NOTES ON CREDIT TRANSACTIONS | REGINALD MATT SANTIAGO 81
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 Fernandez and 105 persons in the for
the collection of unpaid wages earned in connection with the work
done by them in the construction of the Bacarra Bridge, 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.
Decision: The appeal is dismissed and remanded to determine the
amount of security to protect Manila Surety.
Is there a need to execute a subrogation agreement in order that a
paying surety be subrogated in behalf of the creditor?
RIZAL COMMERCIAL BANKING v. BERNARDINO
GR 183947 | September 21, 2016
Facts: In 1995, Marcopper Mining Corporation obtained unsecured
bridge loan from RCBC worth $US13.7M to finance acquisition of 12
Rig Mining Trucks and 1 Demag Excavator Shovel. Payment of loan
was supposed to be sourced from proceeds of a long term loan
Marcopper was seeking from EXIM Bank, but bank failed to approve
the long term loan due to a tailing spill in one of Marcopper’s
mining area in Marinduque causing stoppage of operations.
Due to loan being unsecured, RCBC negotiated with Marcopper to
provide collateral or security. Marcopper decided to mortgage 12
units of Rig Haul Trucks and 1 Demag Hydraulic Excavator Shovel
as well as shares of stocks.
In a letter in1997, Marcopper proposed to RCBC two options for the
payment of the loan:
1. Foreclosure of mortgaged assets ($11.6M) and balance
be relegated as unsecured obligations and paid on the
timing and extent of cash proceeds from the disposal of
the assets of Marcopper;
2. Involvement of major stockholders
a. Assignment of Forbes Park Property (P235M)
b. Payment of P71M over 1 year quarterly
c. And remaining balance 2 years quarterly
Marcopper encouraged RCBC to choose the second option which
guarantees full recovery of principal obligation and that the
stakeholders already indicated their willingness support. Second
option was later amended. RCBC conformed to the second option
by signing the letter indicating the amended second option.
Documents were sent to RCBC for signature. RCBC only signed the
Deed of Assignment of the Forbes Park property and returned the
Deed of Release of Mortgage involving the trucks and shovel and
were unsigned. In 1997, Marcopper sent RCBC surety agreement
executed by Bernardino as well as 2 PNs covering remaining
obligation after assigning the Forbes Park property.
Marcopper failed to settle obligations, demand letters were sent to
Marcopper as well as Bernardino as surety obliging it to pay the
amount in the obligation on the promissory notes as well as P20.6M
as penalty.
Bernardino filed a Complaint for Specific Performance and for the
Declaration of Nullity or Unenforceability of Surety Agreements
against RCBC.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
RCBC answered that contrary to assertion of Bernardino, they did
not agree to execute an agreement of Bernardino’s subrogation
rights and release of mortgage over properties. RCBC prays that he
be considered solidarily liable with RCBC for the amount.
RTC held that Subrogation Agreement was a condition precedent
before Bernardino may be held liable under the comprehensive
surety agreements. Since there was none, the surety agreements
are unenforceable and have no effect.
CA affirmed decision and agreed that Marcopper was led to believe
that RCBC agreed to execute a subrogation agreement in favor of
Bernardino effect release of mortgage and pledge.
Issue: Whether there was a condition precedent, a subrogation
agreement, to the surety agreements executed by Bernardino in
favor of RCBC. – No.
Bernardino Failed to Establish the Existence of
Subrogation Agreement which Operates as
Condition Precedent to the Surety Agreement
Bernardino’s Assertion: Bernardino asserted that surety agreements
he signed in favor of RCBC were ineffectual because the
subrogation agreement, which the parties had allegedly agreed to
execute as a condition precedent, were not executed. Both RTC and
CA gave credence to his testimonies as well as his witness.
IN THIS CASE:The lower courts overlooked significant facts in the
testimonies of the witnesses of Bernardino. The SC found that the
testimony of Atty. Duenas did not corroborate that of Escalante and
that the testimony is unreliable and inconclusive for being unclear
and ambiguous.
RCBC’s witness Rojas was able to clearly state that there was a
surety agreement discussed and that he stated that such security
was not enough, there was no mention of subrogation agreement.
What is glaringly absent from the discussions is a final agreement
reached by the parties. Thus, where there is only a proposal and a
counter-proposal that did not add up to a final arrangement, there
is no meeting of the minds between the parties. Thus, the surety
agreements remain unconditional and their validity stands.
Terms of Surety are Clear; Agreement Does Not Appear
The surety agreements do not include or refer to the execution of
subrogation agreement as condition precedent before Bernardino
could be held liable. Bernardino cannot now come to court asking
for the enforcement of an agreement which clearly does not
appear in the written contract between him and RCBC.
Right to Subrogation of a Paying Surety is by Operation of
Law, Article 2067 Extends to Sureties
In RCBC v. MMC involving the parties, the court already ruled on the
amounts, and thus Bernardino as surety has become liable to the
obligation to RCBC under the PN. Bernardino cannot now renege
on his obligation to pay the promissory notes under the claim that
there was a previous agreement between the parties for RCBC to
execute a subrogation agreement before Bernardino could be held
liable under the surety agreements. We stress that the right to
subrogation of a paying surety is by operation of law. Article 2067
of the Civil Code provides in part that the guarantor who, pays is
subrogated to all the rights which the creditor had against the
debtor. Although Article 2067 explicitly pertains to guarantors, the
right to subrogation extends as well to sureties.
