prayer
for the issuance of a writ of preliminary attachment, against Uy Tiam,
representative of UTEFS and impleaded Diño and Uy as parties-
defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ,
which writ was returned unserved and unsatisfied as defendant Uy Tiam
was nowhere to be found at his given address and his commercial
enterprise was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant
herein) filed a motion to dismiss the complaint on the ground of lack of
cause of action. They maintained that the obligation which they guaranteed
in 1977 has been extinguished since it has already been paid in the same
year. Accordingly, the Continuing Suretyships executed in 1977 cannot be
availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a
guaranty cannot exist without a valid obligation. It was further argued that
they can not be held liable for the obligation contracted in 1979 because
they are not privies thereto as it was contracted without their participation
(Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to
dismiss. Invoking the terms and conditions embodied in the comprehensive
suretyships separately executed by sureties-defendants, the bank argued
that sureties-movants bound themselves as solidary obligors of defendant
Uy Tiam to both existing obligations and future ones. It relied on Article 2053
of the new Civil Code which provides: "A guaranty may also be given as
security for future debts, the amount of which is not yet known; . . . ." It was
further asserted that the agreement was in full force and effect at the time
the letter of credit was obtained in 1979 as sureties-defendants did not
exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-
54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in
abeyance pending the introduction of evidence by the parties as per order
dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order
dated March 7, 1986 within which to file the answer, sureties-defendants
filed their responsive pleading which merely rehashed the arguments in their
motion to dismiss and maintained that they are entitled to the benefit of
excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint
against defendant Uy Tiam on the ground that it has no information as to the
heirs or legal representatives of the latter who died sometime in December,
1986, which motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment,
a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March
30, 1987 by virtue of the Continuing Suretyships they executed on February
25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Diño executed the continuing suretyships, exhibits
E and F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the
amount of P700,000.00 — and this was the obligation which both obligation
which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation
–– and such payment extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter
of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation
under either is apart and distinct from the obligation created in the other —
as evidenced by the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Diño and Uy, being strangers thereto, cannot be
answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño and Uy
when it extended to Credit — at least to inform them that the continuing
suretyships they executed on February 25, 1977 will be considered by the
plaintiff to secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Diño and Uy were
fully informed of the import of the Continuing Suretyships when they affixed
their signatures thereon –– that they are thereby securing all future
obligations which Uy Tiam may contract the plaintiff. On the contrary, Diño
and Uy categorically testified that they signed the blank forms in the office of
Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the
instruction of Uy Tiam, their former employer. They denied having gone to
the office of the plaintiff to subscribe to the documents (October 1, 1987,
tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-
334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and
NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or
factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to the Court of
Appeals. The case was docketed as CA-G.R. CV No. 17724. In support
thereof, it made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING
AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO
AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-
APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER
THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF
THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25,
1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-
APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO
UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES
OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the
dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to
pay, jointly and severally, to appellant METROBANK the amount of
P2,397,883.68 which represents the amount due as of July 17, 1987
inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to
pay, jointly and severally, appellant METROBANK the accruing interest, fees
and charges thereon from July 18, 1987 until the whole monetary obligation
is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to
pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK),
public respondent held that the Continuing Suretyship Agreements
separately executed by the petitioners in 1977 were intended to guarantee
payment of Uy Tiam's outstanding as well as future obligations; each
suretyship arrangement was intended to remain in full force and effect until
METROBANK would have been notified of its revocation. Since no such
notice was given by the petitioners, the suretyships are deemed outstanding
and hence, cover even the 1979 letter of credit issued by METROBANK in
favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They
questioned the public respondent's construction of the suretyship
agreements and its ruling with respect to the extent of their liability
thereunder. They argued the even if the agreements were in full force and
effect when METROBANK granted Uy Tiam's application for a letter of credit
in 1979, the public respondent nonetheless seriously erred in holding them
liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds
utilized by the lower court in rendering judgment for defendants-appellees
which We upon appeal found and resolved to be untenable, thereby
reversing and setting aside said judgment and rendering another in favor of
plaintiff, and no new or fresh issues have been posited to justify reversal of
Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the
petitioners may be held liable as sureties for the obligation contracted by Uy
Tiam with METROBANK on 30 May 1979 under and by virtue of the
Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing
Suretyship Agreements were automatically extinguished upon payment of
the principal obligation secured thereby, i.e., the letter of credit obtained by
Uy Tiam in 1977. They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship Agreements would
stand as security for the 1979 obligation. Moreover, it is posited that to
extend the application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which expressly
provides that a guaranty cannot exist without a valid obligation. Petitioners
further argue that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and thereby also secured
the 1979 obligations incurred by Uy Tiam, they cannot be held liable for
more than what they guaranteed to pay because it s axiomatic that the
obligations of a surety cannot extend beyond what is stipulated in the
agreement.
On 12 February 1990, this Court resolved to give due course to the petition
after considering the allegations, issues and arguments adduced therein,
the Comment thereon by the private respondent and the Reply thereto by
the petitioners; the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations
of Uy Tiam to METROBANK by virtue of the Continuing Suretyship
Agreements they separately signed in 1977; and
2. On the assumption that they are, what is the extent of their
liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to a
single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the
guarantor becomes liable.9 Otherwise stated, a continuing guaranty is one
which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. 10 A guaranty shall be construed as
continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract of guaranty
states that the same is to secure advances to be made "from time to time"
the guaranty will be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any transaction" or money to
be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing
guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship
agreement executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the
BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of
which the SURETY is now obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the BANK, in its discretion, at any time
or from time to time hereafter, to make loans or advances or to extend credit
in any other manner to, or at the request, or for the account of the Borrower,
either with or without security, and/or to purchase or discount, or to make
any loans or advances evidence or secured by any notes, bills, receivables,
drafts, acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower
is or may become liable as maker, endorser, acceptor, or otherwise, the
SURETY agrees to guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or owing to the BANK by
the Borrower, together with any and all expenses which may be incurred by
the BANK in collecting all or any such instruments or other indebtedness or
obligations herein before referred to, and/or in enforcing any rights
hereunder, and the SURETY also agrees that the BANK may make or
cause any and all such payments to be made strictly in accordance with the
terms and provisions of any agreement(s) express or implied, which has
(have) been or may hereafter be made or entered into by the Borrow in
reference thereto, regardless of any law, regulation or decree, unless the
same is mandatory and non-waivable in character, nor or hereafter in effect,
which might in any manner affect any of the terms or provisions of any such
agreement(s) or the Bank's rights with respect thereto as against the
Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; provided, however, that the liability of the
SURETY hereunder shall not exceed at any one time the aggregate
principal sum of PESOS: THREE HUNDRED THOUSAND ONLY
(P300,000.00) (irrespective of the currenc(ies) in which the obligations
hereby guaranteed are payable), and such interest as may accrue thereon
either before or after any maturity(ies) thereof and such expenses as may
be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner
Diño contains identical provisions except with respect to the guaranteed
aggregate principal amount which is EIGHT THOUSAND PESOS
(P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and
effect until written notice shall have been received by the BANK that it has
been revoked by the SURETY, but any such notice shall not release the
SURETY, from any liability as to any instruments, loans, advances or other
obligations hereby guaranteed, which may be held by the BANK, or in which
the BANK may have any interest at the time of the receipt (sic) of such
notice. No act or omission of any kind on the BANK'S part in the premises
shall in any event affect or impair this guaranty, nor shall same (sic) be
affected by any change which may arise by reason of the death of the
SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the
accession to any such partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship
agreement in the case at bar are continuing in nature. Petitioners do not
deny this; in fact, they candidly admitted it. Neither have they denied the
fact that they had not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships
was to induce appellant to grant any application for credit accommodation
(letter of credit/trust receipt) UTEFS may desire to obtain from appellant
bank. By its terms, each suretyship is a continuing one which shall remain in
full force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from
appellant bank, for the purpose of obtaining goods (covered by a trust
receipt) from Planters Products, the continuing suretyships were in full force
and effect. Hence, even if sureties-appellees did not sign the "Commercial
Letter of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered by the said
suretyships. What makes them liable thereunder is the condition which
provides that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was liable as principal
obligor for having failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements
cannot be made applicable to the 1979 obligation because the latter was
not yet in existence when the agreements were executed in 1977; under
Article 2052 of the Civil Code, a guaranty "cannot exist without a valid
obligation." We cannot agree. First of all, the succeeding article provides
that "[a] guaranty may also be given as security for future debts, the amount
of which is not yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not an existing or
current obligation. This distinction is made clearer in the second paragraph
of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance
of a voidable or an unenforceable contract. It may also guarantee a natural
obligation.
As to the amount of their liability under the Continuing Suretyship
Agreements, petitioners contend that the public respondent gravely erred in
finding them liable for more than the amount specified in their respective
agreements, to wit: (a) P800,000.00 for petitioner Diño and (b) P300,000.00
for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the
suretyship agreement each had signed. It is undoubtedly true that the law
looks upon the contract of suretyship with a jealous eye, and the rule is
settled that the obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner, and under the
circumstances pointed out in his obligation, he is bound, and no farther. 17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño
and petitioner Uy fix the aggregate amount of their liability, at any given
time, at P800,000.00 and P300,000.00, respectively. The law is clear that a
guarantor may bond himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the
conditions. 18 In the case at bar, both agreements provide for liability for
interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK
referred to above.19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the
SURETY further agrees to pay the BANK a reasonable compensation for
and as attorney's fees and costs of collection, which shall not in any event
be less than ten per cent (10%) of the amount due (the same to be due and
payable irrespective of whether the case is settled judicially or
extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which
they had signed, petitioners separately bound themselves to pay interest,
expenses, attorney's fees and costs. The last two items are pegged at not
less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable
for the interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation,
but also all its accessories, including the judicial costs, provided with respect
to the latter, that the guarantor shall only be liable for those costs incurred
after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such
interest should run only from the date when the complaint was filed in court.
Even attorney's fees may be imposed whenever appropriate, pursuant to
Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc.
vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because:
(1) they were not mentioned in the bond; and (2) the surety would become
liable for more than the amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922
this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on
a suretyship bond may recover from the surety as part of their damages,
interest at the legal rate even if the surety would thereby become liable to
pay more than the total amount stipulated in the bond. The theory is that
interest is allowed only by way of damages for delay upon the part of the
sureties in making payment after they should have done so. In some states,
the interest has been charged from the date of the interest has been
charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is to order
that interest begin to run from the date when the complaint was filed in
court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with
Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the
contract, but by reason of its failure to pay when demanded and for having
compelled the plaintiff to resort to the courts to obtain payment. It should be
observed that interest does not run from the time the obligation became
due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code,
successful litigants could not recover attorney's fees as part of the damages
they suffered by reason of the litigation. Even if the party paid thousands of
pesos to his lawyers, he could not charge the amount to his opponent (Tan
Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven
cases enumerated in Article 2208, among them, "where the court deems it
just and equitable that attorney's (sic) fees and expenses of litigation should
be recovered" or "when the defendant acted in gross and evident bad faith
in refusing to satisfy the plaintiff's plainly valid, just and demandable claim."
This gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the
principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of
Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last
demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-
9303, the public respondent mentions the amount of "P613,339.32, as of
January 31, 1982, inclusive of interest commission penalty and bank
charges." 23 This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding
obligation as of 17 July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of
UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17,
1987) — P651,092.82 representing the principal amount, P825,133.54, for
past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges
at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that
date, the outstanding principal obligation of Uy Tiam, secured by the
petitioners' Continuing Suretyship Agreements, was less than P613,339.32.
Such amount may be fully covered by the Continuing Suretyship Agreement
executed by petitioner Diño which stipulates an aggregate principal sum of
not exceeding P800,000.00, and partly covered by that of petitioner Uy
which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be
modified to conform to the foregoing exposition, to which extent the instant
petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the
challenged decision has to be modified with respect to the extend of
petitioners' liability. As modified, petitioners JACINTO UY DIÑO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up to
the maximum limit only of their respective Continuing Suretyship
Agreement, the remaining unpaid balance of the principal obligation of UY
TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together
with the interest due thereon at the legal rate commencing from the date of
the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the
Regional Trial Court of Manila, as well as the adjudged attorney's fees and
costs.
All other dispositions in the dispositive portion of the challenged decision not
inconsistent with the above are affirmed.
SO ORDERED.
ATOK FINANCE CORPORATION vs. COURT OF APPEALS G.R. No.
80078. May 18, 1993
FELICIANO, J.:
FACTS:
On 27 July 1979, private respondents Sanyu Chemical Corporation as
principal and Sanyu Trading Corporation along with individual private
stockholders of Sanyu Chemical as sureties, executed a Continuing
Suretyship Agreement in favor of Atok Finance as creditor.
In 1981, Sanyu Chemical assigned its trade receivables outstanding to Atok
Finance in consideration of receipt from Atok Finance of the amount of
P105,000.00. The assigned receivables carried a standard term of thirty
(30) days; it appeared, however, that the standard commercial practice was
to grant an extension of up to one hundred twenty (120) days without
penalties.
In 1984, Atok Finance commenced action against Sanyu Chemical, the
Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional
Trial Court of Manila to collect a sum of money plus penalty charges starting
from 1 September 1983. Atok Finance alleged that Sanyu Chemical had
failed to collect and remit the amounts due under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of
Atok's claim upon the ground that such claim had prescribed under Article
1629 of the Civil Code and for lack of cause of action. The private
respondents contended that the Continuing Suretyship Agreement, being an
accessory contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due to Atok Finance.

After trial the trial court rendered a decision in favor of Atok Finance. On
appeal the CA reversed and set aside the decision of the trial court and
entered a new judgment dismissing the complaint of Atok Finance.
ISSUE:
Whether the individual private respondents may be held solidarily liable with
Sanyu Chemical under the provisions of the Continuing Suretyship
Agreement, or whether that Agreement must be held null and void as having
been executed without consideration and without a pre-existing principal
obligation to sustain it.
Whether private respondents are liable under the Deed of Assignment which
they, along with the principal debtor Sanyu Chemical, executed in favor of
petitioner, on the receivables thereby assigned.
HELD:
Although obligations arising from contracts have the force of law between
the contracting parties, (Article 1159 of the Civil Code) this does not mean
that the law is inferior to it; the terms of the contract could not be enforced if
not valid. So, even if, as in this case, the agreement was for a continuing
suretyship to include obligations enumerated in the agreement, the same
could not be enforced. First, because this contract, just like guaranty, cannot
exist without a valid obligation (Art. 2052, Civil Code); and, second, although
it may be given as security for future debt (Art. 2053, C.C.), the obligation
contemplated in the case at bar cannot be considered 'future debt' as
envisioned by this law.
There is no proof that when the suretyship agreement was entered into,
there was a pre-existing obligation which served as the principal obligation
between the parties. Furthermore, the 'future debts' alluded to in Article
2053 refer to debts already existing at the time of the constitution of the
agreement but the amount thereof is unknown, unlike in the case at bar
where the obligation was acquired two years after the agreement."
A guaranty or a suretyship agreement is an accessory contract in the sense
that it is entered into for the purpose of securing the performance of another
obligation which is denominated as the principal obligation. It is also true
that Article 2052 of the Civil Code states that "a guarantee cannot exist
without a valid obligation." Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an unenforceable contract. It
may also guarantee a natural obligation." Moreover, Article 2053 of the Civil
Code states that a guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured."
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank or a
financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to execute a
separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor. As we understand it, this is
precisely what happened in the case at bar.
As regards the second issue, the contention of Sanyu Chemical was that
Atok Finance had no cause of action under the Deed of Assignment for the
reason that Sanyu Chemical's warranty of the debtors' solvency had
ceased. It relied on Article 1629 of the Civil Code which provides: In case
the assignor in good faith should have made himself responsible for the
solvency of the debtor, and the contracting parties should not have agreed
upon the duration of the liability, it shall last for one year only, from the time
of the assignment if the period had already expired. If the credit should be
payable within a term or period which has not yet expired, the liability shall
cease one year after the maturity."
The debt referred to in this law is the debt under the assigned contract or
the original debts in favor of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the debt incurred by the
assignor to the assignee as contended by the appellant. Applying the said
law to the case at bar, the records disclose that none of the assigned
receivables had matured when the Deed of Assignment was executed.
It may be stressed as a preliminary matter that the Deed of Assignment was
valid and binding upon Sanyu Chemical. Assignment of receivables is a
commonplace commercial transaction today. It is an activity or operation
that permits the assignee to monetize or realize the value of the receivables
before the maturity thereof. In other words, Sanyu Chemical received from
Atok Finance the value of its trade receivables it had assigned; Sanyu
Chemical obviously benefitted from the assignment. The payments due in
the first instance from the trade debtors of Sanyu Chemical would represent
the return of the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code is not material. The liability of Sanyu Chemical
to Atok Finance rests not on the breach of the warranty of solvency; the
liability of Sanyu Chemical was not ex lege but rather ex contractu. Under
the Deed of Assignment, the effect of non-payment by the original trade
debtors was a breach of warranty of solvency by Sanyu Chemical, resulting
in turn in the assumption of solidary liability by the assignor under the
receivables assigned. In other words, the assignor Sanyu Chemical
becomes a solidary debtor under the terms of the receivables covered and
transferred by virtue of the Deed of Assignment. The obligations of
individual private respondent officers and stockholders of Sanyu Chemical
under the Continuing Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each of the
assigned receivables by virtue of the operation of the Deed of Assignment.
That solidary liability of Sanyu Chemical is not subject to the limiting period
set out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in
the trial court, it had a valid and enforceable cause of action against Sanyu
Chemical and the other private respondents.
Atok Finance Corporation ("Atok Finance") asks us to review and set aside
the Decision of the Court of Appeals which reversed a decision of the trial
court ordering private respondents to pay jointly and severally to petitioner
Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu
Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading")
along with individual private stockholders of Sanyu Chemical, namely,
private respondent spouses Danilo E. Halili and Pablico Bermundo as
sureties, executed in the continuing Suretyship Agreement in favor of Atok
Finance as creditor. Under this Agreement, Sanyu Trading and the individual
private respondents who were officers and stockholders of Sanyu Chemical
did:
(1) For valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter
called Creditor), the full, faithful and prompt payment and discharge of any
and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal)
to the Creditor. The word "indebtedness" is used herein in its most
comprehensive sense and includes any and all advances, debts, obligations
and liabilities of Principal or any one or more of them, here[to]fore, now or
hereafter made, incurred or created, whether voluntary or involuntary and
however arising, whether direct or acquired by the Creditor by assignment
or succession, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined and whether the Principal may be
may be liable individually of jointly with others, or whether recovery upon
such indebtedness may be or hereafter become barred by any statute of
limitations, or whether such indebtedness may be or otherwise become
unenforceable.1 (Emphasis supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness,
including that arising under successive transactions which shall either
continue the indebtedness from time to time or renew it after it has been
satisfied. This suretyship is binding upon the heirs, successors, executors,
administrators and assigns of the surety, and the benefits hereof shall
extend to and include the successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent
of the obligations of the Principal. A separate action or actions may be
prosecuted against the Principal and whether or not the Principal be joined
in any such action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys,
securities or other property of the Surety given to the Creditor by law, the
Creditor shall have the lien upon and a right of self-off against all moneys,
securities, and other property of the Surety now and hereafter in the
possession of the Creditor; and every such lien or right of self-off may be
exercised without need of demands upon or notice to the Surety. No lien or
right of set-off shall be deemed to have been waived by any act, omission or
conduct on the part of the Creditor, or by any neglect to exercise such right
of set-off or to enforce such lien, or by any delay in so doing, and every right
of set-off or lien shall continue in full force and effect until such right of set-
off of lien is specifically waived or released by an instrument in writing
executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the
Surety is hereby subordinated to the indebtedness of the Principal to the
Creditor; and if the Creditor so requests, such indebtedness of the Principal
of the Surety shall be collected, enforced and shall be paid over to the
Creditor and shall be paid over to the Creditor and shall be paid over to the
Creditor on account of the indebtedness of the Principal to the Creditor but
without reducing or affecting in any manner the liability of the Surety under
the provisions of this suretyship.
xxx xxx xxx2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables
outstanding as of 27 November 1981 with a total face value of P125,871.00,
to Atok Finance in consideration of receipt from Atok Finance of the amount
of P105,000.00. The assigned receivables carried a standard term of thirty
(30) days; it appeared, however, that the standard commercial practice was
to grant an extension up to one hundred twenty (120) days without
penalties. The relevant portions of this Deed of Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL,
TRANSFER and ASSIGN all his/its rights, title and interest in the contracts,
receivables, accounts, notes, leases, deeds of sale with reservation of title,
invoices, mortgages, checks, negotiable instruments and evidences of
indebtedness listed in the schedule forming part hereinafter called
"Contract" or "Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the
ASSIGNOR does hereby certify, warrant and represent that :
(a). He/It is the sole owner of the assigned Contracts free and clear of
claims of any other party except the herein ASSIGNEE and has the right to
transfer absolute title thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount owing and to
become due on each contract is correctly stated upon the schedule or other
evidences of the Contract delivered pursuant thereto;
(c). Each assigned Contract arises out of the sale of merchandise/s
which had been delivered and/or services which have been rendered and
none of the Contract is now, nor will at any time become, contingent upon
the fulfillment of any contract or condition whatsoever, or subject to any
defense, offset or counterclaim;
(d). No assigned Contract is represented by any note or other
evidence of indebtness or other security document except such as may
have been endorsed, assigned and delivered by the ASSIGNOR to the
ASSIGNEE simultaneously with the assignment of such Contract;
(e). No agreement has been made, or will be made, with any debtor
for any deduction discount or return of merchandise, except as may be
specifically noted at the time of the assignment of the Contract;
(f). None of the terms or provisions of the assigned Contracts have
been amended, modified or waived;
(g). The debtor/s under the assigned Contract/s are solvent and
his/its/their failure to pay the assigned Contracts and/or any installment
thereon upon maturity thereof shall be conclusively considered as a
violation of this warranty; and
(h). Each assigned Contract is a valid obligation of the buyer of the
merchandise and/or service rendered under the Contract And that no
Contract is overdue.
The foregoing warranties and representations are in addition to those
provided for in the Negotiable Instruments Law and other applicable laws.
Any violation thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and severally with the
debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and
receive in trust for the ASSIGNEE all payments made upon the assigned
contracts and shall remit to the ASSIGNEE all collections on the said
Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until
November 1, 1982.
P110,550.00 balloon payment after 12 months.3 (Emphasis supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to
Atok Finance with a total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu
Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before
the Regional Trial Court of Manila to collect the sum of P120,240.00 plus
penalty charges amounting to P0.03 for every peso due and payable for
each month starting from 1 September 1983. Atok Finance alleged that
Sanyu Chemical had failed to collect and remit the amount due under the
trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of
Atok's claim upon the ground that such claim had prescribed under Article
1629 of the Civil Code and for lack of cause of action. The private
respondents contended that the Continuing Suretyship Agreement, being an
accessory contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to
present any evidence on their behalf, although the individual private
respondents submitted a memorandum in support of their argument. After
trial, on 1 April 1985, the trial court rendered a decision in favor of Atok
Finance. The dispositive portion of this decision reads as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK
FINANCE CORPORATION; and against the defendants SANYU
CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA,
PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said
defendants, jointly and severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from
September 1, 1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED.4
Private respondents went on appeal before the then Intermediate Appellate
Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-
CV. The case was raffled to the Third Civil Cases Division of the IAC. In a
resolution dated 21 March 1986, that Division dismissed the appeal upon
the ground of abandonment, since the private respondents had failed to file
their appeal brief notwithstanding receipt of the notice to do so. On 4 June
1986, entry of judgment was made by the Clerk of Court of the IAC.
Accordingly, Atok Finance went before the trial court and sought a writ of
execution to enforce the decision of the trial court of 1 April 1985. The trial
court issued a writ of execution on 23 July 1986.5 Petitioner alleged that the
writ of execution was served on private respondents.6
However, on 27 August 1986, private respondents filed a Petition for Relief
from Judgment before the Court of Appeals. This Petition was raffled off to
the 15th Division of the Court of Appeals. In that Petition, private
respondents claimed that their failure to file their appeal brief was due to
excusable negligence, that is, that their previous counsel had entrusted the
preparation and filing of the brief to one of his associates, which associate,
however, had unexpectedly resigned from the law firm without returning the
records of cases he had been handling, including the appeal of private
respondents. Atok Finance opposed the Petition for Relief arguing that no
valid ground existed for setting aside the resolution of the Third Division of
the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition
for Relief from Judgment "in the paramount interest of justice,"7 set aside
the resolution of the Third Civil Cases Division of the then IAC, and gave
private respondents a non-extendible period of fifteen (15) days within which
to file their appeal brief. Private respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of
the appeal, and reversed and set aside the decision of the trial court and
entered a new judgment dismissing the complaint of Atok Finance, ordering
it to pay private respondents P3,000.00 as attorney's fees and to pay the
costs.
Atok Finance moved to set aside the decision of the 15th Division of the
Court of Appeals, inviting attention to the resolution of the IAC's Third Civil
Cases Division of 21 March 1986 originally dismissing private respondent's
appeal for abandonment thereof. In a resolution dated 18 August 1987, the
15th Division denied Atok Finance's motion stating that it had granted the
Petition for Relief from Judgment and given private respondents herein
fifteen (15) days within which to file an appeal brief, while Atok Finance did
not file an appellee's brief, and that its decision was arrived at "on the basis
of appellant's brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as
errors on the part of the Court of Appeals in rendering its decision of 18
August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement
cannot be effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement
was null and void for lack of consideration without any evidence whatsoever
[being] adduced by private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment
while execution proceedings [were] on-going on the trial court.8 (Emphasis
in the original)
As a preliminary matter, we note that a Division of the Court of Appeals is
co-equal with any other Division of the same court. Accordingly, a Division of
the Court of Appeals has no authority to consider and grant a petition for
relief from a judgment rendered by another Division of the same court. In
the case at bar, however, we must note that an intervening event had
occurred between the resolution of 21 March 1986 of the Third Civil Cases
Division of the IAC dismissing private respondents' appeal and the 30
September 1986 order of the 15th Division of the Court of Appeals granting
the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate
Appellate Court went out of existence and a new court, the Court of
Appeals, came into being, was organized and commenced functioning.9
This event, and the probability that some confusion may have accompanied
the period of transition from the IAC to the Court of Appeals, lead us to
believe that the defect here involved should be disregarded as being of
secondary importance. At the same time, nothing in this decision should be
read as impliedly holding that a petition from relief judgment is available in
respect of a decision rendered by the Court of Appeals; this issue is best
reserved for determination in some future cases where it shall have been
adequately argued by the parties.
We turn, therefore, to a consideration of the first substantive issue
addressed by the Court of Appeals in rendering its Decision on the merits of
the appeal: whether the individual private respondents may be held
solidarily liable with Sanyu Chemical under the provisions of the Continuing
Suretyship Agreement, or whether that Agreement must be held null and
void as having been executed without consideration and without a pre-
existing principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that the suretyship agreement is null
and void because it is not in consonance with the laws on guaranty and
security. The said agreement was entered into by the parties two years
before the Deed of Assignment was executed. Thus, allegedly, it ran counter
to the provision that guaranty cannot exist independently because by nature
it is merely an accessory contract. The law on guaranty is applicable to
surety to some extent Manila Surety and Fidelity Co. v. Baxter Construction
& Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G.
7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between
the contracting parties, (Article 1159 of the Civil Code) this does not mean
that the law is inferior to it; the terms of the contract could not be enforces if
not valid. So, even if, as in this case, the agreement was for a continuing
suretyship to include obligations enumerated in paragraph 2 of the
agreement, the same could not be enforced. First, because this contract,
just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil
Code); and, second, although it may be given as security for future debt
(Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be
considered "future debt" as envisioned by this law.
There is no proof that when the suretyship agreement was entered into,
there was a pre-existing obligation which served the principal obligation
between the parties. Furthermore, the "future debts" alluded to in Article
2053 refer to debts already existing at the time of the constitution of the
agreement but the amount thereof is unknown, unlike in the case at bar
where the obligation was acquired two years after the agreement.10
(Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true
that a serious guaranty or a suretyship agreement is an accessory contract
in the sense that it is entered into for the purpose of securing the
performance of another obligation which is denominated as the principal
obligation. It is also true that Article 2052 of the Civil Code states that "a
guarantee cannot exist without a valid obligation." This legal proposition is
not, however, like most legal principles, to be read in an absolute and literal
manner and carried to the limit of its logic. This is clear from Article 2052 of
the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance
of a voidable or an unenforceable contract. It may also guaranty a natural
obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting
Articles 2052 and 2053 of the Civil Code. In National Rice and Corn
Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc.,11 the
private respondents assailed the decision of the trial court holding them
liable under certain surety bonds filed by private respondent Fojas and
issued by private respondent Alto Surety Co. in favor of petitioner NARIC,
upon the ground that those surety bonds were null and void "there being no
principal obligation to be secured by said bonds." In affirming the decision of
the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made
short shrift of the private respondents' doctrinaire argument:
Under his third assignment of error, appellant Fojas questions the validity of
the additional bonds (Exhs. D and D-1) on the theory that when they were
executed, the principal obligation referred to in said bonds had not yet been
entered into, as no copy thereof was attached to the deeds of suretyship.
This defense is untenable, because in its complaint the NARIC averred, and
the appellant did not deny that these bonds were posted to secure the
additional credit that Fojas has applied for, and the credit increase over his
original contract was sufficient consideration for the bonds. That the latter
were signed and filed before the additional credit was extended by the
NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in
force in 1948, expressly recognized that "a guaranty may also be given as
security for future debts the amount of which is not yet known." (Emphasis
supplied)
In Rizal Commercial Banking Corporation v. Arro,12 the Court was
confronted again with the same issue, that is, whether private respondent
was liable to pay a promissory note dated 29 April 1977 executed by the
principal debtor in the light of the provisions of a comprehensive surety
agreement which petitioner bank and the private respondent had earlier
entered into on 19 October 1976. Under the comprehensive surety
agreement, the private respondents had bound themselves as solidary
debtors of the Diacor Corporation not only in respect of existing obligations
but also in respect of future ones. In holding private respondent surety
(Residoro Chua) liable under the comprehensive surety agreement, the
Court said:
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one, which, in this case is the loan obtained by Daicor as
evidenced by a promissory note. What obviously induced petitioner bank to
grant the loan was the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code. Thus
—
Article 2053. — A guarantee may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured.13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the
NARIC cases rejected the distinction which the Court of Appeals in the case
at bar sought to make with respect to Article 2053, that is, that the "future
debts" referred to in that Article relate to "debts already existing at the time
of the constitution of the agreement but the amount [of which] is unknown,"
and not to debts not yet incurred and existing at that time. Of course, a
surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be secured thereby is born,
any more that there would be in saying that obligations which are subject to
a condition precedent are valid and binding before the occurrence of the
condition precedent.14
Comprehensive or continuing surety agreements are in fact quite commonm
place in present day financial and commercial practice. A bank or a
financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor;
with such surety agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is precisely what
happened in the case at bar.
We turn to the second substantive issue, that is, whether private
respondents are liable under the Deed of Assignment which they, along with
the principal debtor Sanyu Chemical, executed in favor of petitioner, on the
receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of
action under the Deed of Assignment for the reason that Sanyu Chemical's
warranty of the debtors' solvency had ceased. In submitting this contention,
Sanyu Chemical relied on Article 1629 of the Civil Code which reads as
follows:
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties
should not have agreed upon the duration of the liability, it shall last for one
year only, from the time of the assignment if the period had already expired.
If the credit should be payable within a term or period which has not yet
expired, the liability shall cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private
respondents and held that Sanyu Chemical was free from liability under the
Deed of Assignment. The Court of Appeals said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's
solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such
period;
(2) if no period (or length of time) was agreed upon, then:
(a) one year from assignment — if debt was due at the time of the
assignment
(b) one year from maturity — if debt was not yet due at the time of
the assignment..
The debt referred to in this law is the debt under the assigned contract or
the original debts in favor of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the debt incurred by the
assignor to the assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of
the assigned receivables had matured on November 27, 1981 when the
Deed of Assignment was executed. The oldest debt then existing was that
contracted on November 3, 1981 and the latest was contracted on
December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days
(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms
stated on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the company, thus, the assigned debts matured between April 3,
1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this
case, would then be from the maturity period up to April 3, 1983 or May 4,
1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983
(Exhibit D) and the complaint was filed on January 13, 1984. Both dates
were beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that
appellee had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in
reversible error in so concluding. The relevant provision of the Deed of
Assignment may be quoted again in this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above
contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant
and represent that . . .
(g) the debtor/s under the assigned contract/s are solvent and
his/its/their failure to pay the assigned contract/s and/or any installment
thereon upon maturity thereof shall be conclusively considered as a
violation of this warranty; and . . .
The foregoing warranties and representations are in addition to those
provided for in the Negotiable Instruments Law and other applicable laws.
Any violation thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and severally with the
debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of Assignment was
valid and binding upon Sanyu Chemical. Assignment of receivables is a
commonplace commercial transaction today. It is an activity or operation
that permits the assignee to monetize or realize the value of the receivables
before the maturity thereof. In other words, Sanyu Chemical received from
Atok Finance the value of its trade receivables it had assigned; Sanyu
Chemical obviously benefitted from the assignment. The payments due in
the first instance from the trade debtors of Sanyu Chemical would represent
the return of the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted
by the Court of Appeals is not, in the case at bar, material. The liability of
Sanyu Chemical to Atok Finance rests not on the breach of the warranty of
solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629)
but rather ex contractu. Under the Deed of Assignment, the effect of non-
payment by the original trade debtors was breach of warranty of solvency by
Sanyu Chemical, resulting in turn in the assumption of solidary liability by
the assignor under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms of the
receivables covered and transferred by virtue of the Deed of Assignment.
And because assignor Sanyu Chemical became, under the terms of the
Deed of Assignment, solidary obligor under each of the assigned
receivables, the other private respondents (the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili), became solidarily liable for that obligation of
Sanyu Chemical, by virtue of the operation of the Continuing Suretyship
Agreement. Put a little differently, the obligations of individual private
respondent officers and stockholders of Sanyu Chemical under the
Continuing Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each of the
assigned receivables by virtue of the operation of the Deed of Assignment.
That solidary liability of Sanyu Chemical is not subject to the limiting period
set out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in
the trial court, it had a valid and enforceable cause of action against Sanyu
Chemical and the other private respondents. We also agree with the Court
of Appeals that the original obligors under the receivables assigned to Atok
Finance remain liable under the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby
GRANTED DUE COURSE, and the Decision of the Court of Appeals dated
18 August 1987 and its Resolution dated 30 September 1987 are hereby
REVERSED and SET ASIDE. A new judgment is hereby entered
REINSTATING the Decision of the trial court in Civil Case No. 84-22198
dated 1 April 1985, except only that, in the exercise of this Court's
discretionary authority equitably to mitigate the penalty clause attached to
the Deed of Assignment, that penalty is hereby reduced to eighteen percent
(18%) per annum (instead of P0.03 for every peso monthly [or 36% per
annum]). As so modified, the Decision of the trial court is hereby
AFFIRMED. Costs against private respondents.
SO ORDERED.
Willex Plastic, Inc. v. CA, International Corporate Bank (1996)
Doctrine: It is never necessary that a guarantor or surety should receive any
part orbenefit, if such there be, accruing to his principal
Facts:
1978: Inter-Resin took out a loan from Manila Bank. As additional security,
Inter-Resin and Investment Underwriting (IUCP) executed a Continuing
Surety Agreement stating that they are liable to Manila Bank solidarily for
the loan taken out by Inter-Resin
1979: Inter-Resin and Willex Plastic executed a Continuing Guarantee for
the loan which Inter-Resin obtained from Investment Underwriting to the
extent of P5M.
1981: Investment Underwriting (IUCP) paid Manila Bank P4M to satisfy
Inter-Resin’s 1978 Obligation
Investment Underwriting (IUCP) then demanded payment of the P4M from
both Inter-Resin and Willex
oInter-Resin paid IUCP P600K from the proceeds of its fire insurance
Willex denied obligation, it alleged that it is only a guarantor of the
principal, hence its liability was only secondary to the principal and that it did
not receive consideration nor benefit from the contract between the bank
and Inter-Resin.
Willex insisted that IUCP should pursue Inter-Resin and apply to the loan
the assets of the latter first before going after it.
Willex further alleged that it is guarantor of a loan to Manila Bank and not
to Interbank, hence the Continuing Guaranty cannot be retroactive applied
as contracts of suretyship contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for the loans obtained by Inter-
Resin to IUCP?
– Yes
HELD:
Intent is controlling: clear from the evidence that the Continuing Guarantee
executed by Willex with Inter-Resin would cover sums obtained (in the past–
retroactive) and/or to be obtained by Inter-Resin Industrial from Interbank -
Although a contract of suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as revealed by the
evidence is controlling– apply it to the 1978 loan.
Guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. . . . It is never
necessary that a guarantor or surety should receive any part or benefit, if
such there be, accruing to his principal.
