Set 3

16.
Guaranty and Suretyship 2047 2084

a. Concept 2047
b. Guaranty vs. Suretyship 2047, 2nd Paragraph

1. G.R. No. 117660. December 18, 2000
AGRO CONGLOMERATES V. SORIANO 348 SCRA 450
FACTS:
Petitioner sold to Wonderland Food Industries two parcels of land. They stipulated under a
Memorandum of Agreement that the terms of payment would be P1,000,000 in cash,
P2,000,000 in shares of stock, and the balance would be payable in monthly installments.
Thereafter, an addendum was executed between them, qualifying the cash payment. Instead of
cash payment, the vendee authorized the vendor to obtain a loan from the financier on which
the vendee bound itself to pay for. This loan was to cover for the payment of P1,000,000. This
addendum was not notarized. Petitioner Soriano signed as maker the promissory notes payable
to the bank. However, the petitioners failed to pay the obligations as they were due. During that
time, the bank was in financial distress and this prompted it to endorse the promissory notes for
collection. The bank gave ample time to petitioners then to satisfy their obligations. The trial
court held in favor of the bank. It didn't find merit to the contention that Wonderland was the one
to be held liable for the promissory notes.
HELD:
First, there was no contract of sale that materialized. The original agreement was that
Wonderland would pay cash and petitioner would deliver possession of the farmlands. But this
was changed through an addendum, that petitioner would instead secure a loan and the
settlement of the same would be shouldered by Wonderland. Petitioners became liable as
accommodation parties. They have the right after paying the instrument to seek reimbursement
from the party accommodated, since the relation between them has in effect became one of
principal and surety. Furthermore, as it turned out, the contract of surety between Woodland and
petitioner was extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion in the persons of the principal debtor and surety. The addendum
thereon likewise lost its efficacy.
16. Guaranty and Suretyship 2047 2084

2. G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Facts: Private respondent M.B Lending Corporation extended a loan to the spouses Osmea
and Merlyn Azarraga together with petitioner EstrellaPalmares in the amount of P30, 000.00,
with compounded interest at the rate of 6% per annum. 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 the basis of petitioners solidary liability under the promissory note,
Respondent Corporation filed a complaint against petitioner Palmares as a lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the
latter. RTC Dismissed the complaint and held 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. 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 . Issue: WON petitioner Palmares is solidarily liable. Held: Yes. The SC
ruled that Palmares is a surety. Settled is the rule that a surety is bound equally and absolutely
with the principal,and as such is deemed an original promisor and debtor from the beginning.
This is because in suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.
In essence, the contract of a surety starts with the agreement, 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.
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.
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.
2

3. People v. Maniego G.R. No. L-30910. February 27, 1987NARVASA, J.:
FACTS: Accused-appellant Maniego was an indorser of several checks drawn by her sister,
which were dishonored after they have been exchanged with cash belonging to the
Government.
ISSUE: W/N Maniego may not be made liable on account of dishonor of checks indorsed by her.
RULING
NO. Appellants contention that as mere indorser, she may not be made liable on account of the
dishonor of the checks indorsed by her is untenable. Under the law, the holder or last indorsee
of a negotiable instrument has the right to enforce payment of the instrument for the full amount
thereof against all parties liable thereon.
Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of the crime of
Malversation imputed to her and her two (2) co-accused did not operate to absolve her from civil
liability for reimbursement of the amount rightfully due to the Government as owner thereof. Her
liability therefor could properly be adjudged, as it was so adjudged, by the Trial Court on the
basis of the evidence before it, which adequately establishes that she was an indorser of
several checks drawn by her sister, which were dishonored after they had been exchanged with
cash belonging to the Government, then in the official custody of Lt. Ubay.
Appellant's contention that as mere indorser, she may not be made liable on account of the
dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last
indorsee of a negotiable INSTRUMENT has the right to "enforce payment of the instrument for
the full amount thereof against all parties liable thereon." 18 Among the "parties liable thereon" is
an indorser of the instrument i.e., "a person placing his signature upon an instrument otherwise
than as maker, drawer, or acceptor ** unless he clearly indicates by appropriate words his
intention to be bound in some other capacity. " 19 Such an indorser "who indorses without
qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to pay it." 20 Maniego may also be
deemed an "accommodation party" in the light of the facts, i.e., a person "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." 21 As such, she is under the law "liable on
the instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew ** (her) to be only an accommodation party," 22 although she has the right, after
paying the holder, to obtain reimbursement from the party accommodated, "since the relation
3

between them is in effect that of principal and surety, the accommodation party being the
surety." 23
WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts and the
law, is hereby affirmed in toto, with costs against the appellant.
SO ORDERED.

4. G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN
K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch
I, respondents.
Case: Liability of a surety in a counterbond for the lifting of a ritof !reli"inary attach"ent#ACTS$
See Hong, the proprietor of Ororama Supermart in Cagayan de OroCity, sued the spouses
Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the
collection of the sum of P58, 400 plus litigation expenses and attorneys fees. He asked for a
writ of preliminary attachment and the lower court issued an order of attachment. The deputy
sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de
Oro City. To lift the attachment, the Ong spouses filed a counterbond in the amount of P58, 400
with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers
Assurance Corporation bound themselves to pay solidarily to See Hong the sum of P58, 400.
Ong Spouses failed to appear during pre-trial, they were declared in default. The lower court
ordered the spouse and the surety to pay solidarily See Hong the said sum plus litigation
expenses and attorneys fees. Ernesto Ong manifested that he did not want to appeal. Ororama
Supermart filed a motion for execution. It was granted by the lower court. The writ of execution
-as issued against the judgment debtors and their surety. The towers Assurance Corporation
filed the instant petition for certiorari - here it assails the decision and writ of execution.
ISSUES: W/N surety is liable absence of showing that it was given opportunity to be heard.
HELD: Lower court acted with grave abuse of discretion in issuing a writ of execution against
the surety without first giving it an opportunity to be heard as required in Rule 5; of the Rules of
Court which provides:
SEC 17. When execution returned unsatisfed, recovers had upon bond. If the execution be
returned unsatisfied in whole or in part, the surety or sureties on any counterbond given
pursuant to the provisions of this rule to secure the payment of the judgment shall become
charged on such counterbond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such surety or sureties
after notice and summary hearing in the action
Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor and
that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a
demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his liability for the judgment under his
counterbond. The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety
is not entitled to the exhaustion of the properties of the principal debtor, Art 2959. But certainly,
5

the surety is entitled to be, heard before an execution can be issued against him since he is not
a party in the case involving his principal. The writ of is set aside. The lower court is directed to
conduct a summary hearing on the suretys liability on its counterbond.