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 NOTES ON CREDIT TRANSACTIONS | REGINALD MATT SANTIAGO 82
Bernardino as Surety Has Article 2071 as Remedy
Similarly, under Article 2071 of the Civil Code, a remedy available to
a guarantor (or surety), even before having paid, is to demand a
security from the principal debtor that shall protect the guarantor
(or surety) from any proceedings by the creditor and the danger of
insolvency of the debtor in certain cases. It is clear, therefore, that
whatever right to a security Bernardino may have can only be
demanded from MMC and not from RCBC.
Can Article 2071 (Article 1843 of the Old Civil Code) be invoked as
basis for the reimbursement of the surety?
TUASON v. ANTONIO MACHUCA
GR L-22177 | December 02, 1924
Facts: Manila Compania de Seguros executed a bond for P9,663, in
which Universal Trading Company was allowed by Insular Collector
to withdraw from the customhouse sundry goods imported by it
and consigned thru BPI. Subsequently BPI claimed value of goods
and Insurance Collector obligated Compania to pay P9,663.
Before paying, Manila Compania obtained from Universal Trading
Company and Tuason, Tuason & Co. a solidary note for such sum
executed by them in favor of Compania.
Before signing said note, Tuason caused Universal and its president
Machuca to sign a document where they bound themselves to
solidarily pay, reimburse, and refund to Tuason all sums may pay to
its obligation to Compania whether or not it shall have actually paid
such sums or any part thereof.
Compania brought an action against Tuason to recover P9,663 and
obtained final judgment which affirmed for total sum of P12,197.27
which includes interest. Tuason, Tuason & Co. were transferred to
Tuason, Tuason, Inc.
Tuason, Tuason, Inc. (Tuason) brought Action to Recover against
Machuca for the P12,197.27 plus other fees. It alleges that it had
paid Compania the sum of money. Judgment was rendered
against Machuca ordering him to pay the Tuason the sum of
P15,252.19 with interest and other fees.
Tuason alleges that it is entitled to bring action under Article 1843
(under Article 2071) which provides that surety, ay, even before
making payment, bring action against the principal debtor.
Issue: Can Tuason invoke Article 1843 (now Article 2071)? – No.
Article 1843 (2071) Does not Provide for Reimbursement
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 yet as paid "Manila Compañia 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.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
There was No Novation, Mere Additional Security
The defendant also contends that the document executed by
Albina Tuason in favor of "Manila Compañia 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
Compañia 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 Compañia de Seguros" accepted. As above stated, "Manila
Compañia de Seguros" accepted this document only as additional
security for its credit and not as a novation of the contract.
Tuason Can Recover the Sum of P9,663
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 Compañia de Seguros" which the
plaintiff is under obligation to pay by virtue of a final judgment.
Machuca However is Not Liable for Litigation
Expenses by Tuason Against Manila Compania
We do not believe, however, that the defendant must pay the
plaintiff the expenses incurred by it in the litigation between it and
"Manila Compañia de Seguros." That litigation was originated by
the plaintiff having failed to fulfill its obligation with "Manila
Compañia 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 P1,653.65
as attorney's fees.
NOTE: Article 2071 seeks release from guaranty or surety or that a
demand for security be given but not reimbursement under 2066.
What is the difference in the application of
Article 2066 (1838) and Article 2071 (1834)?
KUENZLE & STREIFF v. JOSE TAN SUNCO ET AL.
GR 5208 | December 01, 1909
Facts: Tan Sunco was a surety for Chung Chu Sing for payment of
latter of purchase of certain merchandise purchased from Ed. A.
Keller & Co. The time for payment had expired long and that debt
remained unpaid. The total debt was composed of four invoices of
varying amounts ---- P395.50, P450, P565, and P320.20.
An action was brought against Chung Chu Sing by Kuenzle for the
recovery of the indebtedness due it. But before Kuenzle can secure
judgment, Tan Sunco brought four separate actions against Chung
Chu sing for the payment of merchandise. Tan Sunco obtained
judgments and had caused to be levied on the properties of Chung
Chu Sing.
Kuenzle argues that the four judgments must be set side for such
are obtained by collusion and fraud for Chung Chu Sing did not
owe anything to Sunco at the time judgments were secured and
that Sunco as surety did not pay the sums.
Issue: Whether Article 1843 (now 2071) applies in this case. – Yes.
Held: In their purposes Articles 1838 (2066) and 1834 (2071) are
quite distinct, although in perfect harmony, the latter making more
clearly effective the purpose of the former.
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ARTICLE 1838 (2066) ARTICLE 1834 (2071) SECTION 2. – Effects of Guaranty as Between Co‐guarantors
Provides for the enforcement Provides for his protection
of rights of the surety against before he has paid but after ARTICLE 2073
When there are two or more guarantors of the same debtor and for
the debtor after he has paid he has become liable to do
the same debt, the one among them who has paid may demand of
the debt. so. each of the others the share which is proportionally owing from him.