**
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO
OBJECT TO THE PRESENTATION OF PAROL EVIDENCE CONSTITUTES
A WAIVER THEREOF. - It has been held that explanatory evidence may be
received to show the circumstances under which a document has been
made and to what debt it relates. At all events, Willex Plastic cannot now
claim that its liability is limited to any amount which Interbank, as creditor,
might give directly to Inter-Resin Industrial as debtor because, by failing to
object to the parol evidence presented, Willex Plastic waived the protection
of the parol evidence rule.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE;
APPLICABLE IN CASE AT BAR. The trial court found that it was to secure
the guarantee made by plaintiff of the credit accommodation granted to
defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff
required defendant IRIC to execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the defendant Willex Plastic
Industries Corporation. Similarly, the Court of Appeals found it to be an
undisputed fact that to secure the guarantee undertaken by plaintiff-appellee
[Interbank] of the credit accommodation granted to Inter-Resin Industrial by
Manilabank, plaintiff-appellee required defendant-appellant to sign a
Continuing Guaranty. These factual findings of the trial court and of the
Court of Appeals are binding on us not only because of the rule that on
appeal to the Supreme Court such findings are entitled to great weight and
respect but also because our own examination of the record of the trial court
confirms these findings of the two courts.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE
CONSIDERATION NECESSARY TO SUPPORT A SURETY OBLIGATION
NEED NOT PASS DIRECTLY TO THE SURETY, A CONSIDERATION
MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic
argues that the Continuing Guaranty, being an accessory contract, cannot
legally exist because of the absence of a valid principal obligation. Its
contention is based on the fact that it is not a party either to the Continuing
Surety Agreement or to the loan agreement between Manilabank and Inter-
Resin Industrial. Put in another way the consideration necessary to support
a surety obligation need not pass directly to the surety, a consideration
moving to the principal alone being sufficient. For a guarantor or surety is
bound by the same consideration that makes the contract effective between
the principal parties thereto. . . . It is never necessary that a guarantor or
surety should receive any part or benefit, if such there be, accruing to his
principal.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY
NOT TO BE CONSTRUED AS RETROSPECTIVE, IN THE END THE
INTENTION OF THE PARTIES AS REVEALED BY THE EVIDENCE IS
CONTROLLING. - Willex Plastic contends that the Continuing Guaranty
cannot be retroactively applied so as to secure the payments made by
Interbank under the two Continuing Surety Agreements. Willex Plastic
invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923]) and Dio v.
Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a
contract of suretyship or guaranty should be applied prospectively. The
cases cited are, however, distinguishable from the present case. In El
Vencedor v. Canlas we held that a contract of suretyship is not retrospective
and no liability attaches for defaults occurring before it is entered into unless
an intent to be so liable is indicated. There we found nothing in the contract
to show that the parties intended the surety bonds to answer for the debts
contracted previous to the execution of the bonds. In contrast, in this case,
the parties to the Continuing Guaranty clearly provided that the guaranty
would cover sums obtained and/or to be obtained by Inter-Resin Industrial
from Interbank. On the other hand, in Dio v. Court of Appeals the issue was
whether the sureties could be held liable for an obligation contracted after
the execution of the continuing surety agreement. It was held that by its very
nature a continuing suretyship contemplates a future course of dealing. It is
prospective in its operation and is generally intended to provide security with
respect to future transactions. By no means, however, was it meant in that
case that in all instances a contract of guaranty or suretyship should be
prospective in application. Indeed, as we also held in Bank of the Philippine
Islands v. Foerster, (49 Phil. 843 [1926]) although a contract of suretyship is
ordinarily not to be construed as retrospective, in the end the intention of the
parties as revealed by the evidence is controlling. What was said there
applies mutatis mutandis to the case at bar: In our opinion, the appealed
judgment is erroneous. It is very true that bonds or other contracts of
suretyship are ordinarily not to be construed as retrospective, but that rule
must yield to the intention of the contracting parties as revealed by the
evidence, and does not interfere with the use of the ordinary tests and
canons of interpretation which apply in regard to other contracts. In the
present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera
upon its current account with the plaintiff Bank that we cannot possibly
adopt the view of the court below in regard to the effect of the bond.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision[1] of the Court of
Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional
Trial Court of the National Capital Judicial Region, Branch XLV, Manila,
which ordered petitioner Willex Plastic Industries Corporation and the Inter-
Resin Industrial Corporation, jointly and severally, to pay private respondent
International Corporate Bank certain sums of money, and the appellate
courts resolution of October 17, 1989 denying petitioners motion for
reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of
credit with the Manila Banking Corporation. To secure payment of the credit
accommodation, Inter-Resin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two documents, both
entitled Continuing Surety Agreement and dated December 1, 1978,
whereby they bound themselves solidarily to pay Manilabank obligations of
every kind, on which the [Inter-Resin Industrial] may now be indebted or
hereafter become indebted to the [Manilabank]. The two agreements (Exhs.
J and K) are the same in all respects, except as to the limit of liability of the
surety, the first surety agreement being limited to US$333,830.00, while the
second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic
Industries Corp., executed a Continuing Guaranty in favor of IUCP whereby
For and in consideration of the sum or sums obtained and/or to be obtained
by Inter-Resin Industrial Corporation from IUCP, Inter-Resin Industrial and
Willex Plastic jointly and severally guaranteed the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the
extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00) Philippine Currency and such interests, charges and
penalties as hereafter may be specified.
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the
sum of P4,334,280.61 representing Inter-Resin Industrials outstanding
obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp.,
which in the meantime had succeeded IUCP, demanded from Inter-Resin
Industrial and Willex Plastic the payment of what it (IUCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this case in the
court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,500.00 representing the proceeds of its
fire insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty
was intended to secure payment to Atrium of the amount of P4,334,280.61
which the latter had paid to Manilabank. It claimed, however, that it had
already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the
complaint and interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the
formers liability is extinguished due to the accidental fire that destroyed its
premises, which liability is covered by sufficient insurance assigned to
plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to
plaintiff, its account is now very much lesser than those stated in the
complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability
is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim
against the principal obligor;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The
case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have
waived the right to present evidence for its failure to appear at the hearing
despite due notice. On the other hand, Willex Plastic rested its case without
presenting any evidence. Thereafter Interbank and Willex Plastic submitted
their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin
Industrial and Willex Plastic jointly and severally to pay to Interbank the
following amounts:
(a) P3,646,780.61, representing their indebtedness to the plaintiff, with
interest of 17% per annum from August 11, 1982, when Inter-Resin
Industrial paid P687,500.00 to the plaintiff, until full payment of the said
amount;
(b) Liquidated damages equivalent to 17% of the amount due; and
(c) Attorneys fees and expenses of litigation equivalent to 20% of the total
amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals.
Willex Plastic filed its brief, while Inter-Resin Industrial presented a Motion
to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and
to Defer Filing of the Appellants Brief. After its motion was denied, Inter-
Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming
the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to
present evidence to show that Inter-Resin Industrial had already paid its
obligation to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-
Resin Industrials motion for reception of evidence because the situation or
situations in which we could exercise the power under B.P. 129 did not exist.
Movant here has not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of
February 22, 1991 and the resolution of December 6,1991 of the Court of
Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the Continuing Guaranty signed
on April 2, 1979 petitioner Willex Plastic may be held jointly and severally
liable with Inter-Resin Industrial for the amount paid by Interbank to
Manilabank.
As already stated, the amount had been paid by Interbanks predecessor-in-
interest, Atrium Capital, to Manilabank pursuant to the Continuing Surety
Agreements made on December 1, 1978. In denying liability to Interbank for
the amount, Willex Plastic argues that under the Continuing Guaranty, its
liability is for sums obtained by Inter-Resin Industrial from Interbank, not for
sums paid by the latter to Manilabank for the account of Inter-Resin
Industrial. In support of this contention Willex Plastic cites the following
portion of the Continuing Guaranty:
For and in consideration of the sums obtained and/or to be obtained by
INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may be evidenced by
promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly
and severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties as may hereinafter be
specified.
The contention is untenable. What Willex Plastic has overlooked is the fact
that evidence aliunde was introduced in the trial court to explain that it was
actually to secure payment to Interbank (formerly IUCP) of amounts paid by
the latter to Manilabank that the Continuing Guaranty was executed. In its
complaint below, Interbanks predecessor-in-interest. Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff
required defendant IRIC [Inter-Resin Industrial] to execute a chattel
mortgage in its favor and a Continuing Guaranty which was signed by the
other defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it
claimed that it had already paid its obligation in its entirety. On the other
hand, Willex Plastic, while denying the allegation in question, merely did so
for lack of knowledge or information of the same. But, at the hearing of the
case on September 16, 1986, when asked by the trial judge whether Willex
Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex
Plastics counsel replied in the negative and manifested that the plaintiff in
this case [Interbank] is the guarantor and my client [Willex Plastic] only
signed as a guarantor to the guarantee.[2]
For its part Interbank adduced evidence to show that the Continuing
Guaranty had been made to guarantee payment of amounts made by it to
Manilabank and not of any sums given by it as loan to Inter-Resin Industrial.
Interbanks witness testified under cross- examination by counsel for Willex
Plastic that Willex guaranteed the exposure/of whatever exposure of ACP
[Atrium Capital] will later be made because of the guarantee to Manila
Banking Corporation.[3]
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates.[4] At all events, Willex Plastic cannot now claim that its liability is
limited to any amount which Interbank, as creditor, might give directly to
Inter-Resin Industrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the parol
evidence rule.[5]
Accordingly, the trial court found that it was to secure the guarantee made
by plaintiff of the credit accommodation granted to defendant IRIC [Inter-
Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC
to execute a chattel mortgage in its favor and a Continuing Guaranty which
was signed by the defendant Willex Plastic Industries Corporation.[6]

Similarly, the Court of Appeals found it to be an undisputed fact that to
secure the guarantee undertaken by plaintiff-appellee [Interbank] of the
credit accommodation granted to Inter-Resin Industrial by Manilabank,
plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty. These factual findings of the trial court and of the Court of
Appeals are binding on us not only because of the rule that on appeal to the
Supreme Court such findings are entitled to great weight and respect but
also because our own examination of the record of the trial court confirms
these findings of the two courts.[7]
Nor does the record show any other transaction under which Inter-Resin
Industrial may have obtained sums of money from Interbank. It can
reasonably be assumed that Inter-Resin Industrial and Willex Plastic
intended to indemnify Interbank for amounts which it may have paid
Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it
was to secure the aforesaid guarantee, that INTERBANK required principal
debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor,
and so a Continuing Guaranty was executed on April 2, 1979 by WILLEX
PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-
Resin Industrial].
[2] Willex Plastic argues that the Continuing Guaranty, being an accessory
contract, cannot legally exist because of the absence of a valid principal
obligation.[8] Its contention is based on the fact that it is not a party either to
the Continuing Surety Agreement or to the loan agreement between
Manilabank and Inter-Resin Industrial.
Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. For a guarantor or surety is bound by the
same consideration that makes the contract effective between the principal
parties thereto. . . . It is never necessary that a guarantor or surety should
receive any part or benefit, if such there be, accruing to his principal.[9] In
an analogous case,[10] this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor,
for the purpose of having an additional capital for buying and selling coco-
shell charcoal and importation of activated carbon, the comprehensive
surety agreement was admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and private respondent, even if
he did not sign the promissory note, is liable by virtue of the surety
agreement. The only condition that would make him liable thereunder is that
the Borrower is or may become liable as maker, endorser, acceptor or
otherwise. There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained by Daicor as evidenced
by a promissory note.
[3] Willex Plastic contends that the Continuing Guaranty cannot be
retroactively applied so as to secure the payments made by Interbank under
the two Continuing Surety Agreements. Willex Plastic invokes the ruling m
El Vencedor v. Canlas[11] and Dio v. Court of Appeals[12] in support of its
contention that a contract of suretyship or guaranty should be applied
prospectively.
The cases cited are, however, distinguishable from the present case. In El
Vencedor v. Canlas we held that a contract of suretyship is not retrospective
and no liability attaches for defaults occurring before it is entered into unless
an intent to be so liable is indicated. There we found nothing in the contract
to show that the parties intended the surety bonds to answer for the debts
contracted previous to the execution of the bonds. In contrast, in this case,
the parties to the Continuing Guaranty clearly provided that the guaranty
would cover sums obtained and/or to be obtained by Inter-Resin Industrial
from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted after the execution
of the continuing surety agreement.
It was held that by its very nature a continuing suretyship contemplates a
future course of dealing. It is prospective in its operation and is generally
intended to provide security with respect to future transactions. By no
means, however, was it meant in that case that in all instances a contract of
guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster,[13]
although a contract of suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as revealed by the
evidence is controlling. What was said there[14] applies mutatis mutandis to
the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that
bonds or other contracts of suretyship are ordinarily not to be construed as
retrospective, but that rule must yield to the intention of the contracting
parties as revealed by the evidence, and does not interfere with the use of
the ordinary tests and canons of interpretation which apply in regard to
other contracts.
In the present case the circumstances so clearly indicate that the bond
given by Echevarria was intended to cover all of the indebtedness of the
Arrocera upon its current account with the plaintiff Bank that we cannot
possibly adopt the view of the court below in regard to the effect of the
bond.
[4] Willex Plastic says that in any event it cannot be proceeded against
without first exhausting all property of Inter-Resin Industrial. Willex Plastic
thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxxxxxxxx
The pertinent portion of the Continuing Guaranty executed by Willex Plastic
and Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you
and/or your principal/s may directly proceed against Me/Us without first
proceeding against and exhausting DEBTOR/s properties in the same
manner as if all such liabilities constituted My/Our direct and primary
obligations. (italics supplied)
This stipulation embodies an express renunciation of the right of excussion.
In addition, Willex Plastic bound itself solidarily liable with Inter-Resin
Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by
INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may be evidenced by
promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly
and severally and unconditionally guarantee unto you and/ or your
principal/s, successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties as may hereinafter he
specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed
by the Court of Appeals to adduce evidence to prove this. Suffice it to say
that Inter-Resin Industrial had been given generous opportunity to present
its evidence but it failed to make use of the same. On the other hand, Willex
Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29,
1987, but because of its failure to appear on that date, the hearing was
reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon
motion of Willex Plastic, the hearings on March 12 and 26, 1987 were
cancelled and reset for the last time on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly
the trial court issued the following order:
Considering that, as shown by the records, the Court had exerted every
earnest effort to cause the service of notice or subpoena on the defendant
Inter-Resin Industrial but to no avail, even with the assistance of the
defendant Willex. . . the defendant Inter-Resin Industrial is hereby deemed
to have waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered
its order and set the hearing anew on July 23, 1987. But Inter-Resin
Industrial again moved for the postponement of the hearing to August 11,
1987. The hearing was, therefore, reset on September 8 and 22, 1987 but
the hearings were reset on October 13,1987, this time upon motion of
Interbank. To give Interbank time to comment on a motion filed by Inter-
Resin Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However, Inter-
Resin Industrial again moved for the postponement of the hearing.
Accordingly, the hearing was reset on November 26 and December 11,
1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on
January 22, 1988 and February 5, 1988 upon motion of its counsel. As
Inter-Resin Industrial still failed to present its evidence, it was declared to
have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence,
however, the hearing was postponed to March 4, 1988. Again Inter-Resin
Industrials counsel did not appear. The trial court, therefore, finally declared
Inter-Resin Industrial to have waived the right to present its evidence. On
the other hand, Willex Plastic, as before, manifested that it was not
presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be
given the opportunity of showing that Inter-Resin Industrial has already paid
its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with
costs against the petitioner.
SO ORDERED.
Fortune Motors (Phils.) Corporation vs Court of Appeals
FACTS:
In 1981, Joseph Chua and Edgar Rodriguez a executed separate surety
agreements in favor of Fortune Motors (Phils.) Corporation to cover
obligations incurred by Fortune Motors whether they be enforced or
thereafter made (from the time of said surety contracts).
In 1982, Fortune Motors secured cars from Canlubang Automotive
Resources Corporation (CARCO) via trust receipts and drafts made by
CARCO. These were assigned to Filinvest Credit Corporation. Later
Filinvest, when the obligation matured, demanded payment from Fortune
Motor as well as from Chua and Rodrigueza. No payment was made. A
case was filed. Rodrigueza averred that the surety agreement was void
because when it was signed in 1981, the principal obligation (1982) did not
yet exist.
ISSUE: Whether or not the surety agreement is void.
HELD: No. Future obligations can be covered by a surety. 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.
**
To fund their acquisition of new vehicles (which are later retailed or resold to
the general public), car dealers normally enter into wholesale automotive
financing schemes whereby vehicles are delivered by the manufacturer or
assembler on the strength of trust receipts or drafts executed by the car
dealers, which are backed up by sureties. These trust receipts or drafts are
then assigned and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with the
corresponding right to collect such payment from the car dealers and/or the
sureties. In this manner, car dealers are able to secure delivery of their
stock-in-trade without having to pay cash therefor; manufacturers get paid
without any receivables/collection problems; and financing companies earn
their margins with the assurance of payment not only from the dealers but
also from the sureties. When the vehicles are eventually resold, the car
dealers are supposed to pay the financing companies — and the business
goes merrily on. However, in the event the car dealer defaults in paying the
financing company, may the surety escape liability on the legal ground that
the obligations were incurred subsequent to the execution of the surety
contract?
This is the principal legal question raised in this petition for review (under
Rule 45 of the Rules of Court) seeking to set aside the Decision 1 of the
Court of Appeals (Tenth Division) 2 promulgated on September 30, 1993 in
CA G.R. CV No. 09136 which affirmed in toto the decision 3 of the Regional
Trial Court of Manila — Branch 11 4 in Civil Case No. 83-21994, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, by ordering the latter to pay, jointly and severally,
the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53
per day starting April 1, 1985 until the said principal amount is fully paid;
2. The amount of P50,000.00 as attorney’s fees and another P50,000.00 as
liquidated damages; and
3. That the defendants, although spared from paying exemplary damages,
are further ordered to pay, in solidum, the costs of this suit.
Plaintiff therein was the financing company and the defendants the car
dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee
Rodrigueza (“Petitioner Rodrigueza”) each executed an undated “Surety
Undertaking” 5 whereunder they “absolutely, unconditionally and solidarily
guarantee(d)” to Respondent Filinvest Credit Corporation (“Respondent
Filinvest”) and its affiliated and subsidiary companies the “full, faithful and
prompt performance, payment and discharge of any and all obligations and
agreements” of Fortune Motors (Phils.) Corporation (“Petitioner Fortune”)
“under or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)” of the latter with
Filinvest and its affiliated and subsidiary companies “now in force or
hereafter made.”
The following year or on April 6 5, 1982, Petitioner Fortune, Respondent
Filinvest and Canlubang Automotive Resources Corporation (“CARCO”)
entered into an “Automotive Wholesale Financing Agreement” 7 (“Financing
Agreement”) under which CARCO will deliver motor vehicles to Fortune for
the purpose of resale in the latter’s ordinary course of business; Fortune, in
turn, will execute trust receipts over said vehicles and accept drafts drawn
by CARCO, which will discount the same together with the trust receipts and
invoices and assign them in favor of Respondent Filinvest, which will pay
the motor vehicles for Fortune. Under the same agreement, Petitioner
Fortune, as trustee of the motor vehicles, was to report and remit proceeds
of any sale for cash or on terms to Respondent Filinvest immediately
without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune,
and trust receipts covered by demand drafts and deeds of assignment were
executed in favor of Respondent Filinvest. However, when the demand
drafts matured, not all the proceeds of the vehicles which Petitioner Fortune
had sold were remitted to Respondent Filinvest. Fortune likewise failed to
turn over to Filinvest several unsold motor vehicles covered by the trust
receipts. Thus, Filinvest through counsel, sent a demand letter 8 dated
December 12, 1983 to Fortune for the payment of its unsettled account in
the amount of P1,302,811.00. Filinvest sent similar demand letters 9
separately to Chua and Rodrigueza as sureties. Despite said demands, the
amount was not paid. Hence, Filinvest filed in the Regional Trial Court of
Manila a complaint for a sum of money with preliminary attachment against
Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there
was no factual issue to be resolved except for the correct balance of
defendants’ account with Filinvest as agreed upon by the parties during pre-
trial.10 Subsequently, Filinvest presented testimonial and documentary
evidence. Defendants (petitioners herein), instead of presenting their
evidence, filed a “Motion for Judgment on Demurrer to Evidence” 11
anchored principally on the ground that the Surety Undertakings were null
and void because, at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled the case
for reception of defendants’ evidence. On two scheduled dates, however,
defendants failed to present their evidence, prompting the court to deem
them to have waived their right to present evidence. On December 17,
1985, the trial court rendered its decision earlier cited ordering Fortune,
Chua and Rodrigueza to pay Filinvest, jointly and severally, the sum of
P1,348,033.83 plus interest at the rate of P922.53 per day from April 1,
1985 until fully paid, P50,000.00 in attorney’s fees, another P50,000.00 in
liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals
(Tenth Division) which affirmed in toto the trial court’s decision. Hence, this
recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring that surety can exist even if
there was no existing indebtedness at the time of its execution.
2. that the Court of Appeals erred when it declared that there was no
novation.
3. that the Court of Appeals erred when it declared, that the evidence was
sufficient to prove the amount of the claim. 12
Petitioners argue that future debts which can be guaranteed under Article
2053 of the Civil Code refer only to “debts existing at the time of the
constitution of the guaranty but the amount thereof is unknown,” and that a
guaranty being an accessory obligation cannot exist without a principal
obligation. Petitioners claim that the surety undertakings cannot be made to
cover the Financing Agreement executed by Fortune, Filinvest and CARCO
since the latter contract was not yet in existence when said surety contracts
were entered into.
Petitioners further aver that the Financing Agreement would effect a
novation of the surety contracts since it changed the principal terms of the
surety contracts and imposed additional and onerous obligations upon the
sureties.
Lastly, petitioners claim that no accounting of the payments made by
Petitioner Fortune to Respondent Filinvest was done by the latter. Hence,
there could be no way by which the sureties can ascertain the correct
amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes “estoppel (by pleadings or
by judicial admission)” upon petitioners when in their “Motion to Discharge
Attachment,” they admitted their liability as sureties thus:
Defendants Chua and Rodrigueza could not have perpetrated fraud
because they are only sureties of defendant Fortune Motors . . .;
. . . The defendants (referring to Rodrigueza and Chua) are not parties to
the trust receipts agreements since they are ONLY sureties.
. . . 13
In rejecting the arguments of petitioners and in holding that they (Fortune
and the sureties) were jointly and solidarily liable to Filinvest, the trial court
declared:
As to the alleged non-existence of a principal obligation when the surety
agreement was signed, it is enough (sic) to state that a guaranty may also
be given as security for future debts, the amount of which is not known (Art.
2053, New Civil Code). In the case of NARIC vs. Fojas, L-11517,
promulgated April 10, 1958, it was ruled that a bond posted to secure
additional credit that the principal debtor had applied for, is not void just
because the said bond was signed and filed before the additional credit was
extended by the creditor. The obligation of the sureties on future obligations
of Fortune is apparent from a proviso under the Surety Undertakings
marked Exhs. B and C that the sureties agree with the plaintiff as follows:
In consideration of your entering into an arrangement with the party
(Fortune) named above, . . . by which you may purchase or otherwise
require from, and or enter into with obligor . . . trust receipt . . . arising out of
wholesale and/or retail transactions by or with obligor, the undersigned . . .
absolutely, unconditionally, and solidarily guarantee to you . . . the full,
faithful and prompt performance, payment and discharge of any and all
obligations . . . of obligor under and with respect to any and all such
contracts and any and all agreements (whether by way of guaranty or
otherwise) of obligor with you . . . now in force or hereafter made.
(Emphasis supplied).
On the matter of novation, this has already been ruled upon when this Court
denied defendants’ Motion to dismiss on the argument that what happened
was really an assignment of credit, and not a novation of contract, which
does not require the consent of the debtors. The fact of knowledge is
enough. Besides, as explained by the plaintiff, the mother or the principal
contract was the Financing Agreement, whereas the trust receipts, the sight
drafts, as well as the Deeds of assignment were only collaterals or
accidental modifications which do not extinguish the original contract by way
of novation. This proposition holds true even if the subsequent agreement
would provide for more onerous terms for, at any rate, it is the principal or
mother contract that is to be followed. When the changes refer to secondary
agreements and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications of incidental
facts, but will not extinguish the original obligation (Tolentino, Commentaries
on Jurisprudence of the Civil Code of the Philippines, 1973 Edition, Vol. IV,
page 367; cited in plaintiff’s Memorandum of September 6, 1985, p. 3).
On the evidence adduced by the plaintiff to show the status of defendants’
accounts, which took into consideration payments by defendants made after
the filing of the case, it is enough to state that a statement was carefully
prepared showing a balance of the principal obligation plus interest totalling
P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not
been traversed nor contradicted by defendants although they had the
opportunity to do so. Likewise, there was absolute silence on the part of
defendants as to the correctness of the previous statement of account made
as of December 16, 1983 (referring to Exh. I), but more important, however,
is that defendants received demand letters from the plaintiff stating that, as
of December 1983 (Exhs. J, K and L), this total amount of obligation was
P1,302,811,00, and yet defendants were not heard to have responded to
said demand letters, let alone have taken any exception thereto. There is
such a thing as evidence by silence (Sec. 23, Rule 130, Revised Rules of
Court). 14
The Court of Appeals, affirming the above decision of the trial court, further
explained:
. . . In the case at bar, the surety undertakings in question unequivocally
state that Chua and Rodrigueza “absolutely, unconditionally and solidarily
guarantee” to Filinvest the “full, faithful and prompt performance, payment
and discharge of any and all obligations and agreements” of Fortune “under
or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)” of the latter with
Filinvest in force at the time of the execution of the “Surety Undertakings” or
made thereafter. Indeed, if Chua and Rodrigueza did not intend to
guarantee all of Fortune’s future obligation with Filinvest, then they should
have expressly stated in their respective surety undertakings exactly what
said surety agreements guaranteed or to which obligations of Fortune the
same were intended to apply. For another, if Chua and Rodrigueza truly
believed that the surety undertakings they executed should not cover
Fortune’s obligations under the AWFA, then why did they not inform Filinvest
of such fact when the latter sent them the aforementioned demand letters
(Exhs. ‘K’ and ‘L’) urging them to pay Fortune’s liability under the AWFA.
Instead, quite uncharacteristic of persons who have just been asked to pay
an obligation to which they believe they are not liable, Chua and Rodrigueza
elected or chose not to answer said demand letters. Then, too, considering
that appellant Chua is the corporate president of Fortune and a signatory to
the AWFA, he should have simply had it stated in the AWFA or in a separate
document that the “Surety Undertakings” do not cover Fortune’s obligations
in the aforementioned AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the AWFA
only after two (2) years from the date of the “Surety undertakings” because
Chua and Rodrigueza were thereby made to wait for said number of years
just to know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the “Surety
Undertakings” did not provide that after a period of time the same will lose
its force and effect. In the second place, if Chua and Rodrigueza did not
want to guarantee the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply terminate the ‘Surety
Undertakings’ by serving ten (10) days written notice to Filinvest as
expressly allowed in said surety agreements. It is highly plausible that the
reason why the ‘Surety Undertakings’ were not terminated was because the
execution of the same was part of the consideration why Filinvest and
CARCO agreed to enter into the AWFA with Fortune. 15
The Court’s Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation vs. Court
of Appeals 16 which reiterated our rulings in National Rice and Corn
Corporation (NARIC) vs. Court of Appeals 17 and Rizal Commercial
Banking Corporation vs. Arro. 18 In Atok Finance, Sanyu Chemical as
principal, and Sanyu Trading along with individual private stockholders of
Sanyu Chemical, namely, spouses Daniel and Nenita Arrieta, Leopoldo
Halili and Pablito Bermundo, as sureties, executed a continuing suretyship
agreement in favor of Atok Finance as creditor. Under the agreement,
Sanyu Trading and the individual private stockholders and officers of Sanyu
Chemical “jointly and severally unconditionally guarantee(d) to Atok Finance
Corporation (hereinafter called Creditor), the full, faithful and prompt
payment and discharge of any and all indebtedness of [Sanyu
Chemical] . . . to the Creditor.” Subsequently, Sanyu Chemical assigned its
trade receivables outstanding with a total face value of P125,871.00 to Atok
Finance in consideration of receipt of the amount of P105,000.00. Later,
additional trade receivables with a total face value of P100,378.45 were also
assigned. Due to nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta spouses,
Bermundo and Halili to collect the sum of P120,240.00 plus penalty charges
due and payable. The individual private respondents contended that the
continuing suretyship agreement, being an accessory contract, was null and
void since, at the time of its execution, Sanyu Chemical had no pre-existing
obligation due to Atok Finance. The trial court rendered a decision in favor
of Atok Finance and ordered defendants to pay, jointly and severally,
aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court
and dismissed the complaint on the ground that there was “no proof that
when the suretyship agreement was entered into, there was a pre-existing
obligation which served as the principal obligation between the parties.
Furthermore, the ‘future debts’ alluded to in Article 2053 refer to debts
already existing at the time of the constitution of the agreement but the
amount thereof is unknown, unlike in the case at bar where the obligation
was acquired two years after the agreement.”
We ruled then that the appellate court was in serious error. The distinction
which said court sought to make with respect to Article 2053 (that “future
debts” referred to therein relate to “debts already existing at the time of the
constitution of the agreement but the amount [of which] is unknown” and not
to debts not yet incurred and existing at that time) has previously been
rejected, citing the RCBC and NARIC cases. We further said:
. . . 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.
In Dino vs. Court of Appeals, 19 we again had occasion to discourse on
continuing guaranty/suretyship thus:
. . . A continuing guaranty is one which is not limited to a single transaction,
but which contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with
respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes
liable. Otherwise stated, a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration
or termination thereof. A guaranty shall be construed as continuing when by
the terms thereof it is evident that the object is to give a standing credit to
the principal debtor to be used from time to time either indefinitely or until a
certain period; especially if the right to recall the guaranty is expressly
reserved. Hence, where the contract of guaranty states that the same is to
secure advances to be made ‘from time to time’ the guaranty will be
construed to be a continuing one.
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. 20
We have no reason to depart from our uniform ruling in the above-cited
cases. The facts of the instant case bring us to no other conclusion than that
the surety undertakings executed by Chua and Rodrigueza were continuing
guaranties or suretyships covering all future obligations of Fortune Motors
(Phils.) Corporation with Filinvest Credit Corporation. This is evident from
the written contract itself which contained the words “absolutely,
unconditionally and solidarily guarantee(d)” to Respondent Filinvest and its
affiliated and subsidiary companies the “full, faithful and prompt
performance, payment and discharge of any and all obligations and
agreements” of Petitioner Fortune “under or with respect to any and all such
contracts and any and all other agreements (whether by way of guaranty or
otherwise)” of the latter with Filinvest and its affiliated and subsidiary
companies “now in force or hereafter made.”
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they
stood at the time they executed their respective surety undertakings in favor
of Fortune. As stated in the petition:
Before the execution of the new agreement, Edgar L. Rodrigueza and
Joseph Chua were required to sign blank surety agreements, without
informing them how much amount they would be liable as sureties.
However, because of the desire of petitioners, Chua and Rodrigueza to
have the cars delivered to petitioner. Fortune, they signed the blank
promissory notes. 21 (emphasis supplied)
It is obvious from the foregoing that Rodrigueza and Chua were fully aware
of the business of Fortune, an automobile dealer; Chua being the corporate
president of Fortune and even a signatory to the Financial Agreement with
Filinvest. 22 Both sureties knew the purpose of the surety undertaking which
they signed and they must have had an estimate of the amount involved at
that time. Their undertaking by way of the surety contracts was critical in
enabling Fortune to acquire credit facility from Filinvest and to procure cars
for resale, which was the business of Fortune. Respondent Filinvest, for its
part, relied on the surety contracts when it agreed to be the assignee of
CARCO with respect to the liabilities of Fortune with CARCO. After
benefiting therefrom, petitioners cannot now impugn the validity of the
surety contracts on the ground that there was no preexisting obligation to be
guaranteed at the time said surety contracts were executed. They cannot
resort to equity to escape liability for their voluntary acts, and to heap
injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest
was made to believe that it can collect from Chua and/or Rodrigueza in case
of Fortune’s default. Filinvest relied upon the surety contracts when it
demanded payment from the sureties of the unsettled liabilities of Fortune. A
refusal to enforce said surety contracts would virtually sanction the
perpetration of fraud or injustice. 23
Second Issue: No Novation
Neither do we find merit in the averment of petitioners that the Financing
Agreement contained onerous obligations not contemplated in the surety
undertakings, thus changing the principal terms thereof and effecting a
novation.
We have ruled previously that there are only two ways to effect novation
and thereby extinguish an obligation. First, novation must be explicitly stated
and declared in unequivocal terms. Novation is never presumed. Second,
the old and new obligations must be incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first. 24 Novation must be established either
by the express terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old obligation as a
consideration for the emergence of the new one. The will to novate, whether
totally or partially, must appear by express agreement of the parties, or by
their acts which are too clear and unequivocal to be mistaken. 25
Under the surety undertakings however, the obligation of the sureties
referred to absolutely, unconditionally and solidarily guaranteeing the full,
faithful and prompt performance, payment and discharge of all obligations of
Petitioner Fortune with respect to any and all contracts and other
agreements with Respondent Filinvest in force at that time or thereafter
made. There were to qualifications, conditions or reservations stated therein
as to the extent of the suretyship. The Financing Agreement, on the other
hand, merely detailed the obligations of Fortune to CARCO (succeeded by
Filinvest as assignee). The allegation of novation by petitioners is, therefore,
misplaced. There is no incompatibility of obligations to speak of in the two
contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal
act to manifest their agreement or intention to novate their contract. Neither
did the sureties object to the Financing Agreement nor try to avoid liability
thereunder at the time of its execution. As aptly discussed by the Court of
Appeals:
. . . For another, if Chua and Rodrigueza truly believed that the surety
undertakings they executed should not cover Fortune’s obligations under
the AWFA (Financing Agreement), then why did they not inform Filinvest of
such fact when the latter sent them the aforementioned demand letters
(Exhs. “K” and “L”) urging them to pay Fortune’s liability under the AWFA.
Instead, quite uncharacteristic of persons who have just been asked to pay
an obligation to which they are not liable, Chua and Rodrigueza elected or
chose not to answer said demand letters. Then, too, considering that
appellant Chua is the corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or in a separate
document that the ‘Surety Undertakings’ do not cover Fortune’s obligations
in the aforementioned AWFA, trust receipts or demand drafts.26
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of petitioners is a purely
factual issue. It is an oft repeated maxim that the jurisdiction of this Court in
cases brought before it from the Court of Appeals under Rule 45 of the
Rules of Court is limited to reviewing or revising errors of law. It is not the
function of this Court to analyze or weigh evidence all over again unless
there is a showing that the findings of the lower court are totally devoid of
support or are glaringly erroneous as to constitute serious abuse of
discretion. Factual findings of the Court of Appeals are conclusive on the
parties and carry even more weight when said court affirms the factual
findings of the trial court. 27
In the case at bar, the findings of the trial court and the Court of Appeals
with respect to the assigned error are based on substantial evidence which
were not refuted with contrary proof by petitioners. Hence, there is no
necessity to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals concurring with the decision of the
trial court is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Palmares vs. CA
(288 SCRA 422)
Facts:
Private respondent M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella
Palmares, in the amount of P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per annum to be computed
every 30days from the date thereof. 1 On four occasions after the execution
of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00,thereby leaving a
balance of P13,700.00. No payments were made after the last payment on
September 26, 1991. 2Consequently, on the basis of petitioner's solidary
liability under the promissory note, respondent corporation filed a complaint
3 against petitioner Palmares as the lone party-defendant, to the exclusion
of the principal debtors, allegedly by reason of the insolvency of the latter.
Issue: WON Palmares is liable
Held:
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter3, Title I of this Book shall be observed. In such case the
contract is called a suretyship. It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulation
shall control. In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of the note.
The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Where a party signs a promissory note as a co-maker and binds herself to
be jointly and severally liable with the principal debtor in case the latter
defaults in the payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt, or of a guarantor
who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent
M.B. Lending Corporation extended a loan to the spouses Osmeña and
Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount
of P30,000.00 payable on or before May 12, 1990, with compounded
interest at the rate of 6% per annum to be computed every 30 days from the
date thereof.1 On four occasions after the execution of the promissory note
and even after the loan matured, petitioner and the Azarraga spouses were
able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00.
No payments were made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint3 against
petitioner Palmares as the lone party-defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that
sometime in August 1990, immediately after the loan matured, she offered
to settle the obligation with respondent corporation but the latter informed
her that they would try to collect from the spouses Azarraga and that she
need not worry about it; that there has already been a partial payment in the
amount of P17,010.00; that the interest of 6% per month compounded at
the same rate per month, as well as the penalty charges of 3% per month,
are usurious and unconscionable; and that while she agrees to be liable on
the note but only upon default of the principal debtor, respondent
corporation acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the proceeds
of the loan.
During the pre-trial conference, the parties submitted the following issues for
the resolution of the trial court: (1) what the rate of interest, penalty and
damages should be; (2) whether the liability of the defendant (herein
petitioner) is primary or subsidiary; and (3) whether the defendant Estrella
Palmares is only a guarantor with a subsidiary liability and not a co-maker
with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the
pleadings filed and the memoranda to be submitted by them. On November
26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered
judgment dismissing the complaint without prejudice to the filing of a
separate action for a sum of money against the spouses Osmeña and
Merlyn Azarraga who are primarily liable on the instrument.6 This was
based on the findings of the court a quo that the filing of the complaint
against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by
petitioner to pay the obligation is considered a valid tender of payment
sufficient to discharge a person's secondary liability on the instrument; as
co-maker, is only secondarily liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial
court, and rendered judgment declaring herein petitioner Palmares liable to
pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still
due and owing with interest at six percent (6%) per month computed from
the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%)
per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself to be
jointly and severally or solidarily liable with the principal debtors, the
Azarraga spouses, when she signed as a co-maker. As such, petitioner is
primarily liable on the note and hence may be sued by the creditor
corporation for the entire obligation. It also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that the
Azarraga spouses should have been impleaded. Respondent court ordered
the imposition of the stipulated 6% interest and 3% penalty charges on the
ground that the Usury Law is no longer enforceable pursuant to Central
Bank Circular No. 905. Finally, it rationalized that even if the promissory
note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to
reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as
surety and is therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting
provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-
maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is
solidary.