5. G.R. No. L-16666
April 10, 1922
MACHETTI VS. HOSPICIO DE SAN JOSE & FIDELITY

Facts:
Machetti 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.
This was guaranteed by Fidelity and Surety Company of the Philippine Islands to the
amount of P128,800
Machetti constructed the building 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 and standards required. Payments were stopped. Machetti demanded
payment.
Hospicio de San Jose therefore answered the complaint and presented a counterclaim
for damages for the partial noncompliance for P71,350.
Machetti was declared insolvent and Fidelity became cross-defendant
CFI ruled against Fidelity
Issue:
WON case is an guaranty or a suretyship? -- GUARANTY
WON Fidelity should pay on Machettis behalf? -- NO
Held:
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 appears that the distinguishing features of a contract of guaranty are present:

(1) the contract is the guarantor's separate undertaking in which the principal does not join,
(2) that its rests on a separate consideration moving from the principal and
(3) 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
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. Fidelity is therefore only bound to pay only in the
event that 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.
CFIs ruling is reversed.
c. Nature and Extent of Guaranty 2048-2057
1. RCBC v Arro G.R. No. L-49401 July 30, 1982
Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements to
guaranty among others, any existing indebtedness of Davao Agricultural Industries
Corporation (the latter is referred to as Daicor).
A promissory note in the amount of P100,000 was issued in favor of petitioner RCBC payable
on June 13, 1977.
The note 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, petitioner filed a
complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua.
Respondent Residoro Chua on the ground that the complaint states no cause of action as
against him.
He alleged that 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.

Petitioner alleged that by virtue of the execution of the comprehensive surety agreement,
respondent is liable because said agreement is continuing; and it encompasses every other
indebtedness the Daicor may, from time to time incur with petitioner bank.
YES Respondent Chua is liable.
The comprehensive surety agreement was jointly executed by respondent Residoro Chua and
Enrique Go, Sr., President and General Manager respectively, of Daicor, 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 P100,000.00.
The guaranty is a continuing one which shall remain in full force and effect until the bank is
notified of its termination.
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 Daicor "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.
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.
2. [G.R. No. 112191. February 7, 1997]
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA, petitioners,
vs. THE HONORABLE COURT OF APPEALS and FILINVEST CREDIT
CORPORATION, respondents.

267 SCRA 653 Civil Law Secured Transactions Continuing Surety; Future Obligations
In 1981, Joseph Chua and Edgar Rodrigueza 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.
The Courts Ruling
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] x x x 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
10

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:***
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 Dio vs. Court of Appeals, [19] we again had occasion to discourse on continuing
guaranty/suretyship thus:***
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]
(underscoring 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
11

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 pre-existing 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 Fortunes 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]
3. ATOK FINANCE CORPORATION vs. COURT OF APPEALS

G.R. No. 80078. May 18, 1993
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
12

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."
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
13

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.
14

The Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of
Appeals are hereby REVERSED and SET ASIDE. A new judgment is hereby entered
REINSTATING the Decision of the trial court.
In Atok Finance Corp. v. CA, 222 SCRA 232, 245, May 18, 1993, per Feliciano, J., the Court
explained the nature of a continuing surety in this wise:
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
extended to the principal debtor.
4. BA Finance Corp vs. CA GR 61464, May 28 1988

FACTS:
Augusto Yulo secured a loan from the petitioner in the amount of P591,003.59 as evidenced by
a promissory note he signed in his own behalf and as a representative of A&L Industries.
Augusto presented an alleged special power of attorney executed by his wife, Lily Yulo, who
managed the business and under whose name the said business was registered, purportedly
authorized the husband to procure the loan and sign the promissory note. 2months prior the
procurement of the loan, Augusto left Lily and their children which in turn abandoned their
conjugal home. When the obligation became due and demandable, Augusto failed to pay the
same.
The petitioner prayed for the issuance of a writ of attachment alleging that said spouses were
guilty of fraud consisting of the execution of Deed of Assignment assigning the rights, titles and
interests over a construction contract executed by and between the spouses and A. Soriano
Corporation. The writ hereby prayed for was issued by the trial court and not contented with the
order, petitioner filed a motion for the examination of attachment debtor alleging that the
properties attached by the sheriff were not sufficient to secure the satisfaction of any judgment
which was likewise granted by the court.
ISSUE: WON A&L Industries can be held liable for the obligations contracted by the husband.
HELD:
15

A&L Industries is a single proprietorship, whose registered owner is Lily Yulo. The said
proprietorship was established during the marriage and assets were also acquired during the
same. Hence, it is presumed that the property forms part of the conjugal partnership of the
spouses and be held liable for the obligations contracted by the husband. However, for the
property to be liable, the obligation contracted by the husband must have redounded to the
benefit of the conjugal partnership. The obligation was contracted by Augusto for his own
benefit because at the time he incurred such obligation, he had already abandoned his family
and left their conjugal home. He likewise made it appear that he was duly authorized by his wife
in behalf of the company to procure such loan from the petitioner. Clearly, there must be the
requisite showing that some advantage accrued to the welfare of the spouses.
Thus, the Court ruled that petitioner cannot enforce the obligation contracted by Augusto against
his conjugal properties with Lily. Furthermore, the writ of attachment cannot be issued against
the said properties and that the petitioner is ordered to pay Lily actual damages amouting to
P660,000.00.
6. [G.R. No. 103066. April 25, 1996]

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
SYLLABUS
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.
16