Right of action after payment Protective remedy before
payment If any of the guarantors should be insolvent, his share shall be borne
Substantive rights Nature of a preliminary by the others, including the payer, in the same proportion.
remedy
The provisions of this article shall not be applicable, unless the
Gives a right of action, which, Purposes of obtaining for the payment has been made in virtue of a judicial demand or unless the
without the provisions of surety relief from the burden principal debtor is insolvent.
other, might be worthless of his suretyship or a
guaranty to defend him Right to Contribution of Guarantor who Pays
against any proceedings of Obligation of several guarantors of the same debtor and for the
the creditor and from the same debt is joint and each is bound to pay only his proportionate
danger of insolvency of the share. Article 2073 applies when one guarantor has paid the debt
debtor to the creditor and is seeking reimbursement from each of his co-
The surety is pas t the point To give to the surety a guarantors the share which is proportionately owing him. It is
where a preliminary remedy in anticipation of the required however, that the payment must have been made
protective remedy is of any payment of the debt, which 1. In virtue of a judicial demand; or
value to him debt, being due, he could be 2. Because the principal debtor is insolvent.
called upon to pay at any
time, it remains only to say, in Effect of Insolvency of Any Guarantor
this connection, that the only If any of the guarantors should be insolvent, his share shall be
procedure known under our borne by the others including the paying guarantor in the same
present practice to enforce joint proportion. This follows the rule in solidary obligations.
that the right is by action.
ARTICLE 2074
Tan Sunco’s Methods Were Unusual But Not Fraudulent In the case of the preceding article, the co‐guarantors may set up
Here, Sunco availed himself of that right against Chung Chu Sing against the one who paid, the same defenses which would have
pertained to the principal debtor against the creditor, and which are
and that the methods employed by him to realize his end were not purely personal to the debtor.
unusual but not of themselves fraudulent. We agree with the trial
court that the evidence adduced is entirely insufficient to establish Defenses Available to Co-Guarantors
such fraud and collusion as would justify a decision setting aside In action filed by the paying guarantor against his co=guarantors
the judgments assailed. for their proportionate shares in the obligation, the latter may avail
themselves of all defenses which the debtor would have
But while the surety has the right to obtain as he did the judgments interposed against the creditor but not those which cannot be
against the principal debtor, he ought not to be allowed to realized transmitted for being purely personal to the debtor.
on said judgments to the point of actual collection of the same until
he has satisfied or caused to be satisfied the obligation the ARTICLE 2075
payment of which he assures. A sub‐ A sub‐guarantor, in case of the insolvency of the guarantor for
whom he bound himself, is responsible to the co‐guarantors in the
Otherwise, a great opportunity for collusion and improper practice same terms as the guarantor.
between the surety and his principal would be offered which might
result to the injury and prejudice of the creditor who holds the Liability of Sub-Guarantor in Case of Insolvency of Guarantor
claim against them. In case of the insolvency of the guarantor for whom he bound
himself, a sub-guarantor is liable to the co-guarantors in the same
manner as the guarantor whom he guaranteed.
ARTICLE 2072
If one, at the request of another, becomes a guarantor for the debt of
a third person who is not present, the guarantor who satisfies the
debt may sue either the person so requesting or the debtor for
reimbursement.

Guarantor of a Third Person at Request of Another
The guarantor who guarantees the debt of an absentee at the
request of another has a right to claim reimbursement, after
satisfying the debt either from:
1. The person who requested him to be a guarantor;
2. The debtor

Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM d
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 NOTES ON CREDIT TRANSACTIONS | REGINALD MATT SANTIAGO 84
III. EXTINGUISHMENT OF GUARANTY
ARTICLE 2076
The obligation of the guarantor is extinguished at the same time as
that of the debtor, and for the same causes as all other obligations. is extinguished by the death of Jose D. Santos, Jr. In addition, it
Causes of Extinguishment of Guaranty
Guaranty being accessory and subsidiary, it is also terminated
when the principal obligation is extinguished.
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription,
are governed elsewhere in this Code.
Note: A contract of guaranty or surety may be extinguished
without affecting the principal obligation
Death of the Principal Debtor, Effect on Surety
Death of the principal is not a defense a surety can use to wipe out
its monetary obligation under a performance bond. The obligation
is merely passed on to the decedent’s estate. A surety’s liability to
the creditor or promisee of the principal is direct and primary like
the principal as ruled in Stronghold Insurance v. Republic Asahi:
STRONGHOLD INSURANCE COMPANY v. REPUBLIC-ASAHI
GR 147561 | June 22, 2006
Facts: Republic-Asahi entered into a contract with Jose D. Santos,
who was the proprietor of JDS Construction for construction of
roadways and drainage system in Republic-Asahi’s compound in
Pasig where it pays JDS P5.3M for such construction which was to
be completed in 240 days. In order to guarantee the faithful and
satisfactory performance of its undertakings, JDS shall post
performance bond of P795K which it executed solidarily with
Stronghold Insurance. Thereafter, Republic-Asahi paid P795K as
downpayment.