4. The promissory note is a contract of adhesion and should be
construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals
erred in strictly imposing the interests and penalty charges on the
outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their
material points by respondent corporation. They are further refuted by
accepted doctrines in the American jurisdiction after which we patterned our
statutory law on surety and guaranty. This case then affords us the
opportunity to make an extended exposition on the ramifications of these
two specialized contracts, for such guidance as may be taken therefrom in
similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is
expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have
fully understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or
solidarily liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may
demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of the note subject to the
same conditions above-contained.8
Petitioner contends that the provisions of the second and third paragraph
are conflicting in that while the second paragraph seems to define her
liability as that of a surety which is joint and solidary with the principal
maker, on the other hand, under the third paragraph her liability is actually
that of a mere guarantor because she bound herself to fulfill the obligation
only in case the principal debtor should fail to do so, which is the essence of
a contract of guaranty. More simply stated, although the second paragraph
says that she is liable as a surety, the third paragraph defines the nature of
her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in
the contract should be interpreted in relation to one another and not by
parts. In other words, the second paragraph should not be taken in isolation,
but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions,
petitioner avers that she could be held liable only as a guarantor for several
reasons. First, the words "jointly and severally or solidarily liable" used in
the second paragraph are technical and legal terms which are not fully
appreciated by an ordinary layman like herein petitioner, a 65-year old
housewife who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the wordings used in
the third paragraph are easier to comprehend. Second, the law looks upon
the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified
limits, taking into consideration the peculiar nature of a surety agreement
which holds the surety liable despite the absence of any direct consideration
received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note was brought to petitioner
partially filled up, the contents thereof were never explained to her, and her
only participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent pursuant to
Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory note to be
that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the
loan because the principal debtors cannot be considered in default in the
absence of a judicial or extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported demand letters were never
attached to the pleadings filed by private respondent before the trial court.
And, while petitioner may have admitted in her Amended Answer that she
received a demand letter from respondent corporation sometime in 1990,
the same did not effectively put her or the principal debtors in default for the
simple reason that the latter subsequently made a partial payment on the
loan in September, 1991, a fact which was never controverted by herein
private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the
amount of P2,745,483.39 in favor of private respondent when, in truth and
in fact, the outstanding balance of the loan is only P13,700.00. Where the
interest charged on the loan is exorbitant, iniquitous or unconscionable, and
the obligation has been partially complied with, the court may equitably
reduce the penalty10 on grounds of substantial justice. More importantly,
respondent corporation never refuted petitioner's allegation that immediately
after the loan matured, she informed said respondent of her desire to settle
the obligation. The court should, therefore, mitigate the damages to be paid
since petitioner has shown a sincere desire for a compromise.11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except therefrom
the issue anent the propriety of the monetary award adjudged to herein
respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the
promissory note executed between the parties is a contract of adhesion, it
has been the consistent holding of the Court that contracts of adhesion are
not invalid per se and that on numerous occasions the binding effects
thereof have been upheld. The peculiar nature of such contracts necessitate
a close scrutiny of the factual milieu to which the provisions are intended to
apply. Hence, just as consistently and unhesitatingly, but without
categorically invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when
justified in light of the operative facts and surrounding circumstances.12 The
factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control.13 In the case at
bar, petitioner expressly bound herself to be jointly and severally or solidarily
liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable"
contained in the second paragraph of her contract are technical and legal
terms which could not be easily understood by an ordinary layman like her
is diametrically opposed to her manifestation in the contract that she "fully
understood the contents" of the promissory note and that she is "fully
aware" of her solidary liability with the principal maker. Petitioner admits that
she voluntarily affixed her signature thereto; ergo, she cannot now be heard
to claim otherwise. Any reference to the existence of fraud is unavailing.
Fraud must be established by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Petitioner's attempt to
prove fraud must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal effect
of the undertaking.15 The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship. And the mistake of a surety as to the legal
effect of her obligation is ordinarily no reason for relieving her of liability.16
Petitioner would like to make capital of the fact that although she obligated
herself to be jointly and severally liable with the principal maker, her liability
is deemed restricted by the provisions of the third paragraph of her contract
wherein she agreed "that M.B. Lending Corporation may demand payment
of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note," which makes her contract
one of guaranty and not suretyship. The purported discordance is more
apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the
solvency of the debtor.17 A suretyship is an undertaking that the debt shall
be paid; a guaranty, an undertaking that the debtor shall pay.18 Stated
differently, a surety promises to pay the principal's debt if the principal will
not pay, while a guarantor agrees that the creditor, after proceeding against
the principal, may proceed against the guarantor if the principal is unable to
pay.19 A surety binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so.20 In
other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made out
of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal debtor
does not automatically remove it from the ambit of a contract of suretyship.
The second and third paragraphs of the aforequoted portion of the
promissory note do not contain any other condition for the enforcement of
respondent corporation's right against petitioner. It has not been shown,
either in the contract or the pleadings, that respondent corporation agreed
to proceed against herein petitioner only if and when the defaulting principal
has become insolvent. A contract of suretyship, to repeat, is that wherein
one lends his credit by joining in the principal debtor's obligation, so as to
render himself directly and primarily responsible with him, and without
reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability, petitioner erroneously
invokes the rule on strictissimi juris, which holds that when the meaning of a
contract of indemnity or guaranty has once been judicially determined under
the rule of reasonable construction applicable to all written contracts, then
the liability of the surety, under his contract, as thus interpreted and
construed, is not to be extended beyond its strict meaning.23 The rule,
however, will apply only after it has been definitely ascertained that the
contract is one of suretyship and not a contract of guaranty. It cannot be
used as an aid in determining whether a party's undertaking is that of a
surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt
that the stipulation contained in the third paragraph of the controverted
suretyship contract merely elucidated on and made more specific the
obligation of petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the principal
debtor, must necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall also
be principally considered.24 Several attendant factors in that genre lend
support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she
immediately offered to settle the account with respondent corporation.
Obviously, in her mind, she knew that she was directly and primarily liable
upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the
time of initial payment up to the last, which were all issued in her name and
of the Azarraga spouses.25 This can only be construed to mean that the
payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit
of petitioner. The concomitant and simultaneous compliance of petitioner's
obligation with that of her principals only goes to show that, from the very
start, petitioner considered herself equally bound by the contract of the
principal makers.
In this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal,26 and as such is deemed an
original promisor and debtor from the beginning.27 This is because in
suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.28 In essence, the contract of a surety
starts with the agreement,29 which is precisely the situation obtaining in this
case before the Court.
It will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between respondent
corporation, as creditor, and the principal obligors. A surety is usually bound
with his principal by the same instrument, executed at the same time and
upon the same consideration; he is an original debtor, and his liability is
immediate and direct.30 Thus, it has been held that where a written
agreement on the same sheet of paper with and immediately following the
principal contract between the buyer and seller is executed simultaneously
therewith, providing that the signers of the agreement agreed to the terms of
the principal contract, the signers were "sureties" jointly liable with the
buyer.31 A surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon the same
instrument, and the same consideration usually supports the obligation for
both the principal and the surety.32
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be considered
in default, there having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that respondent corporation
may demand payment of the loan from her in case the principal maker
defaults, subject to the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that "should I fail to pay in
accordance with the above schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the creditor is no longer necessary
in order that delay may exist since the contract itself already expressly so
declares.33 As a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before
bringing suit against them, since the commencement of the suit is a
sufficient demand.34 On this point, it may be worth mentioning that a surety
is not even entitled, as a matter of right, to be given notice of the principal's
default. Inasmuch as the creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure to voluntarily give
information to the surety of the default of the principal cannot have the effect
of discharging the surety. The surety is bound to take notice of the
principal's default and to perform the obligation. He cannot complain that the
creditor has not notified
him in the absence of a special agreement to that effect in the contract of
suretyship.35
The alleged failure of respondent corporation to prove the fact of demand
on the principal debtors, by not attaching copies thereof to its pleadings, is
likewise immaterial. In the absence of a statutory or contractual
requirement, it is not necessary that payment or performance of his
obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before proceeding against the
sureties, that the principal be called on to account.36 The underlying
principle therefor is that a suretyship is a direct contract to pay the debt of
another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default.37 As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his
principal.38
Petitioner questions the propriety of the filing of a complaint solely against
her to the exclusion of the principal debtors who allegedly were the only
ones who benefited from the proceeds of the loan. What petitioner is trying
to imply is that the creditor, herein respondent corporation, should have
proceeded first against the principal before suing on her obligation as
surety. We disagree.
A creditor's right to proceed against the surety exists independently of his
right to proceed against the principal.39 Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even
against the surety alone.40 Since, generally, it is not necessary for the
creditor to proceed against a principal in order to hold the surety liable,
where, by the terms of the contract, the obligation of the surety is the same
that of the principal, then soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any
proceedings are had against the principal.41 Perforce, in accordance with
the rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to immediately
sue petitioner on her obligation does not release her from liability. Where a
creditor refrains from proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or forbearance does not
affect the creditor's rights vis-a-vis the surety, unless the surety requires him
by appropriate notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the principal's
request or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such delay continues
until the principal becomes insolvent.43 And, in the absence of proof of
resultant injury, a surety is not discharged by the creditor's mere statement
that the creditor will not look to the surety,44 or that he need not trouble
himself.45 The consequences of the delay, such as the subsequent
insolvency of the principal,46 or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial.47
The raison d'être for the rule is that there is nothing to prevent the creditor
from proceeding against the principal at any time.48 At any rate, if the
surety is dissatisfied with the degree of activity displayed by the creditor in
the pursuit of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in default, by
delay permitted by the creditor without change in the time when the debt
might be demanded, does not constitute an extension of the time of
payment, which would release the surety.50 In order to constitute an
extension discharging the surety, it should appear that the extension was for
a definite period, pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without the consent of the
surety or with a reservation of rights with respect to him. The contract must
be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying the
debt.51
None of these elements are present in the instant case. Verily, the mere fact
that respondent corporation gave the principal debtors an extended period
of time within which to comply with their obligation did not effectively
absolve here in petitioner from the consequences of her undertaking.
Besides, the burden is on the surety, herein petitioner, to show that she has
been discharged by some act of the creditor,52 herein respondent
corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary,
the interests and penalty charges on the outstanding balance of the loan
cannot be imposed for being illegal and unconscionable. Petitioner
additionally theorizes that respondent corporation intentionally delayed the
collection of the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said respondent, is
misleading.
In an affidavit53 executed by petitioner, which was attached to her petition,
she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same
upon its maturity. I received a telephone call from Mr. Augusto Banusing of
MB Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and
Osmeña Azarraga. At the same time, I offered to pay MB Lending the
outstanding balance of the principal obligation should he fail to collect from
Merlyn and Osmeña Azarraga. Mr. Banusing advised me not to worry
because he will try to collect first from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of
Mr. Banusing who reminded that the loan of Merlyn and Osmeña Azarraga,
together with interest and penalties thereon, has not been paid. Since I had
no available funds at that time, I offered to pay MB Lending by delivering to
them a parcel of land which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-Iloilo. After
learning that a complaint was filed against me, I instructed Sheila Gatia to
go to MB Lending and reiterate my first offer to pay the outstanding balance
of the principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her
to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if
my offer to pay the outstanding balance of the principal obligation loan (sic)
of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed
Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient
and substantial in order to effectively discharge her from liability. There are a
number of circumstances which conjointly inveigh against her aforesaid
theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially requested
that the creditor try to collect from her principal first, and she offered to pay
only in case the creditor fails to collect. The delay, if any, was occasioned by
the fact that respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment to speak of
but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent corporation was
acting well within its rights when it refused to accept the offer. The debtor of
a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value, or more valuable than that which is due.54
The obligee is entitled to demand fulfillment of the obligation or performance
as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her
offer to pay the outstanding balance of the obligation in the amount of
P30,000.00 but the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the amount being offered
because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the thing
or service in which the obligation consists has been completely delivered or
rendered, as the case may be.56 In other words, the prestation must be
fulfilled completely. A person entering into a contract has a right to insist on
its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the amount she
is willing to pay because the moment the latter accepts the performance,
knowing its incompleteness or irregularity, and without expressing any
protest or objection, then the obligation shall be deemed fully complied
with.58 Precisely, this is what respondent corporation wanted to avoid when
it continually refused to settle with petitioner at less than what was actually
due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge
of 3% per month and attorney's fees equivalent to 25% of the total amount
due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the
amount of P16,300.00 had already been paid even before the filing of the
present case. Article 1229 of the Civil Code provides that the court shall
equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has been no
performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private
respondent M.B. Lending Corporation, and which is substantially on all fours
with the one at bar, we decided to eliminate altogether the penalty interest
for being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that
the economic impact of the penalty interest of three percent (3 %) per
month on total amount due but unpaid should be equitably reduced. The
purpose for which the penalty interest is intended — that is, to punish the
obligor — will have been sufficiently served by the effects of compounded
interest. Under the exceptional circumstances in the case at bar, e.g., the
original amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties'
promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the parties,
the court may nevertheless reduce such attorney's fees fixed in the contract
when the amount thereof appears to be unconscionable or unreasonable.60
To that end, it is not even necessary to show, as in other contracts, that it is
contrary to morals or public policy.61 The grant of attorney's fees equivalent
to 25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and the
extent of the work involved in this simple action for collection of a sum of
money. We, therefore, hold that the amount of P10,000.00 as and for
attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the penalty interest of 3% per month is hereby
deleted and the award of attorney's fees is reduced to P10,000.00.
SO ORDERED.
SECURITY BANK V. CUENCA, (2000)
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold
herein respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or to
give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder of the
corporate debtor at the time the later obligations were incurred. He was thus
no longer in a position to compel the debtor to pay the creditor and had no
more reason to bind himself anew to the subsequent obligations.
Continuing Surety
Issue: Contending that the Indemnity Agreement was in the nature of a
continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989 Loan
Agreement. Correct? NO.
Held: That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation
inordinately.
In Dino v. CA, the Court held that “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.”
To repeat, in the present case, the Indemnity Agreement was subject to the
two limitations of the credit accommodation:
1. that the obligation should not exceed P8 million, and
2. that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on
or before the aforementioned expiry date and not exceeding the total of P8
million.
In Dino, the surety Agreement specifically provided that “each suretyship is
a continuing one which shall remain in full force and effect until this bank is
notified of its revocation.” Since the bank had not been notified of such
revocation, the surety was held liable even for the subsequent obligations of
the principal borrower.
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold
herein respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or to
give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder of the
corporate debtor at the time the later obligations were incurred. He was thus
no longer in a position to compel the debtor to pay the creditor and had no
more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review
under Rule 45 of the Rules of Court. Petitioner assails the December 22,
1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the
sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is
RELEASED from liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby
DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution,[3] which denied
petitioners Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial
Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which
disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines
Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally,
plaintiff Security Bank & Trust Company the sum of P39,129,124.73
representing the balance of the loan as of May 10, 1994 plus 12% interest
per annum until fully paid, and the sum of P100,000.00 as attorneys fees
and litigation expenses and to pay the costs.
SO ORDERED.
The Facts
The facts are narrated by the Court of Appeals as follows:[5]
The antecedent material and relevant facts are that defendant-appellant
Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations.
It was a holder of a Timber License Agreement issued by the Department of
Environment and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted
appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of
[e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit
Loan Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except
logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the
borrowings, indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be
maintained at all times; in this connection, a Makati account shall be opened
prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the
above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit A) over some of its machinery and equipment in
favor of [Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated
17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he
solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with
the client (SIMC) in favor of the bank for the payment, upon demand and
without the benefit of excussion of whatever amount x x x the client may be
indebted to the bank x x x by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s) x x x .
(Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first
drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said
drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for
said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in defendant-
appellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M.
Cuenca. Said shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and
obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate
amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen
and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed
Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85,
DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of
the abovementioned additional loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the
amortization payments on its loans and requested [Petitioner] SBTC for a
complete restructuring of its indebtedness. SBTC accommodated appellant
SIMCs request and signified its approval in a letter dated 18 February 1988
(Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice
to or the prior consent of [Respondent] Cuenca, agreed to restructure the
past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security
Bank agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand
[p]esos (P8,800,000.00), to be applied to liquidate the principal portion of
defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner]
Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-
B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand
[p]esos (P3,400,000.00), to be applied to liquidate the past due interest and
penalty portion of the indebtedness of defendant-appellant Sta. Ines to
[Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336;
Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-
3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of
the P8M-Credit Loan Facility on 30 November 1981 and the only one
covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-
Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes Nos.
DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F,
Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta.
Ines which were not secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to
[Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in favor of [Petitioner]
Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of
defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-
appellant Sta. Ines executed a Loan Agreement dated 31 October 1989
(Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the
said Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the
aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND
PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall
be released in two (2) tranches of P8,800,000.00 for the first tranche (the
First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to
be applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding indebtedness to the
Lender (the indebtedness) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness.
(Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I,
p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines
made further payments to [Petitioner] Security Bank in the amount of [o]ne
[m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00)
(Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to
165)
Appellant SIMC defaulted in the payment of its restructured loan obligations
to [Petitioner] SBTC despite demands made upon appellant SIMC and
CUENCA, the last of which were made through separate letters dated 5
June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC.
Thus, SBTC filed a complaint for collection of sum of money on 14 June
1993, resulting after trial on the merits in a decision by the court a quo, x x x
from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989
Loan Agreement had novated the 1980 credit accommodation earlier
granted by the bank to Sta. Ines. Accordingly, such novation extinguished
the Indemnity Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself solidarily liable for
the payment of the loans secured by that credit accommodation. It noted
that the 1989 Loan Agreement had been executed without notice to, much
less consent from, Cuenca who at the time was no longer a stockholder of
the corporation.
The appellate court also noted that the Credit Approval Memorandum had
specified that the credit accommodation was for a total amount of P8 million,
and that its expiry date was November 30, 1981. Hence, it ruled that
Cuenca was liable only for loans obtained prior to November 30, 1981, and
only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989
Loan Agreement was tantamount to a grant of an extension of time to the
debtor without the consent of the surety. Under Article 2079 of the Civil
Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank
and Sta. Ines decided to materially alter or modify the principal obligation
after the expiry date of the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues
In its Memorandum, petitioner submits the following for our consideration:[8]
A. Whether or not the Honorable Court of Appeals erred in releasing
Respondent Cuenca from liability as surety under the Indemnity Agreement
for the payment of the principal amount of twelve million two hundred
thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88
dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March
1988, plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered only
availments on SIMCs credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC without
Respondent Cuencas consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity
Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently
complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a)
whether the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity Agreement; and
(b) whether Cuenca waived his right to be notified of and to give consent to
any substitution, renewal, extension, increase, amendment, conversion or
revival of the said credit accommodation. As preliminary matters, the
procedural questions raised by respondent will also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA
Decision, in merely rehashing the arguments already passed upon by the
appellate court, was pro forma; that as such, it did not toll the period for
filing the present Petition for Review.[9] Consequently, the Petition was filed
out of time.[10]
We disagree. A motion for reconsideration is not pro forma just because it
reiterated the arguments earlier passed upon and rejected by the appellate
court. The Court has explained that a movant may raise the same
arguments, precisely to convince the court that its ruling was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to
delay the proceedings. In Marikina Valley Development Corporation v. Flojo,
[12] the Court explained that a pro forma motion had no other purpose than
to gain time and to delay or impede the proceedings. Hence, where the
circumstances of a case do not show an intent on the part of the movant
merely to delay the proceedings, our Court has refused to characterize the
motion as simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right
of appeal, that doctrine should be applied reasonably, rather than literally.
The right to appeal, where it exists, is an important and valuable right.
Public policy would be better served by according the appellate court an
effective opportunity to review the decision of the trial court on the merits,
rather than by aborting the right to appeal by a literal application of the
procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable,
the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort
to other modes must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this Rule may be
cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain
a sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13]
that the aforecited rule was mandatory, and that only when personal service
or filing is not practicable may resort to other modes be had, which must
then be accompanied by a written explanation as to why personal service or
filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective
counsels of Sta. Ines and Cuenca by registered mail in lieu of personal
service due to limitations in time and distance.[14] This explanation
sufficiently shows that personal service was not practicable. In any event,
we find no adequate reason to reject the contention of petitioner and
thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of
the Civil Code, which reads as follows:
ART. 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.
Novation of a contract is never presumed. It has been held that [i]n the
absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point.[15] Indeed, the
following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old
contract is extinguished; and (4) there is a valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between the
old and the new obligations, and that the latter did not extinguish the earlier
one. It further argues that the 1989 Agreement did not change the original
loan in respect to the parties involved or the obligations incurred. It adds
that the terms of the 1989 Contract were not more onerous.[17] Since the
original credit accomodation was not extinguished, it concludes that Cuenca
is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present
in this case. The 1989 Loan Agreement extinguished the obligation[18]
obtained under the 1980 credit accomodation. This is evident from its
explicit provision to liquidate the principal and the interest of the earlier
indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding Indebtedness to the
Lender (the Indebtedness) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness.[19]
(Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989
Loan Agreement were used to pay-off the original indebtedness serves to
strengthen this ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and the
1980 original obligation demonstrate that the two cannot coexist. While the
1980 credit accommodation had stipulated that the amount of loan was not
to exceed P8 million,[22] the 1989 Agreement provided that the loan was
P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and
negative covenants not found in the earlier obligation. As an example of a
positive covenant, Sta. Ines undertook from time to time and upon request
by the Lender, [to] perform such further acts and/or execute and deliver
such additional documents and writings as may be necessary or proper to
effectively carry out the provisions and purposes of this Loan Agreement.
[23] Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it
participate in any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code,
which provides:
ART. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or
extension of the P8 million original accommodation; it was not a novation.
[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to liquidate, not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or
consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be
deemed extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that [a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x x. In an
earlier case,[26] the Court explained the rationale of this provision in this
wise:
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the suretys consent would deprive
the surety of his right to pay the creditor and to be immediately subrogated
to the creditors remedies against the principal debtor upon the maturity
date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period.
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit
Approval Memorandum in holding that the credit accommodation was only
for P8 million, and that it was for a period of one year ending on November
30, 1981. Petitioner objects to the appellate courts reliance on that
document, contending that it was not a binding agreement because it was
not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to
prove the accommodation. Attached to the Complaint as Annex A was a
copy thereof evidencing the accommodation.[27] Moreover, in its Petition
before this Court, it alluded to the Credit Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was
granted by the Bank a credit line in the aggregate amount of Eight Million
Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this purpose, the
Bank issued a Credit Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of
the P8 million credit accommodation as contained in the very document it
presented to the courts. Indeed, it cannot take advantage of that document
by agreeing to be bound only by those portions that are favorable to it, while
denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca
impliedly gave his consent to any modification of the credit accommodation
or otherwise waived his right to be notified of, or to give consent to, the
same.[28] Respondents consent or waiver thereof is allegedly found in the
Indemnity Agreement, in which he held himself liable for the credit
accommodation including [its] substitutions, renewals, extensions,
increases, amendments, conversions and revival. It explains that the
novation of the original credit accommodation by the 1989 Loan Agreement
is merely its renewal, which connotes cessation of an old contract and birth
of another one x x x.[29]
At the outset, we should emphasize that an essential alteration in the terms
of the Loan Agreement without the consent of the surety extinguishes the
latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is
fundamental in the law of suretyship that any agreement between the
creditor and the principal debtor which essentially varies the terms of the
principal contract, without the consent of the surety, will release the surety
from liability.
In this case, petitioners assertion - that respondent consented to the
alterations in the credit accommodation -- finds no support in the text of the
Indemnity Agreement, which is reproduced hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale
Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro
Manila for and in consideration of the credit accommodation in the total
amount of eight million pesos (P8,000,000.00) granted by the SECURITY
BANK AND TRUST COMPANY, a commercial bank duly organized and
existing under and by virtue of the laws of the Philippine, 6778 Ayala
Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor
of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter
referred to as the CLIENT, with the stipulated interests and charges thereon,
evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed
and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the
BANK for the payment , upon demand and without benefit of excussion of
whatever amount or amounts the CLIENT may be indebted to the BANK
under and by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendment, conversions
and revivals of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the CLIENT may owe the
BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses
arising from any agreement or agreements that may have heretofore been
made, or may hereafter be executed by and between the parties thereto,
including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), and
further bind(s) himself/themselves with the CLIENT in favor of the BANK for
the faithful compliance of all the terms and conditions contained in the
aforesaid credit accommodation(s), all of which are incorporated herein and
made part hereof by reference.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the
P8 million limit and the November 30, 1981 term. It did not give the bank or
Sta. Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent who
was solidarily liable. Taking the banks submission to the extreme,
respondent (or his successors) would be liable for loans even amounting to,
say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and
extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more
than what is stipulated. It is strictly construed against the creditor, every
doubt being resolved against enlarging the liability of the surety.[31]
Likewise, the Court has ruled that it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the
doubt should be resolved in favor of the surety x x x. Ambiguous contracts
are construed against the party who caused the ambiguity.[32] In the
absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation,
we cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly
shows that the bank did not have absolute authority to unilaterally change
the terms of the loan accommodation. Indeed, it may do so only upon notice
to the borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original
loan accommodation.[34] Following the banks reasoning, such modification
would not be valid as to Sta. Ines if no notice were given; but would still be
valid as to respondent to whom no notice need be given. The latters liability
would thus be more burdensome than that of the former. Such untenable
theory is contrary to the principle that a surety cannot assume an obligation
more onerous than that of the principal.[35]
The present controversy must be distinguished from Philamgen v. Mutuc,
[36] in which the Court sustained a stipulation whereby the surety consented
to be bound not only for the specified period, but to any extension thereafter
made, an extension x x x that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It
is hereby further agreed that in case of any extension of renewal of the
bond, we equally bind ourselves to the Company under the same terms and
conditions as herein provided without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our
right to be notified of any renewal or extension of the bond which may be
granted under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the
alleged basis of respondents waiver is vague and uncertain. It confers no
clear authorization on the bank or Sta. Ines to modify or extend the original
obligation without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing
surety, petitioner maintains that there was no need for respondent to
execute another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing
surety does not authorize the bank to extend the scope of the principal
obligation inordinately.[37] In Dino v. CA,[38] the Court held that 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.
To repeat, in the present case, the Indemnity Agreement was subject to the
two limitations of the credit accommodation: (1) that the obligation should
not exceed P8 million, and (2) that the accommodation should expire not
later than November 30, 1981. Hence, it was a continuing surety only in
regard to loans obtained on or before the aforementioned expiry date and
not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation, that were obtained in
1986. Certainly, he could not have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety
liable for the loan obtained after the payment of the original one, which was
covered by a continuing surety agreement. At the risk of being repetitious,
we hold that in Dino, the surety Agreement specifically provided that each
suretyship is a continuing one which shall remain in full force and effect until
this bank is notified of its revocation. Since the bank had not been notified of
such revocation, the surety was held liable even for the subsequent
obligations of the principal borrower.
No similar provision is found in the present case. On the contrary,
respondents liability was confined to the 1980 credit accommodation, the
amount and the expiry date of which were set down in the Credit Approval
Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS (joint and solidary
signature) of a major stockholder or corporate officer, as an additional
security for loans granted to corporations. There are at least two reasons for
this. First, in case of default, the creditors recourse, which is normally limited
to the corporate properties under the veil of separate corporate personality,
would extend to the personal assets of the surety. Second, such surety
would be compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank
to have required the JSS of respondent, who was the chairman and
president of Sta. Ines in 1980 when the credit accommodation was granted.
There was no reason or logic, however, for the bank or Sta. Ines to assume
that he would still agree to act as surety in the 1989 Loan Agreement,
because at that time, he was no longer an officer or a stockholder of the
debtor-corporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind himself
further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety
of respondent, without even informing him, smacks of negligence on the
part of the bank and bad faith on that of the principal debtor. Since that Loan
Agreement constituted a new indebtedness, the old loan having been
already liquidated, the spirit of fair play should have impelled Sta. Ines to
ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist
on the JSS of one who was in a position to ensure the payment of the loan.
Even a perfunctory attempt at credit investigation would have revealed that
respondent was no longer connected with the corporation at the time. As it
is, the bank is now relying on an unclear Indemnity Agreement in order to
collect an obligation that could have been secured by a fairly obtained
surety. For its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million credit accommodation. Hence, the
Indemnity Agreement, which had been an accessory to the 1980 credit
accommodation, was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of, or to give
consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether the loan
obtained before the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
JEANETTE D. MOLINO, petitioner, vs. SECURITY DINERS
INTERNATIONAL CORPORATION, respondent.
FACTS:
On 24 July 1987, Jeanette Molino acted as a surety for her brother-in-law,
Danilo Alto, in his application for a local credit card(P10,000.00 credit limit)
with the Security Diners International Corporation (SDIC). A Surety
Undertaking was signed by Jeanette which states that she bound herself
jointly and severally with Danilo to pay SDIC all obligations and charges in
the use of the credit card; and she declared that "any change or novation in
the Agreement shall not release her from the Surety Undertaking," it being
understood that said Undertaking is a continuing one and shall subsist and
bind her until all such obligations, charges, and fees have been fully paid
and satisfied. The application of Danilo was approved by SDIC. On 8
February1988, he requested SDIC to upgrade his Regular Card to Diamond
Card (no credit limit). As a requirement, Danilo secured the approval of
Jeanette who then signed a note indicating her approval to the said request.
On 01 October 1988, Danilo defaulted in the payment ofP166,408.31. SDIC
filed an action for collection against Danilo and Jeanette before the RTC of
Makati. Jeanette claimed that the Surety Undertaking only applies to the
original agreement covering the Regular Card first issued to Danilo and
incurred no liability under the Diamond Card because she did not expressly
give her consent to be a surety thereto; and the upgrading of the card
extinguishes her obligation under the original agreement and Surety
Undertaking.
ISSUE:
Whether the upgrading of the card constituted a novation that will
extinguish Jeanette’s obligation under the original agreement and Surety
Undertaking.
HELD:
The upgrading was a novation because it was committed with the intent of
cancelling and replacing the first card.
However, the novation did not serve to release petitioner from her surety
obligations because in the Surety Undertaking she expressly waived
discharge in case of change or novation in the agreement governing the use
of the first credit card.
The extent of a surety’s liability is determined by the language of the
suretyship contract or bond itself. The Surety Undertaking expressly
provides that petitioner’s liability is solidary. A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to
be inseparable. Although the contract of a surety is in essence secondary
only to a valid principal obligation, his liability to the creditor is direct,
primary and absolute; he becomes liable for the debt and duty of another
although he possesses no direct or personal interest over the obligations
nor does he receive any benefit therefrom. The petition filed by Jeanette
was dismissed for lack of merit.
*************************
Assailed by this petition for review on certiorari is the decision of the Court
of Appeals dated September 28, 1998[1] which held petitioner liable as
surety for the outstanding credit card debts of Danilo Alto with herein
respondent corporation.
The decision of the Court of Appeals satisfactorily sums up the facts that led
to the filing of this case:
The Security Diners International Corporation (SDIC) operates a credit card
system under the name of Diners Club through which it extends credit
accommodation to its cardholders for the purchase of goods and payment
of services from its member establishments to be reimbursed later on by the
cardholder upon proper billing. There are two types of credit cards issued:
one, the Regular (Local) Card which entitles the cardholder to purchase
goods and pay services from member establishments in an amount not
exceeding P10,000.00; and two, the Diamond (Edition) Card which entitles
the cardholder to purchase goods and pay services from member
establishments in unlimited amounts. One of the requirements for the
issuance of either of these cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with
SDIC. He got as his surety his own sister-in-law Jeanette Molino Alto. Thus,
Danilo signed the printed application form (Exhibit A) and Jeanette signed
the Surety Undertaking (Exhibit A-5). Attached to the Application Form was
an Agreement (Use of Diners Club Card), paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an adequate surety or sureties
acceptable to Security Diners who shall be jointly and severally liable with
the cardholder to pay Security Diners all the obligations and charges
incurred and credit extended on the basis of the card. In the event the
surety/sureties furnished the cardholder are discharged the cardholder must
furnish a new surety or sureties acceptable to Security Diners within thirty
(30) days. Otherwise the cardholders privileges shall be automatically
terminated in accordance with Section 11 hereof.
The Surety Undertaking signed by Jeanette states:
I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr.
Danilo Alto to pay SECURITY DINERS INTERNATIONAL CORPORATION,
hereinafter referred to as Security Diners all the obligations and charges
including but not limited to fees, interest, attorneys fees and all other costs
incurred by him/her in connection with the use of the DINERS CLUB CARD
in accordance with the terms and conditions governing the issuance and
use of the Diners Club Card. Any change or novation in the agreement or
any extension of time granted by SECURITY DINERS to pay such
obligations, charges and fees, shall not release me/us from this Surety
Undertaking, it being understood that said undertaking is a continuing one
and shall subsist and bind me/us until all such obligations, charges and fees
have been fully paid and satisfied.
It is understood that the indication of a credit limit to the cardholder shall not
relieve me/us of liability for charges and all other amounts voluntarily
incurred by the cardholder in excess of the credit limit.
On the basis of the completed and signed Application Form and Surety
Undertaking, the SDIC issued to Danilo Diners Card No. 36510293216-
0006. The latter used this card and initially paid his obligations to SDIC. On
February 8, 1988, Danilo wrote SDIC a letter (Exhibit B) requesting it to
upgrade his Regular (Local) Diners Club Card to a Diamond (Edition) one.
As a requirement of SDIC, Danilo secured from Jeanette her approval. The
latter obliged and so on March 2, 1988, she signed a Note (Exhibit C) which
states:
This certifies that I, Jeanette D. Molino, approve of the request of Danilo and
Gloria Alto with Card No. 3651-203216-0006 and 3651-203412-5007 to
upgrade their card from regular to diamond edition.
Danilos request was granted and he was issued a Diamond (Edition) Diners
Club Card. He used this card and made purchases (Exhibits D, D-1 to D-7)
from member establishments. On October 1, 1988 Danilo had incurred
credit charged plus appropriate interest and service charges in the
aggregate amount of P166,408.31. He defaulted in the payment of this
obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did
not pay. So, on November 9, 1988, SDIC filed an action to collect said
indebtedness against Danilo and Jeanette. This was docketed in the
Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381. xxx
[2]
Defendant Danilo Alto failed to file an Answer, and during the pre-trial
conference respondent moved to have the complaint dismissed against him,
without prejudice to a subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC,
petitioner claimed that her liability under the Surety Undertaking was limited
to P10,000.00 and that she did not expressly and categorically agree to act
as surety for Danilo in an amount higher than P10,000.00.[3] By way of
counterclaim, she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision dismissing the
complaint for failure of respondent to prove its case by a preponderance of
the evidence. It found that while petitioner clearly bound herself as surety
under the terms of Danilo Altos Regular Diners Club Card, there was no
evidence that after the card had been upgraded to Diamond (Edition)
petitioner consented or agreed to act as surety for Danilo. Exhibit C or
Exhibit 1, inter alia, which was a note bearing petitioners signature certifying
to her approval of Danilos request to have his card upgraded should be
read simply as a statement of no objection to his request for upgrading, and
not as an assumption of liability for the debts that Danilo may later owe
through the said card.[4] The trial court also took note of the testimony of
Alfredo Vicente, an officer of respondent, who opined that the consent to be
bound as surety to an upgraded card should be categorical[5] and not in a
simple no objection form.
The trial court went on further to state that petitioner was not liable for any
amount, not even for P10,000.00 which is the maximum credit limit for
Regular Diners Club Cards, since at the time of the upgrading Danilo had no
outstanding credit card debts.[6] This is evident from the fact that Danilos
request for upgrading was approved, since one of the requirements for the
approval of a request for the upgrading of a credit card from Regular to
Diamond is that the applicant must have paid all his billings for the last three
months prior to his request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against
defendant Jeanette D. Molino-Alto for failure of the plaintiff to prove its case
by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.[7]
The Court of Appeals found contrary to the lower court, and declared that
the Surety Undertaking signed by petitioner when Danilo Alto first applied for
a Regular Diners Club Card clearly applied to the unpaid purchases of
Danilo Alto under the Diamond card. In holding thus, the Court of Appeals
referred to the terms of the said Surety Undertaking, which stated that any
change or novation in the agreement on the use of the Diners Club card
does not release the surety from his obligations, it being understood that the
undertaking is a continuing one which subsists until all obligations and
charges under the subject credit card are paid and satisfied. It also cited
Pacific Banking Corporation vs. Intermediate Appellate Court,[8] a 1991
decision which held the surety liable to the extent of the credit cardholders
indebtedness, under the clear terms of the Guarantors Undertaking that the
surety signed with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court
to conclude that petitioner was completely relieved of liability under Danilo
Altos credit card since the Surety Undertaking she signed remained valid
and enforceable even after the upgrading of the said card; besides,
petitioner herself admitted that she was liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorneys fees (stipulated in
the Agreement for the Use of Diners Club Card) from 25% to 10% of the
amount due, judging this to be a more reasonable rate under the
circumstances.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the appealed Decision is REVERSED and one is rendered
ordering defendant-appellee Jeanette D. Molino-Alto to pay plaintiff-
appellant Security Diners International, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per
month from November 9, 1988 until the obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the
preceding paragraph as attorneys fees; and
3. Costs.
SO ORDERED.[9]
Petitioners motion for reconsideration of the above decision was denied for
lack of merit on December 1, 1998. Hence, the petition before us, which
assigns the following errors:
I
The material findings of the Court of Appeals, which are contrary to those of
the lower court, are erroneous.