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.
Doctrine: It is never necessary that a guarantor or surety should receive any part or benefit, 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 the 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 InterResin obtained from Investment Underwriting to the extent of P5M.
1981: Investment Underwriting (IUCP) paid Manila Bank P4M to satisfy Inter-Resins 1978
Obligation
Investment Underwriting (IUCP) then demanded payment of the P4M from both Inter-Resin and
Willex Inter-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:
17

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.
[8]
Art. 2052 of the Civil Code provides:
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 guarantee a natural obligation.
7. [G.R. No. 138544. October 3, 2000]

SECURITY BANK AND TRUST COMPANY, Inc. vs RODOLFO M. CUENCA
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 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.
18

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.
8. G.R. No. L-26473 February 29, 1972

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
PAL-FOX LUMBER CO., INC. AND FAR EASTERN SURETY & INSURANCE COMPANY,
INC., defendants, FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellant;
FAR EASTERN SURETY & INSURANCE CO., INC., third-party plaintiff-appellant, vs.
GASPAR PALANCA & JOSEPH LEE, third-party defendants.
Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau of Internal Revenue for
forest charges andsurcharges amounting to P11,851.56, and that the Far Eastern
Surety & Insurance Co., Inc. was jointly andseverally liable with the lumber company for
the payment of said forest charges up to P5,000.00. Republicmoved for reconsideration,
pointing out that the surety company's correct liability under the appealeddecision was
P5,000.00 plus legal interest from the filing of the complaint. In other words, the
Republic wouldwant the surety company to pay the legal interest adjudged by the trial
court before the case may finally beconsidered dismissed. Far Eastern's denial of
liability for such interest is based on the stipulation in the bondthat it was bound to the
plaintiff "in the sum of P5,000.00."
Issue: W/N Far Eastern should also pay interest?
Ruling: Yes. Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly
applicable.If it (the guaranty) be simple or indefinite, it shall comprise not only the
principal obligation but also all its accessories, including judicial costs.
19
On whether the surety's liability can exceed the amount of its bond, it isenough to
remark that while the guarantee was for the original amount of thedebt of Gabino
Marquez, the amount of the judgment by the trial court in noway violates the rights of
the surety.If it (the guaranty) be simple or indefinite,it shall comprise not only the
principal obligation but also all its accessories,including judicial costs, provided with
respect to the latter, that the guarantor
Footnotes
1 In fact payment of the principal of P5,000.00 has been effected, as alleged in
the surety company's opposition to the plaintiff's motion for reconsideration of the
resolution of this Court of February 22, 1967, and evidenced by a photostat of the
receipt attached.
20

d. Effects of Guaranty 2076-2081
i. Between the guarantor and creditor
1.G.R. No. L-42518
August 29, 1936
WISE & CO., INC., plaintiff-appellee,

vs.
DIONISIO P. TANGLAO, defendant-appellant.
Facts: Atty. Dionisio Tanglao (Cornelio Davids atty) by power of attorney mortgaged two
real properties belonging to him to secure the payment of a judgment credit of P640
obtained by Wise & Co. against Cornelio David (agent of 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 that Atty. Tanglao
become Davids surety for the payment of the judgment debt.
Tanglao did not contract any personal responsibility for the payment of the sum of P640.
The only obligation which he contracted was that resulting from the mortgage. However,
a foreclosure suit was not instituted against Atty. Tanglao but a purely personal action for
the recovery of the amount still owned by Atty. Tanglao.
Even granting that Atty. Tanglao may be considered a surety (or guarantor), the action
does not lie against him on the ground that all the legal remedies against him have not
previously been asked for and David has property sufficient to pay the balance of the
debt the payment 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 the latter has
exhausted all the property of the debtor, and has resorted to all legal remedies against
the debtor.
21

2. SOUTHERN MOTORS VS ELISEO BARBOSA, GR # L-9306
FACTS
Plaintiff Southern Motors brought an action against defendant Barbosa to foreclose a real estate
mortgage constituted by the latter in favor of the former, as security for the payment of a sum
extended by plaintiff to one Alfredo Brillantes, because the latter failed to settle his obligation in
accordance with the terms and conditions corresponding with the deed of mortgage defendant
"led an answer admitting the allegations of the complaint and alleging by way of special and
affirmative defense that he executed the deed of mortgage for the sole purpose of guaranteeing
the above mentioned debt of Brillantes and that therefore plaintiff cannot foreclose the mortgage
property without a prior exhaustion of the principals properties. After the case transferred from
one judge to another, the trial court rendered judgment on the pleadings in favor of plaintiff that
prompted respondent to appeal before the A who certified the case to the S& in view of the act
that the appeal raises purely questions of law.
ISSUE : Plaintiff is required to exhaust debtor principals property before he can proceed to
foreclose the mortgage?
HELD
:NO. Defendants invocation of article 2058 the Civil Code is misplaced because the right of the
guarantors to demand exhaustion of the property of the principal debtor under said provision
exists only when a pledge or mortgage has not been given as special security for the payment
of the principal obligation. Under the given facts of the case, a mortgage was executed as
security Brillantes debt, hence, defendants reliance upon the aforementioned provision cannot
be sustained, for what governs in this case are the provisions under title XVI the Civil Code
concerning pledge and mortgages.
22

