CREDIT TRANSACTIONS|| GUARANTY / SURETY General Indemnity vs Alvarez Pacionaria Baylon vs Court of Appeals and Leonila Tomacruz Facts:

Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is the co-manager of her husband in PLDT. Baylon invited Leonila to lend Rosita money for her business as contractor and in return pay the amount and a monthly interest rate of 5%. Persuaded by Baylons assurances that the business was stable and the high interest rate Leonila lent Rosita P 150,000. Rosita on the other hand issued and signed a promissory note acknowledging the receipt of P 150,000 payable on August 22, 1987. Baylon signed the promissory note as guarantor. Later on, Rosita failed to pay the said amount forcing Leonila to file a case for collection of sum of money against Rosita and Baylon. However summons were never served to Rosita. Baylon denied having guaranteed the payment of the promissory note and claims that the money given to Rosita was not a loan but an investment and that assuming that the loan was guaranteed Leonila has not exhausted the property of Rosita nor resorted to all legal remedies against Rosita as required by law. Trial court ruled in favor of Leonila making Baylon liable for the said amount. This decision was affirmed by the C.A. Issue: WON Baylon should be held liable for the amount of the promissory note. Ruling: No. Rationale: Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that 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 axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal debtor must first be exhausted before his own is levied upon. 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." This rule is embodied in article 2062 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 when the action may be brought against both the debtor and the principal debtor. Under the circumstances availing in the present case, the court held that it is premature to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. The court held that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor. FACTS: On February 1954, Appellee General Indemnity Co., Inc., filed a complaint in the CFI Manila against Appellant Estanislao Alvarez for the recovery of the sum of P2,000 representing the amount of a loan allegedly taken by the Appellant from the PNB, which the Appellee guaranteed with an indemnity bond, and for which Appellant, as counter-guaranty, executed in Plaintiff's favor a mortgage on his share of land in a parcel of land . The complaint further alleged that the Appellant failed to pay said loan, together with interest, to PNB as a result of which the bank deducted the amount thereof Plaintiff's deposit. Thereafter, Appellant averred that the loan in question was secured by him only in accommodation of one Hao Lam, and that Plaintiff agreed not to take any steps against Appellant and the mortgage executed by him in Plaintiff's favor until the latter had failed to obtain payment from said Hao Lam. Eight months later, Plaintiff filed a motion for summary judgment saying that Appellang presented no real and meritorious defense and that it was entitled to a summary judgment in its favor, based on the affidavit of its comptroller Pedro R. Mendiola essentially saying that: o o That he has personal knowledge of the indebtedness of the Defendant. Notwithstanding said several demands by Plaintiff, Defendant has failed and refused and still fails and refuses to pay the same.

The lower courts ruled in favour of Plaintiff. Thus this petition. Issue: Whether or not Defendant Alvarez is liable? Ruling: NO. The SC ruled that there exists a controversy in the complaint and answer as to whether or not Appellee had actually paid Appellant's obligation to the Philippine National Bank, a matter which should be decided in the affirmative before Appellant, as surety, can claim reimbursement from Appellant, the principal debtor. However, Appellee is correct in saying that said defense is immaterial to its right to recovery, since the mortgage deed executed by Appellant in its favor (the genuineness and due execution of which Appellant admitted in his answer) shows Appellant to be the actual and only debtor, and Appellant is precluded from varying this representation by parol evidence. In ruling for the Appellant, the SC opined that the last paragraph of Art. 2071 of the New Civil Code, provides that the only action the guarantor can file against the debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceeding by the creditor and from the danger of insolvency of the debtor."

An action by the guarantor against the principal debtor for payment, before the former has paid the creditor, is premature.

bond. There was consequently, no material or essential alteration of the original contract which could result in the release of the surety from the obligation under the said bond. For purposes of releasing a surety's obligation, there must be a material alteration of the contract in connection with which the bond is given, a change which imposes some new obligation on the party promising or takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof . . . To allow compensated surety companies to collect and retain premiums for their services and then repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties. While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability and that such liability cannot be extended by implication, it should be noted in the present case that although the technical specifications of the items to be purchased have been changed, it clearly appears that such changes are not substantial and have not added any other liability to that originally assumed. A surety is not released by a change in the contract which does not have the effect of making its obligation more onerous. On the argument of Torrento, the Court found that since the surety bond expressly provides that Torrento and MSIC solidarily bind themselves under the surety bond, it is a suretyship in which case the provisions of the Civil Code with respect to joint and solidary obligations will apply and Article 1216 of the Civil Code which provides that the creditor may proceed against any of the solidary debtors or all of them simultaneously. Although as a rule, sureties are only subsidiarily liable for an obligation, nevertheless, if they biond themselves jointly and severally, or in solidum, with the principal debtor, the creditor can bring action against anyone of them, either alone or together with the principal debtor. SECURITY BANK AND TRUST CO. VS. CUENCA I. Facts * Creditor: Sccurity Bank and Trust Co. Debtor: Sta. Ines Melale Corp. Surety: Rodolfo Cuenca A. Sta. Ines is a corporation engaged in logging operations. In 1980, it was granted by Security Bank a credit line in the amount of Php 8M. To secure payment, it executed a chattel mortgage over some of its machineries and equipments. And as an additional security, its President and Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity agreement in favor of Security Bank whereby he bound himself jointly and severally with Sta. Ines. After Cuenca resigned, Sta. Ines obtained a Php 6M loan. Because of its difficulty in making the amortization payments, in 1989 it requested Security Bank a complete restructure of its indebtedness, which was approved without prior notice to, or prior consent of Cuenca. Still it was unable to pay. B. Contention of the Petitioner Security Bank insists that the 1989 Loan Agreement was a mere renewal or extension of the Php 8M original accommodation, that Cuenca waived his right to be notified of and to give consent to