II
The findings of the Court of Appeals are conflicting and/or without citation of
specific evidence on which they are based.
III
The Court of Appeals erred in disregarding the applicable legal principle
established by this Honorable Court that, unlike in ordinary solidary debtors,
the surety does not incur liability unless the principal debtor is held liable.
[10]
Petitioner posits that she did not expressly give her consent to be bound as
surety under the upgraded card. She points out that the note she signed,
marked as Exhibit C, registering her approval of the request of Danilo Alto to
upgrade his card, renders the Surety Undertaking she signed under the
terms of the previous card without probative value, immaterial and irrelevant
as it covers only the liability of the surety in the use of the regular credit card
by the principal debtor xxx .[11] She argues further that because the
principal debtor, Danilo Alto, was not held liable, having been dropped as a
defendant, she could not be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond
card revolves around the effect of the upgrading by Danilo Alto of his card.
Was the upgrading a novation of the original agreement governing the use
of Danilo Altos first credit card, as to extinguish that obligation and the
Surety Undertaking which was simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways:
by explicit declaration, or by material incompatibility (implied novation). As
we stated in Fortune Motors vs. Court of Appeals, supra:
xxx The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the first. Novation must be
established either by the express terms of the new agreement or by the acts
of the parties clearly demonstrating the intent to dissolve the old obligation
as a consideration for the emergence of the new one. The will to novate,
whether totally or partially, must appear by express agreement of the
parties, or by their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original
agreement covering the first credit card issued to Danilo Alto, basically since
it was committed with the intent of cancelling and replacing the said card.
However, the novation did not serve to release petitioner from her surety
obligations because in the Surety Undertaking she expressly waived
discharge in case of change or novation in the agreement governing the use
of the first credit card.
The nature and extent of petitioners obligations are set out in clear and
unmistakable terms in the Surety Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all
obligations and charges in the use of the Diners Club Card, including fees,
interest, attorneys fees, and costs;
2. She declared that any change or novation in the Agreement or any
extension of time granted by SECURITY DINERS to pay such obligation,
charges, and fees, shall not release (her) from this Surety Undertaking;
3. (S)aid undertaking is a continuous one and shall subsist and bind (her)
until all such obligations, charges and fees have been fully paid and
satisfied; and
4. The indication of a credit limit to the cardholder shall not relieve (her) of
liability for charges and all other amounts voluntarily incurred by the
cardholder in excess of said credit limit.[12]
We cannot give any additional meaning to the plain language of the subject
undertaking. The extent of a suretys liability is determined by the language
of the suretyship contract or bond itself.[13] Article 1370 of the Civil Code
provides: 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.
This case is no different from Pacific Banking Corporation vs. IAC, supra,
correctly applied by the Court of Appeals, which involved a Guarantors
Undertaking (although thus denominated, it was in substance a contract of
surety) signed by the husband for the credit card application of his wife. Like
herein petitioner, the husband also argued that his liability should be limited
to the credit limit allowed under his wifes card but the Court declared him
liable to the full extent of his wifes indebtedness. Thus:
We need not look elsewhere to determine the nature and extent of private
respondent Roberto Regala, Jr.s undertaking. As a surety he bound himself
jointly and severally with the debtor Celia Regala to pay the Pacific Banking
Corporation upon demand, any and all indebtedness, obligations, charges
or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation. xxx
xxxxxxxxxxx
It is likewise not disputed by the parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia Regala succeeded in using
the card beyond the original period of its effectivity, October 29, 1979. We
do not agree, however, that Roberto Jr.s liability should be limited to that
extent. Private respondent Roberto Regala, Jr., as surety of his wife,
expressly bound himself up to the extent of the debtors (Celias)
indebtedness likewise expressly waiving any discharge in case of any
change or novation of the terms and conditions in connection with the
issuance of the Pacificard credit card. Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear under
the Guarantors Undertaking Roberto signed, thus:
x x x. Any changes of or novation in the terms and conditions in connection
with the issuance or use of said Pacificard, or any extension of time to pay
such obligations, charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that the undertaking is
a continuing one and shall subsist and bind me/us until all the liabilities of
the said Celia Syjuco Regala have been fully satisified or paid. (italics
supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety,
a pronouncement should first be made declaring the principal debtor liable
before she herself can be proceeded against. The argument, which is
hinged upon the dropping of Danilo as defendant in the complaint, is bereft
of merit.
The Surety Undertaking expressly provides that petitioners liability is
solidary. A surety is considered in law as being the same party as the debtor
in relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable.[14] Although the contract
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor is direct, primary and absolute; he becomes liable for
the debt and duty of another although he possesses no direct or personal
interest over the obligations nor does he receive any benefit therefrom.[15]
There being no question that Danilo Alto incurred debts of P166,408.31 in
credit card advances, an obligation shared solidarily by petitioner,
respondent was certainly within its rights to proceed singly against
petitioner, as surety and solidary debtor, without prejudice to any action it
may later file against Danilo Alto, until the obligation is fully satisfied. This is
so provided 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 demand made against one of them shall
not be an obstacle to those which may be subsequently directed against the
others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and possesses
considerable work experience in several banks. She knew the full import
and consequence of the Surety Undertaking that she executed. She had the
option to withdraw her suretyship when Danilo upgraded his card to one that
permitted unlimited purchases, but instead she approved the upgrading.
While we commiserate in the financial predicament she now faces, it is also
evident that the liability she incurred is only the legitimate consequence of
an undertaking that she freely and intelligently obliged to. Prospective
sureties to credit card applicants would be well-advised to study carefully
the terms of the agreements prepared by the credit card companies before
giving their consent, and pay heed to stipulations that could lead to onerous
effects, like in the present case where the credit applied for was limitless. At
the same time, it bears articulating that although courts in appropriate cases
may equitably reduce the award for penalty as provided under such
suretyship agreements if the same is iniquitous or unconscionable,[16] we
are unable to give relief to petitioner by way of reducing the amount of the
principal liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit. The decision of
the Court of Appeals is AFFIRMED in all respects.
SO ORDERED.
VISAYAN Surety vs. CA ( 364 SCRA 631)
FACTS:
The case is a petition to review and set aside a decision of the Court of
Appeals affirming that of the Regional Trial Court, Biñan, Laguna, Branch
24, holding the surety liable to the intervenor in lieu of the principal on a
replevin bond
On February 2, 1993, the spouses Danilo and Mila Ibajan filed with the
Regional Trial Court, Laguna, Biñan a complaint against spouses Jun and
Susan Bartolome, for replevin to recover from them the possession of an
Isuzu jeepney, with damages. Plaintiffs Ibajan alleged that they were the
owners of an Isuzu jeepney which was forcibly and unlawfully taken by
defendants Jun and Susan Bartolome on December 8, 1992, while parked
at their residence. On February 8, 1993, plaintiffs filed a replevin bond
through petitioner Visayan Surety & Insurance Corporation. The contract of
surety provided that Danilo and Mila are jointly and severally binding
themselves in the sum of Three Hundred Thousand Pesos (P300,000.00)
for the return of the property to the defendant, if the return thereof be
adjudged, and for the payment to the defendant of such sum as he/she may
recover from the plaintiff in the action.”
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed
with the trial court a motion for leave of court to intervene, stating that he
has a right superior to the plaintiffs over the ownership and possession of
the subject vehicle and the he trial court granted the motion to intervene. On
August 8, 1993, the trial court issued an order granting the motion to quash
the writ of replevin and ordering plaintiff Mila Ibajan to return the subject
jeepney to the intervenor Dominador Ibajan.
On September 1, 1993, The trial court issued a writ of replevin in favor of
intervenor Dominador Ibajan but it was returned unsatisfied and on March 7,
1994, intervenor Dominador Ibajan filed with the trial court a
motion/application for judgment against plaintiffs’ bond.
Respective motions for reconsideration were made by both parties and
petitioner Visayan Surety contends that it is not liable to the intervenor,
Dominador Ibajan, because the intervention of the intervenor makes him a
party to the suit, but not a beneficiary to the plaintiffs’ bond. The intervenor
was not a party to the contract of surety, hence, he was not bound by the
contract. Hence, this petition.
ISSUE:
Whether the surety is liable to an intervenor on a replevin bond posted by
petitioner in favor of respondents.?
HELD:
The petition is meritorious. It is a basic principle in law that contracts can
bind only the parties who had entered into it; it cannot favor or prejudice a
third person. Contracts take effect between the parties, their assigns, and
heirs, except in cases where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law.
The obligation of a surety cannot be extended by implication beyond its
specified limits. “When a surety executes a bond, it does not guarantee that
the plaintiff’s cause of action is meritorious, and that it will be responsible for
all the costs that maybe adjudicated against its principal in case the action
fails. The extent of a surety’s liability is determined only by the clause of the
contract of suretyship.” A contract of surety is not presumed; it cannot
extend to more than what is stipulated.
Since the obligation of the surety cannot be extended by implication, it
follows that the surety cannot be held liable to the intervenor when the
relationship and obligation of the surety is limited to the defendants
specified in the contract of surety.
The Case
The case is a petition to review and set aside a decision[1] of the Court of
Appeals affirming that of the Regional Trial Court, Bian, Laguna, Branch 24,
holding the surety liable to the intervenor in lieu of the principal on a replevin
bond.
The Facts
The facts, as found by the Court of Appeals,[2] are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed
with the Regional Trial Court, Laguna, Bian a complaint against spouses
Jun and Susan Bartolome, for replevin to recover from them the possession
of an Isuzu jeepney, with damages. Plaintiffs Ibajan alleged that they were
the owners of an Isuzu jeepney which was forcibly and unlawfully taken by
defendants Jun and Susan Bartolome on December 8, 1992, while parked
at their residence.
On February 8, 1993, plaintiffs filed a replevin bond through petitioner
Visayan Surety & Insurance Corporation. The contract of surety provided
thus:
WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN
SURETY & INSURANCE CORP., of Cebu, Cebu, with branch office at
Manila, jointly and severally bind ourselves in the sum of Three Hundred
Thousand Pesos (P300,000.00) for the return of the property to the
defendant, if the return thereof be adjudged, and for the payment to the
defendant of such sum as he/she may recover from the plaintiff in the
action.[3]
On February 8, 1993, the trial court granted issuance of a writ of replevin
directing the sheriff to take the Isuzu jeepney into his custody.
Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject
vehicle and turned over the same to plaintiff spouses Ibajan.[4]
On February 15, 1993, the spouses Bartolome filed with the trial court a
motion to quash the writ of replevin and to order the return of the jeepney to
them.
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed
with the trial court a motion for leave of court to intervene, stating that he
has a right superior to the plaintiffs over the ownership and possession of
the subject vehicle.
On June 1, 1993, the trial court granted the motion to intervene.
On August 8, 1993, the trial court issued an order granting the motion to
quash the writ of replevin and ordering plaintiff Mila Ibajan to return the
subject jeepney to the intervenor Dominador Ibajan.[5]
On August 31, 1993, the trial court ordered the issuance of a writ of replevin
directing the sheriff to take into his custody the subject motor vehicle and to
deliver the same to the intervenor who was the registered owner.[6]
On September 1, 1993, the trial court issued a writ of replevin in favor of
intervenor Dominador Ibajan but it was returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a
motion/application for judgment against plaintiffs bond.
On June 6, 1994, the trial court rendered judgement the dispositive portion
of which reads:
WHEREFORE, in the light of the foregoing premises, judgment is hereby
rendered in favor of Dominador Ibajan and against Mila Ibajan and the
Visayan Surety and Insurance Corporation ordering them to pay the former
jointly and severally the value of the subject jeepney in the amount of
P150,000.00 and such other damages as may be proved by Dominador
Ibajan plus costs.[7]
On June 28, 1994, Visayan Surety and Insurance Corporation and Mila
Ibajan filed with the trial court their respective motions for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance Corporation
(hereafter Visayan Surety) appealed the decision to the Court of Appeals.[8]
On August 30, 1996, the Court of Appeals promulgated its decision affirming
the judgment of the trial court.[9] On September 19, 1996, petitioner filed a
motion for reconsideration.[10] On December 2, 1996, the Court of Appeals
denied the motion for reconsideration for lack of merit.[11]
Hence, this petition.[12]
The Issue
The issue in this case is whether the surety is liable to an intervenor on a
replevin bond posted by petitioner in favor of respondents.[13]
Respondent Dominador Ibajan asserts that as intervenor, he assumed the
personality of the original defendants in relation to the plaintiffs bond for the
issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the intervenor,
Dominador Ibajan, because the intervention of the intervenor makes him a
party to the suit, but not a beneficiary to the plaintiffs bond. The intervenor
was not a party to the contract of surety, hence, he was not bound by the
contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally impleaded in a proceeding, who has
legal interest in the matter in litigation, or in the success of either of the
parties, or an interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property in the custody of
the court or of an officer thereof.[14]
May an intervenor be considered a party to a contract of surety which he did
not sign and which was executed by plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the parties who had
entered into it; it cannot favor or prejudice a third person.[15] Contracts take
effect between the parties, their assigns, and heirs, except in cases where
the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.[16]
A contract of surety is an agreement where a party called the surety
guarantees the performance by another party called the principal or obligor
of an obligation or undertaking in favor of a third person called the obligee.
[17] Specifically, suretyship is a contractual relation resulting from an
agreement whereby one person, the surety, engages to be answerable for
the debt, default or miscarriage of another, known as the principal.[18]
The obligation of a surety cannot be extended by implication beyond its
specified limits.[19] When a surety executes a bond, it does not guarantee
that the plaintiffs cause of action is meritorious, and that it will be
responsible for all the costs that may be adjudicated against its principal in
case the action fails. The extent of a suretys liability is determined only by
the clause of the contract of suretyship.[20] A contract of surety is not
presumed; it cannot extend to more than what is stipulated.[21]
Since the obligation of the surety cannot be extended by implication, it
follows that the surety cannot be held liable to the intervenor when the
relationship and obligation of the surety is limited to the defendants
specified in the contract of surety.
WHEREFORE, the Court REVERSES and sets aside the decision of the
Court of Appeals in CA-G. R. CV No. 49094. The Court rules that petitioner
Visayan Surety & Insurance Corporation is not liable under the replevin
bond to the intervenor, respondent Dominador V. Ibajan.
No costs.
SO ORDERED.
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN
LUMBER MANUFACTURING CORPORATION, petitioners,
vs. BA FINANCE CORPORATION, respondent.
Facts:
On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors
Corporation, executed in favor of plaintiff-appellant a Continuing Suretyship
Agreement, in which he "jointly and severally unconditionally" guaranteed
the "full, faithful and prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA Finance Corporation.
On February 3, 1983, Palawan Lumber Manufacturing Corporation
represented by Joseph L.G. Chua, George D. Tan, Edgar C. Rodrigueza
and Joselito C. Baltazar, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 19-20). On the same date,
South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F.
Tablante, likewise executed a Continuing Suretyship Agreement in which
said corporation "jointly and severally unconditionally" guaranteed the "full,
faithful and prompt payment and discharge of any and all indebtedness" of
Fortune Motors Corporation to BA Finance Corporation.
Fortune Motors Corporation thereafter executed trust receipts covering the
motor vehicles delivered to it by CARCO under which it agreed to remit to
the Entruster (CARCO) the proceeds of any sale and immediately surrender
the remaining unsold vehicles. ). The drafts and trust receipts were
assigned to plaintiff-appellant, under Deeds of Assignment executed by
CARCO.
Upon failure of the defendant-appellant Fortune Motors Corporation to pay
the amounts due under the drafts and to remit the proceeds of motor
vehicles sold or to return those remaining unsold in accordance with the
terms of the trust receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante,
Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D.
Tan and Joselito C. Baltazar (Folder of Exhibits, pp. 29-37). Since the
defendants-appellants failed to settle their outstanding account with plaintiff-
appellant, the latter filed on December 22, 1983 a complaint for a sum of
money with prayer for preliminary attachment, with the Regional Trial Court
of Manila.
Issue: WON respondent BAFC has a valid cause of action for a sum of
money following the drafts and trust receipts transactions.
Held: As an entruster, respondent BAFC must first demand the return of the
unsold vehicles from Fortune Motors Corporation, pursuant to the terms of
the trust receipts. Having failed to do so, petitioners had no cause of action
whatsoever against Fortune Motors Corporation and the action for collection
of sum of money was, therefore, premature.
A trust receipt is a security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance
the importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.9 In the event of default by the entrustee on his
obligations under the trust receipt agreement, it is not absolutely necessary
that the entruster cancel the trust and take possession of the goods to be
able to enforce his rights thereunder.
The Case
The case is a petition to set aside the decision[1] of the Court of Appeals,
the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed Decision (as amended
by that Order of July 22, 1992) of the lower court in Civil Case No. 21944 is
hereby AFFIRMED with the MODIFICATION that defendant-appellee South
City Homes, Inc. is hereby ordered to pay, jointly and severally, with Fortune
Motors Corporation, Palawan Lumber Manufacturing Corporation and
Joseph L. G. Chua, the outstanding amounts due under the six (6) drafts
and trust receipts, with interest thereon at the legal rate from the date of
filing of this case until said amounts shall have been fully paid, as follows:
Date of Draft Amount Balance Due
July 26, 1983 P 244,269.00 P 198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10
and the attorneys fees and costs of suit.
SO ORDERED.[2]
The Facts
The facts, as found by the Court of Appeals, are as follows:
The present controversy relates to the rights of an assignee (financing
company) of drafts and trust receipts backed up by sureties, in the event of
default by the debtor (car dealer) to whom the assignor creditor (car
manufacturer) sold and delivered motor vehicles for resale. A consistent
ruling on these cases is hereby reiterated: that a surety may secure
obligations incurred subsequent to the execution of the surety contract.
Prior to the transactions covered by the subject drafts and trust receipts,
defendant-appellant Fortune Motors Corporation (Phils.) has been availing
of the credit facilities of plaintiff-appellant BA Finance Corporation. On
January 17, 1983, Joseph L. G. Chua, President of Fortune Motors
Corporation, executed in favor of plaintiff-appellant a Continuing Suretyship
Agreement, in which he jointly and severally unconditionally guaranteed the
full, faithful and prompt payment and discharge of any and all indebtedness
of Fortune Motors Corporation to BA Finance Corporation (Folder of
Exhibits, pp. 21-22).
On February 3, 1983, Palawan Lumber Manufacturing Corporation
represented by Joseph L.G. Chua, George D. Tan, Edgar C. Rodrigueza
and Joselito C. Baltazar, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 19-20). On the same date,
South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F.
Tablante, likewise executed a Continuing Suretyship Agreement in which
said corporation jointly and severally unconditionally guaranteed the full,
faithful and prompt payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation (Folder of Exhibits,
pp. 17-18).
Subsequently, Canlubang Automotive Resources Corporation (CARCO)
drew six (6) Drafts in its own favor, payable thirty (30) days after sight,
charged to the account of Fortune Motors Corporation, as follows:
Date of Draft Amount

July 26, 1983 P 244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
Fortune Motors Corporation thereafter executed trust receipts covering the
motor vehicles delivered to it by CARCO under which it agreed to remit to
the Entruster (CARCO) the proceeds of any sale and immediately surrender
the remaining unsold vehicles (Folder of Exhibits, pp. 2, 5, 7-A, 9, 12 and
15). The drafts and trust receipts were assigned to plaintiff-appellant, under
Deeds of Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B,
10, 13 and 16).
Upon failure of the defendant-appellant Fortune Motors Corporation to pay
the amounts due under the drafts and to remit the proceeds of motor
vehicles sold or to return those remaining unsold in accordance with the
terms of the trust receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante,
Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D.
Tan and Joselito C. Baltazar (Folder of Exhibits, pp. 29-37). Since the
defendants-appellants failed to settle their outstanding account with plaintiff-
appellant, the latter filed on December 22, 1983 a complaint for a sum of
money with prayer for preliminary attachment, with the Regional Trial Court
of Manila, Branch 1, which was docketed as Civil Case No. 83-21944
(Record, pp. 1-12). Plaintiff-appellant filed a surety bond in the amount of
P3,391,546.56 and accordingly, Judge Rosalio C. Segundo ordered the
issuance of a writ of preliminary attachment on January 3, 1984 (Record,
pp. 37-47). Defendants Fortune Motors Corporation, South City Homes,
Inc., Edgar C. Rodrigueza, Aurelio F. Tablante, Palawan Lumber
Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito
C. Baltazar filed a Motion to Discharge Attachment, which was opposed by
plaintiff-appellant (Record, pp. 49-56). In an Order dated January 11, 1984,
Judge Segundo dissolved the writ of attachment except as against
defendant Fortune Motors Corporation and set the said incident for hearing
(Record, p. 57). On January 19, 1984, the defendants filed a Motion to
Dismiss. Therein, they alleged that conventional subrogation effected a
novation without the consent of the debtor (Fortune Motors Corporation)
and thereby extinguished the latters liability; that pursuant to the trust
receipt transaction, it was premature under P. D. No. 115 to immediately file
a complaint for a sum of money as the remedy of the entruster is an action
for specific performance; that the suretyship agreements are null and void
for having been entered into without an existing principal obligation; and that
being such sureties does not make them solidary debtors (Record, pp. 58-
64).
After due hearing, the court denied the motion to discharge attachment with
respect to defendant Fortune Motors Corporation as well as the motion to
dismiss by the defendants (Record, pp. 68 and 87). In their Answer,
defendants stressed that their obligations to the creditor (CARCO) was
extinguished by the assignment of the drafts and trust receipts to plaintiff-
appellant without their knowledge and consent, and pursuant to legal
provision on conventional subrogation a novation was effected, thereby
extinguishing the liability of the sureties; that plaintiff-appellant failed to
immediately demand the return of the goods under the trust receipt
agreements or exercise the courses of action by the entruster as provided
for under P. D. No. 115; and that at the time the suretyship agreements were
entered into, there were no principal obligations, thus rendering them null
and void. A counterclaim for the award of actual, moral and exemplary
damages was prayed for by defendants (Record, pp. 91-110).
During the pre-trial, efforts to reach a compromise was not successful, and
in view of the retirement of Judge Rosalio C. Segundo of RTC Manila,
Branch 1, the case was-re-raffled off to Branch XXXIII, presided over by
Judge Felix V. Barbers (Record, pp. 155-160).
Fortune Motors Corporation filed a motion to lift the writ of attachment
covering three (3) vehicles described in the Third-Party Claim filed with the
Office of Deputy Sheriff Jorge C. Victorino (RTC, Branch 1) by Fortune
Equipment, Inc. which was opposed by plaintiff-appellant (Record, pp. 173-
181). On June 15, 1984, Deputy Sheriff Jorge C. Victorino issued a Notice
of Levy Upon Personal Properties Pursuant to Order of Attachment which
was duly served on defendant Fortune Motors Corporation (Record, pp.
191-199). In an Order dated April 28, 1986, the court a quo denied the
motion to lift the writ of attachment on three (3) vehicles described in the
Third-Party Claim filed by Fortune Equipment Inc. (Record, p. 207). On
motion of their respective counsel, the trial court granted the parties time to
sit down and appraise the machineries and spare parts owned by defendant
Fortune Motors Corporation which are now in the possession of plaintiff
corporation by virtue of the attachment. A series of conferences was allowed
by the court, as means toward possible compromise agreement. In an Order
dated June 2, 1987, the case was returned to Branch I, now presided over
by Judge Rebecca G. Salvador (Record, p. 237). The pre-trial period was
terminated and the case was set for trial on the merits (Record, p. 259).
Acting on the motion to sell levied properties filed by defendant George D.
Tan, the trial court ordered the public sale of the attached properties
(Record, p. 406). The court likewise allowed the complaint-in-intervention
filed by Fortune Equipment Inc. and South Fortune Motors Corporation who
claimed ownership of four (4) vehicles earlier seized and attached (Record,
p. 471-475). Plaintiff corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so attached but
denied the rest of intervenors allegations (Record, pp. 479-482). Thereafter,
the parties submitted their respective pre-trial briefs on the complaint-in-
intervention, and after the submission of evidence thereon, the case was
submitted for decision (Record, pp. 573-577).
On November 25, 1991, the lower court rendered its judgment, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing
Corporation and Joseph Chua, jointly and severally to pay the plaintiff on
the July 27, 1983 Draft, the sum of P324,767.41 with the interest thereon at
the legal rate from the date of filing of this case, December 21, 1983 until
the amount shall have been fully paid;
2. Ordering defendants Fortune Motors, Palawan Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the plaintiff on
the July 26, 1983 Draft, the sum of P198,659.52 with interest thereon at the
legal rate from the date of filing of this case, until the amount shall have
been fully paid;
3. Ordering defendant Fortune Motors, Palawan Manufacturing Corporation
and Joseph Chua jointly and severally to pay to the plaintiff on the July 28,
1983 Draft the sum of P1,138,941.00 with interest thereon at the legal rate
from the date of filing of this case, until the amount shall have been fully
paid;
4. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the plaintiff on
the August 2, 1983 Draft, the sum of P244,269.00 with interest thereon at
the legal rate from the date of filing of this case, until the amount shall have
been fully paid;
5. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the plaintiff on
the August 5, 1983 Draft the sum of P275,079.60 with interest thereon at
the legal rate from the date of the filing of this case, until the amount shall
have been fully paid;
6. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the plaintiff on
the August 8, 1983 Draft the sum of P475,046.10 with interest thereon at
legal rate from the date of the filing of this case, until the amount shall been
fully paid;
7. Ordering defendant Fortune Motors, Palawan Lumber Manufacturing
Corporation and Joseph Chua jointly and severally to pay the sum of
P300,000.00 as attorneys fees and the costs of this suit;
8. Dismissing plaintiffs complaint against South City Homes, Aurelio
Tablante, Joselito Baltazar, George Tan and Edgar Rodrigueza and the
latters counterclaim for lack of basis;
9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor Fortune
Equipment the Mitsubishi Truck Canter with Motor No. 310913 and Chassis
No. 513234;
10. Dismissing the complaint-in-intervention in so far as the three other
vehicles mentioned in the complaint-in- intervention are concerned for lack
of cause of action;
11. Dismissing the complaint-in-intervention against Fortune Motor for lack
of basis; and
12. Ordering the parties-in-intervention to bear their respective damages,
attorneys fees and the costs of the suit.
Upon execution, the sheriff may cause the judgment to be satisfied out of
the properties attached with the exception of one (1) unit Mitsubishi Truck
Canter with Motor No. 310913 and Chassis No. 513234, if they be sufficient
for that purpose. The officer shall make a return in writing to the court of his
proceedings. Whenever the judgment shall have been paid, the officer, upon
reasonable demand must return to the judgment debtor the attached
properties remaining in his hand, and any of the proceeds of the properties
not applied to the judgment.
SO ORDERED.
On two (2) separate motions for reconsideration, one filed by plaintiffs-
intervenors dated December 18, 1991 and the other by plaintiff dated
December 26, 1991, the trial court issued an Order dated July 22, 1992
amending its Decision dated November 25, 1991. Specifically, said Order
amended paragraphs 9 and 10 thereof and deleted the last paragraph of the
said Decision.
Paragraphs 9 and 10 now read:
9. Ordering Deputy Sheriff Jorge C. Victorino to return to Intervenor Fortune
Equipment, Inc. the Mitsubishi Truck Canter with Motor No. 310913 and
Chassis No. 513234; Mitsubishi Truck Canter with Motor No. 4D30-313012
and Chassis No. 513696, and Fuso Truck with Motor No. 006769 and
Chassis No. 20756, and to Intervenor South Fortune Motors Corporation the
Cimaron Jeepney with Plate No. NET-849;
10. Ordering the plaintiff, in the event the motor vehicles could no longer be
returned to pay the estimated value thereof, i.e., P750,000.00 for the three
trucks, and P5,000.00 for the Cimaron Jeepney, to the plaintiffs-intervenors.
x x x (Records, pp. 664-665)
Plaintiffs BA Finance Corporation, defendants Fortune Motors Corp. (Phils.)
and Palawan Lumber Manufacturing Corporation, and intervenors Fortune
Equipment and South Fortune Motors, interposed the present appeal and
filed their respective Briefs.[3]
On September 8, 1998, the Court of Appeals promulgated a decision, the
dispositive portion of which is quoted in the opening paragraph of this
decision.
Hence, this appeal.[4]
The Issues
The issues presented are: (1) whether the suretyship agreement is valid; (2)
whether there was a novation of the obligation so as to extinguish the
liability of the sureties; and (3) whether respondent BAFC has a valid cause
of action for a sum of money following the drafts and trust receipts
transactions.[5]
The Courts Ruling
On the first issue, petitioners assert that the suretyship agreement they
signed is void because there was no principal obligation at the time of
signing as the principal obligation was signed six (6) months later. The Civil
Code, however, allows a suretyship agreement to secure future loans even
if the amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for future debts, the
amount of which is not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of Appeals,[6] we held:
To fund their acquisition of new vehicles (which are later retailed or resold to
the general public), car dealers normally enter into wholesale automotive
financing schemes whereby vehicles are delivered by the manufacturer or
assembler on the strength of trust receipts or drafts executed by the car
dealers, which are backed up by sureties. These trust receipts or drafts are
then assigned and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with the
corresponding right to collect such payment from the car dealers and/or the
sureties. In this manner, car dealers are able to secure delivery of their
stock-in-trade without having to pay cash therefor; manufacturers get paid
without any receivables/collection problems; and financing companies earn
their margins with the assurance of payment not only from the dealers but
also from the sureties. When the vehicles are eventually resold, the car
dealers are supposed to pay the financing companies -- and the business
goes merrily on. However, in the event the car dealer defaults in paying the
financing company, may the surety escape liability on the legal ground that
the obligations were incurred subsequent to the execution of the surety
contract?
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.
Petitioners next posit (second issue) that a novation, as a result of the
assignment of the drafts and trust receipts by the creditor (CARCO) in favor
of respondent BAFC without the consent of the principal debtor (Fortune
Motors), extinguished their liabilities.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor.[7] As a consequence, the third party
steps into the shoes of the original creditor as subrogee of the latter.
Petitioners obligations were not extinguished. Thus:
x x x Moreover, in assignment, the debtors consent is not essential for the
validity of the assignment (Art. 1624 in relation to Art. 1475, Civil Code), his
knowledge thereof affecting only the validity of the payment he might make
(Article 1626, Civil Code).
Article 1626 also shows that payment of an obligation which is already
existing does not depend on the consent of the debtor. It, in effect,
mandates that such payment of the existing obligation shall already be
made to the new creditor from the time the debtor acquires knowledge of
the assignment of the obligation.
The law is clear that the debtor had the obligation to pay and should have
paid from the date of notice whether or not he consented.
We have ruled in Sison & Sison vs. Yap Tico and Avancea, 37 Phil. 587
[1918] that definitely, consent is not necessary in order that assignment may
fully produce legal effects. Hence, the duty to pay does not depend on the
consent of the debtor. Otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the debtors refusal to
give consent.
What the law requires in an assignment of credit is not the consent of the
debtor but merely notice to him. A creditor may, therefore, validly assign his
credit and its accessories without the debtors consent (National Investment
and Development Co. v. De Los Angeles, 40 SCRA 489 [1971]. The
purpose of the notice is only to inform that debtor from the date of the
assignment, payment should be made to the assignee and not to the
original creditor.[8]
Petitioners finally posit (third issue) that as an entruster, respondent BAFC
must first demand the return of the unsold vehicles from Fortune Motors
Corporation, pursuant to the terms of the trust receipts. Having failed to do
so, petitioners had no cause of action whatsoever against Fortune Motors
Corporation and the action for collection of sum of money was, therefore,
premature. A trust receipt is a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of
the merchandise imported or purchased.[9] In the event of default by the
entrustee on his obligations under the trust receipt agreement, it is not
absolutely necessary that the entruster cancel the trust and take possession
of the goods to be able to enforce his rights thereunder. We ruled:
x x x Significantly, the law uses the word may in granting to the entruster the
right to cancel the trust and take possession of the goods. Consequently,
petitioner has the discretion to avail of such right or seek any alternative
action, such as a third party claim or a separate civil action which it deems
best to protect its right, at any time upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust agreement.[10]
The Judgment
WHEREFORE, the appealed decision is hereby AFFIRMED. However, the
award of attorneys fees is deleted.
No costs.
SO ORDERED.
Escaño v. Ortigas, Jr.526 SCRA 26 (June 29, 2007)
Facts:
On April 28, 1980, Private Development Corporation of the Philippines
(PDCP) entered into a loanagreement with Falcon Minerals, Inc. (Falcon)
amounting to $320,000.00 subject to terms and conditions.[
“Nagpautang ang PDCP sa Falcon ng $320K
]On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George A.
Scholey, and George T. Scholeyexecuted an Assumption of Solidary Liability
“to assume in [their] individual capacity, solidary liability with[Falcon] for due
and punctual payment” of the loan contracted by Falcon with PDCP. Two (2)
separate guaranties were executed to guarantee payment of the same loan
by other stockholdersand officers of Falcon, acting in their personal and
individual capacities. One guaranty was executed byEscaño, Silos, Silverio,
Inductivo and Rodriguez. Two years later, an agreement developed to cede
control of Falcon to Escaño, Silos and Matti. Contractswere executed
whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already
deceasedGeorge T. Scholey assigned their shares of stock in Falcon to
Escaño, Silos and Matti. An Undertakingdated June 11, 1982 was executed
by the concerned parties, namely: with Escaño, Silos and Matti
as“SURETIES” and Ortigas, Inductivo and Scholeys as “OBLIGORS”Falcon
eventually availed of the sum of $178,655.59 from the credit line extended
by PDCP. It would alsoexecute 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, thereremained a subsisting deficiency of Php
5,031,004.07 which falcon did not satisfy despite demand.
Issue:
Whether the obligation to repay is solidary, as contended by respondent and
the lower courts, ormerely joint as argued by petitioners.
Held/Ruling:
In case, there is a concurrence of two or more creditors or of two or more
debtors in one and thesame obligation, Article 1207 of the Civil Code states
that among them, “[t]here is a solidary liability onlywhen the obligation
expressly so states, or when the law or the nature of the obligation
requiressolidarity.” 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 morecreditors or of two or more debtors in one and
the same obligation, and in the absence of express andindubitable 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 characterto prove such fact with a
preponderance of evidence.Note that Article 2047 itself specifically calls for
the application of the provisions on joint andsolidary obligations to
suretyship contracts. 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) infavor of the one who paid (i.e., the surety).[
However, a significant distinction still lies between a joint andseveral debtor,
on one hand, and a surety on the other. Solidarity signifies that the creditor
can compelany 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
seekreimbursement for the sums they paid out to the creditor. In the case of
joint and several debtors, Article1217 makes plain that the solidary debtor
who effected the payment to the creditor “may claim from hisco-debtors
only the share which corresponds to each, with the interest for the payment
alreadymade.” Such solidary debtor will not be able to recover from the co-
debtors the full amount already paid tothe 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 asthe surety is solidarily bound with the principal
debtor to the creditor, the surety who does pay the creditorhas the right to
recover the full amount paid, and not just any proportional share, from the
principal debtoror debtors. Such right to full reimbursement falls within the
other rights, actions and benefits which pertainto the surety by reason of the
subsidiary obligation assumed by the surety.
*Petitioners and Matti are jointly liable to Ortigas, Jr. in the amt. of P1.3M;
Legal interest of 12% per annum on P 1.3M computed from March 14, 1994.
Assailed rulings are affirmed. Costs against petitioners.
DECISION
The main contention raised in this petition is that petitioners are not under
obligation to reimburse respondent, a claim that can be easily debunked.
The more perplexing question is whether this obligation to repay is solidary,
as contended by respondent and the lower courts, or merely joint as argued
by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP)[1] entered into a loan agreement with Falcon Minerals, Inc. (Falcon)
whereby PDCP agreed to make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to certain terms and
conditions.[2] On the same day, three stockholders-officers of Falcon,
namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and
George T. Scholey executed an Assumption of Solidary Liability whereby
they agreed to assume in [their] individual capacity, solidary liability with
[Falcon] for the due and punctual payment of the loan contracted by Falcon
with PDCP.[3] In the meantime, two separate guaranties were executed to
guarantee the payment of the same loan by other stockholders and officers
of Falcon, acting in their personal and individual capacities. One
Guaranty[4] was executed by petitioner Salvador Escao (Escao), while the
other[5] by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio),
Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to
Escao, Silos and Joseph M. Matti (Matti). Thus, contracts were executed
whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already
deceased George T. Scholey assigned their shares of stock in Falcon to
Escao, Silos and Matti.[6] Part of the consideration that induced the sale of
stock was a desire by Ortigas, et al., to relieve themselves of all liability
arising from their previous joint and several undertakings with Falcon,
including those related to the loan with PDCP. Thus, an Undertaking dated
11 June 1982 was executed by the concerned parties,[7] namely: with
Escao, Silos and Matti identified in the document as SURETIES, on one
hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the other.
The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP
and PAIC to release OBLIGORS from their said guarantees [sic],
SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP and PAIC under the following
terms and conditions:
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 Judgment[12] dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement[13] with PDCP, allegedly without the knowledge of Escao, Matti
and Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as full
satisfaction of the PDCPs claim against Ortigas,[14] in exchange for PDCPs
release of Ortigas from any liability or claim arising from the Falcon loan
agreement, and a renunciation of its claims against Ortigas.