3. PRUDENTIAL BANK V IAC (Philippine Rayon Mills & Anacleto Chi)
216 SCRA 257 G.R. No. 74886 December 8, 1992
NATURE Petition for review of the decision of IAC, which affirmed in toto the decision of CFI
Quezon City in a civil actioninstituted by the petitioner for the recovery of a sum of money
representing the amount paid by it to the Nissho CompanyLtd. of Japan for textile machinery
imported by the Philippine Rayon Mills, Inc., represented by co-defendant Anacleto R.Chi.
FACTS
-August 8, 1962: 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, Phil. Rayon appliedfor and was granted a commercial letter
of credit with the Prudential Bank and Trust Company in favor of Nissho. Againstthis letter of
credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank
through itscorrespondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of
these drafts were accepted by the PhilRayon through its president, Anacleto R. Chi, while the
others were not.-Upon arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the Phil Rayon which accepteddelivery of the same. To enable the Phil Rayon to
take delivery of the machineries, it executed, by prior arrangement withthe Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his capacity as president of Phil Rayon.-At
the back of the trust receipt is a printed form to be accomplished by two sureties who, by the
very terms andconditions thereof, were to be jointly and severally liable to the Prudential Bank
should the Phil Rayon fail to pay the totalamount or any portion of the drafts issued by Nissho
and paid for by Prudential Bank. The Phil Rayon was able to takedelivery of the textile
machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.Sometime in 1967, the Phil Rayon ceased business operation. On December 29, 1969, Phil
Rayon's factory was leased byYupangco Cotton Mills for an annual rental of P200,000.00. The
lease was renewed on January 3, 1973. On January 5,1974, all the textile machineries in the
Phil Rayon's factory were sold to AIC Development Corporation for P300,000.00.-The obligation
of the Phil Rayon arising from the letter of credit and the trust receipt remained unpaid and
unliquidated.Repeated formal demands for the payment of the said trust receipt yielded no
result Hence, the present action for thecollection of the principal amount of P956,384.95 was
filed on October 3, 1974 against the Phil Rayon and Anacleto R.Chi.
Defendants Defenses: Lack of cause of action; prescription; laches
Lower Courts Ruling
Both the CFI and the IAC ruled that Philippine Rayon could be held liable for the two (2) drafts
because only these appear to have been accepted by the latter after due presentment. The
liability for the remaining ten(10) drafts did not arise because the same were not presented for
acceptance. In short, both courts concluded thatacceptance of the drafts by Philippine Rayon
was indispensable to make the latter liable thereon.
ISSUES:
23

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 beenforced3a. If not, WON he may be considered a guarantor 3b. If he is a
guarantor, WON the case should have been dismissed on the ground of lack of cause of action
as there wasno prior exhaustion of Philippine Rayon's properties.
HELD:
1. NO. Presentment for acceptance is necessary only in the cases expressly provided for in
Section 143 of the NegotiableInstruments Law (NIL). The parties herein agree, and the trial
court explicitly ruled, that the subject, drafts are sight draftswhich do not require presentment for
acceptance. They are, pursuant to Section 7 of the NIL, payable on demand. 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. SEC 143
(NIL) (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. 2. YES. -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 Art.315, par. 1(b) of the RPC. -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. 3. NO. Private
respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily
with Philippine Rayon. 3a. YES. SCs own reading of the questioned solidary guaranty clause
yields the conclusion that the obligation of Chi is only that of a guarantor. Reasoning Last
sentence of the clause 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. -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. -Any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner since the trust receipt, together with the questioned solidary
guaranty clause, is a contract of adhesion which must be strictly construed against the party
responsible for its preparation. -By his signing, Chi became the sole guarantor. The attestation
24

by witnesses and the acknowledgement before a notary public are not required by law to make
a party liable on the instrument. 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. With respect to a guaranty, 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. 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. -Reading
Section 13 of PD No. 115: It is clear that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty of imprisonment shall be imposed
upon the directors, officers, employees or other officials or persons therein responsible for the
offense. However, it is these corporations, partnerships, associations, etc, which are made liable
for the civil liability arising from the criminal offense. -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. 3b. NO. Excussion is not a condition sine qua non for the institution of an action against
a guarantor. There was nothing procedurally objectionable in impleading private respondent Chi
as a co-defendant in the civil case for the collection of a sum of money. As a matter of fact,
Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. -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. -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. 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. Disposition Petition
granted. Philippine Rayon Mills, Inc. declared liable on the 12 drafts in question and on the trust
receipt. Private respondent Anacleto R. Chi declared secondarily liable on the trust receipt.
25

4. G.R. No. L-28030 January 18, 1982
THE IMPERIAL INSURANCE, INC., petitioner,
vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal,
Quezon City Branch IV, ROSA V. REYES, PEDRO V. REYES and CONSOLACION V.
REYES, respondents.
IMPERIAL INSURANCE vs DE LOS ANGELES
FACTS: Felicisimo Reyes owed Rosa Reyes, and Pedro and Consolacion Reyes (creditors)
certain amounts. Both creditors obtained writs of preliminary attachment against Felicisimo.
Felicisimo and his surety, Imperial Insurance, posted bonds for dissolution of attachment. Both
cases were tried jointly, and the creditors won the case against elicisimo. The CA armed and
remanded the case to the lower court (presided by Judge de los Angeles) for execution. Judge
de los Angeles issued the writs of execution, but the sheriff returned them unsatisfied. The
creditors sued for recovery on the surety bonds. Imperial opposed. The judge ruled against the
counter-bonds (probably meaning that the creditors can recover from the bonds, not sure
though). The creditors moved to execute. Imperial moved for Judge de los Angeles to
reconsider decision, but the motion was denied. Judge de los Angeles granted writ of execution
against the bonds Fled by Imperial. Imperial appealed to the CA. CA dismissed. Imperial
elevated the case to SC. ISSUE: WON the creditors can go aer the surety (Imperial) without
First exhausting Felicisimos properties.
HELD: Yes, in this case. Imperial bound itself solidarily with Felicisimo on the counterbonds.
Article 2059 par 2 applies (excussion [previous exhaustion of the property of the debtor] shall
not take place if the guarantor has bound himself solidarily with the debtor).
Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the principal,
the deceased defendant Felicisimo V. Reyes. In accordance with Article 2059, par. 2 of the Civil
Code of the Philippines, 15excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor." Section 17, Rule
57 of the Rules of Court cannot be construed that an "execution against the debtor be first
returned unsatisfied even if the bond were a solidary one, for a procedural rule may not amend
the substantive law expressed in the Civil Code, and further would nullify the express stipulation
of the parties that the surety's obligation should be solidary with that of the defendant." 16
Hence the petitioner cannot escape liability on its counter-bonds based on the second error
assigned.
DISPOSITION: Armed
26