Several times, engineers of Republic-Asahi called attention of JDS
to the alarmingly slow pace of construction which resulted in the
fear that it will not be finished within the agreed 240-day period.
But this was unheeded by JDS Construction.
On November 24, 1989, dissatisfied with the progress of the work,
petitioner extrajudicially rescinded the contract without prejudice
for the recovery of damages. Alleging that for failure to comply, it
was constrained to hire another contractor to finish project which
it incurred additional expense of P3,256,874.
Republic-Asahi sent a letter to Stronghold for claim of performance
bond for not less than P795K. Another letter was sent but both
letters were unheeded.
This prompted Republic-Asahi to file a Complaint against JDS and
SICI seeing P3.2M for additional expenses and P795K (them being
solidary) for the perofrmance bond as well as damages and
attorneys fees.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
It was shown that in 1990, Jose D. Santos had died and JDS was no
longer at its address and whereabout were unknown.
Thus, in 1991, Stronghold alleged that the money claims against it
argues that there was no liquidation. Thus, the claim for the P795K
performance bond was without legal and factual basis. That it was
not informed of Santos’s death and was deprived to protect its right
as surety and thus released from liability.
Lower Court dismissed complaint on the ground that the claim
against JDS did not survive the death of sole proprietor Jose. The
CA reversed finding that surety agreement was not extinguished
by the death of Jose.
Issue: Whether liability of Stronghold Insurance under the
perofrmance bond was automatically extinguished by the death of
Santos, the principal. – NO.
Effect of Death on the Surety’s Liability
As a general rule, the death of either the creditor or the debtor does
not extinguish the obligation. Obligations are transmissible to the
heirs, except when the transmission is prevented by the law, the
stipulations of the parties, or the nature of the obligation. Only
obligations that are personal or are identified with the persons
themselves are extinguished by death.
Rules of Court allows prosecution of money claims arising from a
contract against the estate of a deceased debtor (Sec. 5, Rule 86).
IN THIS CASE: Whatever monetary liabilities or obligations Santos had
under his contracts with respondent were not intransmissible by
their nature, by stipulation, or by provision of law. Hence, his death
did not result in the extinguishment of those obligations or
liabilities, which merely passed on to his estate.
Death is not a defense that he or his estate can set up to wipe out
the obligations under the performance bond. Consequently,
petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.
Solidary Nature of Surety’s Liability
Under the law and jurisprudence, respondent may sue, separately
or together, the principal debtor and the petitioner herein, in view
of the solidary nature of their liability. The death of the principal
debtor will not work to convert, decrease or nullify the substantive
right of the solidary creditor. Evidently, despite the death of the
principal debtor, respondent may still sue petitioner alone, in
accordance with the solidary nature of the latter's liability under the
performance bond.
ARTICLE 2077
If the creditor voluntarily accepts immovable or other property in
payment of the debt, even if he should afterwards lose the same
through eviction, the guarantor is released.
Released by Conveyance of Property
This is in the nature of dacion en pago. If the creditor accepts
property in payment of a debt from the debtor, the guarantor is
relieved from responsibility. This is also true even in case the
creditor is subsequently evicted from the property. Eviction revives
the principal obligation but not the guaranty. The creditor’s action
against the debtor is for eviction and this is different from what the
guarantor guaranteed.
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 NOTES ON CREDIT TRANSACTIONS | REGINALD MATT SANTIAGO 85

ARTICLE 2078 The Continuing Guaranty was then signed, the instrument have
A release made by the creditor in favor of one of the guarantors, provided for the solidary liability of the signatories thereto for
without the consent of the others, benefits all to the extent of the and in consideration of "loans or advances" and "credit in any other
share of the guarantor to whom it has been granted.
manner to, or at the request or for the account" of FBPC.
 There was no maximum indebtedness which FBPC can
Release of Guarantor Without Consent of Others
incur and for which the sureties may be liable
As a rule, the guarantors enjoy the benefit of division (2065).
 It contained a de facto acceleration clause in case of
However, if any of them should be insolvent all the other
default in any of the instruments, indebtedness or other
guarantors must bear his share (2073). A release made by the
obligation guaranteed
creditor in favor of one of the guarantors without the consent of
 It waived rights of sureties against delay or absence of
the others may thus prejudice the latter should a guarantor
notice or demand on the part of the Bank
become insolvent. Under the above article, the release benefits all
 It also gave future consent to Bank’s action to extend or
to the extent of the share of the guarantor released.
charge the time payment, or manner, place or terms
ARTICLE 2079 including renewal of the credit facility, without notice or
An extension granted to the debtor by the creditor without the further assent from the sureties.
consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt FBPC availed of the credit facility and procure letters of credit up to
has become due does not of itself constitute any extension of time 13 obtaining loans totaling P15,227,510. It was later on shown that
referred to herein. Spouses Li fraudently departed from their conjugal home. This
prompted the Bank to serve demand invoking the acceleration
Release by Extension of Term Granted by Creditor to Debtor clause in the trust receipts of FBPC and claimed for the payment of
If the creditor grants an extension of time to the debtor without the P10,538,758.68 as unpaid overdue accounts on the letters of
consent of the guarantor (or surety), the latter is discharged from credits plus interest and penalties.
his undertaking. Reason for the rule is the necessity of avoiding
prejudice to the guarantor. The debtor (and/or indemnitors) may The Bank also invoked the Continuing Guaranty executed by
become insolvent during the extension, thus depriving the petitioner-spouses Luis Toh and Vicky Tan Toh who were the only
guarantor of his right to reimbursement. parties known to be within national jurisdiction to answer as
sureties for the credit facility of FBPC.