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 Decision[20] dated 23 January 2002, the Court of
Appeals dismissed the appeals and affirmed the Summary Judgment. The
appellate court found that the RTC did not err in rendering the summary
judgment since the three appellants did not effectively deny their execution
of the 1982 Undertaking. The special defenses that were raised, payment
and excussion, were characterized by the Court of Appeals as appear[ing]
to be merely sham in the light of the pleadings and supporting documents
and affidavits.[21] Thus, it was concluded that there was no genuine issue
that would still require the rigors of trial, and that the appealed judgment
was decided on the bases of the undisputed and established facts of the
case.
Hence, the present petition for review filed by Escao and Silos.[22] Two
main issues are raised. First, petitioners dispute that they are liable to
Ortigas on the basis of the 1982 Undertaking, a document which they do not
disavow and have in fact annexed to their petition. Second, on the
assumption that they are liable to Ortigas under the 1982 Undertaking,
petitioners argue that they are jointly liable only, and not solidarily. Further
assuming that they are liable, petitioners also submit that they are not liable
for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary
judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the
1997 Rules of Civil Procedure, summary judgment may avail if the
pleadings, supporting affidavits, depositions and admissions on file show
that, except as to the amount of damages, there is no genuine issue as to
any material fact and that the moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to demonstrate before us that
there existed a genuine issue as to any material fact that would preclude
summary judgment. Thus, we affirm with ease the common rulings of the
lower courts that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly
held liable to Ortigas on the basis of the 1982 Undertaking in this Summary
Judgment. An examination of the document reveals several clauses that
make it clear that the agreement was brought forth by the desire of Ortigas,
Inductivo and the Scholeys to be released from their liability under the loan
agreement which release was, in turn, part of the consideration for the
assignment of their shares in Falcon to petitioners and Matti. The whereas
clauses manifest that Ortigas had bound himself with Falcon for the
payment of the loan with PDCP, and that amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES relieving
OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON.[23] Most crucial is the clause in Paragraph 3 of
the Undertaking wherein petitioners irrevocably agree and undertake to
assume all of OBLIGORs said guarantees [sic] to PDCP x x x under the
following terms and conditions.[24]
At the same time, it is clear that the assumption by petitioners of Ortigass
guarantees [sic] to PDCP is governed by stipulated terms and conditions as
set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by
any of OBLIGORS of any demand from PDCP for the payment of Falcons
obligations with it, any of OBLIGORS was to immediately inform SURETIES
thereof so that the latter can timely take appropriate measures. Second,
should any and/or all of OBLIGORS be impleaded by PDCP in a suit for
collection of its loan, SURETIES agree[d] to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity, subrogation or other relief[25]
in respect to any of the claims of PDCP. Third, if any of the OBLIGORS is
for any reason made to pay any amount to [PDCP], SURETIES [were to]
reimburse OBLIGORS for said amount/s within seven (7) calendar days
from such payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas
was not made to pay PDCP the amount now sought to be reimbursed, as
Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable
settlement of the claims posed by the bank against him. However, the
subject clause in paragraph 3(c) actually reads [i]n the event that any of
OBLIGORS is for any reason made to pay any amount to PDCP x x x[27] As
pointed out by Ortigas, the phrase for any reason reasonably includes any
extra-judicial settlement of obligation such as what Ortigas had undertaken
to pay to PDCP, as it is indeed obvious that the phrase was incorporated in
the clause to render the eventual payment adverted to therein unlimited and
unqualified.
The interpretation posed by petitioners would have held water had the
Undertaking made clear that the right of Ortigas to seek reimbursement
accrued only after he had delivered payment to PDCP as a consequence of
a final and executory judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to relieve the burden on Ortigas
and his fellow OBLIGORS as soon as possible, and not only after Ortigas
had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to
cause PDCP x x x to within a reasonable time release all the OBLIGORS x
x x from their guarantees [sic] to PDCP x x x[28] In the event that Ortigas
and his fellow OBLIGORS could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the Board of Directors
of Falcon to make a call on its stockholders for the payment of their unpaid
subscriptions and to pledge or assign such payments to Ortigas, et al., as
security for whatever amounts the latter may be held liable under their
guaranties. In addition, paragraph 1 also makes clear that nothing in the
Undertaking shall prevent OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said guarantees [sic].[29]
There is no argument to support petitioners position on the import of the
phrase made to pay in the Undertaking, other than an unduly literalist
reading that is clearly inconsistent with the thrust of the document. Under
the Civil Code, the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from
all of them taken jointly.[30] Likewise applicable is the provision that if some
stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it
effectual.[31] As a means to effect the general intent of the document to
relieve Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other
conditions set in paragraph 3, as they claim. Following the general assertion
in the petition that Ortigas violated the terms of the Undertaking, petitioners
add that Ortigas paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOSs knowledge and consent.[32] Paragraph
3(a) of the Undertaking does impose a requirement that any of the
OBLIGORS shall immediately inform SURETIES if they received any
demand for payment of FALCONs obligations to PDCP, but that requirement
is reasoned so that the [SURETIES] can timely take appropriate
measures[33] presumably to settle the obligation without having to burden
the OBLIGORS. This notice requirement in paragraph 3(a) is markedly way
off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982
Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas
are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place.
They note that Ortigas had, in his answer, denied any liability to PDCP and
had alleged that he signed the Assumption of Solidary Liability not in his
personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily
paid PDCP the amount of P1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP and Ortigas
expressly stipulated that Ortigass offer to pay PDCP was conditioned
without [Ortigass] admitting liability to plaintiff PDCP Banks complaint, and
to terminate and dismiss the said case as against Ortigas solely.[34]
Petitioners profess it is unthinkable for Ortigas to have voluntarily paid
PDCP without admitting his liability,[35] yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise
Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he
had already assigned his obligation to petitioners through the 1982
Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas
notwithstanding the Undertaking he executed with petitioners. Not being a
party to such Undertaking, PDCP was not precluded by a contract from
pursuing its claim against Ortigas based on the original Assumption of
Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving
his distress through a settlement with the creditor bank. Indeed, paragraph
1 of the Undertaking expressly states that nothing herein shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x
x x for the release of their said guarantees [sic].[36] Simply put, the
Undertaking did not bar Ortigas from pursuing his own settlement with
PDCP. Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through his own
settlement. The stipulation that if Ortigas was for any reason made to pay
any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for
said amount/s within seven (7) calendar days from such payment[37] makes
it clear that petitioners remain liable to reimburse Ortigas for the sums he
paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative,
that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to
Ortigas, claiming that the Undertaking did not provide for express solidarity.
They cite Article 1207 of the New Civil Code, which states in part that [t]here
is a solidary liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the agreement
clearly shows that it is a surety agreement[38] between the obligors (Ortigas
group) and the sureties (Escao group). Ortigas points out that the
Undertaking uses the word SURETIES although the document, in
describing the parties. It is further contended that the principal objective of
the parties in executing the Undertaking cannot be attained unless
petitioners are solidarily liable because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or any of the
SURETIES default from their obligation in the Undertaking.[39]
In case, there is a concurrence of two or more creditors or of two or more
debtors in one and the same obligation, Article 1207 of the Civil Code states
that among them, [t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires
solidarity. Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: The indivisibility of an obligation
does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility.
These Civil Code provisions establish that in case of concurrence of two or
more creditors or of two or more debtors in one and the same obligation,
and in the absence of express and indubitable terms characterizing the
obligation as solidary, the presumption is that the obligation is only joint. It
thus becomes incumbent upon the party alleging that the obligation is
indeed solidary in character to prove such fact with a preponderance of
evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed to bind themselves jointly and severally in their
obligations to the Ortigas group, or any such terms to that effect. Hence,
such obligation established in the Undertaking is presumed only to be joint.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the
burden to overcome the presumption of jointness of obligations. We rule
and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti
identified themselves in the Undertaking as SURETIES, a term repeated no
less than thirteen (13) times in the document. Ortigas claims that such
manner of identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article 2047
provides the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship. [Emphasis supplied][40]
As provided in Article 2047 in a surety agreement the surety undertakes to
be bound solidarily with the principal debtor. Thus, a surety agreement is an
ancillary contract as it presupposes the existence of a principal contract. It
appears that Ortigass argument rests solely on the solidary nature of the
obligation of the surety under Article 2047. In tandem with the nomenclature
SURETIES accorded to petitioners and Matti in the Undertaking, however,
this argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under
Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor
to whom the surety is solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the principal debtor and the
creditor. The suretyship does bind the surety to the creditor, inasmuch as
the latter is vested with the right to proceed against the former to collect the
credit in lieu of proceeding against the principal debtor for the same
obligation.[41] At the same time, there is also a legal tie created between
the surety and the principal debtor to which the creditor is not privy or party
to. The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished.[42] At the
same time, the surety may seek reimbursement from the principal debtor for
the amount paid, for the surety does in fact become subrogated to all the
rights and remedies of the creditor.[43]
Note that Article 2047 itself specifically calls for the application of the
provisions on joint and solidary obligations to suretyship contracts.[44]
Article 1217 of the Civil Code thus comes into play, recognizing the right of
reimbursement from a 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 Appeals[51]
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.
GATEWAY ELECTRONICS and GERONIMO VS. ASIANBANK
G.R. No. 172041
DECEMBER 18, 2008
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 delos Reyes 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
for Domestic Bills Purchased Line and the Omnibus Credit Line.
Later developments saw Asianbank extending to Gateway several export
packing loans .This loan package was later consolidated with A Dollar
Promissory Note (and secured by a chattel mortgage over Gateway’s
equipment.
Gateway initially made payments on its loan obligations, but eventually
defaulted. Upon Gateway’s request, Asianbank extended the maturity dates
of the loan several times. These extensions bore the conformity of three of
Gateway’s officers, among them Andrew.
Gateway issued two Philippine Commercial International Bank checks as
payment for its arrearages and but both checks were dishonored for
insufficiency of funds. Asianbank’s demands for payment made upon
Gateway and its sureties went unheeded. As of November 23, 1999,
Gateway’s obligation to Asianbank, inclusive of principal, interest, and
penalties, totaled USD 2,235,452.17.
Thus Asianbank filed with the RTC in Makati City a complaint for a sum of
money against Gateway, Geronimo, and Andrew.
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 Domestic Bills Purchased Line and the
Omnibus Credit Line did NOT include the Dollar Promissory Note, 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
wife’s 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 holding Gateway, Geronimo
and Andrew jointly and severally liable to pay Asianbank.
Petitioners herein appealed to the CA. Following the filing of its and
Geronimo’s joint appellants’ brief, Gateway filed on a petition for voluntary
insolvency6 with the RTC in Imus, Cavite, which was granted. CA affirmed
the decision of the lower court. MR denied, hence this petition for review
under Rule 45.
ISSUE: is Geronimo discharged from liability because of the insolvency of
Gateway, the principal
HELD: petition denied
NO
Asianbank argues that the stay of the collection suit against Gateway
(because its case is transferred to an insolvency court) is without bearing
on the liability of Geronimo as a surety. 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 Gateway’s 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.
Geronimo’s 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 Court’s 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 principal’s debt if
the principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the
principal is unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. x x xIn 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 creditor’s 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.
A Suretyship contract 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. Geronimo’s position that a surety cannot be
made to pay when the principal is unable to pay is clearly specious and
must be rejected.
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. 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,
WHEREFORE, the Petition is GRANTED in PART. The Order of the respectively, as payment for its arrearages and interests for the periods
Regional Trial Court dated 5 October 1995 is MODIFIED by declaring that June 30 and July 30, 1999; but both checks were dishonored for
petitioners and Joseph M. Matti are only jointly liable, not jointly and insufficiency of funds. Asianbanks demands for payment made upon
severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. Gateway and its sureties went unheeded. As of November 23, 1999,
The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in Gateways obligation to Asianbank, inclusive of principal, interest, and
that the legal interest of 12% per annum on the amount of P1,300,000.00 is penalties, totaled USD 2,235,452.17.
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.
Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court
SO ORDERED. (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
This petition for review under Rule 45 seeks to nullify and set aside the
entitled Asian Bank Corporation v. Gateway Electronics Corporation,
Decision[1] dated October 28, 2005 of the Court of Appeals (CA) in CA-G.R.
Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
CV No. 80734 and its Resolution[2] of March 17, 2006 denying petitioners
motion for reconsideration.
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
The Facts
problem, and faulted Asianbank for trying to undermine its efforts toward
Petitioner Gateway Electronics Corporation (Gateway) is a domestic
recovery.
corporation that used to be engaged in the semi-conductor business. During
the period material, petitioner Geronimo B. delos Reyes, Jr. was its
Andrew also filed an answer alleging, among other things, that the deed of
president and one Andrew delos Reyes its executive vice-president.
suretyship he executed covering the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus Credit Line did not include
On July 23, 1996, Geronimo and Andrew executed separate but almost
PN No. FCD-0599-2749, the payment of which was extended several times
identical deeds of suretyship for Gateway in favor of respondent Asianbank
without his consent.
Corporation (Asianbank), pertinently providing:
Geronimo, on the other hand, alleged that the subject deed of suretyship,
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK
assuming the authenticity of his signature on it, was signed without his wifes
CORPORATION, x x x due and punctual payment by the following
consent and should, thus, be considered as a mere continuing offer. Like
individuals/companies/firms, hereinafter called the DEBTOR(S), of such
Andrew, Geronimo argued that he ought to be relieved of his liability under
amounts whether due or not, as indicated opposite their respective names,
the surety agreement inasmuch as he too never consented to the repeated
to wit:
loan maturity date extensions given by Asianbank to Gateway.
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
After due hearing, the RTC rendered judgment dated October 7, 2003[5] in
favor of Gateway, the dispositive portion of which states:
GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLS
WHEREFORE then, in view of the foregoing, judgment is rendered holding
CORPORATION [PURCHASED LINE]
defendants Gateway Electronics Corporation, Geronimo De Los Reyes and
Andrew De Los Reyes jointly and severally liable to pay the plaintiff the
*US$3,000,000.00*OMNIBUS CREDIT LINE
following:
owing to the said ASIANBANK CORPORATION, hereafter called the
a) The sum of $2,235,452.17 United States Currency with interest to be
CREDITOR, as evidenced by all notes, drafts, overdrafts and other [credit]
added on at the prevailing market rate over a given thirty day London
obligations of every kind and nature contracted/incurred by said
Interbank Offered Rate (LIBOR) plus a spread of 5.5358 percent or ten and
DEBTOR(S) in favor of said CREDITOR.
[45,455/100,000] percent per annum for the first 35 days and every thirty
days beginning November 23, 1999 until fully paid;
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
b) a penalty charge after November 23, 1999 of two percent (2%) per
agree and engage to the CREDITOR, its successors and assigns, the
month until fully paid;
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
c) attorneys fees of twenty percent (20%) of the total amount due and
hereafter become indebted to the CREDITOR, together with all interests,
unpaid; and
penalty and other bank charges as may accrue thereon x x x.
d) costs of the suit.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of
all obligations to be performed under any contracts evidencing
SO ORDERED.
indebtedness/obligations and any supplements, amendments, changes or
modifications made thereto, including but not limited to, the due and
Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their
punctual payment by the said DEBTOR(S).
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
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and
petition for voluntary insolvency[6] with the RTC in Imus, Cavite, Branch 22,
immediate and not contingent upon the pursuit by the CREDITOR x x x of
docketed as SEC Case No. 037-04, in which Asianbank was listed in the
whatever remedies it or they may have against the DEBTOR(S) or the
attached Schedule of Obligations as one of the creditors. On March 16,
securities or liens it or they may possess; and I/WE hereby agree to be and
2005, Metrobank, as successor-in-interest of Asianbank, via a Notice of
remain bound upon this suretyship, x x x and notwithstanding also that all
Creditors Claim, prayed that it be allowed to participate in the Gatewayss
obligations of the DEBTOR(S) to you outstanding and unpaid at any time
creditors meeting.
may exceed the aggregate principal sum hereinabove stated.[3]
In its Decision dated October 28, 2005, the CA affirmed the decision of the
Later developments saw Asianbank extending to Gateway several export
Makati City RTC. In time, Gateway and Geronimo interposed a motion for
packing loans in the total aggregate amount of USD 1,700,883.48. This loan
reconsideration. This was followed by a Supplemental Motion for
package was later consolidated with Dollar Promissory Note (PN) No. FCD-
Reconsideration dated January 20, 2006, stating that in SEC Case No. 037-
0599-2749[4] for the amount of USD 1,700,883.48 and secured by a chattel
04, the RTC in Imus, Cavite had issued an Order dated December 2, 2004,
mortgage over Gateways equipment for USD 2 million.
declaring Gateway insolvent and directing all its creditors to appear before
the court on a certain date for the purpose of choosing among themselves
Gateway initially made payments on its loan obligations, but eventually
the assignee of Gateways estate which the courts sheriff has meanwhile
defaulted. Upon Gateways request, Asianbank extended the maturity dates
placed in custodia legis.[7] Gateway and Geronimo thus prayed that the
of the loan several times. These extensions bore the conformity of three of
assailed decision of the Makati City RTC be set aside, the insolvency court
Gateways officers, among them Andrew.
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:
I Section 18. Upon receiving and filing said petition, schedule, and inventory,
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.
V is in dispute, the suit, by leave of the court in insolvency, may proceed to
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:
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
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.
ASSET BUILDERS VS STRONGHOLD
DIGEST ON ATTACHED PDF
This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure assails the February 27, 2009 Decision[1] of the Regional Trial
Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering
defendant Lucky Star to pay petitioner Asset Builders Corporation the sum
of P575,000.00 with damages, but absolving respondent Stronghold
Insurance Company, Incorporated (Stronghold) of any liability on its Surety
Bond and Performance Bond.
THE FACTS
On April 28, 2006, Asset Builders Corporation (ABC) entered into an
agreement with Lucky Star Drilling & Construction Corporation (Lucky Star)
as part of the completion of its project to construct the ACG Commercial
Complex on NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo
City.[2] As can be gleaned from the Purchase Order,[3] Lucky Star was to
supply labor, materials, tools, and equipment including technical supervision
to drill one (1) exploratory production well on the project site. The total
contract price for the said project was P1,150,000.00. The salient terms and
conditions of said agreement are as follows:
i. Lump sum price--------PHP1,150,000.00;
ii. 50% downpayment---upon submission of surety bond in an equivalent
amount and performance bond equivalent to 30 % of contract amount;
iii. Completion date-----60 calendar days;
iv. Penalty----2/10 of 1% of total contract amount for every day of delay;
v. Terms---50% down payment to be released after submission of
bonds;
vi. RetentionSubject to 10% retention to be released after the project is
accepted by the owner;
To guarantee faithful compliance with their agreement, Lucky Star engaged
respondent Stronghold which issued two (2) bonds in favor of petitioner. The
first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the
sum of P575,000.00[4] or the required downpayment for the drilling work.
The full text of the surety bond is herein quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168
ACACIA St., Octagon Industrial Estate Subd., Pasig City as principal, and
STRONGHOLD INSURANCE COMPANY, INC., a corporation duly
organized and existing under and by virtue of laws of the Philippines, as
surety, are held and firmly bound unto ASSET BUILDERS CORPORATION
to the sum of Pesos FIVE HUNDRED SEVENTY FIVE THOUSAND ONLY
(P575,000.00) Philippine Currency, for the payment of which, well and truly
to be made, we bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done through
deductions from periodic billings of the advance payment made or to be
made by the Obligee to the Principal in connection with the supply of labor,
materials, tools and equipment including technical supervision to drill one
(1) exploratory production well located at NIA Ave. cor. Olalia St., Brgy. dela
Paz, Antipolo City. This bond is callable on demand.
The liability of the surety company upon determination under this bond shall
in no case exceed the penal sum of PESOS: FIVE HUNDRED SEVENTY
FIVE THOUSAND (P575,000.00) only, Philippine Currency.
WHEREAS, the Obligee requires said principal to give a good and sufficient
bond in the above stated sum to secure the full and faithful performance on
his part of said undertakings.
NOW, THEREFORE, if the above bounden principal shall in all respects
duly and fully observe and perform all and singular the aforesaid [co]-
venants, conditions and agreements to the true intent and meaning thereof,
then this obligation shall be null and void, otherwise to remain in full force
and effect.
Liability of surety on this bond will expire on May 09, 2007 and said bond
will be cancelled five DAYS after its expiration, unless surety is notified of
and existing obligations hereunder.
x x x[5]
With respect to the second contract, PERFORMANCE BOND G(13) No.
115388, dated May 09, 2006, it covers the sum of P345,000.00.[6] Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St.,
Octagon Indl., contractor, of Estate, Sub., Pasig City Philippines, as
principal and the STRONGHOLD INSURANCE COMPANY, INC. a
corporation duly organized and existing under and by virtue of the laws of
the Philippines, with head office at Makati, as Surety, are held and firmly
bound unto the ASSET BUILDERS CORPORATION and to any individual,
firm, partnership, corporation or association supplying the principal with
labor or materials in the penal sum of THREE HUNDRED FORTY FIVE
THOUSAND ONLY (P345,000.00), Philippine Currency, for the payment of
which sum, well and truly to be made, we bind ourselves, our heirs,
executors, administrators, successors and assigns, jointly and severally,
firmly by these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of __________,
19__ entered into a contract with the ASSET BUILDERS CORPORATION
represented by _________________, to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment including
technical supervision to drill one (1) exploratory production well located at
NIA Ave. cor. Olalia St., Brgy. Dela Paz, Antipolo City. This bond is callable
on demand.
WHEREAS, the liability of the Surety Company under this bond shall in no
case exceed the sum of PESOS THREE HUNDRED FORTY FIVE
THOUSAND ONLY (P345,000.00) Philippine Currency, inclusive of interest,
attorneys fee, and other damages, and shall not be liable for any advances
of the obligee to the principal.
WHEREAS, said contract requires the said principal to give a good and
sufficient bond in the above-stated sum to secure the full and faithfull
performance on its part of said contract, and the satisfaction of obligations
for materials used and labor employed upon the work;
NOW THEREFORE, if the principal shall perform well and truly and fulfill all
the undertakings, covenants, terms, conditions, and agreements of said
contract during the original term of said contract and any extension thereof
that may be granted by the obligee, with notice to the surety and during the
life of any guaranty required under the contract, and shall also perform well
and truly and fulfill all the undertakings, covenants, terms, conditions, and
agreements of any and all duly authorized modifications of said contract that
may hereinafter be made, without notice to the surety except when such
modifications increase the contract price; and such principal contractor or
his or its sub-contractors shall promptly make payment to any individual,
firm, partnership, corporation or association supplying the principal of its
sub-contractors with labor and materials in the prosecution of the work
provided for in the said contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any extension of the period
of time which may be granted by the obligee to the contractor shall be
considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.
The right of any individual, firm, partnership, corporation or association
supplying the contractor with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and confirmed. x x x
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding
tax) as advance payment, representing 50% of the contract price.[7] Lucky
Star, thereafter, commenced the drilling work. By July 18, 2006, just a few
days before the agreed completion date of 60 calendar days, Lucky Star
managed to accomplish only ten (10) % of the drilling work. On the same
date, petitioner sent a demand letter to Lucky Star for the immediate
completion of the drilling work[8] with a threat to cancel the agreement and
forfeit the bonds should it still fail to complete said project within the agreed
period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract with
Demand for Damages to Lucky Star.[9] Pertinent portions of said notice
read:
Pursuant to paragraph 1 of the Terms and Conditions of the service
contract, notice is hereby made on you of the rescission of the contract and
accordingly demand is hereby made on you, within seven (7) days from
receipt hereof:
(1) to refund the down payment of PHP563,500.00, plus legal interest
thereon;
(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price
for every day of delay, or a total of PHP138,000.00;
(3) to pay the amount guaranteed by your performance bond in the amount
of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential damages;
(5) to pay exemplary damages in the amount of PHP150,000.00;
(6) to vacate the project site, together with all your men and equipment.
Should you refuse to comply with our demand within the above period, we
shall be constrained to sue you in court, in which event we shall demand
payment of attorneys fees in the amount of at least PHP100,000.0.
On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold
to make good its obligation under its bonds.[10]
Despite notice, ABC did not receive any reply either from Lucky Star or
Stronghold, prompting it to file its Complaint for Rescission with Damages
against both before the RTC[11] on November 21, 2006.
In its Answer (with Complusory Counterclaim and Cross-Claim), dated
January 24, 2007, Stronghold denied any liability arguing that ABC had not
shown any proof that it made an advance payment of 50% of the contract
price of the project. It further averred that ABCs rescission of its contract
with Lucky Star virtually revoked the claims against the two bonds and
absolved them from further liability.[12]
Lucky Star, on the other hand, failed to file a responsive pleading within the
prescribed period and, thus, was declared in default by the RTC in its Order
dated August 24, 2007.[13]
On February 27, 2009, the RTC rendered the assailed decision ordering
Lucky Star to pay ABC but absolving Stronghold from liability.[14] Relevant
parts of the decision, including the decretal portion, read:
On the liability of defendant Stronghold Insurance, the Court rules on the
negative.
The surety bond and performance bond executed by defendants Lucky Star
and Stronghold Insurance are in the nature of accessory contracts which
depend for its existence upon another contract. Thus, when the agreement
(Exhibit A) between the plaintiff and defendant Asset Builders was
rescinded, the surety and performance bond were automatically cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
favor of the plaintiff and against defendant Lucky Star Drilling &
Construction, ordering the latter as follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus
legal interest from the filing of the complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;
4. to pay plaintiff in the amount of PHP 50,000.00 as attorneys fees;
5. to pay the costs of the suit.
Defendant Stronghold Insurance Company, Inc.s compulsory counterclaim
and cross-claim are dismissed.[15]
Hence, this petition.
Petitioner ABC prays for the reversal of the challenged decision based on
the following
GROUNDS
A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY with
manifest bias and grave abuse of discretion, CONTRARY to applicable laws
and established jurisprudence in declaring the automatic CANCELLATION
of respondent Strongholds Surety Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID PRINCIPAL
OBLIGATION guaranteed by Respondents Bonds, arising out of the
Contractors DEFAULT and Non-performance.
(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondents
bonds had already ACCRUED, automatically attached, and had become
already DIRECT, PRIMARY and ABSOLUTE, even before Petitioners
legitimate exercise of its option under Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the Respondent
Stronghold as its LIABILITIES on its subject bonds have already become
INTERWOVEN and INSEPARABLE with the liabilities of its Principal, the
Contractor Lucky Star.
B. With the Lower Courts completely erroneous ruling on the liabilities of
Respondents bonds, the Lower Court equally ERRED with manifest bias
and grave abuse, in its FAILURE to comply with the duty of court to make a
finding of unreasonable denial or withholding by Respondent Stronghold or
Petitioners claims and impose upon the Respondent the penalties provided
for under Section 241 and 244 of the Insurance Code.[16]
Essentially, the primary issue is whether or not respondent insurance
company, as surety, can be held liable under its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to the
petitioner when it executed in its favor surety and performance bonds. The
contents of the said contracts clearly establish that the parties entered into a
surety agreement as defined under Article 2047 of the New Civil Code.
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]
As provided in Article 2047, the surety undertakes to be bound solidarily
with the principal obligor. That undertaking makes a surety agreement an
ancillary contract as it presupposes the existence of a principal contract.
Although the contract of a surety is in essence secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over the obligations nor
does it receive any benefit therefrom.[17] Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal
obligation, the surety assumes liability as a regular party to the undertaking.
[18]
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,
[19] reiterating the ruling in Garcia v. Court of Appeals,[20] expounds on the
nature of the suretys liability:
X x x. The suretys obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract of
a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with
the principal.
Suretyship, in essence, contains two types of relationship the principal
relationship between the obligee (petitioner) and the obligor (Lucky Star),
and the accessory surety relationship between the principal (Lucky Star)
and the surety (respondent). In this arrangement, the obligee accepts the
suretys solidary undertaking to pay if the obligor does not pay. Such
acceptance, however, does not change in any material way the obligees
relationship with the principal obligor. Neither does it make the surety an
active party to the principal obligee-obligor relationship. Thus, the
acceptance does not give the surety the right to intervene in the principal
contract. The suretys role arises only upon the obligors default, at which
time, it can be directly held liable by the obligee for payment as a solidary
obligor.[21]
In the case at bench, when Lucky Star failed to finish the drilling work within
the agreed time frame despite petitioners demand for completion, it was
already in delay. Due to this default, Lucky Stars liability attached and, as a
necessary consequence, respondents liability under the surety agreement
arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner
and further failed to return the P575,000.00 downpayment that was already
advanced to it, respondent, as surety, became solidarily bound with Lucky
Star for the repayment of the said amount to petitioner. The clause, this
bond is callable on demand, strongly speaks of respondents primary and
direct responsibility to the petitioner.
Accordingly, after liability has attached to the principal, the obligee or, in this
case, the petitioner, can exercise the right to proceed against Lucky Star or
respondent or both. Article 1216 of the New Civil Code states:
The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.
Contrary to the trial courts ruling, respondent insurance company was not
automatically released from any liability when petitioner resorted to the
rescission of the principal contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising from the surety
contracts comes to life upon the solidary obligors default. It should be
emphasized that petitioner had to choose rescission in order to prevent
further loss that may arise from the delay of the progress of the project.
Without a doubt, Lucky Stars unsatisfactory progress in the drilling work and
its failure to complete it in due time amount to non-performance of its
obligation.
In fine, respondent should be answerable to petitioner on account of Lucky
Stars non-performance of its obligation as guaranteed by the performance
bond.
Finally, Article 1217[22] of the New Civil Code acknowledges the right of
reimbursement from a co-debtor (the principal co-debtor, in case of
suretyship) in favor of the one who paid (the surety). Thus, respondent is
entitled to reimbursement from Lucky Star for the amount it may be required
to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court,
Pasig City, Branch 71, is AFFIRMED with MODIFICATION. Respondent
Stronghold Insurance is hereby declared jointly and severally liable with
Lucky Star for the payment of P575,000.00 and the payment of
P345,000.00 on the basis of its performance bond.
SO ORDERED.
FIDELIZA J. AGLIBOT, Petitioner, vs. INGERSOL L. SANTIA
G.R. No. 185945 December 05, 2012
FACTS: Private respondent-complainant Engr. Ingersol L. Santia loaned the
amount of P2,500,000.00 to Pacific Lending & Capital Corporation (PLCC),
through its Manager, petitioner Fideliza J. Aglibot. The loan was evidenced
by a Promissory Note dated July 1, 2003, issued by Aglibot in behalf of
PLCC, payable in one year subject to interest at 24% per annum. Allegedly
as a guaranty or security for the payment of the note, Aglibot also issued
and delivered to Santia eleven (11) post-dated personal checks drawn from
her own demand account maintained at Metrobank, Camiling Branch.
Aglibot is a major stockholder of PLCC, with headquarters at 27 Casimiro
Townhouse, Casimiro Avenue, Zapote, Las Piñas, Metro Manila, where
most of the stockholders also reside. Upon presentment of the aforesaid
checks for payment, they were dishonored by the bank for having been
drawn against insufficient funds or closed account. Santia thus demanded
payment from PLCC and Aglibot of the face value of the checks, but neither
of them heeded his demand.
ISSUE: Whether or not Aglibot is an accommodation party or a
guaranteeing party? If she is the latter, is she benefitted from excussion
against Santia?
HELD:
Aglibot is an accommodation party and therefore liable to Santia
The facts below present a clear situation where Aglibot, as the manager of
PLCC, agreed to accommodate its loan to Santia by issuing her own post-
dated checks in payment thereof. She is what the Negotiable Instruments
Law calls an accommodation party. Concerning the liability of an
accommodation party, Section 29 of the said law provides:
Sec. 29.
Liability of an accommodation party. —
An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable
on the instrument to a holder for value notwithstanding such holder at the
time of taking the instrument knew him to be only an accommodation party.
The mere fact, then, that Aglibot issued her own checks to Santia made her
personally liable to the latter on her checks without the need for Santia to
first go after PLCC for the payment of its loan. It would have been
otherwise had it been shown that Aglibot was a mere guarantor, except that
since checks were issued ostensibly in payment for the loan, the provisions
of the Negotiable Instruments Law must take primacy in application.
Before the Court is a Petition for Review on Certiorari under Rule 45 of the
1997 Rules of Civil Procedure seeking to annul and set aside the
Decision[1] dated March 18, 2008 of the Court of Appeals (CA) in CA-G.R.
SP No. 100021, which reversed the Decision[2] dated April 3, 2007 of the
Regional Trial Court (RTC) of Dagupan City, Branch 40, in Criminal Case
Nos. 2006-0559-D to 2006-0569-D and entered a new judgment. The fallo
reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint
Decision dated April 3, 2007 of the RTC of Dagupan City, Branch 40, and its
Order dated June 12, 2007 are REVERSED AND SET ASIDE and a new
one is entered ordering private respondent Fideliza J. Aglibot to pay
petitioner the total amount of [P]3,000,000.00 with 12% interest per annum
from the filing of the Informations until the finality of this Decision, the sum of
which, inclusive of interest, shall be subject thereafter to 12% annual
interest until fully paid.
SO ORDERED.[3]
On December 23, 2008, the appellate court denied herein petitioner's
motion for reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the
amount of P2,500,000.00 to Pacific Lending & Capital Corporation (PLCC),
through its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was
evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot in
behalf of PLCC, payable in one year subject to interest at 24% per annum.
Allegedly as a guaranty or security for the payment of the note, Aglibot also
issued and delivered to Santia eleven (11) post-dated personal checks
drawn from her own demand account maintained at Metrobank, Camiling
Branch. Aglibot is a major stockholder of PLCC, with headquarters at 27
Casimiro Townhouse, Casimiro Avenue, Zapote, Las Piñas, Metro Manila,
where most of the stockholders also reside.[4]
Upon presentment of the aforesaid checks for payment, they were
dishonored by the bank for having been drawn against insufficient funds or
closed account. Santia thus demanded payment from PLCC and Aglibot of
the face value of the checks, but neither of them heeded his demand.
Consequently, eleven (11) Informations for violation of Batas Pambansa
Bilang 22 (B.P. 22), corresponding to the number of dishonored checks,
were filed against Aglibot before the Municipal Trial Court in Cities (MTCC),
Dagupan City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674.
Each Information, except as to the amount, number and date of the checks,
and the reason for the dishonor, uniformly alleged, as follows:
That sometime in the month of September, 2003 in the City of Dagupan,
Philippines and within the jurisdiction of this Honorable Court, the above-
named accused, FIDELIZA J. AGLIBOT, did then and there, willfully,
unlawfully and criminally, draw, issue and deliver to one Engr. Ingersol L.
Santia, a METROBANK Check No. 0006766, Camiling Tarlac Branch,
postdated November 1, 2003, in the amount of [P]50,000.00, Philippine
Currency, payable to and in payment of an obligation with the complainant,
although the said accused knew full[y] well that she did not have sufficient
funds in or credit with the said bank for the payment of such check in full
upon its presentment, such [t]hat when the said check was presented to the
drawee bank for payment within ninety (90) days from the date thereof, the
same was dishonored for reason "DAIF", and returned to the complainant,
and despite notice of dishonor, accused failed and/or refused to pay and/or
make good the amount of said check within five (5) days banking days [sic],
to the damage and prejudice of one Engr. Ingersol L. Santia in the
aforesaid amount of [P]50,000.00 and other consequential damages.[5]
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from
Santia, but claimed that she did so in behalf of PLCC; that before granting
the loan, Santia demanded and obtained from her a security for the
repayment thereof in the form of the aforesaid checks, but with the
understanding that upon remittance in cash of the face amount of the
checks, Santia would correspondingly return to her each check so paid; but
despite having already paid the said checks, Santia refused to return them
to her, although he gave her assurance that he would not deposit them; that
in breach of his promise, Santia deposited her checks, resulting in their
dishonor; that she did not receive any notice of dishonor of the checks; that
for want of notice, she could not be held criminally liable under B.P. 22 over
the said checks; and that the reason Santia filed the criminal cases against
her was because she refused to agree to his demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J.
AGLIBOT, is hereby ACQUITTED of all counts of the crime of violation of
the bouncing checks law on reasonable doubt. However, the said accused
is ordered to pay the private complainant the sum of [P]3,000,000.00
representing the total face value of the eleven checks plus interest of 12%
per annum from the filing of the cases on November 2, 2004 until fully paid,
attorney's fees of [P]30,000.00 as well as the cost of suit.
SO ORDERED.[6]
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal
Case Nos. 2006-0559-D to 2006-0569-D, which further absolved Aglibot of
any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the court a quo
regarding the civil aspect of these cases is reversed and set aside and a
new one is entered dismissing the said civil aspect on the ground of failure
to fulfill, a condition precedent of exhausting all means to collect from the
principal debtor.
SO ORDERED.[7]
Santia's motion for reconsideration was denied in the RTC's Order dated
June 12, 2007.[8] On petition for review to the CA docketed as CA-G.R. SP
No. 100021, Santia interposed the following assignment of errors, to wit:
"In brushing aside the law and jurisprudence on the matter, the Regional
Trial Court seriously erred:
In reversing the joint decision of the trial court by dismissing the civil aspect
of these cases;
In concluding that it is the Pacific Lending and Capital Corporation and not
the private respondent which is principally responsible for the amount of the
checks being claimed by the petitioner;
In finding that the petitioner failed to exhaust all available legal remedies
against the principal debtor Pacific Lending and Capital Corporation;
In finding that the private respondent is a mere guarantor and not an
accommodation party, and thus, cannot be compelled to pay the petitioner
unless all legal remedies against the Pacific Lending and Capital
Corporation have been exhausted by the petitioner;
In denying the motion for reconsideration filed by the petitioner."[9]
In its now assailed decision, the appellate court rejected the RTC's
dismissal of the civil aspect of the aforesaid B.P. 22 cases based on the
ground it cited, which is that the "failure to fulfill a condition precedent of
exhausting all means to collect from the principal debtor." The appellate
court held that since Aglibot's acquittal by the MTCC in Criminal Case Nos.