5. G.R. No. L-46702
October 6, 1939
ALEIDA SAAVEDRA, petitioner,
vs.
W.S. PRICE, FORTUNATO BORROMEO, Judge of the Court of First Instance of Leyte, and
ANASTACIO AOVER, provincial Sheriff of Leyte, respondents.
RAFAEL MARTINEZ, intervenor.
IMPERIAL, J.:
This is a proceeding instituted by the petitioner to annul the order of May 8, 1939, entered by
the Court of First Instance of Leyte, which provided for the sale at public auction of the real
property described in Transfer Certificate of Title No. 395 issued in favor of the petitioner, so that
the proceeds thereof may be applied to the payment of the credit of the respondent W.S. Price
in the sum of P15,000.
In civil case No. 3569 of the Court of First Instance of Leyte, Saavedra et al. vs. Martinez et
al. (58 Phil., 767), this court, on appeal, rendered judgment in case which reads as follows,
Wherefore, the judgment appealed from is hereby modified to the effect that the deed of
sale, Exhibit C, executed by Ceferino Ibaez in favor of Rafael Martinez is declared
rescinded and without force and effect, and the register of deeds of Leyte is hereby
ordered to cancel transfer certificate of title No. 294 issued in favor of the said Martinez,
and to issue, in lieu thereof, another transfer certificate of title in favor of Ceferino Ibaez
and his wife, Aleida Saavedra, with a notation thereon of (1) the mortgage constituted in
favor of W.S. Price to secure the payment of the sum of P15,000 and (2) the judgment
rendered by this court in case G.R. No. 33795, civil case No. 7957 of the Court of First
Instance of Cebu; without prejudice to any right of action which Rafael Martinez may
have against Ceferino Ibaez in accordance with the law. As thus modified, the judgment
appealed from is hereby affirmed in all other respects, with the costs instances against
Ceferino Ibaez and Rafael Martinez.
In civil case No. 3707 of the Court of First Instance of Leyte, W.S. Price, plaintiff vs. Ceferino
Ibaez et al., defendants, said court rendered judgment ordering the defendants to pay the
plaintiff within ninety days the sum of P15,000, with the legal interest thereon from January 16,
1934, and in case of default on their part, that the real property subject matter of the mortgage
be sold at public auction so that the proceeds thereof may be applied to the payment of the sum
in question and the interest thereon. On appeal, this court, in case G. R. No. 44974, (38 Off.
Gaz., 2410), modified the judgment of the lower court as follows:
The judgment appealed from is modified and Rafael Martinez and Ceferino Ibaez are
ordered to pay the sum of P15,000 to plaintiff within the period of ninety days to be
counted from the date this decision becomes final, without pronouncement as to costs.
After the period of ninety days has elapsed and Rafael Martinez and Ceferino Ibaez failed to
pay the sum in question with the interest thereon, the respondent Price filed a motion praying
that the real property mortgaged be sold at public auction for the payment of his mortgage credit
27

and its interest. The motion was set for hearing on April 22, 1939, but on motion of the petitioner
the court postponed it definitely for May 6, 1939. On the 4th of said month, the attorneys for the
petitioner against sought the postponement of the hearing by reason of the bad weather then
prevailing, but the court proceeded with the hearing of the motion on the date fixed, and on the
8th of May it entered the order directing the sale of the mortgaged realty for the payment of the
judgment obtained by the respondent W.S. Price. The petitioner asked for the reconsideration of
the order and the court denied the motion filed to that effect.
The petitioner now claims that the respondent Judge acted with abuse of his discretion in not
transferring the hearing of the motion for the sale of the mortgaged realty and that he exceeded
his jurisdiction in ordering the sale of said property.lwphi1.nt
In connection with the first contention, we hold that the court made good use of its discretion in
denying the postponement on the ground that said hearing had already been postponed
definitely to another date upon petition of the petitioner herself. Furthermore, with respect to a
mere motion to sell the mortgaged realty, the court could hear it ex parte without the presence of
the petitioner because in the judgment rendered by the court and affirmed by this court, it had
already been ordered previously that if the defendants Rafael Martinez and Ceferino Ibaez
should fail to pay the debt of P15,000 within 90 days, the mortgaged realty must be sold in
accordance with the law (Government of the Philippine Islands vs. De las Cajigas, 55 Phil.,
667).
As to the second point, it is contended that since the petitioner is not the debtor and as she, on
the other hand is the owner of the mortgaged realty, she merely acted as surety to Rafael
Martinez, the principal debtor, and as such she entitled to the benefit of the exhaustion of the
property of the principal debtor, in accordance with the provision of article 1830 of the Civil
Code. Basing her claim on this alleged defense, the petitioner contends that the court should
not have ordered the sale of the real property in question. We are of the opinion that this last
contention is likewise unfounded and untenable. In the first place, this alleged defense should
have been interposed before the judgment was rendered in this case and it is too late to raise it
for the first time as a ground for opposing the motion to sell the real property in question. In the
second place, the contention that the mortgaged real property belonging to the petitioner cannot
be sold to pay the debt for the reason that she is a mere surety of Rafael Martinez, finds no
support in the law. It is a fact that the principal debtors, according to the judgment of this court,
are Rafael Martinez and Ceferino Ibaez and that the mortgaged property belongs to the
petitioner, but the lien imposed upon the property was legal and valid in accordance with article
1857 (paragraph 3) of the Civil Code, and in case of default, which took place herein, said
property is subject to sale, in accordance with the provisions of articles 1858 and 1876 of the
same Code of sections 256 and 257 of the Code of Civil Procedure. It is true that the petitioner
is a surety with regard to Rafael Martinez and as such surety she is entitled to resort to the
actions and remedies against him which the law affords her, but we should not lose sight of the
fact that she was sued not as a surety but as a mortgage debtor for being the owner of the
mortgaged property.
28