Instances where there is a release
1. When there are payments due to debtor from third A Complaint for sum of money with preliminary attachment was
persons and these are assigned to credit, in effect, filed against FBPC, Spouses Li and Spouses Toh. Summons cannot
extended the term of payment without consent. be served upon the Spouses Li who had apparently absconded.
2. If payable in installments, an extension of time to one or
more will not affect the liability of surety for others. The spouses Answered stating that they were made to sign papers
a. But if there is an operation of an acceleration in blank and the Continuing Guaranty could have been one of
clause for failure to pay an installment, the act them. They also asserted that it was impossible and absurd for
of creditor extending payment without consent them to freely consent to the surety of May 1993, because on March
of guarantor discharges guarantor. 1993 they already divested shares in favor of Kenneth Li although
3. A guarantor may waive his right to be notified of or to the notarization was only on June.
give consent to the release of securities or extension of
time for the payment. Trial Court found FBPC liable to pay the amount but absolved the
It is not essential that the extension be prejudicial to the guarantor Sps. Toh from liability with the bank because the letters of credit
or surety. Whether or not prejudicial, if the extension is without the supposed to be secured was opened long after petitioners have
consent, then the guarantor or surety is discharged. ceased to be part of FBPC. It ruled that the continuing guaranty was
effective only while Spouses were still stockholders and officers. CA
What is the effect when there are ilicit extensions? What is the effect modified finding spouses solidarily liable with FBPC to pay amount.
when requisites to waiver was not followed?
Contention of Spouses Toh
SPS. LUIS AND VICKY TOH v. SOLIDBANK CORPORATION Continuing Guaranty is not legally valid and binding against them
GR 154183 | August 07, 2003 for having been executed long after they withdrawn from FBPC
and that it was extinguished by material alterations, the flight of
Facts: Solidbank agreed to extend an omnibus line credit facility their co-sureties among others.
worth P10M in favor of First Business Paper Corp. (FBPC) the terms
of which are in a letter-advise which was effective upon compliance Argument of Solid Bank
with documentary requirements which required: It argues that the notarization of the document discredits the
1. Board resolution or excerpts of Board of Directors meeting, uncorroborated assertions against authenticity and due execution
notarized, authorizing loan and security agreement as well as of the Continuing Guaranty.
designated officers to sign and negotiate for FBPC stating
authority to mortgage, pledge or assign properties
Issue: Whether or not the Continuing Guaranty was valid. – YES.
2. Agreement to purchase Domestic Bills; and
3. Continuing Guaranty for any and all amounts signed by
Spouses Toh who were then Chairman (Luis) of the Board and Continuing Guaranty is a Valid and Binding Contract
VP of FBPC (Vicky), as well as by Spouses Li, who were the It is a public document that enjoys the presumption of authenticity
President (Kenneth) and General Manager (Ma. Victoria) of and due execution. The SC is bound the findings of the courts a quo
the same corporation. that the Spouses Toh voluntarily affixed signature.

Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM d
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN d
 NOTES ON CREDIT TRANSACTIONS | REGINALD MATT SANTIAGO 86
Nothing in Continuing Guaranty Limits their Liability to the
Condition that they were Officers and Stockholders of FBPC
There is no basis for petitioners to limit their responsibility thereon
so long as they were corporate officers and stockholders of FBPC.
Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality.
In fact the obligations assumed by them therein subsist "upon the
undersigned, the heirs, executors, administrators, successors and
assigns of the undersigned, and shall inure to the benefit of, and be
enforceable by you, your successors, transferees and assigns," and
that their commitment "shall remain in full force and effect until
written notice shall have been received by [the Bank] that it has
been revoked by the undersigned."
Verily, if petitioners intended not to be charged as sureties after
their withdrawal from FBPC, they could have simply terminated the
agreement by serving the required notice of revocation upon
the Bank as expressly allowed therein.
Issue: Whether or not the unilateral extensions made by Solid Bank
extinguished the liability of Spouses Toh. – YES.
Extension of Due Dates Were Subject to Requirements
Certainly, while the Bank may extend the due date at its discretion
pursuant to the Continuing Guaranty, it should nonetheless
comply with requirements: domestic letters of credit be supported
by fifteen percent (15%) marginal deposit extendible three (3)
times for a period of thirty (30) days for each extension, subject to
twenty-five percent (25%) partial payment per extension.