47664 to 47674 was upon a reasonable doubt[10] on whether the
prosecution was able to satisfactorily establish that she did receive a notice
of dishonor, a requisite to hold her criminally liable under B.P. 22, her
acquittal did not operate to bar Santia's recovery of civil indemnity.
It is axiomatic that the "extinction of penal action does not carry with it the
eradication of civil liability, unless the extinction proceeds from a declaration
in the final judgment that the fact from which the civil liability might arise did
not exist. Acquittal will not bar a civil action in the following cases: (1) where
the acquittal is based on reasonable doubt as only preponderance of
evidence is required in civil cases; (2) where the court declared the
accused's liability is not criminal but only civil in nature[;] and (3) where the
civil liability does not arise from or is not based upon the criminal act of
which the accused was acquitted."[11] (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia P3,000,000.00
with interest at 12% per annum, from the filing of the Informations until the
finality of its decision. Thereafter, the sum due, to be compounded with the
accrued interest, will in turn be subject to annual interest of 12% from the
finality of its judgment until full payment. It thus modified the MTCC
judgment, which simply imposed a straight interest of 12% per annum from
the filing of the cases on November 2, 2004 until the P3,000,000.00 due is
fully paid, plus attorney's fees of P30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the appellate
court to adjudge her personally liable for issuing her own eleven (11) post-
dated checks to Santia, since she did so in behalf of her employer, PLCC,
the true borrower and beneficiary of the loan. Still maintaining that she was
a mere guarantor of the said debt of PLCC when she agreed to issue her
own checks, Aglibot insists that Santia failed to exhaust all means to collect
the debt from PLCC, the principal debtor, and therefore he cannot now be
permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the face of the
Promissory Note x x x that the accused-appellant signed the same on behalf
of PLCC as Manager thereof and nowhere does it appear therein that she
signed as an accommodation party."[12] The RTC further ruled that what
Aglibot agreed to do by issuing her personal checks was merely to
guarantee the indebtedness of PLCC. So now petitioner Aglibot reasserts
that as a guarantor she must be accorded the benefit of excussion prior
exhaustion of the property of the debtor as provided under Article 2058 of
the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to all
the legal remedies against the debtor.
It is settled that the liability of the guarantor is only subsidiary, and all the
properties of the principal debtor, the PLCC in this case, must first be
exhausted before the guarantor may be held answerable for the debt.[13]
Thus, the creditor may hold the guarantor liable only after judgment has
been obtained against the principal debtor and the latter is unable to pay,
"for obviously the 'exhaustion of the principal's property' the benefit of which
the guarantor claims cannot even begin to take place before judgment has
been obtained."[14] This rule is contained in Article 2062[15] of the Civil
Code, which provides that the action brought by the creditor must be filed
against the principal debtor alone, except in some instances mentioned in
Article 2059[16] when the action may be brought against both the guarantor
and the principal debtor.
The Court must, however, reject Aglibot's claim as a mere guarantor of the
indebtedness of PLCC to Santia for want of proof, in view of Article 1403(2)
of the Civil Code, embodying the Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable, unless they are
ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from
the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of
another;
c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price
not less than five hundred pesos, unless the buyer accept and receive part
of such goods and chattels, or the evidences, or some of them, or such
things in action, or pay at the time some part of the purchase money; but
when a sale is made by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and kind of property sold,
terms of sale, price, names of purchasers and person on whose account the
sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the
sale of real property or of an interest therein;
f) A representation to the credit of a third person. (Italics ours)
Under the above provision, concerning a guaranty agreement, which is a
promise to answer for the debt or default of another,[17] the law clearly
requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified,[18] although under
Article 1358[19] of the Civil Code, a contract of guaranty does not have to
appear in a public document.[20] Contracts are generally obligatory in
whatever form they may have been entered into, provided all the essential
requisites for their validity are present, and the Statute of Frauds simply
provides the method by which the contracts enumerated in Article 1403(2)
may be proved, but it does not declare them invalid just because they are
not reduced to writing. Thus, the form required under the Statute is for
convenience or evidentiary purposes only.[21]
On the other hand, Article 2055 of the Civil Code also provides that a
guaranty is not presumed, but must be express, and cannot extend to more
than what is stipulated therein. This is the obvious rationale why a contract
of guarantee is unenforceable unless made in writing or evidenced by some
writing. For as pointed out by Santia, Aglibot has not shown any proof, such
as a contract, a secretary's certificate or a board resolution, nor even a note
or memorandum thereof, whereby it was agreed that she would issue her
personal checks in behalf of the company to guarantee the payment of its
debt to Santia. Certainly, there is nothing shown in the Promissory Note
signed by Aglibot herself remotely containing an agreement between her
and PLCC resembling her guaranteeing its debt to Santia. And neither is
there a showing that PLCC thereafter ratified her act of "guaranteeing" its
indebtedness by issuing her own checks to Santia.
Thus did the CA reject the RTC's ruling that Aglibot was a mere guarantor of
the indebtedness of PLCC, and as such could not "be compelled to pay
[Santia], unless the latter has exhausted all the property of PLCC, and has
resorted to all the legal remedies against PLCC x x x."[22]
Aglibot is an accommodation party and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a check as "a bill of
exchange drawn on a bank payable on demand," while Section 126 of the
said law defines a bill of exchange as "an unconditional order in writing
addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at a fixed
or determinable future time a sum certain in money to order or to bearer."
The appellate court ruled that by issuing her own post-dated checks, Aglibot
thereby bound herself personally and solidarily to pay Santia, and dismissed
her claim that she issued her said checks in her official capacity as PLCC's
manager merely to guarantee the investment of Santia. It noted that she
could have issued PLCC's checks, but instead she chose to issue her own
checks, drawn against her personal account with Metrobank. It concluded
that Aglibot intended to personally assume the repayment of the loan,
pointing out that in her Counter-Affidavit, she even admitted that she was
personally indebted to Santia, and only raised payment as her defense, a
clear admission of her liability for the said loan.
The appellate court refused to give credence to Aglibot's claim that she had
an understanding with Santia that the checks would not be presented to the
bank for payment, but were to be returned to her once she had made cash
payments for their face values on maturity. It noted that Aglibot failed to
present any proof that she had indeed paid cash on the above checks as
she claimed. This is precisely why Santia decided to deposit the checks in
order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of
PLCC, agreed to accommodate its loan to Santia by issuing her own post-
dated checks in payment thereof. She is what the Negotiable Instruments
Law calls an accommodation party.[23] Concerning the liability of an
accommodation party, Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party. An accommodation party is
one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for
value notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v. Aruego:[24]
An accommodation party is one who has signed the instrument as maker,
drawer, indorser, without receiving value therefor and for the purpose of
lending his name to some other person. Such person is liable on the
instrument to a holder for value, notwithstanding such holder, at the time of
the taking of the instrument knew him to be only an accommodation party.
In lending his name to the accommodated party, the accommodation party
is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part
of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. x x x.[25]
(Citation omitted)
The relation between an accommodation party and the party
accommodated is, in effect, one of principal and surety the accommodation
party being the surety. It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promisor and debtor
from the beginning. The liability is immediate and direct.[26] It is not a valid
defense that the accommodation party did not receive any valuable
consideration when he executed the instrument; nor is it correct to say that
the holder for value is not a holder in due course merely because at the time
he acquired the instrument, he knew that the indorser was only an
accommodation party.[27]
Moreover, it was held in Aruego that unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but also
unconditional to a holder for value, such that even if the accommodated
party receives an extension of the period for payment without the consent of
the accommodation party, the latter is still liable for the whole obligation and
such extension does not release him because as far as a holder for value is
concerned, he is a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to Santia made her
personally liable to the latter on her checks without the need for Santia to
first go after PLCC for the payment of its loan.[28] It would have been
otherwise had it been shown that Aglibot was a mere guarantor, except that
since checks were issued ostensibly in payment for the loan, the provisions
of the Negotiable Instruments Law must take primacy in application.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
DENIED and the Decision dated March 18, 2008 of the Court of Appeals in
CA-G.R. SP No. 100021 is hereby AFFIRMED.
SO ORDERED.
GILAT SATELLITE NETWORKS LTD., Petitioner, v. UNITED COCONUT
PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.
FACTS:
On September 15, 1999, One Virtual placed with GILAT a purchase order
for various telecommunications equipment, accessories, spares, services
and software, at a total purchase price of Two Million One Hundred Twenty
Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said
purchase price for the goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance with the payment
schedule dated 22 November 1999. To ensure the prompt payment of this
amount, it obtained defendant UCPB General Insurance Co., Inc.s surety
bond dated 3 December 1999, in favor of GILAT.
During the period between September 1999 and June 2000, GILAT shipped
and delivered to One Virtual the purchased products and equipment, as
evidenced by airway bills/Bill of Lading. All of the equipment (including the
software components for which payment was secured by the surety bond,
was shipped by GILAT and duly received by One Virtual. Under an
endorsement dated December 23, 1999, the surety issued, with One
Virtuals conformity, an amendment to the surety bond, Annex A thereof,
correcting its expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred Thousand
Dollars (US$400,000.00) on the due date of May 30, 2000 in accordance
with the payment schedule to the surety bond, prompting GILAT to write the
surety defendant UCPB on June 5, 2000, a demand letter for payment of
the said amount of US$400,000.00. No part of the amount set forth in this
demand has been paid to date by either One Virtual or defendant UCPB.
One Virtual likewise failed to pay on the succeeding payment installment
date of 30 November 2000 of the surety bond, prompting GILAT to send a
second demand letter dated January 24, 2001, for the payment of the full
amount of US$1,200,000.00 guaranteed under the surety bond, plus
interests and expenses and which letter was received by the defendant
surety on January 25, 2001. However, defendant UCPB failed to settle the
amount of US$1,200,000.00 or a part thereof, hence, the instant complaint.
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint
against respondent UCPB General Insurance Co., Inc., to recover the
amounts supposedly covered by the surety bond, plus interests and
expenses. After due hearing, the RTC rendered its Decision for the plaintiff.
On 18 October 2007, respondent appealed to the CA. The appellate
dismissed the case for lack of jurisdiction.
On 9 September 2008, petitioner filed a Motion for Reconsideration with
Motion for Oral Argument. The motion was denied for lack of merit in a
Resolution issued by the CA on 16 September 2009.
ISSUES: 1. Whether or not the CA erred in dismissing the case and
ordering petitioner and One Virtual to arbitrate; and 2. Whether or not
petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.
HELD:
CIVIL LAW: suretyship agreement
The existence of a suretyship agreement does not give the surety the right
to intervene in the principal contract, nor can an arbitration clause between
the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel
arbitration, unless a party entitled to it applies for this relief. This referral,
however, can only be demanded by one who is a party to the arbitration
agreement. Considering that neither petitioner nor One Virtual has asked for
a referral, there is no basis for the CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code clearly provide that the
creditor may proceed against the surety without having first sued the
principal debtor. Even the Surety Agreement itself states that respondent
becomes liable upon mere failure of the Principal to make such prompt
payment. Thus, petitioner should not be ordered to make a separate claim
against One Virtual (via arbitration) before proceeding against respondent.
On the other hand, respondent maintains that a surety contract is merely an
accessory contract, which cannot exist without a valid obligation. Thus, the
surety may avail itself of all the defenses available to the principal debtor
and inherent in the debt that is, the right to invoke the arbitration clause in
the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a suretys liability is joint and
solidary with that of the principal debtor. This undertaking makes a surety
agreement an ancillary contract, as it presupposes the existence of a
principal contract. Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, its liability to the
creditor or promise of the principal is said to be direct, primary and absolute;
in other words, a surety is directly and equally bound with the principal. He
becomes liable for the debt and duty of the principal obligor, even without
possessing a direct or personal interest in the obligations constituted by the
latter. Thus, a surety is not entitled to a separate notice of default or to the
benefit of excussion. It may in fact be sued separately or together with the
principal debtor.
After a thorough examination of the pieces of evidence presented by both
parties, the RTC found that petitioner had delivered all the goods to One
Virtual and installed them. Despite these compliances, One Virtual still failed
to pay its obligation, triggering respondents liability to petitioner as the
formers surety. In other words, the failure of One Virtual, as the principal
debtor, to fulfill its monetary obligation to petitioner gave the latter an
immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondents claim that the Purchase
Agreement, being the principal contract to which the Suretyship Agreement
is accessory, must take precedence over arbitration as the preferred mode
of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction
Co. Ltd., that the acceptance of a surety agreement, 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. In other words, the acceptance does not give the surety
the right to intervene in the principal contract. The suretys role arises only
upon the debtors default, at which time, it can be directly held liable by the
creditor for payment as a solidary obligor. Hence, the surety remains a
stranger to the Purchase Agreement. We agree with petitioner that
respondent cannot invoke in its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that contract. An arbitration
agreement being contractual in nature, it is binding only on the parties
thereto, as well as their assigns and heirs.
Second, Section 24 of Republic Act No. 928542 is clear in stating that a
referral to arbitration may only take place if at least one party so requests
not later than the pre-trial conference, or upon the request of both parties
thereafter. Respondent has not presented even an iota of evidence to show
that either petitioner or One Virtual submitted its contesting claim for
arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt
itself. They are contracted precisely to mitigate risks of nonperformance on
the part of the obligor. This responsibility necessarily places a surety on the
same level as that of the principal debtor. The effect is that the creditor is
given the right to directly proceed against either principal debtor or surety.
This is the reason why excussion cannot be invoked. To require the creditor
to proceed to arbitration would render the very essence of suretyship
nugatory and diminish its value in commerce. At any rate, as we have held
in Palmares v. Court of Appeals, if the surety is dissatisfied with the degree
of activity displayed by the creditor in the pursuit of his principal, he may pay
the debt himself and become subrogated to all the rights and remedies of
the creditor.
CIVIL LAW: interest; delay
Interest, as a form of indemnity, may be awarded to a creditor for the delay
incurred by a debtor in the payment of the latters obligation, provided that
the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid
legal interest of 12% per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from the second demand on 24
January 2001 because of the latters delay in discharging its monetary
obligation. Citing Article 1169 of the Civil Code, petitioner insists that the
delay started to run from the time it demanded the fulfilment of respondents
obligation under the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable for legal interest of
6% per annum from the date of petitioners last demand on 24 January
2001.
In rejecting petitioners position, the RTC stated that interests may only
accrue when the delay or the refusal of a party to pay is without any
justifiable cause. In this case, respondents failure to heed the demand was
due to the advice of One Virtual that petitioner allegedly breached its
undertakings as stated in the Purchase Agreement.49 The CA, however,
made no pronouncement on this matter.
We sustain petitioner. Article 2209 of the Civil Code is clear: if an obligation
consists in the payment of a sum of money, and the debtor incurs a delay,
the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest.
Delay arises from the time the obligee judicially or extrajudicially demands
from the obligor the performance of the obligation, and the latter fails to
comply. Delay, as used in Article 1169, is synonymous with default or mora,
which means delay in the fulfilment of obligations. It is the nonfulfillment of
an obligation with respect to time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2)
that the debtor delays performance; and (3) that the creditor requires the
performance judicially or extrajudicially.
Having held that a surety upon demand fails to pay, it can be held liable for
interest, even if in thus paying, its liability becomes more than the principal
obligation. The increased liability is not because of the contract, but
because of the default and the necessity of judicial collection.
However, for delay to merit interest, it must be inexcusable in nature.
In Guanio v. Makati-Shangri-la Hotel, citing RCPI v. Verchez, we held thus:
In culpa contractual the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief.
The law, recognizing the obligatory force of contracts, will not permit a party
to be set free from liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach upon the
contract confers upon the injured party a valid cause for recovering that
which may have been lost or suffered. The remedy serves to preserve the
interests of the promissee that may include his expectation interest, which is
his interest in having the benefit of his bargain by being put in as good a
position as he would have been in had the contract been performed, or his
reliance interest, which is his interest in being reimbursed for loss caused by
reliance on the contract by being put in as good a position as he would have
been in had the contract not been made; or his restitution interest, which is
his interest in having restored to him any benefit that he has conferred on
the other party.
Indeed, agreements can accomplish little, either for their makers or for
society, unless they are made the basis for action. The effect of every
infraction is to create a new duty, that is, to make RECOMPENSE to the one
who has been injured by the failure of another to observe his contractual
obligation unless he can show extenuating circumstances, like proof of his
exercise of due diligence or of the attendance of fortuitous event, to excuse
him from his ensuing liability.
We agree with petitioner that records are bereft of proof to show that
respondents delay was indeed justified by the circumstances that is, One
Virtuals advice regarding petitioners alleged breach of obligations. The
lower courts Decision itself belied this contention when it said that plaintiff is
not disputing that it did not complete commissioning work on one of the two
systems because One Virtual at that time is already in default and has not
paid GILAT. Assuming arguendo that the commissioning work was not
completed, respondent has no one to blame but its principal, One Virtual; if
only it had paid its obligation on time, petitioner would not have been forced
to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice
president of Gilat, repeatedly stated that petitioner had delivered all
equipment, including the licensed software; and that the equipment had 2. The defendant surety to pay the plaintiff the amount of Forty Four
been installed and in fact, gone into operation. Thousand Four Dollars and Four Cents (US$44,004.04) representing
attorney’s fees and litigation expenses.
Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.
stating that it accrues from the time judicial or extrajudicial demand is made
on the surety. This ruling is in accordance with the provisions of Article 1169 SO ORDERED. (Emphasis in the original)
of the Civil Code and of the settled rule that where there has been an extra-
judicial demand before an action for performance was filed, interest on the In so ruling, the RTC reasoned that there is "no dispute that plaintiff
amount due begins to run, not from the date of the filing of the complaint, [petitioner] delivered all the subject equipments [sic] and the same was
but from the date of that extra-judicial demand. Considering that respondent installed. Even with the delivery and installation made, One Virtual failed to
failed to pay its obligation on 30 May 2000 in accordance with the Purchase pay any of the payments agreed upon. Demand notwithstanding, defendant
Agreement, and that the extrajudicial demand of petitioner was sent on 5 failed and refused and continued to fail and refused to settle the
June 2000, we agree with the latter that interest must start to run from the obligation."8
time petitioner sent its first demand letter (5 June 2000), because the
obligation was already due and demandable at that time. Considering that its liability was indeed that of a surety, as "spelled out in
the Surety Bond executed by and between One Virtual as Principal, UCPB
GRANTED. as Surety and GILAT as Creditor/Bond Obligee,"9 respondent agreed and
bound itself to pay in accordance with the Payment Milestones. This
obligation was not made dependent on any condition outside the terms and
conditions of the Surety Bond and Payment Milestones.10
This is an appeal via a Petition for Review on Certiorari1 filed 6 November
2009 assailing the Decision2 and Resolution3 of the Court of Appeals (CA)
Insofar as the interests were concerned, the RTC denied petitioner’s claim
in CA-G.R. CV No. 89263, which reversed the Decision4 of the Regional
on the premise that while a surety can be held liable for interest even if it
Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461,
becomes more onerous than the principal obligation, the surety shall only
ordering respondent to pay petitioner a sum of money.
accrue when the delay or refusal to pay the principal obligation is without
any justifiable cause.11 Here, respondent failed to pay its surety obligation
The antecedent facts, as culled from the CA, are as follows:
because of the advice of its principal (One Virtual) not to pay.12 The RTC
then obligated respondent to pay petitioner the amount of USD1,200,000.00
On September 15, 1999, One Virtual placed with GILAT a purchase order
representing the principal debt under the Surety Bond, with legal interest at
for various telecommunications equipment (sic), accessories, spares,
the rate of 12% per annum computed from the time the judgment becomes
services and software, at a total purchase price of Two Million One Hundred
final and executory, and USD44,004.04 representing attorney’s fees and
Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of
litigation expenses.
the said purchase price for the goods delivered, One Virtual promised to pay
a portion thereof totalling US$1.2 Million in accordance with the payment
On 18 October 2007, respondent appealed to the CA.13 The appellate court
schedule dated 22 November 1999. To ensure the prompt payment of this
rendered a Decision14 in the following manner:
amount, it obtained defendant UCPB General Insurance Co., Inc.’s surety
bond dated 3 December 1999, in favor of GILAT.
WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction.
The trial court’s Decision dated December 28, 2006 is VACATED. Plaintiff-
During the period between [sic] September 1999 and June 2000, GILAT
appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to
shipped and delivered to One Virtual the purchased products and
proceed to arbitration, the outcome of which shall necessary bind the
equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to
parties, including the surety, defendant-appellant United Coconut Planters
"F-8"). All of the equipment (including the software components for which
Bank General Insurance Co., Inc.
payment was secured by the surety bond, was shipped by GILAT and duly
received by One Virtual. Under an endorsement dated December 23, 1999
SO ORDERED. (Emphasis in the original)
(Exhibit "E"), the surety issued, with One Virtual’s conformity, an
amendment to the surety bond, Annex "A" thereof, correcting its expiry date
The CA ruled that in "enforcing a surety contract, the ‘complementary-
from May 30, 2001 to July 30, 2001.
contracts-construed-together’ doctrine finds application." According to this
doctrine, the accessory contract must be construed with the principal
One Virtual failed to pay GILAT the amount of Four Hundred Thousand
agreement.15 In this case, the appellate court considered the Purchase
Dollars (US$400,000.00) on the due date of May 30, 2000 in accordance
Agreement entered into between petitioner and One Virtual as the principal
with the payment schedule attached as Annex "A" to the surety bond,
contract,16 whose stipulations are also binding on the parties to the
prompting GILAT to write the surety defendant UCPB on June 5, 2000, a
suretyship.17 Bearing in mind the arbitration clause contained in the
demand letter (Exhibit "G") for payment of the said amount of
Purchase Agreement18 and pursuant to the policy of the courts to
US$400,000.00. No part of the amount set forth in this demand has been
encourage alternative dispute resolution methods,19 the trial court’s
paid to date by either One Virtual or defendant UCPB. One Virtual likewise
Decision was vacated; petitioner and One Virtual were ordered to proceed
failed to pay on the succeeding payment instalment date of 30 November
to arbitration.
2000 as set out in Annex "A" of the surety bond, prompting GILAT to send a
second demand letter dated January 24, 2001, for the payment of the full
On 9 September 2008, petitioner filed a Motion for Reconsideration with
amount of US$1,200,000.00 guaranteed under the surety bond, plus
Motion for Oral Argument. The motion was denied for lack of merit in a
interests and expenses (Exhibits "H") and which letter was received by the
Resolution20 issued by the CA on 16 September 2009.
defendant surety on January 25, 2001. However, defendant UCPB failed to
settle the amount of US$1,200,000.00 or a part thereof, hence, the instant
Hence, the instant Petition.
complaint."5 (Emphases in the original)
On 31 August 2010, respondent filed a Comment21 on the Petition for
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6
Review. On 24 November 2010, petitioner filed a Reply.22
against respondent UCPB General Insurance Co., Inc., to recover the
amounts supposedly covered by the surety bond, plus interests and
ISSUES
expenses. After due hearing, the RTC rendered its Decision,7 the
dispositive portion of which is herein quoted:
From the foregoing, we reduce the issues to the following:
WHEREFORE, premises considered, the Court hereby renders judgment
1. Whether or not the CA erred in dismissing the case and ordering
for the plaintiff, and against the defendant, ordering, to wit:
petitioner and One Virtual to arbitrate; and
1. The defendant surety to pay the plaintiff the amount of One Million Two
2. Whether or not petitioner is entitled to legal interest due to the delay in
Hundred Thousand Dollars (US$1,200,000.00) representing the principal
the fulfilment by respondent of its obligation under the Suretyship
debt under the Surety Bond, with legal interest thereon at the rate of 12%
Agreement.
per annum computed from the time the judgment becomes final and
executory until the obligation is fully settled; and
THE COURT’S RULING
The existence of a suretyship agreement does not give the surety the right
to intervene in the principal contract, nor can an arbitration clause between
the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel
arbitration, unless a party entitled to it applies for this relief.23 This referral,
however, can only be demanded by one who is a party to the arbitration
agreement.24 Considering that neither petitioner nor One Virtual has asked
for a referral, there is no basis for the CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that
the creditor may proceed against the surety without having first sued the
principal debtor.26 Even the Surety Agreement itself states that respondent
becomes liable upon "mere failure of the Principal to make such prompt
payment."27 Thus, petitioner should not be ordered to make a separate
claim against One Virtual (via arbitration) before proceeding against
respondent.28
On the other hand, respondent maintains that a surety contract is merely an
accessory contract, which cannot exist without a valid obligation.29 Thus,
the surety may avail itself of all the defenses available to the principal debtor
and inherent in the debt30 – that is, the right to invoke the arbitration clause
in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is joint and
solidary with that of the principal debtor. This undertaking makes a surety
agreement an ancillary contract, as it presupposes the existence of a
principal contract.31 Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, its liability to the
creditor or "promise" of the principal is said to be direct, primary and
absolute; in other words, a surety is directly and equally bound with the
principal.32 He becomes liable for the debt and duty of the principal obligor,
even without possessing a direct or personal interest in the obligations
constituted by the latter.33 Thus, a surety is not entitled to a separate notice
of default or to the benefit of excussion.34 It may in fact be sued separately
or together with the principal debtor.35
After a thorough examination of the pieces of evidence presented by both
parties,36 the RTC found that petitioner had delivered all the goods to One
Virtual and installed them. Despite these compliances, One Virtual still failed
to pay its obligation,37 triggering respondent’s liability to petitioner as the
former’s surety.1âwphi1 In other words, the failure of One Virtual, as the
principal debtor, to fulfill its monetary obligation to petitioner gave the latter
an immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the Purchase
Agreement, being the principal contract to which the Suretyship Agreement
is accessory, must take precedence over arbitration as the preferred mode
of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction
Co. Ltd.,38 that "[the] acceptance [of a surety agreement], however, does
not change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-
debtor relationship. In other words, the acceptance does not give the surety
the right to intervene in the principal contract. The surety’s role arises only
upon the debtor’s default, at which time, it can be directly held liable by the
creditor for payment as a solidary obligor." Hence, the surety remains a
stranger to the Purchase Agreement. We agree with petitioner that
respondent cannot invoke in its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that contract.39 An arbitration
agreement being contractual in nature,40 it is binding only on the parties
thereto, as well as their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in stating that a
referral to arbitration may only take place "if at least one party so requests
not later than the pre-trial conference, or upon the request of both parties
thereafter." Respondent has not presented even an iota of evidence to show
that either petitioner or One Virtual submitted its contesting claim for
arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt
itself.43 They are contracted precisely to mitigate risks of non-performance
on the part of the obligor. This responsibility necessarily places a surety on
the same level as that of the principal debtor.44 The effect is that the
creditor is given the right to directly proceed against either principal debtor
or surety. This is the reason why excussion cannot be invoked.45 To require
the creditor to proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce. At any rate, as we
have held in Palmares v. Court of Appeals,46 "if the surety is dissatisfied
with the degree of activity displayed by the creditor in the pursuit of his
principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor."
Interest, as a form of indemnity, may be awarded to a creditor for the delay
incurred by a debtor in the payment of the latter’s obligation, provided that
the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid
legal interest of 12% per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from the second demand on 24
January 2001 because of the latter’s delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the
delay started to run from the time it demanded the fulfilment of respondent’s
obligation under the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable for legal interest of
6% per annum from the date of petitioner’s last demand on 24 January
2001.
In rejecting petitioner’s position, the RTC stated that interests may only
accrue when the delay or the refusal of a party to pay is without any
justifiable cause.48 In this case, respondent’s failure to heed the demand
was due to the advice of One Virtual that petitioner allegedly breached its
undertakings as stated in the Purchase Agreement.49 The CA, however,
made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the
payment of a sum of money, and the debtor incurs a delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal
interest."
Delay arises from the time the obligee judicially or extrajudicially demands
from the obligor the performance of the obligation, and the latter fails to
comply.50 Delay, as used in Article 1169, is synonymous with default or
mora, which means delay in the fulfilment of obligations.51 It is the
nonfulfillment of an obligation with respect to time.52 In order for the debtor
(in this case, the surety) to be in default, it is necessary that the following
requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially.53
Having held that a surety upon demand fails to pay, it can be held liable for
interest, even if in thus paying, its liability becomes more than the principal
obligation.54 The increased liability is not because of the contract, but
because of the default and the necessity of judicial collection.55
However, for delay to merit interest, it must be inexcusable in nature. In
Guanio v. Makati-Shangri-la Hotel,56 citing RCPI v. Verchez,57 we held
thus:
In culpa contractual x x x the mere proof of the existence of the contract and
the failure of its compliance justify, prima facie, a corresponding right of
relief. The law, recognizing the obligatory force of contracts, will not permit a
party to be set free from liability for any kind of misperformance of the
contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to
preserve the interests of the promissee that may include his "expectation
interest," which is his interest in having the benefit of his bargain by being
put in as good a position as he would have been in had the contract been
performed, or his "reliance interest," which is his interest in being
reimbursed for loss caused by reliance on the contract by being put in as
good a position as he would have been in had the contract not been made;
or his "restitution interest," which is his interest in having restored to him any
benefit that he has conferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made
the basis for action. The effect of every infraction is to create a new duty,
that is, to make RECOMPENSE to the one who has been injured by the
failure of another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence x x x
or of the attendance of fortuitous event, to excuse him from his ensuing
liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show that
respondent’s delay was indeed justified by the circumstances – that is, One
Virtual’s advice regarding petitioner’s alleged breach of obligations. The
lower court’s Decision itself belied this contention when it said that "plaintiff
is not disputing that it did not complete commissioning work on one of the
two systems because One Virtual at that time is already in default and has
not paid GILAT."58 Assuming arguendo that the commissioning work was
not completed, respondent has no one to blame but its principal, One
Virtual; if only it had paid its obligation on time, petitioner would not have
been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi,
vice president of Gilat, repeatedly stated that petitioner had delivered all
equipment, including the licensed software; and that the equipment had
been installed and in fact, gone into operation.59 Notwithstanding these
compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in
stating that it accrues from the time judicial or extrajudicial demand is made
on the surety. This ruling is in accordance with the provisions of Article 1169
of the Civil Code and of the settled rule that where there has been an extra-
judicial demand before an action for performance was filed, interest on the
amount due begins to run, not from the date of the filing of the complaint,
but from the date of that extra-judicial demand.60 Considering that
respondent failed to pay its obligation on 30 May 2000 in accordance with
the Purchase Agreement, and that the extrajudicial demand of petitioner
was sent on 5 June 2000,61 we agree with the latter that interest must start
to run from the time petitioner sent its first demand letter (5 June 2000),
because the obligation was already due and demandable at that time.
With regard to the interest rate to be imposed, we take cue from Nacar v.
Gallery Frames,62 which modified the guidelines established in Eastern
Shipping Lines v. CA63 in relation to Bangko Sentral-Monetary Board
Circular No. 799 (Series of 2013), to wit:
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 6% 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.
xxxx
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 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Applying the above-discussed concepts and in the absence of an
agreement as to interests, we are hereby compelled to award petitioner
legal interest at the rate of 6% per annum from 5 June 2000, its first date of
extra judicial demand, until the satisfaction of the debt in accordance with
the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED.
The assailed Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 89263 are REVERSED. The Decision of the Regional Trial Court,
Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as
the award of legal interest is concerned. Respondent is hereby ordered to
pay legal interest at the rate of 6% per annum from 5 June 2000 until the
satisfaction of its obligation under the Suretyship Contract and Purchase
Agreement.
SO ORDERED.
YULIM INTERNATIONAL COMPANY LTD., JAMES YU,
JONATHAN YU, AND ALMERICK TIENG LIM, PETITIONERS,
VS. INTERNATIONAL EXCHANGE BANK (NOW UNION BANK
OF THE PHILIPPINES)
In the assailed Decision[1] dated February 1, 2012 in CA-G.R. CV No. 95522,
the Court of Appeals (CA) modified the Decision [2] dated December 21, 2009
of the Regional Trial Court (RTC) of Makati City, Branch 145, in Civil Case
No. 02-749, holding that James Yu (James), Jonathan Yu (Jonathan) and
Almerick Tieng Lim (Almerick), who were capitalist partners in Yulim
International Company Ltd. (Yulim), collectively called as the petitioners,
were jointly and severally liable with Yulim for its loan obligations with
respondent International Exchange Bank (iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic
partnership, a credit facility in the form of an Omnibus Loan Line for
P5,000,000.00, as evidenced by a Credit Agreement [3] which was secured by
a Chattel Mortgage[4] over Yulim's inventories in its merchandise warehouse
at 106 4th Street, 9th Avenue, Caloocan City. As further guarantee, the
partners, namely, James, Jonathan and Almerick, executed a Continuing
Surety Agreement[5] in favor of iBank.
Yulim availed of its aforesaid credit facility with iBank, as follows:
Promissory Note
Face Value PN Date Date of Maturity
No.
2110005852 P 1,298,926.00 10/26/2000 01/29/2001
2110006026 1,152,963.00 11/18/2000 02/05/2001
2110006344 499,890.00 12/04/2000 03/12/2001
2110006557 798,010.00 12/18/2000 04/23/2001
2110100189 496,521.00 01/11/2001 05/07/2001[6]
The above promissory notes (PN) were later consolidated under a single
promissory note, PN No. SADDK001014188, for P4,246,310.00, to mature
on February 28, 2002.[7] Yulim defaulted on the said note. On April 5, 2002,
iBank sent demand letters to Yulim, through its President, James, and
through Almerick,[8] but without success. iBank then filed a Complaint for
Sum of Money with Replevin[9] against Yulim and its sureties. On August 8,
2002, the Court granted the application for a writ of replevin. Pursuant to
the Sheriff's Certificate of Sale dated November 7, 2002, [10] the items seized
from Yulim's warehouse were worth only P140,000.00, not P500,000.00 as
the petitioners have insisted.[11]
On October 2, 2002, the petitioners moved to dismiss the complaint
insisting that their loan had been fully paid after they assigned to iBank
their Condominium Unit No. 141, with parking space, at 20 Landsbergh
Place in Tomas Morato Avenue, Quezon City.[12] They claimed that while the
pre-selling value of the condominium unit was P3.3 Million, its market value
has since risen to P5.5 Million. [13]The RTC, however, did not entertain the
motion to dismiss for non-compliance with Rule 15 of the Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating that they
have paid their loan by way of assignment of a condominium unit to iBank,
as well as insisting that iBank's penalties and charges were exorbitant,
oppressive and unconscionable.[14]
Ruling of the RTC
After trial on the merits, the RTC rendered judgment on December 21,
2009, the dispositive portion of which reads, as follows:
WHEREFORE, in view of the foregoing considerations, the Court finds the
individual defendants James Yu, Jonathan Yu and Almerick Tieng Lim, not
liable to the plaintiff, iBank, hence the complaint against them is hereby
DISMISSED for insufficiency of evidence, without pronouncement as to
cost.
This court, however, finds defendant corporation Yulim International
Company Ltd. liable; and it hereby orders defendant corporation to pay
plaintiff the sum of P4,246,310.00 with interest at 16.50% per annum from
February 28, 2002 until fully paid plus cost of suit.
The counterclaims of defendants against plaintiff iBank are hereby
DISMISSED for insufficiency of evidence.
SO ORDERED.[15]
Thus, the RTC ordered Yulim alone to pay iBank the amount of
P4,246,310.00, plus interest at 16.50% per annum from February 28, 2002
until fully paid, plus costs of suit, and dismissed the complaint against
petitioners James, Jonathan and Almerick, stating that there was no iota of
evidence that the loan proceeds benefited their families. [16]
The petitioners moved for reconsideration on January 12, 2010; [17] iBank on
January 19, 2010 likewise filed a motion for partial reconsideration. [18] In its
Joint Order[19] dated March 8, 2010, the RTC denied both motions.
Ruling of the CA
On March 23, 2010, Yulim filed a Notice of Partial Appeal, followed on
March 30, 2010 by iBank with a Notice of Appeal.
Yulim interposed the following as errors of the court a quo:
I. THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY
[iBANK] THE AMOUNT OF P4,246,310.00 WITH INTEREST AT
16.5% PER ANNUM FROM FEBRUARY 28, 2002 UNTIL FULLY
PAID.
 II. THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO
PAY ATTORNEY'S FEES, MORAL DAMAGES AND EXEMPLARY
DAMAGES.[20]
For its part, iBank raised the following as errors of the RTC:
I. THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL
[PETITIONERS JAMES, JONATHAN AND ALMERICK]
SOLIDARILY LIABLE WITH [YULIM] ON THE BASIS OF THE
CONTINUING SURETYSHIP AGREEMENT EXECUTED BY
THEM.
II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE
[PETITIONERS] LIABLE FOR PENALTY CHARGES UNDER
THE CREDIT AGREEMENT AND PROMISSORY NOTES SUED
UPON.
III. THE TRIAL COURT ERRED IN NOT HOLDING [THE
PETITIONERS] LIABLE TO [iBANK] FOR ATTORNEY'S FEES
AND INDIVIDUAL [PETITIONERS] JOINTLY AND SEVERALLY
LIABLE WITH [YULIM] FOR COSTS OF SUIT INCURRED BY
[iBANK] IN ORDER TO PROTECT ITS RIGHTS.[21]
Chiefly, the factual issue on appeal to the CA, raised by petitioners James,
Jonathan and Almerick, was whether Yulim's loans have in fact been
extinguished with the execution of a Deed of Assignment of their
condominium unit in favor of iBank, while the corollary legal issue, raised
by iBank, was whether they should be held solidarily liable with Yulim for its
loans and other obligations to iBank.