The order of May 8. 1939, appealed from, being in accordance with law, for the reason that it
was rendered by the respondent Judge in the exercise of his jurisdiction and discretion, the
petition for certiorari is hereby denied, with the costs to the petitioner. So ordered.
6. G.R. No. L-41320
November 9, 1934
CONCEPCION J. VIUDA DE SYQUIA, in her capacity as administratrix of the state of the
deceased Gregorio Syquia, plaintiff-appellee,
vs.
PERFECTO JACINTO, ET AL., defendants. RAFAEL PALMA, appellants.
BUTTE, J.:
On December 15, 1924, the Bank of the Philippine Islands obtained a judgment against
Perfecto and Felipe Jacinto and Rafael Palma on a promissory note in its favor executed by the
defendants on May 27, 1922, for the sum of P22,000 with interest at the rate of 9 per cent per
annum plus 10 per cent of the principal as costs and attorney's fees. The dispositive part of this
judgment is as follows:
Se condena a los Sres. P. y F. Jacinto y Rafael Palma a que paguen a la parte
demandante, los primeros como obligados principales y el ultimo como fiador, la suma
de veinticuatro mil pesos (P24,000) al interes de 9 por ciento al ao desde el 27 de
mayo de 1923, mas el uno por ciento sobre el principal en concepto de honorarios de
abogado y costas.
No debe expedirse ejecucion contra el demandado Sr. Rafael Palma, sino despues de
haberse hecho excusion de los bienes de los senores P. y F. Jacinto.
On August 16, 1928, the Bank of the Philippine Islands "in consideration of the sum of P1 and
other valuable considerations" assigned and transferred said judgment to Gregorio Syquia.
On July 12, 1932, the widow of Gregorio Syquia, as administratrix of his estate, filed suit in the
Court of First Instance of Manila against Perfecto and Felipe Jacinto and Rafael Palma reciting
the aforementioned judgment and assignment and alleging that since the date of said judgment
none of the defendants had paid anything thereon and there remains still due the sum of
P24,000 with interest at 9 per cent since May 27, 1923. The plaintiff prayed that the judgment
be revived and that defendants Perfecto and Felipe Jacinto as principal and Rafael Palma as
guarantor be adjudged to pay the sum of P24,000 with interest since May 27, 1923, and costs.
To this petition were attached a copy of the judgment of December 15, 1924, Exhibit A, and a
copy of the assignment thereof to the plaintiff, Exhibit B.
The defendants filed a joint amended answer in which they admitted the judgment, Exhibit A,
and that said judgment had lapsed and it was necessary to revive the same; but they denied the
assignment to Syquia and the allegation that nothing had been paid on said judgment and that
the full amount thereof was still due. They set up as a special defense that the judgment which
the plaintiff was attempting to revive has been fully paid; that at the time of making the
assignment to Gregorio Syquia, the bank had no right or interest under said judgment, the same
having been fully paid, and that the partition does not state facts sufficient to constitute a cause
of action.
29

In the same answer they set up a counter-demand to the following effect: that in the month of
April, 925, the Bank of the Philippine Islands caused an execution to be issued under said
judgment and the sheriff on the request of the bank sold at public sale three properties
belonging to the defendants Jacinto which had been previously attached; that at said public sale
three properties belonging to the defendants Jacinto which had been previously attached; that
at said public sale the bank was the highest bidder crediting the amount of its bid on the said
judgment; that said parcels of land with their improvements consisting of four houses yielded a
monthly revenue of P880 or P10,560 a year; that during the year allowed the judgment debtors
for redemption the said bank took control and possession of the said parcels of land and
collected and retained the revenues thereof as aforesaid and that Gregorio Syquia has been
receiving the same since that time, though without any right whatever; that the said revenues
during the year of redemption in the sum of P10,560 were never applied by the bank as a credit
on said judgment. The defendants prayed that they be absolved from the demand of the
petitioner and that the estate of Gregorio Syquia be condemned to pay the sum of P10,560 with
costs. The answer concludes with a prayer for general relief.
On the trial of this cause it was shown that at the execution sale held on April 18, 1925, the bank
bought two of the properties of the defendants Jacinto for the sum of P15,045. The third
property was sold to Rufino Reyes for P1,000 which was not credited on the judgment debt
pending the determination of Reyes' claim of priority. The trial court stated the judgment debt as
of April 18, 1925, as follows: ***
from which is to be deducted P15,045 the value of the two parcels sold to the bank on April 18,
1925, leaving a balance due of P13,696.24. On September 2, 1925, the defendant Palma paid
the bank P100 leaving thus a net balance due of P13,596.24. The trial court entered the
following judgment:
Dictese sentencia condenando a los demandados, Perfecto Jacinto y Felipe Jacinto,
como obligados principales, y Rafael Palma como fiador, a pagar a la demandante la
cantidad de trece mil quinientos noventa y seis pesos con veinte y cuatro centimos
(P13,596.24), mas las costas del juicio.
Se sobresee la reconvencion de los demandados.
Asi se ordena.
Manila, I.F., 25 de septiembre de 1933.
From this judgment only defendant Palma appeals. He submits the following assignments of
error:
1. El Juzgado erro al no apreciar que la cuenta de los deudores P. y F. Jacinto quedo
liquidada con el banco al efectuarse la venta de las fincas embargadas por este a favor
de Gregorio Syquia por la suma de P45,000 y que, por consiguiente, la sentencia firme
de diciembre 14, 1924, quedo ipso facto saldada y con creces, en virtud de aquella
venta.
2. El Juzgado erro al no apreciar que el banco no transmitio ningun derecho, interes o
participacion en la sentencia referida al tiempo de hacerse el traspaso de los mismos a
Gregorio Syquia.
30