An extension of the period for enforcing the indebtedness does
not by itself bring about the discharge of the sureties unless the
extra time is not permitted within the terms of the waiver, i.e.,
where there is no payment or there is deficient settlement of the
marginal deposit and the twenty-five percent (25%) consideration,
in which case the illicit extension releases the sureties.
Liability of a surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his accountability is
strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial
court that several letters of credit were irrevocably extended for
ninety (90) days with alarmingly flawed and inadequate
consideration - the indispensable marginal deposit of fifteen
percent (15%) and the twenty-five percent (25%) prerequisite for
each extension of thirty (30) days.
Rigid Restrictions for Extensions Were Not Observed thus Not
covered by the Waiver Stipulated in the Guaranty; They
Constitute Illicit Extension Prohibited under the Civil Code
It bears stressing that the requisite marginal deposit and security
for every thirty (30) - day extension specified in the "letter-advise"
were not set aside or abrogated nor was there any prior notice of
such fact, if any was done. Moreover, these irregular extensions
were candidly admitted by Victor Ruben L. Tuazon, an account
officer and manager of respondent Bank
The foregoing extensions of letters of credit made by respondent
Bank without observing the rigid restrictions for exercising the
privilege are not covered by the waiver stipulated in the
Continuing Guaranty.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
Evidently, they constitute illicit extensions prohibited under Art.
2079 of the Civil Code, "an extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the
guaranty."
As Result of illicit Extensions, Spouses Toh are Released
As a result of these illicit extensions, petitioner-spouses Luis Toh
and Vicky Tan Toh are relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil Code.
TIDCORP v. ASIA PACES CORPORATION
GR 187403 | February 12, 2014
Facts: January 19, 1981, Asia Paces Corporation (ASPAC) and Paces
Industrial Corporation (PICO) entered sub-contracting agreement
denominated 200 KV Transmission Lines Contract, Civil Works &
Electrical Erection with Electrical Projects Company (ELPCO) of
Libya as main contractor for the construction and erection of a
double circuit bundle phase conductor transmission line in the
country of Libya.
To finance its working capital requirements, ASPAC obtained loans
from foreign banks Banque Indosuez and PCI Capital, Hong Kong,
Limited (PCI Capital) which upon the latter’s request, were secured
by several Letters of Guarantee issued by Trade and Investment
Development Corporation of the Philippines (TIDCORP) which was
a GOCC for the purpose guarantee with prior concurrence of the
Monetary Board, approved foreign loans.
Letters of Guarantee: TIDCORP irrevocably and unconditionally
guaranteed full payment ASPAC’s loan obligations to Banque
Indosuez and PCI Capital in the event of default of ASPAC.
As condition precedent for the issuance by TIDCORP of the Letters
of Guarantee, ASPAC, PICO and ASPAC’s President Balderrama had
to execute Deeds of Undertaking binding themselves jointly and
severally pay TIDCORP for whatever damages or liabilities it may
incur under the letters of guarantee.
ASPAC, as principal debtor, entered into Surety Agreements with
Paramount, Phoenix and Mega Pacific and Fortune (bonding
companies) as sureties also holding themselves solidarily liable to
TIDCORP as creditor, for whatever damages or liabilities under the
letters of guarantee.
ASPAC eventually defaulted on its loan obligations to the foreign
banks prompting the foreign banks to demand from TIDCORP the
Letters of Guarantee. In turn, TIDCORP demanded payment from
the bonding companies.
There was then a Restructuring Agreement between TIDCORP
and its various creditor banks, extending the maturity dates of the
Letters of Guarantee. (Pursuant to a Moratorium Request)
The bonding companies were not privy to the Restructuring
Agreement and, hence, did not give their consent to the payment
extensions granted by Banque Indosuez and PCI Capital, among
others, in favor of TIDCORP, TIDCORP fully settled its obligations
under the Letters of Guarantee
Seeking payment for what it had incurred under the Letters of
Guarantee TIIDCORP filed a collection case against: (a) ASPAC,
PICO, and Balderrama on account of their obligations under the
deeds of undertaking; and (b) the bonding companies on account
of their obligations under the Surety Bonds.
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RTC found ASPAC, PICO and Balderrama jointly and severally liable
for P277M pursuant to the Deeds of Undertaking, the bonding
companies were absolved for extensions were made without their
consent citing Article 2079. CA upheld such ruling.
Issue: Whether the liabilities of the bonding companies are
extinguished by the payment extensions granted to TIDCORP
under the Restructuring Agreements. – NO.
Payment Extensions Was Only for TIDCORP’s Own Debt Not
Under the Surety Bond thus Not Extinguished
The theory behind Article 2079 is that an extension of time given to
the principal debtor by the creditor without the surety’s consent
would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditor’s 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.
But, in this case, the payment extensions granted by the foreign
banks (Banque Indosuez and PCI Capital) to TIDCORP under the
Restructuring Agreement did not have the effect of extinguishing
the bonding companies’ obligations to TIDCORP under the Surety
Bonds, notwithstanding the fact that said extensions were made
without their consent.
This is because Article 2079 of the Civil Code refers to a payment
extension granted by the creditor to the principal debtor without
the consent of the guarantor or surety.