NATIONAL SHIPYARDS & STEEL CORPORATION v. CARIDAD TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION Facts: Torrento applied for a purchase on credit of 60 tins of steel bars, 3/8 deformed or plain, at P430 per ton, for a 120-day period with the NASSCO. A contract of purchase and sale was then executed. Pursuant to the stipulation in the contract the value of the steel bars sold to Torrento should be secured by a surety bond, in compliance therewith, Mutual Security Insurance Corporation (MSIC) and Torrento executed in favor of NASSCO a P25,000 bond, whereas the contract called for the payment of P25,800 so a supplemental bond was executed to increase the same to P25,800. In the bond, it was stated in clear terms that both principal and surety are held firmly bound in the said sum, jointly and severally. Later on, NASSCO could no longer supply the steel bars called for in the contract since the 3/8 deformed steel bars had been exhausted. To address the problem, Torrento and NASSCO executed a supplemental agreement wherein NASSCO shall sell to Torrento and the latter shall buy from the former 38.50 tons of steel bars of other sizes for P440 or P430 per ton. NASSCO then delivered to Torrento the said steel bars in the total value of P25,749.09. The 120-day period for payment lapsed and demand letters were sent but MSIC made no reply. As a consequence, an action was brought to recover the unpaid contract price from Torrento and MSIC. The lower court ruled against the latter. On appeal, Torrento maintains that NASSCO has no cause of action against her for the reason that inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of her default is exclusively against her surety. She argues that the cause of action does not arise until after payment by MSIC. On one hand, MSIC averred that the execution of the supplemental agreement without its knowledge and consent released it from any liability under the surety bond as there was a material alteration of the principal contract. CA ruled against Torrento and MSIC, hence, the present appeal. Issue: WON the supplemental agreement constitutes a material alteration that may release MSIC from any liability under the surety bond Held: No. Ratio: The supplemental agreement did not result in Torrentos assuming more onerous conditions than those stipulated in the original contract, and for which the surety furnished the

any substitution, renewal, extension, increase, amendment, conversion or revival of the same, and that it was a continuing surety. C. Contention of the Respondent Cuenca argues that the 1989 agreement extinguished the obligation under the 1980 credit accommodation by novation. II. Issues WON the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement. III. Ruling The 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. It is essential in the law of suretyship that any agreement between the creditor and the principal debtor that essentially varies the terms of the principal contract without the consent of the surety, will release the surety from liability. 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. 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.

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. Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor (PBC) to determine against whom he will enforce collection. Consequently, the dismissal of the case against Pontanosas may not be deemed as having discharged Inciong from liability as well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him. Inciong, therefore, may only have recourse against his co-makers, as provided by law. ZOBEL INC VS. CA FACTS: Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges and one tugboat 3 which would be used in their molasses business secured by a chattel mortgage over the three (3) vessels to be acquired and a Continuing Guaranty by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. Respondent spouses defaulted in the payment upon maturity. SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety. The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as follows: For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account of the borrower, . . . ISSUE: We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.

INCIONG VS. CA In February 1983, Rene Naybe took out a loan from Philippine Bank of Communications (PBC) in the amount of P50k. For that he executed a promissory note in the same amount. Naybe was able to convince Baldomero Inciong and Gregorio Pantanosas to co-sign with him as co-makers. The promissory note went due and it was left unpaid. PBC demanded payment from the three but still no payment was made. PBC then sue the three but PBC later released Pantanosas from its obligations. Naybe left for Saudi Arabia hence cant be issued summons and the complaint against him was subsequently dropped. Inciong was left to face the suit. He argued that that since the complaint against Naybe was dropped, and that Pantanosas was released from his obligations, he too should have been released. ISSUE: Whether or not Inciong should be held liable. HELD: Yes. Inciong is considering himself as a guarantor in the promissory note. And he was basing his argument based on Article 2080 of the Civil Code which provides that guarantors are released from their obligations if the creditors shall release their debtors. It is to be noted however that Inciong did not sign the promissory note as a guarantor. He signed it as a solidary co-maker. A guarantor who binds himself in solidum with the principal debtor 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

HELD: A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. 7 A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. 8 Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. 9 Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay. 10 Based on the aforementioned definitions Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is "Continuing Guaranty", the Court's interpretation is not limited to the title alone but to the contents and intention of the parties more specifically if the language is clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is rendered unnecessary and redundant. One need not look too deeply at the contract to determine the nature of the undertaking and the intention of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the stipulations in the contract