3. Aun suponiendo que la sentencia firme era subsistente contra los deudores y su
fiador al tiempo de hacerse el traspaso por el banco de cualquier titulo, derecho, interes
o participacion en dicha sentencia, el Juzgado erro al no apreciar que se ha constituido
una novacion de la obligacion del fiador sin su conocimiento ni consentimiento, y, por
tanto, sin eficacia juridica contra el.
4. El Juzgado erro al no apreciar que el demandado Rafael Palma, como fiador, ha
quedado eximido de su obligacion no solo por efecto de la novacion hecha sin su
conocimiento ni consentimiento, sino tambien por efecto de la aceptacion por el banco
de los bienes inmuebles de los deudores P. y F. Jacinto, en pago de deuda.
It is to be noted that Palma filed no separate answer nor special defenses available to him as
guarantor but merely joined in the answer of his codefendants pleading that the bank had been
fully paid. It should be noted too that the execution which was issued under the judgment of
December 15, 1924, and under which said parcels of land were sold on April 18, 1925, was
directed solely against the principal debtors, Perfecto and Felipe Jacinto, Palma not being
mentioned therein.
Under his first and second assignments of error, the appellant argues that when the bank
acquired said properties at the sheriff's sale on April 18, 1925, for the sum of P15,045, it paid
much less than they were worth, in view of the fact that they yielded an annual revenue of
P10,560; and this is further established by the fact that the bank on August 16, 1928, sold and
conveyed said parcels to Gregorio Syquia for the sum of P45,000. Exhibits 2-A and 2-Bare
copies of pages of the "libro de diversas cuentas" of the bank, upon which appears the account
of Perfecto and Felipe Jacinto and Rafael Palma. From these it appears that after the sale by
the bank to Syquia, said account was marked as balanced and closed. From these facts the
appellant contends that the principal debtors, and therefore the guarantor, were discharged from
further liability on the judgment; and that being true, Syquia acquired nothing by the assignment
of the judgment to him by the bank. In strict law, it is obvious that the plea that the defendants
has paid their debt cannot be sustained. Indeed the appellant himself in arguing his first and
second assignments of error invokes the equitable principle that no person should enrich
himself unjustly at the expense of another. Clearly this equitable principle has no application to a
legally conducted sheriff's sale. The appellant does not question the regularity of the sale. A
purchaser at a sheriff's sale, when his title has once become vested, may dispose of the
property for such consideration as he sees fit or as he can obtain. The rule which the appellant
asks us to introduce into our jurisprudence with regard to sheriff's sales would cast such a doubt
upon such sales that bidders would abstain therefrom and even judgment creditors would offer
less, all to the prejudice of judgment debtors. The Code of Civil Procedure goes far in protecting
the judgment debtor. He may prevent the sale of the property on execution (sec. 456); or he
may redeem it from the purchaser at any time within twelve months after the sale(sec. 465). In
the instant case, although it was alleged the property was sold for greatly below its value, the
defendants did not exercise any right of redemption. We hold, therefore, that the judgment debt
in its entirety was not discharged before the action for the revival of the judgment was brought.
However, the majority of the court are of the opinion that there should be credited upon the
judgment for the benefit of the guarantor alone the sum of P10,560, being the revenues
collected and retained during the year of redemption by Gregorio Syquia from said properties,
according to the testimony of Perfecto Jacinto (t.s.n., 19, 20,22). This conclusion is based on
the interpretation given to the provisions of the Code of Civil Procedure by this court in the
cases of Pabico vs. Ong Pauco (43 Phil., 572); Flores vs. Lim (50 Phil. 738); Powell vs. National
31

Bank (54 Phil., 54). It is view of the writer that this defense so far as the guarantor is concerned
is premature.
In his brief and upon the oral argument the appellant has pressed upon our attention several
defenses available to guarantors under our law which, he claims, entitle him to a reversal of the
judgment. With reference to all these defences, it suffices to say that it is conceded that Palma
as guarantor is still entitled to the benefits of articles 1830,1832 and 1852 of the Civil Code. Up
to the present, the judgment creditor has made no demand on Palma. Joining him in the suit
against the principal debtor is not the demand intended articles 1832 of the Civil Code. That
demand can be made only after judgment on the debt, 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. Only then can the creditor "levy upon the property of
the principal" only then can the liability of the creditor begin under article 1833 of the Civil
Code. It would be absurd and futile to point out "saleable property of the debtor" at the inception
of the suit, when it cannot be seized or sold, and require the creditor to make a "levy" upon it.
There is no competent evidence that the principal debtors, Perfecto and Felipe Jacinto, are
insolvent even if they were now, there can be no certainty that they may not be in funds when
an exemption on the revived judgment is issued. So far as this record shows, the judgment
creditor has not exhausted his remedies against the principal debtors and he is still looking to
them for payment. It is not for the guarantor to anticipate that there will be a return of nulla
bona on the execution, when and if issued. Nor is it for him to anticipate a demand on him under
article 1832 and to offer defences thereto which have not matured. The occasion for these
defences may never arise. The present revived judgment could not therefore be res judicata as
to such future defences. The revived judgment does not foreclose any defence which the
guarantor may raise when "demand for payment" is made on him. Indeed, he cannot claim the
benefits of articles 1830, 1832, 1834 and 1852 of the Civil Code before demand is made on him;
they are all available to him only after "demand for payment" (art. 1832).
The appellant's defences may be all be considered when they are property presented at the
proper time. The case which he now presents, in anticipation of a demand which has not yet
been made, is purely hypothetical. The courts do not undertake to decide hypothetical cases.
It results that the judgment appealed from must be modified in the sense that Rafael Palma as
guarantor maybe held contingently liable only in the sum of P3,034.24 under said judgment,
which is in all other respects affirmed, without special pronouncement as to costs in this
instance.
7. Malayan Insurance Co., Inc. v. Salas (90 SCRA 252), lays down the procedure regarding
claims for damages against an illegal attachment. It states:
Under section 20, in order to recover damages on a replevin bond (or on a bond
for preliminary attachment, injunction or receivership) it is necessary (1) that the
defendant-claimant has secured a favorable judgment in the main action,
meaning that the plaintiff has no cause of action and was not, therefore, entitled
to the provisional remedy of replevin; (2) that the application for damages,
showing claimant's right thereto and the amount thereof, be filed in the same
action before trial or before appeal is perfected or before the judgment becomes
executory; (3) that due notice be given to the other party and his surety or
32