In this case, the Surety Bonds are suretyship contracts which secure
the debt of ASPAC, the principal debtor, under the Deeds of
Undertaking to pay TIDCORP, the creditor, the damages and
liabilities it may incur under the Letters of Guarantee, within the
bounds of the bonds’ respective coverage periods and amounts.
No payment extension was, however, granted by TIDCORP in
favor of ASPAC in this regard; hence, Article 2079 of the Civil
Code should not be applied with respect to the bonding
companies’ liabilities to TIDCORP under the Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI
Capital pertain to TIDCORP’s own debt under the Letters of
Guarantee wherein it (TIDCORP) irrevocably and unconditionally
guaranteed full payment of ASPAC’s loan obligations to the banks
in the event of its (ASPAC) default.
In other words, the Letters of Guarantee secured ASPAC’s loan
agreements to the banks. Under this arrangement, TIDCORP
therefore acted as a guarantor, with ASPAC as the principal debtor,
and the banks as creditors.
Two Sets of Transactions
Proceeding from the foregoing discussion, it is quite clear that
there are two sets of transactions that should be treated
separately and distinctly from one another.
Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and
not TIDCORP’s debt to the banks, the payments extensions
(which conversely concern TIDCORP’s debt to the banks and not
ASPAC’s debt to TIDCORP) would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to
be immediately subrogated to the latter’s remedies against the
principal debtor (ASPAC) upon the maturity date.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
It must be stressed that these payment extensions did not modify
the terms of the Letters of Guarantee but only provided for a new
payment scheme covering TIDCORP’s liability to the banks.
In fine, considering the inoperability of Article 2079 of the Civil
Code in this case, the bonding companies’ liabilities to TIDCORP
under the Surety Bonds – except those issued by Paramount and
covered by its Compromise Agreement with TIDCORP – have not
been extinguished.
Since these obligations arose and have been duly demanded
within the coverage periods of all the Surety Bonds, TIDCORP’s
claim is hereby granted and the CA’s ruling on this score
consequently reversed.
ARTICLE 2080
The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter.
Release When Guarantor Cannot be Subrogated
The guarantor who pays is entitled to be subrogated to all the
rights of the creditor. If there can be no subrogation because of the
fault of the creditor, as when the creditor releases or fails to register
a mortgage, the guarantors are thereby released. The same rule
applies even though the guarantors be solidary. The rule is founded
on the principle of law that the act of one cannot prejudice another.
It also avoids opportunity for collusion between the creditor and
the debtor or a third person.
Duty of Creditor to Account for His Lien on Principal’s Property
If the creditor has acquired a lien upon the property of a principal,
the creditor at once becomes charged with the duty of retaining
such security, or maintaining such lien in the interest of the surety,
and any release or impairment of this security as a primary resource
for the payment of a debt, will discharge the surety to the extent
of the value of the property or lien released for there immediately
arises a trust relation between the parties, and the creditor as
trustee is bound to account to the surety for the value of the
security in his hands (Toh v. Solid Bank).
PNB v. MANILA SURETY & FIDELITY
GR L20567 | July 30, 1965
Facts: PNB opened letter of credit and advanced $120,000 to
Edgington Oil for 8,000 tons of hot asphalt. Out of such, 2000 tons
(worth P279K) were released and delivered to ATACO under a trust
receipt guaranteed by Manila Surety up to the amount of P75K.
To pay for the Asphalt ATACO executed a deed of assignment
authorizing PNB to receive and collect from Bureau of Public Works
the amount to be applied as payment for the asphalt it owned.
ATACO then delivered to the Bureau of Public Works asphalt to the
total value of P431,466.52. The bank collected P106,382.01. But
thereafter, for unexplained reasons, the Bank ceased to collect,
until 1952 when it found that more moneys were payable to ATACO
from the Public Works office, because the latter had allowed
another creditor to collect funds due to ATACO under the same
purchase order, to a total of P311,230.
PNB then demanded ATACO and Manila Surety, having been
refused, the Bank sued both in CFI Manila for the recovery of the
balance of P158,563 plus interests and costs.
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Trial Court ordered ATACO and Manila Surety to pay the sum of
money. CA ruled that bank was negligent in having stopped from
collecting from Bureau of Public Works moneys falling due in favor
of ATACO before the debt was fully collected, thereby allowing
such funds to be taken and exhausted by other creditors to the
prejudice of the Surety. Such negligence of petitioner bank
resulted in the exoneration of the Manila Surety.
PNB argues that the power of attorney obtained from ATACO was
merely an additional security in its favor, and that it was the duty of
the surety and not of the creditor to see to it that the obligor fulfills
his obligation, and that the creditor owed the surety no duty of
active diligence to collect any sum from principal debtor.
Issue: Whether or not PNB’s negligence in collecting the debt had
exonerated Manila Surety from liability. – YES.
Power of Attorney to Collect; Duty of the Bank to Diligently
Perform; Such Power was Irrevocable
The CA did not hold the Bank answerable for negligence in failing
to collect from the principal debtor but for its neglect in collecting
the sums due to the debtor from the Bureau of Public Works,
contrary to its duty as holder of an exclusive and irrevocable power
of attorney to make such collections, since an agent is required to
act with the care of a good father of a family and becomes liable for
the damages which the principal may suffer through his non-
performance.