The CA ruled that the petitioners failed to prove that they have already paid
Yulim's consolidated loan obligations totaling P4,246,310.00, for which it
issued to iBank PN No. SADDK001014188 for the said amount. It held that
the existence of a debt having been established, the burden to prove with
legal certainty that it has been extinguished by payment devolves upon the
debtors who have offered such defense. The CA found the records bereft of
any evidence to show that Yulim had fully settled its obligation to iBank,
further stating that the so-called assignment by Yulim of its condominium
unit to iBank was nothing but a mere temporary arrangement to provide
security for its loan pending the subsequent execution of a real estate
mortgage. Specifically, the CA found nothing in the Deed of Assignment
which could signify that iBank had accepted the said property as full
payment of the petitioners' loan. The CA cited Manila Banking Corporation
v. Teodoro, Jr.[22] which held that an assignment to guarantee an obligation
is in effect a mortgage and not an absolute conveyance of title which confers
ownership on the assignee.
Concerning the solidary liability of petitioners James, Jonathan and
Almerick, the CA disagreed with the trial court's ruling that it must first be
shown that the proceeds of the loan redounded to the benefit of the family of
the individual petitioners before they can be held liable. Article 161 of the
Civil Code and Article 121 of the Family Code cited by the RTC apply only
where the liability is sought to be enforced against the conjugal partnership
itself. In this case, regardless of whether the loan benefited the family of the
individual petitioners, they signed as sureties, and iBank sought to enforce
the loan obligation against them as sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and denied that of the
petitioners, as follows:
WHEREFORE, the foregoing considered, [iBank's] appeal is PARTLY
GRANTED while [the petitioners'] appeal is DENIED. Accordingly, the
appealed decision is hereby MODIFIED in that [petitioners] James Yu,
Jonathan Yu and A[l]merick Tieng Lim are hereby held jointly and severally
liable with defendant-appellant Yulim for the payment of the monetary
awards. The rest of the assailed decision is AFFIRMED.
SO ORDERED.[23]
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before this Court:
1. The CA erred in ordering petitioners James, Jonathan and Almerick
jointly and severally liable with petitioner Yulim to pay iBank the amount of
P4,246,310.00 with interest at 16.5% per annum from February 28, 2002
until fully paid.
2. The CA erred in not ordering iBank to pay the petitioners moral damages,
exemplary damages, and attorney's fees.[24]
The petitioners insist that they have paid their loan to iBank. They maintain
that the letter of iBank to them dated May 4, 2001, which "expressly
stipulated that the petitioners shall execute a Deed of Assignment over one
condominium unit No. 141, 3rd Floor and a parking slot located at 20
Landsbergh Place, Tomas Morato Avenue, Quezon City," was with the
understanding that the Deed of Assignment, which they in fact executed,
delivering also to iBank all the pertinent supporting documents, would serve
to totally extinguish their loan obligation to iBank. In particular, the
petitioners state that it was their understanding that upon approval by
iBank of their Deed of Assignment, the same "shall be considered as full and
final payment of the petitioners' obligation." They further assert that iBank's
May 4, 2001 letter expressly carried the said approval.
The petitioner invoked Article 1255 of the Civil Code, on payment by
cession, which provides:
Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the
contrary, shall only release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors shall be governed by
special laws.
Ruling of the Court
The petition is bereft of merit.
Firstly, the individual petitioners do not deny that they executed the
Continuing Surety Agreement, wherein they "jointly and severally with the
PRINCIPAL [Yulim], hereby unconditionally and irrevocably guarantee
full and complete payment when due, whether at stated maturity, by
acceleration, or otherwise, of any and all credit accommodations that have
been granted" to Yulim by iBank, including interest, fees, penalty and other
charges.[25] Under Article 2047 of the Civil Code, these words are said to
describe a contract of suretyship. It states:
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.
In a contract of suretyship, one lends his credit by joining in the principal
debtor's obligation so as to render himself directly and primarily responsible
with him without reference to the solvency of the principal. [26] According to
the above Article, if a person binds himself solidarily with the principal
debtor, the provisions of Articles 1207 to 1222, or Section 4, Chapter 3, Title
I, Book IV of the Civil Code on joint and solidary obligations, shall be
observed. Thus, where there is a concurrence of two or more creditors or of
two or more debtors in one and the same obligation, Article 1207 provides
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."
"A surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable."[27] And it is well settled
that when the obligor or obligors undertake to be "jointly and severally"
liable, it means that the obligation is solidary, [28] as in this case. There can be
no mistaking the same import of Article I of the Continuing Surety
Agreement executed by the individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL,
hereby unconditionally and irrevocably guarantee full and complete
payment when due, whether at stated maturity, by acceleration, or
otherwise, of any and all credit accommodations that have been granted or
may be granted, renewed and/or extended by the BANK to the PRINCIPAL.
The liability of the SURETIES shall not be limited to the maximum principal
amount of FIVE MILLION PESOS (P5,000,000.00) but shall include
interest, fees, penalty and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of payment and not
merely of collection and is intended to be a perfect and continuing
indemnity in favor of the BANK for the amounts and to the extent stated
above.
The liability of the SURETIES shall be direct, immediate and not contingent
upon the pursuit of the BANK of whatever remedies it may have against the
PRINCIPAL of the other securities for the Accommodation. [29]
Thereunder, in addition to binding themselves "jointly and severally" with
Yulim to "unconditionally and irrevocably guarantee full and complete
payment" of any and all credit accommodations that have been granted to
Yulim, the petitioners further warrant that their liability as sureties "shall be
direct, immediate and not contingent upon the pursuit [by] the BANK of
whatever remedies it may have against the PRINCIPAL of other
securities." There can thus be no doubt that the individual petitioners have
bound themselves to be solidarily liable with Yulim for the payment of its
loan with iBank.
As regards the petitioners' contention that iBank in its letter dated May 4,
2001 had "accepted/approved" the assignment of its condominium unit in
Tomas Morato Avenue as full and final payment of their various loan
obligations, the Court is far from persuaded. On the contrary, what the letter
accepted was only the collaterals provided for the loans, as well as the
consolidation of the petitioners' various PN's under one PN for their
aggregate amount of P4,246,310.00. The letter goes on to spell out the terms
of the new PN, such as, that its expiry would be February 28, 2002 or a term
of 360 days, that interest would be due every 90 days, and that the rate
would be based on the 91-day Treasury Bill rate or other market reference.
Nowhere can it be remotely construed that the letter even intimates an
understanding by iBank that the Deed of Assignment would serve to
extinguish the petitioners' loan. Otherwise, there would have been no need
for iBank to mention therein the three "collaterals" or "supports" provided
by the petitioners, namely, the Deed of Assignment, the Chattel Mortgage
and the Continuing Surety Agreement executed by the individual
petitioners. In fact, Section 2.01 of the Deed of Assignment expressly
acknowledges that it is a mere "interim security for the repayment of any
loan granted and those that may be granted in the future by the BANK to
the ASSIGNOR and/or the BORROWER, for compliance with the terms
and conditions of the relevant credit and/or loan documents
thereof."[30] The condominium unit, then, is a mere temporary security, not a
payment to settle their promissory notes.[31]
Even more unmistakably, Section 2.02 of the Deed of Assignment provides
that as soon as title to the condominium unit is issued in its name, Yulim
shall "immediately execute the necessary Deed of Real Estate Mortgage in
favor of the BANK to secure the loan obligations of the ASSIGNOR and/or
the BORROWER."[32] This is a plain and direct acknowledgement that the
parties really intended to merely constitute a real estate mortgage over the
property. In fact, the Deed of Assignment expressly states, by way of a
resolutory condition concerning the purpose or use of the Deed of
Assignment, that after the petitioners have delivered or caused the delivery
of their title to iBank, the Deed of Assignment shall then become null and
void. Shorn of its legal efficacy as an interim security, the Deed of
Assignment would then become functus officio once title to the
condominium unit has been delivered to iBank. This is so because the
petitioners would then execute a Deed of Real Estate Mortgage over the
property in favor of iBank as security for their loan obligations.
Respondent iBank certainly does not share the petitioners' interpretation of
its May 4, 2001 letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and
the Vice President of iBank's Commercial Banking Group, declared in her
testimony that the purpose of the Deed of Assignment was merely to serve
as collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,] was negotiating
with your bank, [is it] not a fact that the defendant offered to you a
[condominium] unit so that that will constitute full payment of his
obligation?
A: No ma'am. It was not offered that way. It was offered as security or
collateral to pay the outstanding loans. But the premise is, that he will pay x
x x in cash. So, that property was offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the document was signed. It
was worded out[.]
xxxx
Q: Do you remember if a real estate mortgage was executed over this
property that was being assigned to the plaintiff?
A: To my recollection, none at all.
Q: Madam Witness, this Deed of Assignment was considered as full payment
by the plaintiff bank, what document was executed by the plaintiff bank?
A: It should have been a Dacion en Pago.
Q: Was there such document executed in this account?
A: None.[33]
To stress, the assignment being in its essence a mortgage, it was but a
security and not a satisfaction of the petitioners' indebtedness. [34]Article
1255[35] of the Civil Code invoked by the petitioners contemplates the
existence of two or more creditors and involves the assignment of the entire
debtor's property, not a dacion en pago.[36] Under Article 1245 of the Civil
Code, "[d]ation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales."
Nowhere in the Deed of Assignment can it be remotely said that a sale of the
condominium unit was contemplated by the parties, the consideration for
which would consist of the amount of outstanding loan due to iBank from
the petitioners.
WHEREFORE, premises considered, the petition is DENIED.
SO ORDERED.
GUARANTEE - EFFECTS
Kuenzle & Streiff vs. Tan Sunco
Facts: Kuenzle & Streiff instituted an action against Chung Chu Sing for
therecovery of indebtedness. Before Kuenzle & Streiff could secure
judgment, TanSunco brought an action against Chung Chu Sing for the
payment of anotherobligation for which Tan Sunco acted as guarantor.
Chung Chu Sing confessed judgment in favor of Tan Sunco. Immediately
after obtaining judgment, TanSunco caused to be levied upon under
execution all the properties of ChungChu Sing. Kuenzle & Streiff
commenced an action to set aside the judgment,claiming it was obtained by
the fraud and collusion, and that Tan Sunco hadnot paid the debt for which
as guarantor he obtained the judgment.
Issue: WON a guarantor who sues his principal debtor before paying the
debthimself entitled to recover judgment for the debt?
Held: No, while the surety has the right to obtain judgment against
hisprincipal debtor, he will not be permitted to realize on said judgment to
thepoint of actual collection until he has satisfied, or caused to be satisfied,
theobligation the payment of the obligation of which he assures.A guarantor
who obtains judgment against his principal cannot executesaid judgment
against the latter’s property until he has paid the debt for whichhe stands as
guarantor.
This is an action to set aside four judgments rendered by a justice of the
peace of the city of Manila upon the ground that they were procured by
collusion and fraud, to the injury and damage of the plaintiff.
The court below, after hearing the evidence offered upon the trial, found
against the plaintiff and rendered a judgment in favor of the defendant
dismissing the plaintiff's complaint, with costs.
The plaintiff did not make a motion for a new trial in the court below and this
court can not, therefore, look into the evidence but must confine itself to the
facts stated in the opinion of the court below for the purpose of ascertaining
whether or not the judgment of that court can be sustained.
It appears from the opinion of the court below that Tan Sunco was a surety
for Chung Chu Sing for the payment by the latter of the purchase price of
certain merchandise purchased by said Chung Chu Sing of Ed. A. Keller &
Co.; that the time within which said merchandise was to be paid for under
the terms of its purchase had expired long before said four judgments were
obtained, and that the debt remained unpaid; that the total debt was
composed of four invoices of varying amounts P395.50, P450, P565, and
P320.20; that an action had been commenced against the said debtor,
Chung Chu Sing, by the present plaintiff for the recovery of the
indebtedness due it; that shorly before judgment was secured in that action
the said Tan Sunco began four separate actions against the said debtor
upon the said invoices in the court of the justice of the peace of the city of
Manila; that soon thereafter the said Sunco and the said debtor appeared
before said court, and the said debtor then and there confessed judgment in
favor of said Tan Sunco in each one of said actions, Tan Sunco thereby
obtaining against the said debtor four separate judgments; that immediately
upon the recovery of said judgments the plaintiff in those actions, Sunco,
caused to be levied thereunder executions upon all of the property of said
debtor, which property was not more than sufficient to pay the judgments
under which the levies were made; that thereupon the action at bar was
begun and the sales under said executions were enjoined pending the
determination thereof. These are the admitted facts.
The plaintiff in this action contends that said four judgments ought to be set
wholly aside on account of their having been obtained, as he claims, by
collusion and fraud, because the debtor did not owe anything to Sunco at
the time the four judgments were secured, basing that contention on the
fact, which is admitted, that Sunco had not yet paid the sums for which he
had become surety and in connection with which he obtained the
judgments.
We think that article 1843 of the Civil Code is applicable to this case. In their
purposes articles 1838 and 1843 are quite distinct, although in perfect
harmony, the latter making more clearly effective the purpose of the former.
Article 1838 provides for the enforcement of the rights of the surety against
the debtor after he has paid the debt. Article 1843 provides for his protection
before he has paid but after he has become liable to do so. The one gives a
right of action after payment, the other a protective remedy before payment.
(Supreme court of Spain, March 22, 1901.) The one is a substantive right,
the other of the nature of a preliminary remedy. The one gives a right of
action which, without the provisions of the other, might be worthless. The
remedy given in article 1843 purposes to obtain for the surety "relief from
the burden of his suretyship or a guaranty to defend him against any
proceedings of the creditor and from the danger of insolvency of the debtor."
(Last paragraph of art. 1843.) Article 1838, speaking strictly, has no such
purpose. When the surety's rights under this article become available, he is
past the point where a preliminary protective remedy is of any value to him.
It being evident that the purpose of article 1843 is to give to the surety a
remedy in anticipation of the payment of the debt, which debt, being due, he
could be called upon to pay at any time, it remains only to say, in this
connection, that the only procedure known under our present practice to
enforce that right is by action. (Manresa, Civil Code, vol. 12, p. 320.) The
defendant Sunco availed himself of that right against the debtor. The
methods employed by him to realize his end were unusual but not of
themselves fraudulent. We agree with the trial court that the evidence
adduced is entirely insufficient to establish such fraud and collusion as
would justify a decision setting aside the judgments assailed. (Arts. 1291,
1297, Civil Code; Peña vs. Mitchell, 9 Phil. Rep., 587; Jones vs. Brittan, 13
Fed. Cas., No. 7455; Oberly vs. Oberly, 190 Pa. St., 341; Caldwell vs.
Fifield, 24 N. J. L., 150.) The facts stated in the opinion of the court below
abundantly justify the conclusion.
But while the surety has the right to obtain as he did the judgments against
the principal debtor, he ought not to be allowed to realize on said judgments
to the point of actual collection of the same until he has satisfied or caused
to be satisfied the obligation the payment of which he assures. Otherwise, a
great opportunity for collusion and improper practices between the surety
and his principal would be offered which might result to the injury and
prejudice of the creditor who holds the claim against them.
The judgment of the court below is, therefore, affirmed, with costs against
the appellant. But the said Sunco shall not execute said judgments against
the property of the judgment debtor until he has paid the debt for which he
stands surety. So ordered.
Tuason, Tuason, Inc. vs. Machuca
Section 2. Effects of Guaranty Between the Debtor and the Guarantor(Arts.
2066-2072 NCC)
Facts: Manila Compania de Seguros signed a note for 10,000 in favor of
Tuason, Tuason Inc. to guarantee a liability of Universal Trading Co, In turn,
Universal Trading Co. and its president, Antonio Machuca, in his personal
capacity, executed a document wherein they bound themselves solidarily
toreimburse Manila Compania de Seguros all of such sum it may pay or
becomebound to pay, upon its obligation to Tuason, Tuason Inc. whether or
not it shallhave actually paid such sums or any part thereof. Universal
Trading Co. wasdeclared insolvent. Tuason, Tuason, Inc. brought action
against Manila Compania De Seguros torecover the value of the note and
obtained final judgment. Later, ManilaCompania De Seguros filed a
complaint against Machuca to recover theamount which Manila Compania
De Seguros was sentenced to pay Tuason, Tuason, Inc, plus attorney’s
fees, judicial costs and sheriff’s fees, and interest,although Manila
Compania De Seguros had not, in fact, paid the amount of the judgment.
Issue:
a) WON Tuason, Tuason Inc. Is entitled to the relief sought in view of
theabove facts?
b) WON Tuason, Tuason Inc. has the right to recover from Machuca
morethan the value of the note executed by Tuason, Tuason, Inc. in favor of
Manila Compania de Seguros?
Held:
a. Yes. It is indispensable that Universal Trading Co. became bound byvirtue
of final judgment to pay the value of the note executed by it infavor of
Manila Compania de Seguros, and according to the documentexecuted
solidarily by Universal Trading Co. and Machuca, Machucabound himself to
pay Tuason, Tuason, Inc. as soon as the latter mayhave become bound and
liable, whether or not it shall have actuallypaid.
b. Machuca must not be responsible for the expenses incurred by
ManilaCompania De Seguros in the litigation between it and Tuason,
Tuason,Inc. and it cannot charge Machuca with expenses it was compelled
tomake by reason of its fault. It is entitled only to expenses incurred by itin
the action against Machuca.Art. 2071 the guarantor, even before having
paid, may proceed against theprincipal debtor:1.When he is being sued for
the payment2.In the case of insolvency of the principal debtor3.When the
debtor has bound himself to relieve him from the guarantywithin specified
period, and this period has expired4.When the debt has become
demandable, by reason of the expiration of the period of the payment5.After
the lapse of ten years, when the principal obligation has no fixedperiod for
its maturity, unless it be such nature that it cannot beextinguished except
within a period longer than ten years6.If there are reasonable grounds to
fear that the principal debtor intendsto abscond7.If the principal debtor is in
imminent danger of becoming insolventIn all these, cases, the action of the
guarantor is to obtain release from theguaranty, or to demand a security that
shall protect him from any proceedingsby the creditor and from the danger
of the insolvency of the debtor.
By giving a bond in the sum of P9,663 executed by "Manila Compania de
Seguros," the Universal Trading Company was allowed by the Insular
Collector of Customs to withdraw from the customhouse sundry goods
imported by it and consigned through the Bank of the Philippine Islands.
Subsequently, the Bank of the Philippine Islands claimed the value of the
goods, and the Insular Collector of Customs obligated the "Manila
Compania de Seguros" to pay the sum of P9,663, the amount of the bond.
Before paying this amount to the Insular Collector of Customs, the "Manila
Compania de Seguros" obtained from the Universal Trading Company and
Tuason, Tuason & Co., a solidary note for the sum of P9,663 executed by
said companies in its favor. Before signing said note, Tuason, Tuason & Co.,
in turn, caused the Universal Trading Company and its president Antonio
Machuca, personally, to sign a document (Exhibit B), wherein they bound
themselves solidarily to pay, reimburse, and refund to the company all such
sums or amounts of money as it, or its representatives, may pay or become
bound to pay, upon its obligation with "Manila Compania de Seguros,"
whether or not it shall have actually paid such sum or sums or any part
thereof. The Universal Trading Company having been declared insolvent,
"Manila Compania de Seguros" brought an action in the lower court against
Tuason, Tuason & Co. to recover the value of the note for P9,663 and
obtained final judgment therein, which was affirmed by this court on appeal,
for the ttotal sum of P12,197.27, which includes the value of the note with
interest thereon.[1] Subsequently, all the rights of Tuason, Tuason & Co.
were transferred to the plaintiff Tuason, Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this action to recover of Antonio
Machuca the sum of P12,197.27 which it was sentenced to pay in the case
filed against it by "Manila Compania de Seguros plus P3,000 attorney's
fees, and P155.92 court's costs and sheriff's fees, that is, a total of
P15,353.19, together with P1,180.46 as interest upon the sum of
P15,353.19 at the rate of 10 per cent per annum from October 8, 1922, to
July 8, 1923, and interest on the sum of P16,535.65 at the rate of 10 per
cent from July 8, 1923, until this sum was paid, and, in addition the sum of
P1,653.65 for attorney's fees in this case. For its cause of action, the
plaintiff alleges that it had paid "Manila Compania de Seguros" the sum of
P12,197.27, the amount of the judgment against it. The dispositive part of
the judgment appealed from is as follows:
"Judgment is rendered against the defendant Antonio Machuca, and he is
hereby ordered to pay the plaintiff company the sum of fifteen thousand
three hundred fifty-three pesos and nineteen centavos (P15,353.19), with
compound interest thereon at the rate of ten per cent (10%) per annum, to
be computed quarterly, that is, one thousand one hundred eighty pesos and
forty-six centavos (P1,180.46), which is ten per cent interest on the amount
of fifteen thousand three hundred fifty-three pesos and nineteen centavos
(P15,353.19) from October 8, 1922, to July 8, 1923, and ten per cent on the
sum of sixteen thousand five hundred thirty-three pesos and sixty-five
centavos (16,533.65) from July 8, 1923, until full payment, to be computed
quarterly, besides the sum of one thousand six hundred fifty-three pesos
and sixty-five centavos (P1,653.65), which is ten per cent (10%) on the
amount due and the interest thereon, which said defendant promised to pay
as penalty and attorney's fees in the event of a suit being necessary to
recover the debt, and the costs. So ordered."
It appears from the evidence that what the plaintiff alleges to be a payment
made to "Manila Compania de Seguros" for the satisfaction of the judgment
rendered in favor of the latter is.the execution by Albina Tuason of a
document Exhibit D in favor of "Manila Compania de Seguros." In this
document Albina Tuason declares that she assumes and makes hers the
obligation to pay the amount of said judgment to "Manila Compania de
Seguros" within one year and mortgages a property described in the
document as security for this obligation. This obligation of Albina Tuason
was accepted by the "Manila Compania de Seguros," in the following terms:
"I accept the foregoing security executed by Miss Albina Tuason in favor of
"Manila Compania de Seguros.' " It, thus, appears that the plaintiff has not in
fact paid the amount of the judgment to "Manila Compania de Seguros."
The action brought by the plaintiff is that which a surety, who pays the debt
of the debtor, is entitled to bring to recover the amount thus paid (art. 1823,
Civil Code). It is evident that such a payment not having been made, the
alleged cause of action does not exist.
The plaintiff company argues that, at all events, it is entitled to bring this
action under article 1843 of the Civil Code, which provides that the surety
may, even before making payment, bring action against the principal debtor.
This contention of the plaintiff is untenable. The present action, according to
the terms of the complaint, is clearly based on the fact of payment. It is true
that, under article 1843, an action lies against the principal debtor even
before the surety pays the debt, but it clearly appears in the complaint that
this is not the action brought by the plaintiff. Moreover this article 1843
provides several cumulative remedies in favor of the surety, at his election,
and the surety who brings an action under this article must choose the
remedy and apply for it specifically. At any rate this article does not provide
for the reimbursement of any amount, as is sought by the plaintiff.
But although the plaintiff has not as yet paid "Manila Compania de Seguros"
the amount of the judgment against it, and even considering that this action
cannot be held to come under article 1843 of the Civil Code, yet the plaintiff
is entitled to the relief sought in view of the facts established by the
evidence. The plaintiff became bound, by virtue of a final judgment, to pay
the value of the note executed by it in favor of "Manila Compania de
Seguros." According to the document executed solidarily by the defendant
and the Universal Trading Company, the defendant bound himself to pay the
plaintiff as soon as the latter may have become bound and liable, whether
or not it shall have actually paid. It is indisputable that the plaintiff became
bound and liable by a final judgment to pay the value of the note to "Manila
Compania de Seguros."
The defendant also contends that the document executed by Albina Tuason
in favor of "Manila Compania de Seguros" assuming and making hers the
obligation of Tuason, Tuason & Co., was a novation of the contract by
substitution of the debtor, and relieved Tuason, Tuason & Co. from all
obligation in favor of "Manila Compania de Seguros." As to this, it is enough
to say that if this was what Albina Tuason contemplated in signing the
document, evidently it was not what "Manila Compania de Seguros"
accepted. As above stated, "Manila Compania de Seguros" accepted this
document only as additional security for its credit and not as a novation of
the contract.
Our conclusion is that the plaintiff has the right to recover of the defendant
the sum of P9,663, the value of the note executed by the plaintiff in favor of
"Manila Compailia de Seguros" which the plaintiff is under obligation to pay
by virtue of a final judgment. We do not believe, however, that the defendant
must pay the plaintiff the expenses incurred by it in the litigation between it
and "Manila Compania de Seguros." That litigation was originated by the
plaintiff having failed to fulfill its obligation with "Manila Compania de
Seguros," and it cannot charge the defendant with the expenses which it
was compelled to make by reason of its own fault. It is entitled, however, to
the expenses incurred by it in this action brought against the defendant,
which are fixed at Pl,653.65 as attorney's fees.
The judgment appealed from is modified, and the defendant is sentenced to
pay the plaintiff the sum of P9,663, with interest thereon at the rate of 10 per
cent per annum from July 19, 1923, when the complaint was filed until full
payment thereof, plus the sum of P1,653.65 for attorney's fees, without
special pronouncement as to costs. So ordered.
Wise & Co. vs. Tanglao
Section 1. Effects of Guaranty Between the Guarantor and the Creditor
Facts: Atty. Dionisio Tanglao (Cornelio David’s atty) by power of
attorneymortgaged two real properties belonging to him to secure the
payment of a judgment credit of P640 obtained by Wise & Co. against
Cornelio David (agentof W&C). As Cornelio David paid only a part of the
indebtedness, Wise & Co.filed an action against Atty. Tanglao to recover the
unpaid balance.
Issue: WON atty. Dionisio Tanglao is liable for the balance?
Held: No, Nothing is stated in the compromise agreement to the effect
thatAtty. Tanglao become David’s surety for the payment of the judgment
debt.
(1) Tanglao did not contract any personal responsibility for the payment of
the sum of P640. The only obligation which he contracted was thatresulting
from the mortgage. However, a foreclosure suit was notinstituted against
Atty. Tanglao but a purely personal action for therecovery of the amount still
owned by Atty. Tanglao.
(2) Even granting that Atty. Tanglao may be considered a surety (or
guarantor), the action does not lie against him on the ground that all
thelegal remedies against him have not previously been asked for andDavid
has property sufficient to pay the balance of the debt thepayment of which is
sought of Tanglao in his alleged capacity as surety.A guaranty or surety
must be expressed and cannot be presumed.Art 2058 the guarantor cannot
be compelled to pay the creditor unless thelatter has exhausted all the
property of the debtor, and has resorted to alllegal remedies against the
debtor.
In the Court of First Instance of Manila, Wise & Co. instituted civil case No.
41129 against Cornelio C. David for the recovery of a certain sum of money
David was an agent of Wise & Co. and the amount claimed from him was
the result of a liquidation of accounts showing that he was indebted in said
amount. In said case Wise & Co. asked and obtained a preliminary
attachment of David's property. To avoid the execution of said attachment,
David succeeded in having his Attorney Tanglao execute on January 16,
1932, a power of attorney (Exhibit A) in his favor, with the following clause:
To sign for me as guarantor for himself in his indebtedness to Wise &
Company of Manila, which indebtedness appears in civil case No. 41129, of
the Court of First Instance of Manila, and to mortgage my lot (No. 517-F of
the subdivision plan Psd-20, being a portion of lot No. 517 of the cadastral
survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said
obligations to the Wise & Company, Inc., of Manila.
On the 18th of said month David subscribed and on the 23d thereof, filed in
court, the following document (Exhibit B):
COMPROMISE
Come now the parties, plaintiff by the undersigned attorneys and
defendants in his own behalf and respectfully state:
I. That the defendant confesses judgment for the sum of six hundred forty
pesos (P640), payable at the rate of eighty pesos (P80) per month, the first
payment to be made on February 15, 1932 and successively thereafter until
the full amount is paid; the plaintiff accepts this stipulation.
II. That as security for the payment of said sum of P640, defendant binds in
favor of, and pledges to the plaintiff, the following real properties:
1. House of light materials described under tax declaration No. 9650 of the
municipality of Angeles, Province of Pampanga, assessed at P320.
2. Accesoria apartments with a ground floor of 180 sq. m. with the first story
of cement and galvanized of iron roofing located on the lot belonging to
Mariano Tablante Geronimo, said accesoria is described under tax
declaration No. 11164 of the municipality of Angeles, Province of
Pampanga, assessed at P800.
3. Parcel of land described under Transfer Certificate of Title No. 2307 of the
Province of Pampanga recorded in the name of Dionisio Tanglao of which
defendant herein holds a special power of attorney to pledge the same in
favor of Wise & Co., Inc., as a guarantee for the payment of the claim
against him in the above entitled cause. The said parcel of land is bounded
as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW.
lot No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente
Dayrit; containing 431 sq. m. and described in tax declaration No. 11977 of
the municipality of Angeles, Pampanga, assessed at P423.
That this guaranty is attached to the properties above mentioned as first lien
and for this reason the parties agree to register this compromise with the
Register of Deeds of Pampanga, said lien to be cancelled only on the
payment of the full amount of the judgment in this case.
Wherefore, the parties pray that the above compromise be admitted and
that an order issue requiring the register of Deeds of Pampanga to register
this compromise previous to the filing of the legal fees.
David paid the sum of P343.47 to Wise & Co., on account of the P640 which
he bound himself to pay under Exhibit B, leaving an unpaid balance of
P296.53.
Wise & Co. now institutes this case against Tanglao for the recovery of said
balance of P296.53.
There is no doubt that under Exhibit, A, Tanglao empowered David, in his
name, to enter into a contract of suretyship and a contract of mortgage of
the property described in the document, with Wise & Co. However, David
used said power of attorney only to mortgage the property and did not enter
into contract of suretyship. Nothing is stated in Exhibit B to the effect that
Tanglao became David's surety for the payment of the sum in question.
Neither is this inferable from any of the clauses thereof, and even if this
inference might be made, it would be insufficient to create an obligation of
suretyship which, under the law, must be express and cannot be presumed.
It appears from the foregoing that defendant, Tanglao could not have
contracted any personal responsibility for the payment of the sum of P640.
The only obligation which Exhibit B, in connection with Exhibit A, has
created on the part of Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said P640. However, a
foreclosure suit is not instituted in this case against Tanglao, but a purely
personal action for the recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may be considered as a
surety under Exhibit B, the action does not yet lie against him on the ground
that all the legal remedies against the debtor have not previously been
exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court
of Spain of March 2, 1891). The plaintiff has in its favor a judgment against
debtor David for the payment of debt. It does not appear that the execution
of this judgment has been asked for and Exhibit B, on the other hand,
shows that David has two pieces of property the value of which is in excess
of the balance of the debt the payment of which is sought of Tanglao in his
alleged capacity as surety.
For the foregoing considerations, the appealed judgment is reversed and
the defendant is absolved from the complaint, with the costs to the plaintiff.
So ordered.
Mira Hermanos, Inc. vs. Manila Tobaconists, Inc.
Facts: To secure the obligation of Manila Tobaconists up to the sum of 3,000
under contract with Mira Hermanos who agreed to deliver to Manila
Tobacconists’ merchandise for sale on consignment under certain
specifiedterms, Provident Insurance Co. executed a bond of 3,000. Since
the value of merchandise exceeded 3,000 Manila Compania de Seguros
executed a bond of 2,000 with the same terms and conditions that the
bonds would respond forthe obligation of Manila Tobacconists. Mira
Hermanos sued the 2 insurancecompanies for the amount of 2,500
Issue: WON Provident Insurance Co. is entitled to the benefit of division.
Held: No, The benefit of division is applicable only wherethere are
severalguarantors or sureties of only one debtor for the same debt. In the
instantcase, although the 2 bonds on their face appear to guarantee the
same debtco-extensively up to 2K – that Provident Insurance Co. alone
extending beyondthe sum up to 3K – in realitysaid bonds do not guarantee
the same debt.Art. 2065 should there be several guarantors of only one
debtor and for thesame debt, the obligation to answer for the same is
divided among all. Thecreditor cannot claim from the guarantors except
shares which they arerespectively bound to pay, unless solidarily has been
expressly stipulated. Thebenefit of division against the co-guarantors
ceased in the same cases and forthe same reasons as the benefit of
excussion against the principal debtor.
This appeal has been certified to this court by the Court of Appeals because
it involves only a question of law arising from the following facts:
By virtue of a written contract (Exhibit A) entered into between Mira
Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver
to the latter merchandise for sale on consignment under certain specified
terms and the latter agreed to pay to the former on or before the 20th day of
each month the invoice value of all the merchandise sold during the
preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists,
Inc., a bond of P3,000, which was executed by the Provident Insurance Co.,
on September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation
of the Tobacconists under the contract (Exhibit A) up to the sum of P3,000.
In the month of October, 1940, the volume of the business of the
Tobacconists having increased so that the merchandise received by it on
consignment from Mira Hermanos exceeded P3,000 in value, Mira
Hermanos required of the Tobacconist an additional bond of P2,000, and in
compliance with that requirement the defendant Manila Compañia de
Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with
the same terms and conditions (except as to the amount) as the bond of the
Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was made of the
transactions between Mira Hermanos and the Tobacconists, as a result of
which there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a demand upon the two
surety companies for the payment of said sum.
The Provident Insurance Co., paid only the sum of P1,363.67, which is 60%
of the amount owned by the Tobacconists to Mira Hermanos, alleging that
the remaining 40% should be paid by the other surety, Manila Compañia de
Seguros, in accordance with article 8137 of the Civil Code. The Manila
Compañia de Seguros refused to pay the balance, contending that so long
as the liability of the Tobacconists did not exceed P3,000, it was not bound
to pay anything because its bond referred only to the obligation of the
Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos,
Inc., brought this action against the Manila Tobacconists, Inc., Provident
Insurance Co., and Manila Compañia de Seguros to recover from them
jointly and severally the sum of P909.12 with legal interest thereon from the
date of the complaint.
The controversy is mainly between the two surety companies. In its answer
the defendant Manila Compañia de Seguros alleged as a special defense:
4. — Que la fianza otorgada por esta demandada 'Manila Compania de
Seguros', el Octubre de 1940 fue exigida por la demandante solo cuando el
importe de las mercancias servidas por esta y pedidas por la demandada
Manila Tobacconists, Inc., excedio de la suma de P3,000 garantizada por la
otra demandada Provident Insurance Co.; por lo que quedo entendido entre
la demandante y las tres demandadas que la fianza de P2,000 prestada el
Octubre de 1940 por esta demandada, 'Manila Compañia de Seguros', se
limitaba y era para responder solamente del importe de mercancias
servidad a la demandada Manila Tobacconists, Inc., en tanto en cuanto el
valor de esas mercancias excediese de P3,000 asegurada por la fianza
P3,000 de la Manila Tobacconists, Inc.
To that the defendant Provident Insurance Co. replied:
Que no es verdad el hecho alegado por la demandada 'Manila Compañia
de Seguros' en el parrafo 4 de su contestacion que dice: 'que quedo
entendido entre la demandante y las tres demandadas que la fianza de
P2,000 prestada el Octubre de 1940 por esta demandada "Manila
Compañia de Seguros" se limitaba y era para responder solamente del
importe de mercancias servidas a la demandada Manila Tocacconists, Inc.,
en tanto en cuanto el valor de esas mercancias excediese de P3,000
asegurada por la fianza de P3,000 de la "Manila Tobacconists, Inc."
Que la demandada, aqui compareciente, nunca ha tenido conocimiento ni
menos prestado su consentimiento a esa supuesta inteligencia.
Que esta demandada no puede ser privada del beneficio de division a que
tiene derecho como co-fiador, sin que conste expresamente, por escrito, su
conformidad y consentimiento de renunciar a su derecho.
Thus there was an issue of fact between the two surety companies, viz.:
whether the understanding between the plaintiff and the three defendants
was, that the bond of P2,000 given by the Manila Compañia de Seguros
was limited to and responded for the obligation of the Tobacconists only
insofar as it might exceed the amount of P3,000 secured by the bond of the
Provident Insurance Co. That issue of fact was decided by the trial court in
favor of the contention of the Manila Compañia de Seguros; and judgment
was rendered by it against the Provident Insurance Co. alone for the
amount claimed by the plaintiff.
Appellant's first two assignments of error (the third being a mere
consequence of the first two) read as follows:
1. El juzgado inferior incurrio en error al hacer caso omiso del beneficio de
division reclamado por la demandada Provident Insurance Co. of the
Philippines con arreglo a lo dispuesto en el Art. 1837 del Codigo Civil.
2. El juzgado erro al aplicar, en lugar de lo dispuesto en el Art. 1837 del
Codigo Civil, una teoria suya, declarando que la fianza de P3,000.00
prestada por Provident Insurance Co. of the Philippines y la fianza de
P2,000 de Manila Compañia de Seguros, cada una tiene una esfera de
responsabilidad propia e independiente la una de la otra.
Discussing these two assignments of error jointly, counsel says:
La unica cuestion que se presenta en esta causa es puramente de derecho.
Si el saldo deudor de P2,272.79 que Tobacconists ha dejado de pagar,
deben pagarlo en su lugar, los dos fiadores proporcionalmente a la cuantia
en que se obligaron o debe pagarlo sola y exclusivamente la fiadora
Provident Insurance Co., como ordena la sentencia opelada.
Thus it appears that the issue of fact raised by and between the two surety
companies before the trial court and decided by the latter in favor of the
appellee Manila Compañia de Seguros is no longer raised before this Court,
appellant Provident Insurance Co. having limited the issue in this appeal to
whether or not it is entitled to the "benefit of division" provided in article
1837 of the Civil Code, which reads as follows:
Art. 1837. Should there be several sureties of only one debtor for the same
debt, the liability therefor shall be divided among them all. The creditor can
claim from each surety only his proportional part unless liability in solidum
has been expressly stipulated.
The right to the benefit of division against the co-sureties for their respective
shares ceases in the same cases and for the same reason as that to an
exhaustion of property against the principal debtor.
With particular reference to the second assignment of error, we find that the
statement of the trial court to the effect that the bond of P3,000 responded
for the obligation of the Tobacconists up to the sum of P3,000 and the bond
of P2,000 responded for the obligation of the Tobacconists only insofar as it
might exceed P3,000 and up to P5,000, is not a mere theory but a finding of
fact based upon the undisputed testimony of the witnesses called by the
defendant Manila Compañia de Seguros in support of its special defense
hereinbefore quoted. While on its face the bond given by the Manila
Compañia de Seguros contains the same terms and conditions (except as
to the amount) as those of the bond given by the Provident Insurance Co.,
nevertheless it was pleaded by the Manila Compañia de Seguros and found
proven by the trial court "que la intencion realmente que se habia
perseguido, por lo menos en lo que respecta a la Manila Tobacconists, Inc.,
y la Manila Compañia de Seguros, era la de que esta fianza de P2,000
habria de responder solamente por todo aquello que excediera de los
P3,000."
The evidence upon which that finding is based is not only undisputed but
perfectly reasonable and convincing. For, as the trial court observed, there
would have been no need for the additional bond of P2,000 if its purpose
were to cover the first P2,000 already covered by the P3,000 bond of the
Provident Insurance Co. Indeed, we might add, if the purpose of the
additional bond of P2,000 were to cover not the excess over and above
P3,000 but the first P2,000 of the obligation of the principal debtor like the
bond of P3,000 which covered only the first P3,000 of said obligation, then it
would result that had the obligation of the Tobacconists exceeded P3,000,
neither of the two bonds would have responded for the excess, and that
was precisely the event against which Mira Hermanos wanted to protect
itself by demanding the additional bond of P2,000. For instance, suppose
that the obligation of the principal debtor, the Tobacconists, amounted to
P5,000; if both bonds were co-extensive up to P2,000 — as would logically
follow if appellant's contention were correct — the result would be that the
first P2,000 of the obligation would have to be divided between and paid
equally by the two surety companies, which should pay P1,000 each, and of
the balance of P3,000 the Provident Insurance Co. would have to pay only
P1,000 more because its liability is limited to the first P3,000, thus leaving
the plaintiff in the lurch as to the excess of P2,000. That was manifestly not
the intention of the parties. As a matter of fact, when the Provident gave its
bond and fixed the premiums thereon it assumed an obligation of P3,000 in
solidum with the Tobacconists without any expectation of any benefit of
division with any other surety. The additional bond of P2,000 was, more
than a year later, required by the creditor of the principal debtor for the
protection of said creditor and certainly not for the benefit of the original
surety, which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion as to
the real intent and agreement of the parties with regard to the bond of
P2,000 given by the Manila Compañia de Seguros, destroys at the same
time the theory of the appellant regarding the applicability of article 1837 of
the Civil Code.
That article refers to several sureties of only one debtor for the same debt.
In the instant case, altho the two bonds on their face appear to guarantee
the same debt co-extensively up to P2,000 — that of the Provident
Insurance Co. alone extending beyond that sum up to P3,000 — it was
pleaded and conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because the Provident Insurance
Co. guarantees only the first P3,000 and the Manila Compañia de Seguros,
only the excess over and above said amount up to P5,000. Article 1837
does not apply to this factual situation.
The judgment of the trial court is affirmed, with the only modification that it
shall be entered against the defendants Manila Tobacconists, Inc., and
Provident Insurance Co. jointly and severally. Appellant shall pay the costs
of this instance.
MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,
vs. BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN,
GONZALO P. AMBOY and ANDRES TUNAC, defendants-appellees.
In a complaint filed in the Court of First Instance of Manila, the plaintiff, a
domestic corporation engaged in the bonding business, hereafter called the
company, alleges that the Batu Construction & Company, a partnership the
members of which are the other three defendants, requested it to post, as it
did, a surety bond for P8,812 in favor of the Government of the Philippines
to secure the faithful Performance of the construction of the Bacarra Bridge,
Project PR-72 (3), in Ilocos Norte, undertaken by the partnership, as
stipulated in a construction on contract entered into on 11 July 1950 by and
between the partnership and the Government of the Philippines, on
condition that the defendants would "indemnify the COMPANY for any
damage, loss, costs, or charges, or expenses of whatever kind and nature,
including counsel or attorney's fees, which the COMPANY may, at any time,
sustain or incur, as a consequence of having become surety upon the
above mentioned bond; said attorney's fees shall not be less than fifteen
(15%) per cent of the total amount claimed in any action which the
COMPANY may institute against the undersigned (the defendants except
Andres Tunac) in Court," and that "Said indemnity shall be paid to the
COMPANY as soon as it has become liable for the payment of any amount,
under the above-mentioned bond, whether or not it shall have paid such
sum or sums of money, or any part thereof," as stipulated in a contract
executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the
unsatisfactory progress of the work on the bridge, the Director of Public
Works, with the approval of the Secretary of Public Works and
Communications, annulled, the construction contract referred to and notified
the plaintiff Company that the Government would hold it (the Company)
liable for any amount incurred by the Government for the completion of the
bridge, in excess of the contract price (Exhibit D); that on 19 December
1951 (should be 23 November 1951), Ricardo Fernandez and 105 other
persons brought an action in the Justice of the Peace Court of Laoag, Ilocos
Norte, against the partnership, the individual partners and the herein plaintiff
Company for the collection of unpaid wages amounting to P5,960.10, lawful
interests thereon and costs (Exhibit E); that the defendants are in imminent
danger of becoming insolvent, and are removing and disposing, or about to
remove and dispose, of their properties with intent to defraud their creditors,
particularly the plaintiff Company; and that the latter has no other sufficient
security to protect its rights against the defendants. Upon these allegations,
the plaintiff prays that, upon the approval of a bond and on the strength of
the allegations of the verified complaint, a writ attachment be issued and
levied upon the properties of the defendants; and that after hearing,
judgment be rendered " ordering the defendants to deliver to the plaintiff
such sufficient security as shall protect plaintiff from the any proceedings by
the creditors on the Surety Bond aforementioned and from the danger of
insolvency of the defendants; and to allow costs to the herein plaintiff," and "
for such other measures of relief as may be proper and just in the
premises." Attached to the complaint are a verification and affidavit of
attachment; and copies of the surety bond marked Annex A; of the
indemnity contract marked Annex B; and of the letter of the Acting Director
of Public Works to the plaintiff dated 30 May 1951, marked Annex C.
Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3 and
4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9
of the complaint, because he has never promised to put up an indemnity
bond in favor of the plaintiff nor has he ever entered into any indemnity
agreement with it; because the partnership or the Batu Construction &
Company was fulfilling its obligations in accordance with the terms of the
construction contract; because the Republic of the Philippines, through the
Director of Public, Works, had no authority to annul the contract at its own
initiative; because the Justice of the Peace court of Laoag, Ilocos Norte had
no jurisdiction to hear and decide a case for collection of P5,960.10; and
because the defendants were not in imminent danger of insolvency, neither
did they remove or dispose of their properties with intent to defraud their
creditors. By way of affirmative defenses, he alleges that the signing by
Carlos N. Baquiran of the indemnity agreement for and in behalf of the
partnership Batu Construction & Company did not bind the latter to the
plaintiff and as the partnership is not bound, he (Andres Tunac), as a
member thereof, is also not bound; that he not being a party to the said
agreement, the plaintiff has no cause of action against him; that in the event
the partnership is bound by the indemnity agreement he invokes his right of
exhaustion of the property of the partnership before the plaintiff may
proceed against his property. And as a counterclaim he alleges that the
plaintiff brought the action against him maliciously and in bad faith for the
purpose of annoying him and damaging his professional reputation, he
having a flourishing and successful practice as engineer in Ilocos Norte,
thereby compelling him to defend himself; that to secure the issuance of a
writ of attachment the plaintiff made false representations; and that the
issuance of the writ upon such false representations of the plaintiff caused
him damages in the sum of P10,000 including expenses of litigation and
attorney's fees. Upon the foregoing he prays that the complaint be
dismissed as to him and the defendant Batu Construction & Company, with
costs against the plaintiff; that the latter be ordered to pay him the sum of
P10,000; and that he be granted such other remedies as may be just,
equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint,
except those that may be deemed admitted in the special defenses, and
alleges that he is not in imminent danger of insolvency and is not removing
and disposing or about to remove and dispose of his properties, because he
has no property; that has been no liquidation of the expenses incurred in the
construction of the Bacarra Bridge, Project PR-72(3) to determine whether
there would be a balance of the contract price which may be applied to pay
the claim for unpaid wages of Ricardo Fernandez et al. sought to be
collected in civil case No. 198 of the Justice of the Peace Court of Laoag,
Ilocos Norte, and not until after such liquidation shall have been made could
his liability and that of his co-defendants be determined and fixed; that if
after proper liquidation's there be a deficit of the contract price the
defendants are willing to pay the claim for unpaid wages of Ricardo
Fernandez et al. Upon these allegations he prays that the issuance of the
writ of attachment prayed for by the plaintiff be held in abeyance until after
civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte,
shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2,
3,4, 5, 6, and 11 of the complaint but alleges that he has no sufficient
knowledge to form a belief as to the truth of the claim of Ricardo Fernandez
et al. set forth in paragraph 7 of the complaint, for there has never been a
liquidation between the defendants and the Bureau of Public Works. He
further denies specifically paragraphs 8, 9 and 10 of the complaint. By way
of special defenses he alleges that there has been no liquidation by and
between the defendants and the Bureau of Public Works on Project PR-
72(3) to determine whether the total amount spent for the construction of
the bridge exceeded the contract price; that after the determination of the
respective liabilities of the parties in civil case No. 198 of the Justice of the
Peace Court of Laoag, Ilocos Norte, if any there be against the defendants
herein, and such liability could not be paid out of the balance of the contract
price of Project PR-72(3), the defendants are ready and willing to assume
their respective responsibilities. Upon these allegations he prays that the
complaint of the plaintiff be dismissed; that the issuance of the writ of
attachment prayed for be denied; and that he be granted such other relief
as may be just and equitable, with costs against the plaintiff.
At the hearing, the plaintiff presented its evidence. After the plaintiff had
rested its case, defendant Gonzalo P. Amboy moved for the dismissal of the
complaint, on the ground that the remedy provided for in the last paragraph
of article 2071 of the new Civil Code may be availed of by the guarantor
only and not by a surety.
Acting upon this motion to dismiss the trial court made the following
findings:
. . . That on July 8, 1950, the defendant Batu Construction & Company, as
principal, and the plaintiff Manila Surety & Fidelity Co. Inc., as surety,
executed a surety bond for the sum of P8,812.00 to insure faithful
performance of the former's obligation as contractor for the construction of
the Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province. On the
same date, July 8,1950, the Batu Construction & Company and the
defendants Carlos N. Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila Surety & Fidelity Co. Inc..,
against damage, loss or expenses which it may sustain as a consequence
of the surety bond executed by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from the Director of
Public Works (Exhibit B) annulling its contract with the Government for the
construction of the Bacarra Bridge because of its failure to make satisfactory
progress in the execution of the works, with the warning that ,any amount
spent by the Government in the continuation of the work, in excess of the
contract price, will be charged against the surety bond furnished by the
plaintiff. It also appears that a complaint by the laborers in said project of the
Batu Construction & Company was filed against it and the Manila Surety
and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10.
and, being of the opinion that the provisions of article 2071 of the new Civil
Code may be availed of by a guarantor only and not by a surety the
complaint, with costs against the plaintiff.
From this order the plaintiff Company has appealed to this Court, because it
proposes to raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and 20
July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for
leave to prove damages they allegedly suffered as a result of the
attachment levied upon their properties. On 15 August 1953 the Court heard
the evidence on damages. On 23 September 1953 the Court found and held
that the defendant Gonzalo P. Amboy is entitled to recover from the plaintiff
damages equivalent to 6 per cent interest per annum on the sum of P35 in
possession of the Provincial Treasurer of Ilocos Norte, which was garnished
pursuant to the writ of attachment, from the date of garnishment until its
charge; but the claims for damages of Andres Tunac and Gonzalo P. Amboy
allegedly suffered by them in their business, moral damages and attorney's
fees were without basis in law and in fact. Hence their recovery was denied.
The Court dissolved the writ of attachment. From this last order only the
plaintiff Company has appealed.
The main question to determine is whether the last paragraph of article
2071 of the new Civil Code taken from article 1843 of the old Civil Code
may be availed of by a surety.
A guarantor is the insurer of the solvency of the debtor; a surety is an
insurer of the debt. A guarantor binds himself to pay if the principal is unable
to pay; a surety undertakes to pay if the principal does not pay.1 The reason
which could be invoked for the non-availability to a surety of the provisions
of the last paragraph of article 2071 of the new Civil Code would be the fact
that guaranty like commodatum2 is gratuitous. But guaranty could also be
for a price or consideration as provided for in article 2048. So, even if there
should be a consideration or price paid to a guarantor for him to insure the
performance of an obligation by the principal debtor, the provisions of article
2071 would still be available to the guarantor. In suretyship the surety
becomes liable to the creditor without the benefit of the principal debtor's
exclusion of his properties, for he (the surety) maybe sued independently.
So, he is an insurer of the debt and as such he has assumed or undertaken
a responsibility or obligation greater or more onerous than that of guarantor.
Such being the case, the provisions of article 2071, under guaranty, are
applicable and available to a surety. The reference in article 2047 to, the
provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on
solidary or several obligations, does not mean that suretyship which is a
solidary obligation is withdrawn from the applicable provisions governing
guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article 2071
of the new Civil Code, because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of lack of
progress in the construction of the bridge is no proof of such insolvency. It
does not fall under paragraph 3, because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a specified period
which already has expired, because the surety bond does not fix any period
of time and the indemnity agreement stipulates one year extendible or
renewable until the bond be completely cancelled by the person or entity in
whose behalf the bond was executed or by a Court of competent
jurisdiction. It does not come under paragraph 4, because the debt has not
become demandable by reason of the expiration of the period for payment.
It does not come under paragraph 5 because of the lapse of 10 years, when
the principal obligation has no period for its maturity, etc., for 10 years have
not yet elapsed. It does not fall under paragraph 6, because there is no
proof that "there are reasonable grounds to fear that the principal debtor
intends to abscond." It does not come under paragraph 7, because the
defendants, as principal debtors, are not in imminent danger of becoming
insolvent, there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of article 2071 of
the new Civil Code, because the action brought by Ricardo Fernandez and
105 persons in the Justice of the Peace Court of Laoag, province of Ilocos
Norte, for the collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge, Project PR-72 (3),
undertaken by the Batu Construction & Company, and one of the
defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co.,
Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the
guarantor, even before having paid, may proceed against the principal
debtor "to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor or from the danger of
insolvency of the debtor, when he (the guarantor) is sued for payment. It
does not provide that the guarantor be sued by the creditor for the payment
of the debt. It simply provides that the guarantor of surety be sued for the
payment of an amount for which the surety bond was put up to secure the
fulfillment of the obligation undertaken by the principal debtor. So, the suit
filed by Ricardo Fernandez and 105 persons in the Justice of the Peace
Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages
earned in connection with the work done by them in the construction of the
Bacarra Bridge, Project PR-72(3), is a suit for the payment of an amount for
which the surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal debtors (the
defendants) in favor of the creditor, the Government of the Philippines.
The order appealed from dismissing the complaint is reversed and set
aside, and the case remanded to the court below for determination of the
amount of security that would protect the plaintiff Company from any
proceedings by the creditor or from the danger of insolvency of the
defendants, the principal debtors, and direction to the defendants to put up
such amount of security as may be established by competent evidence,
without pronouncement as to costs.
The writ of attachment having been issued improvidently because, although
there is an allegation in the verified complaint that the defendants were in
imminent danger of insolvency and that they were removing or disposing, or
about to remove or dispose, of their properties, with intent to defraud their
creditors, particularly the plaintiff Company, still such allegation was not
proved, the fact that a complaint had been filed against the defendants and
the plaintiff Company in the Justice of the Peace Court of Laoag, Ilocos
Norte, for the collection of an amount for unpaid wages of the plaintiffs
therein who claimed to have worked in the construction of the bridge, being
insufficient to prove it, and because the relief prayed for in the complaint for
security that shall protect it from any proceedings by the creditor and from
the danger of the defendants becoming insolvent is inconsistent with the
state of insolvency of the defendants or their being in imminent danger of
insolvency, the order awarding 6 per cent on the sum of P35 in possession
of the Provincial Treasurer owned by the defendant Gonzalo P. Amboy
garnished by virtue of the writ of attachment, from the date of the
garnishment until its discharge, and denying recovery of the amounts of
damages claimed to have been suffered by the defendants, is affirmed, the
defendants not having appealed therefrom.
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs. COURT OF APPEALS, JOSEPH L.G. CHUA and JALECO
DEVELOPMENT, INC., respondents.
This petition seeks the reversal of the Court of Appeals' decision affirming
the earlier decision of the Regional Trial Court of Makati, Branch 150 in Civil
Case No. 7889 dismissing petitioner Philippine Bank of Communications'
(PBCOM) complaint for annulment of a Deed of Exchange executed by
respondent Joseph L.G. Chua in favor of Jaleco Development, Inc.
(JALECO). The deed of exchange was alleged to be in fraud of PBCOM as
creditor of Chua who previously signed as one of the sureties in three (3)
Surety Agreements executed in favor of PBCOM. It involved a transfer by
Chua of his real property in exchange for shares of stocks of JALECO.
The facts of the case as summarized by the appellate court are not in
dispute, to wit:
On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety
Agreement in favor of Philippine Bank of Communications (PBCOM for
short) with defendant-appellee Joseph L.G. Chua, as one of the sureties
(Exh. "A"). Again, on October 1, 1981, Fortune Motors (Phils.), Inc. executed
another Surety Agreement in favor of PBCOM with Chua likewise acting as
one of the sureties (Exh. "A-1").
From March 7, 1983 to May 3, 1983 Fortune Motors, (Phils.) thru its
authorized officers and/or representatives executed several trust receipts
(Exhibits "B", "B-1", "B-2", "B-3", "B-4", "B-5" and "B-6") in favor of PBCOM,
the total principal amount of which was P2,492,543.00.
On March 6, 1981, Forte Merchant Finance, Inc., executed a Surety
Agreement in favor of PBCOM with Joseph L.G. Chua as one of the sureties
(Exh. "A-2").
On May 13, 1983 to March 16, 1984, Forte Merchant Finance, Inc. obtained
credit accommodations from PBCOM in the form of trust receipt (Exh. "B-7")
and loans represented by promissory notes (Exhibits "C", "C-1", "C-2", and
"C-3") in the total amount of P2,609,862.00.
On October 24, 1983 Chua executed a Deed of Exchange (Exh. "F")
transferring a parcel of land with improvements thereon covered by TCT No.
S-52808 (343721) to JALECO Development, Inc., in exchange for 12,000
shares of said Corporation with a par value of P1,200,000.00. As a result,
TCT No. 126573 of the Register of Deeds of Rizal covering the
aforementioned parcel of land was issued in the name of JALECO
Development, Inc., on November 24, 1983.
On November 2, 1983, Chua sold 6,000 shares of JALECO Development,
Inc., to Mr. Chua Tiong King for P600,000.00 (Exh. "10"-Chua; Exh. "3"-
JALECO) and another 6,000 shares of JALECO Development, Inc. to
Guillermo Jose, Jr. also for P600,000.00 (Exh. "5"-JALECO) and Caw Le Ja
Chua, wife of Chua sold the 6,000 share of JALECO Development, Inc., to
Chua Tiong King for P200,000.00 (Exh. "11"-Chua).
In the meanwhile, for failure of both Fortune Motors (Phils.), Inc. and Forte
Merchant Finance, Inc. to meet their respective financial obligations with
PBCOM, the latter filed Civil Case No. 84-25159 against Fortune Motors
(Phils.), Inc., Joseph L. G. Chua, George D. Tan, Edgar L. Rodriguez and
Jose C. Alcantara and Civil Case No. 84-25160 against Forte Merchant
Finance, Inc., Joseph L. G. Chua, George O. Tan and Edgar L. Rodriguez
with the Regional Trial Court of Manila, both for Sum of Money with Writ of
Preliminary Attachment where PBCOM was able to obtain a notice of levy
on the properties of Fortune Motors (Phils.) covered by TCT No. S-41915
(Makati, MM IV) and S-54185 to 86 (Province of Rizal). When plaintiff was
able to locate Chua's former property situated in Dasmariñas, Makati, Metro
Manila, covered by TCT No. S-52808 containing an area of 1,541 square
meters which was already transferred to JALECO Development, Inc., under
TCT No. 126573 by virtue of the Deed of Exchange dated October 24,
1983, PBCOM filed Civil Case No. 7889 for annulment of Deed of Exchange
with the Regional Trial Court of Makati, Metro Manila.
In due course, a decision was rendered on September 18, 1986 dismissing
said case. (Rollo, pp. 37-39)
In affirming the dismissal of the complaint, the appellate court stated: The
Deed of Exchange was neither submitted nor offered as evidence rendering
the petitioner's cause of action untenable. Furthermore, the appellate court
stated that the case for annulment of the deed of exchange was filed at a
time when two (2) other cases for sums of money were filed against the
respondent as one of the sureties of Fortune Motors (Phils.), Inc. (Civil Case
No. 84-25159) and of Forte Merchant Finance, Inc. (Civil Case No. 84-
25160) which are both pending. Hence, the annulment case which was filed
in the hope of receiving favorable judgments in the two (2) other cases in
the future is premature. Finally, the appellate court stated that the
petitioner's interests in the meantime are sufficiently protected by a writ of
preliminary attachment on several properties of one of the principal debtors.
The petition is impressed with merit.
The records reveal the following:
In its petition filed with the lower court, the petitioner alleged among others:
xxx xxx xxx
12. That plaintiff was able to locate a parcel of land with buildings and
improvements thereon situated in Dasmariñas Village, Makati, Metro
Manila, with T.C.T. No. S-52808, containing an area of 1,514 square meters,
but the said property was transferred to the name of a corporation named
Jaleco Development Inc., pursuant to the Deed of Exchange executed
between Defendant Joseph L. G. Chua and Jaleco Development, Inc.,
dated October 24, 1983, photocopy of T.C.T. No. S-52808, the Deed of
Exchange, and T.C.T. No. 126573 are hereto attached as Annexes E, F, and
G; and made integral part hereof; (Rollo, pp. 95-96)
xxx xxx xxx
In his answer, respondent Chua stated:
xxx xxx xxx
That paragraph 12, is admitted; the said Deed of Exchange (Annex "F") was
done in good faith, was done in accordance with law and same is valid;
(Rollo, p. 44)
xxx xxx xxx
Chua's admission of the existence of the Deed of Exchange, attached to the
"Petition as Annex "F" falls squarely within the scope of Judicial Admissions
under Section 4, Rule 129 of the Rules of Court. The rule provides:

Judicial Admissions. — An admission, verbal or written, made by a party in
the course of the proceeding 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.
As early as 1925 in the case of Asia Banking Corporation v. Walter E. Olsen
& Co. (48 Phil. 529), we have ruled that documents attached to the
complaint are considered a part thereof and may be considered as evidence
although they were not introduced as such. We said:
Another error assigned by the appellant is the fact that the lower court took
into consideration the documents attached to the complaint as a part
thereof, without having been expressly introduced in evidence, This was no
error. In the answer of the defendants, there was no denial under oath of the
authenticity of these documents. Under section 103 of the Code of Civil
Procedure, the authenticity and due execution of these documents must, in
that case, be deemed admitted. The effect of this is to relieve the plaintiff
from the duty of expressly presenting such documents as evidence. The
court, for the proper decision of the case, may and should consider, without
the introduction of evidence, the facts admitted by the parties. (at p. 532)
We reiterated this principle in the later case of Bravo Jr. v. Borja (134 SCRA
466 [1985]). In that case we said:
But respondent judge claims that petitioner has not proved his minority. This
is inaccurate. In the motion for bail, petitioner alleged that he was a minor of
16 and this averment was never challenged by the prosecution.
Subsequently, in his memorandum in support of the motion for bail,
petitioner attached a copy of his birth certificate. And finally, after
respondent Judge had denied the motion for bail, petitioner filed a motion
for reconsideration, attaching thereto a certified true copy of his birth
certificate. Respondent Judge however refused to take cognizance of
petitioner's unchallenged minority allegedly because the certificate of birth
was not offered in evidence. This was error because evidence of petitioner's
minority was already a part of the record of the case. It was properly filed in
support of a motion. It would be a needless formality to offer it in evidence.
Respondent Judge therefore acted with grave abuse of discretion in
disregarding it.
For its part, JALECO stated in its Answer:
xxx xxx xxx
2. That it has no knowledge or information sufficient to form a belief
as to the truth of the allegation contained in pars. 3, 4, 5, 6, 7, 8, 9, 10, 11
and 12 of the Petitioner; (Emphasis supplied)
Paragraph 12 refers to the deed of exchange in the petition.
The Deed of Exchange was attached to the petition. Necessarily, JALECO's
contention that it has no knowledge or information sufficient to form a belief
as to the truth of the deed of exchange becomes an invalid or ineffective
denial pursuant to the Rules of Court. Under the circumstances, the
petitioner could have easily asserted whether or not it executed the deed of
exchange. The ruling in Capitol Motors Corporations vs. Yabut (32 SCRA 1
[1970]) applies:
We agree with defendant-appellant that one of the modes of specific denial
contemplated in Section 10, Rule 8, is a denial by stating that the defendant
is without knowledge or information sufficient to form a belief as to the truth
of a material averment in the complaint. The question, however, is whether
paragraph 2 of the defendant-appellant's answer constitutes a specific
denial under the said rule. We do not think so. In Warner Barnes & Co., Ltd.
vs. Reyes, et al. G.R. No. L-9531, May 14, 1958 (103 Phil. 662), this Court
said that the rule authorizing an answer to the effect that the defendant has
no knowledge or information sufficient to form a belief as to the truth of an
averment and giving such answer the effect of a denial, does not apply
where the fact as to which want of knowledge is asserted, is so plainly and
necessarily within the defendant's knowledge that his averment of ignorance
must be palpably untrue. In said case, the suit was one for foreclosure of
mortgage, and a copy of the deed of mortgage was attached to the
complaint thus; according to this Court, it would have been easy for the
defendants to specifically allege in their answer whether or not they had
executed the alleged mortgage. The same thing can be said in the present
case, where a copy of the promissory note sued upon was attached to the
complaint. . . .
Considering the admission by Chua and the non-denial by JALECO of the
document forming part of the petition, the appellate court committed
reversible error in not admitting the deed of exchange as evidence.
Furthermore, we find as not well-taken the appellate court's ruling that the
pendency of two (2) other cases for collection of money against respondent
Chua, among others as surety of Fortune Motors (Phils.), Inc. and Forte
Merchant Finance, Inc., renders the petition for annulment of deed of
exchange premature.
For failure of both Fortune Motors (Phils), Inc. and Forte Merchant Finance,
Inc. to pay their obligations with the petitioner, the latter filed the two civil
cases against Fortune Motors (Phils.), Inc. and Forte Merchant Finance, Inc.
and respondent Chua, among others with the Regional Trial Court of Manila.
The petitioner was granted a writ of attachment as a result of which
properties belonging to Fortune Motors (Phils.) were attached. It turned out,
however, that the attached properties of Fortune Motors (Phils.), Inc. were
already previously attached/mortgaged to prior lien holders in the amount of
about P70,000,000.00. As regards Forte Merchant Finance, Inc., it appears
that it has no property to satisfy the debts it incurred with PBCOM. The
record further shows that as regards Chua, the property subject of the Deed
of Exchange between him and JALECO was his only property.
Under these circumstances, the petitioner's petition for annulment of the
deed of exchange on the ground that the deed was executed in fraud of
creditors, despite the pendency of the two (2) other civil cases is well-taken.
As surety for the financial obligations of Fortune Motors (Phils.), Inc. and the
Forte Merchant Finance, Inc., with the petitioner, respondent Chua bound
himself solidarily liable with the two (2) principal debtors. (Article 2047, Civil
Code) The petitioner may therefore demand payment of the whole financial
obligations of Fortune Motors (Phils.), Inc. and Forte Finance, Inc., from
Chua, if the petitioner chooses to go directly after him. Hence, since the only
property of Chua was sold to JALECO after the debts became due, the
petitioner has the right to file an annulment of the deed of exchange
between Chua and JALECO wherein Chua sold his only property to
JALECO to protect his interests and so as not to make the judgments in the
two (2) cases illusory:
Rescission requires the existence of creditors at the time of the fraudulent
alienation, and this must be proved as one of the bases of the judicial
pronouncement setting aside the contract; without prior existing debts, there
can be neither injury nor fraud. The credit must be existing at the time of the
fraudulent alienation, even if it is not yet due. But at the time the accion
pauliana is brought, the credit must already be due. Therefore, credits with
suspensive term or condition are excluded, because the accion pauliana
presupposes a judgment and unsatisfied execution, which cannot exist
when the debt is not demandable at the time the rescissory action is
brought. Rescission is a subsidiary action, which presupposes that the
creditor has exhausted the property of the debtor, which is impossible in
credits which cannot be enforced because of the term or condition.
While it is necessary that the credit of the plaintiff in the accion pauliana
must be prior to the fraudulent alienation, the date of the judgment enforcing
it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was
constituted. . . . (Emphasis Supplied) (Tolentino, Civil Code of the
Philippines, Vol. IV Ed. pp. 578-579)
Parenthetically, the appellate court's observation that the petitioner's
interests are sufficiently protected by a writ of attachment on the properties
of Fortune Finance (Phils.), Inc. has neither legal nor factual basis.
One other point.
The trial court disregarded the ex-parte evidence adduced by the petitioner
against JALECO when the latter was declared in default on the ground that
the ex-parte proceedings were conducted by the Deputy Clerk of Court
which is not allowed in accordance with the ruling in the case of Lim Tanhu
vs. Ramolete (66 SCRA 425 [1975]). That ruling has already been overruled
in the later case of Gochangco vs. CFI of Negros Occidental (157 SCRA 40
[1988]), wherein we said:
The respondent Court also declared null and void "the reception of evidence
ex parte before . . (the) deputy clerk of court." It invoked what it termed the
doctrinal rule laid down in the recent case of Lim Tan Hu vs. Ramolete, 66
SCRA 430, promulgated on August 29, 1975 (inter alia declaring that) a
Clerk of Court is not legally authorized to receive evidence ex-parte.
Now, that declaration does not reflect long observed and established judicial
practice with respect to default cases. It is not quite consistent, too, with the
several explicitly authorized instances under the Rules where the function of
receiving evidence and even of making recommendatory findings of facts on
the basis thereof may be delegated to commissioners, inclusive of the Clerk
of Court. These instances are set out in Rule 33, treating of presentation of
evidence before commissioners, etc., in particular situations, such as when
the trial of an issue of fact requires the examination of a long account, or
when the taking of an account is necessary for the information of the court,
or when issues of fact arise otherwise than upon the pleadings or while
carrying a judgment or order into effect; Rules 67 and 69, dealing with
submission of evidence also before commissioners in special civil actions of
eminent domain and partition, respectively; Rule 86 regarding trials of
contested claims in judicial proceedings for the settlement of a decedent's
estate; Rule 136 empowering the clerk of court, directed by the judge inter
alia to receive evidence relating to the accounts of executors,
administrators, guardians, trustees and receivers, or relative to the
settlement of the estates of deceased persons, or to guardianships,
trusteeships, or receiverships. In all these instances, the competence of the
clerk of court is assumed. Indeed, there would seem, to be sure, nothing
intrinsically wrong in allowing presentation of evidence ex parte before a
Clerk of Court. Such a procedure certainly does not foreclose relief to the
party adversely affected who, for valid cause and upon appropriate and
seasonable application, may bring about the undoing thereof or the
elimination of prejudice thereby caused to him; and it is, after all, the Court
itself which is duty bound and has the ultimate responsibility to pass upon
the evidence received in this manner, discarding in the process such proofs
as are incompetent and then declare what facts have thereby been
established. In considering and analyzing the evidence preparatory to
rendition of judgment on the merits, it may not unreasonably be assumed
that any serious error in the ex parte presentation of evidence, prejudicial to
any absent party, will be detected and duly remedied by the Court, and/or
may always, in any event be drawn to its attention by any interested
party. . . .
Consequently, there is no legal impediment to the admissibility of the
evidence presented by the petitioner against JALECO.
These findings pave the way to the resolution of the case on its merits.
Respondent Chua admitted his liability under the various Surety
Agreements executed on several dates by Fortune Motors (Phils.), Inc. and
Forte Merchants Finance, Inc. as principal debtors, respondent Chua,
among others, as surety and the petitioner as creditor. He also admitted in
the Pre-Trial Order that he has no other properties sufficient to cover the
claims of the petitioner except for the Dasmariñas property, subject matter
of the Deed of Exchange.
when necessary for the protection of creditors." (Sulo ng Bayan, Inc. vs.
Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc. vs.
Jarencio, supra; Western Agro Industrial Corporation, et al. vs. Court of
Appeals, supra.)
In the instant case, the evidence clearly shows that Chua and his immediate
family control JALECO. The Deed of Exchange executed by Chua and
JALECO had for its subject matter the sale of the only property of Chua at
the time when Chua's financial obligations became due and demandable.
The records also show that despite the "sale", respondent Chua continued
to stay in the property, subject matter of the Deed of Exchange.
These circumstances tend to show that the Deed of Exchange was not what
it purports to be.1âwphi1 Instead, they tend to show that the Deed of
Exchange was executed with the sole intention to defraud Chua's creditor—
the petitioner. It was not a bona fide transaction between JALECO and
Chua. Chua entered a sham or simulated transaction with JALECO for the
sole purpose of transferring the title of the property to JALECO without
really divesting himself of the title and control of the said property.
Hence, JALECO's separate personality should be disregarded and the
corporation veil pierced. In this regard, the transaction leading to the
execution of the Deed of Exchange between Chua and JALECO must be
considered a transaction between Chua and himself and not between Chua
and JALECO. Indeed, Chua took advantage of his control over JALECO to
execute the Deed of Exchange to defraud his creditor, the petitioner herein.
JALECO was but a mere alter ego of Chua. (See Tan Boon Bee & Co., Inc.
vs. Jarencio, supra)
WHEREFORE, the instant petition is GRANTED, The questioned decision
dated February 8, 1990 of the Court of Appeals is REVERSED and SET
ASIDE. The Deed of Exchange executed by and between Joseph L. G.
Chua and JALECO Development, Inc., and the title issued in the name of
JALECO on the basis thereof are declared NULL and VOID. Costs against
the private respondents.
SO ORDERED.

During the above-mentioned proceedings, the petitioner established the

following:

After the petitioner attached the properties of Fortune Motors (Phils.), Inc. by
virtue of the writ of attachment filed in the two (2) civil cases, it found out the
same properties were previously mortgaged and/or attached in the amount
of about P70,000,000.00. Thereafter, the petitioner was able to locate a
property in the name of respondent Chua. This property was, however
already sold to JALECO on November 24, 1983 pursuant to a Deed of
Exchange and the Register of Deeds of Makati had already issued T.C.T.
No. 126573 covering the property in the name of JALECO.

Upon investigation with the Securities and Exchange Commission (SEC),

the petitioner gathered the following facts based on the SEC records: a)
JALECO was organized on November 2, 1982 with a capital stock of
P5,000,000.00; b) the stockholders of said corporation were mostly
members of the immediate family of Joseph L. G. Chua; c) on April 4, 1983,
a Board Resolution was passed authorizing the issuance of 12,000 shares
of stocks worth Pl,200,000.00 to a new subscriber and non-stockholder
Joseph L. G. Chua; and d) prior to the acquisition by the corporation of the
property located at Dasmariñas Village, Makati, the percentage of the
shareholding of the members of the family of Joseph L. G. Chua was 88%
while after the acquisition of the property and the issuance of the shares to
Chua, they owned 94% of the corporation.

The evidence on record also shows that despite the "sale" of the
Dasmariñas property, respondent Chua continued to stay in the said
property.

The well-settled principle is that a corporation "is invested by law with a

separate personality, separate and distinct from that of the person
composing it as well as from any other legal entity to which it may be
related." (Tan Boon Been & Co., Inc. vs. Jarencio, 163 SCRA 205 [1988]
citing Yutivo and Sons Hardware Company vs. Court of Tax Appeals, 1
SCRA 160 [1961]; Emilio Cano Enterprises, Inc. vs. Court of Industrial
Relations, 13 SCRA 290 [1965]; and Western Agro Industrial Corporation
and Antonio Rodriguez vs. Court of Appeals, and Sia's Automotive and
Diesel Parts, Inc., G.R. No. 82558, August 20, 1990) However, the separate
personality of the corporation may be disregarded, or the veil of corporate
fiction pierced when the corporation is used "as a cloak or cover for fraud or
illegality, or to work an injustice, or where necessary to achieve equity or