Certainly, the Bank could not expect either ATACO or the surety to
collect from the Bureau of Public Works the moneys it had failed to
demand. Not only because these parties had the right to expect
that the Bank would diligently perform its duty under its power of
attorney, but because they could not have collected from the
Bureau even if they had attempted to do so.
It must not be forgotten that the Bank's power to collect was
expressly made irrevocable, so that the Bureau of Public Works
could very well refuse to make payments to the principal debtor
itself, and a fortiori reject any demands by the surety.
Allowing Assigned Funds to be Exhausted Without Notifying
Surety Deprives It Recourse Against that Security
Even if the assignment with power of attorney from the principal
debtor were considered as more additional security, still, by
allowing the assigned funds to be exhausted without notifying the
surety, the Bank deprived the former of any possibility of
recoursing against that security.
The Bank thereby exonerated the surety, pursuant to Article 2080
of the Civil Code:
Art. 2080. - The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages and preferences of the latter
The appellant points out to its letter of demand, Exhibit "K",
addressed to the Bureau of Public Works, on May 5, 1949, and its
letter to ATACO, Exhibit "G", informing the debtor that as of its date,
October 31, 1949, its outstanding balance was P156,374.83. Said
Exhibit "G" has no bearing on the issue whether the Bank has
exercised due diligence in collecting from the Bureau of Public
Works, since the letter was addressed to ATACO, and the funds
were to come from elsewhere.
Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN
As to the letter of demand on the Public Works office, it does not
appear that any reply thereto was made; nor that the demand was
pressed, nor that the debtor or the surety were ever apprised that
payment was not being made.
The fact remains that because of the Bank's inactivity the other
creditors were enabled to collect P173,870.31, when the
balance due to appellant Bank was only P158,563.18. The finding
of negligence made by the Court of Appeals is thus not only
conclusive on us but fully supported by the evidence.
ARTICLE 2081
The guarantor may set up against the creditor all the defenses which
pertain to the principal debtor and are inherent in the debt; but not
those that are purely personal to the debtor.
Defense Available to Guarantor Against Creditor
The defenses available to a debt as against a guarantor are
provided in Article 2068, and those available to co-guarantors in
Article 2074. Article 2081 provides for the defenses, except those
which are purely personal to the debtor, that may be interposed by
the guarantor as against the creditor. Inasmuch as the guarantor
proceeded against takes the place of the debtor, it would be absurd
and unjust to deny him the defenses of the latter because the
guarantor who is only subsidiarily liable would be put in a worse
position than the debtor, the one principally liable.
IV. LEGAL AND JUDICIAL BONDS
ARTICLE 2082
The bondsman who is to be offered in virtue of a provision of law or
of a judicial order shall have the qualifications prescribed in Article
2056 and in special laws.
Bond, Meaning and Form
A bond, when required by law, is commonly understood to mean
an undertaking that is sufficiently secured, and not cash or
currency. Of course, whatever surety bonds are submitted are
subject to any objections as to their sufficiency or as to the solvency
of the bondsman.
Qualifications of Personal Bondsman
A bondsman is a surety (Art. 2047, par. 2.) offered in virtue of a
provision of law or a judicial order. He must have the qualifications
required of a guarantor (Art. 2056.) and in special laws.
Nature of Bonds
All bonds including “judicial bonds” are contractual in nature. Bonds
exist only in consequence of a meeting of minds under the
conditions essential to a contract. Judicial bonds constitute merely
a special class of contracts of guaranty, characterized by the fact
that they are given in virtue of a judicial order.
ARTICLE 2083
If the person bound to give a bond in the cases of the preceding
article, should not be able to do so, a pledge or mortgage considered
sufficient to cover his obligation shall be admitted in lieu thereof.
Pledge or Mortgage in Lieu of Bond
Guaranty or suretyship is a personal security. On the other hand,
pledge or mortgage is a property or real security. If the person
required to give a legal or judicial bond should not be able to do
so, a pledge or mortgage sufficient to cover the obligation shall be
admitted in lieu thereof.
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ARTICLE 2084
A judicial bondsman cannot demand the exhaustion of the property
of the principal debtor.

A sub‐surety in the same case, cannot demand the exhaustion of the
property of the debtor or of the surety.

Judicial Bondsman Not Entitled to Excussion

A judicial bondsman and the sub-surety are not entitled to the
benefit of excussion because they are not mere guarantors, but
sureties whose liability is primary and solidary.

Effect of Negligence of Creditor

The contract of suretyship is not that the creditor will see that the
principal debtor pays his debt or fulfills his contract, but that the
surety will see that the debtor pays or performs. Hence, mere
negligence on the part of the creditor in collecting from the debtor
will not relieve the surety from liability.

Summarized from the discussions of Atty. Jazzie M. Sarona-Lozare, CPA, ESQ, LLM d
And from Comments and Cases on Credit Transactions by De Leon and 2016-17; 2018-2019 TSN d