sureties, notice to the principal not being sufficient and (4) that there should be a
proper hearing and the award for damages should be included in the final
judgment (Luneta Motor Co. v. Menendez, 117 Phil. 970, 974; 3 Moran's
Comments on the Rules of Court, 1970 Ed., pp. 54-56. See Cruz v. Manila
Surety & Fidelity Co., Inc., 92 Phil. 699).
xxx xxx xxx
As may be gathered from section 20 of Rule 57, the application for damages
against the surety must be filed (with notice to the surety) in the Court of First
Instance before the trial or before appeal is perfected or before the judgment
becomes executory.
If an appeal is taken, the application must be filed in the appellate court but
always before the judgment of that court becomes executory so that the award
may be included in its judgment (Luneta Motor Co. v. Menendez, supra).
But it is not always mandatory that the appellate court should include in its
judgment the award of damages against the surety. Thus, it was held that where
the application for damages against the surety is seasonably made in the
appellate court, 'the latter must either proceed to hear and decide the application
or refer 'it' to the trial court and allow it to hear and decide the same' (Rivera v.
Talavera, 112 Phil. 209, 219).
xxx xxx xxx
Note that under the second paragraph of section 20, Rule 57 of the present
Rules of Court, the damages suffered during the pendency of an appeal in a
case where the writs of attachment, injunction and replevin or an order of
receivership were issued should be claimed in the appellate court.
xxx xxx xxx
33

ii. Between debtor and guarantor - 2066-2072
1. G.R. No. L-22177
December 2, 1924
TUASON, TUASON, INC., plaintiff-appellee, vs. ANTONIO MACHUCA, defendant-appellant.
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 to reimburse Manila Compania de Seguros all of such sum it may pay or
become bound to pay, upon its obligation to Tuason, Tuason Inc. whether or not it shall have
actually paid such sums or any part thereof. Universal Trading Co. was declared insolvent.
Tuason, Tuason, Inc. brought action against Manila Compania De Seguros to recover the value
of the note and obtained final judgment. Later, Manila Compania De Seguros filed a complaint
against Machuca to recover the amount which Manila Compania De Seguros was sentenced to
pay Tuason, Tuason, Inc, plus attorneys fees, judicial costs and sheriffs 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 the above facts?
b) WON Tuason, Tuason Inc. has the right to recover from Machuca more than 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 by virtue of final
judgment to pay the value of the note executed by it in favor of Manila Compania de
Seguros, and according to the document executed solidarily by Universal Trading Co.
and Machuca, Machuca bound himself to pay Tuason, Tuason, Inc. as soon as the latter
may have become bound and liable, whether or not it shall have actually paid.
b. Machuca must not be responsible for the expenses incurred by Manila Compania De
Seguros in the litigation between it and Tuason, Tuason, Inc. and it cannot charge
Machuca with expenses it was compelled to make by reason of its fault. It is entitled only
to expenses incurred by it in the action against Machuca.
Art. 2071 the guarantor, even before having paid, may proceed against the principal debtor:
1. When he is being sued for the payment
2. In the case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve him from the guaranty within specified
period, and this period has expired
4. When the debt has become demandable, by reason of the expiration of the period of the
payment
5. After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be such nature that it cannot be extinguished except within a period
longer than ten years
6. If there are reasonable grounds to fear that the principal debtor intends to abscond
7. If the principal debtor is in imminent danger of becoming insolvent
34

In all these, cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the
danger of the insolvency of the debtor.
iii. Between co-guarantors
e. Extinguishment of guaranty
1. G.R. No. L-16550
January 31, 1962
ALLEN McCONN, plaintiff-appellant,
vs.
PAUL HARAGAN, ET AL., defendants,
ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.
CONCEPCION, J.:
On June 30, 1955 pending hearing of Civil Case No. 24790 of the Court of First Instance of
Manila, entitled "Morris McConn v. Paul Haragan", which was scheduled to take place on
September 16, 1955 the Bureau of Immigration advised said court that defendant Paul
Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave
the Philippines for 15 days only and requested information whether the court had any objection
thereto. By an order dated July 11, 1955, the court required Haragan to file a bond of P4,000 "to
answer for his return to the Philippines and the prosecution of his case against him, with the
understanding, that upon his failure to return, said bond will answer pro tanto for any judgment
that may be rendered against him". Thereupon, or on July 12, 1955, Haragan submitted a bond,
subcribed by him and the Associated Insurance & Surety Co., as principal and surety,
respectively, reading: .
WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines on a
business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days from date of
his departure, in connection with his business;
WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court of
First Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs. Paul Haragan,
Defendant", Civil Case No. 24790, which is scheduled for hearing on September 16,
1955;
WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for
Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a
Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine
Currency, the guarantee that he will return to the Philippines on or before September 16,
1955;
NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL
and the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic
of the Philippines, or its authorized representatives, in the sum of PESOS FOUR
THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will
35

return to the Philippines on or before September 16, 1955 and that should he fail to do
so, said bond will answer pro tanto for any judgment that may be rendered against him.
Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of said bond,
it would have no objection" to Haragan's "departure from the Philippines for a short stay abroad"
and that "formal leave" was thereby given him. On the date set for the hearing of the case,
Haragan's counsel moved for continuance, whereupon, the hearing was postponed to
November 14, 1955. On the date last mentioned, the same counsel informed the court that
Haragan had been unable to return to the Philippines because the Philippine Consulate in
Hongkong had advised Haragan of a communication from our Department of Foreign Affairs
banning him from returning to the Philippines. The court then postponed the hearing to January
6, 1956. Subsequently, Herbert T. Fallis was impleaded as defendant and, later on, one
Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on February 19,
1959, the court rendered judgment, which, inter alia, sentenced Haragan to pay to plaintiff the
sum of P5,500, with 6% interest thereon from December 8, 1954, until full payment, plus P1,000
as attorney's fees and costs. After this judgment had become final and executory, plaintiff
moved for the execution of the aforementioned bond to satisfy said judgment against Haragan.
The surety company objected thereto upon several grounds and, after due hearing, the lower
court issued an order dated October 13, 1959, releasing said company from liability under the
bond aforementioned and denying plaintiff's motion. A reconsideration of this order having been
denied, the case is now before us on record on appeal filed by the plaintiff.1wph1.t
The issue is whether the Surety Company is liable to plaintiff under the bond quoted above, in
view of the failure of Haragan to return to the Philippines. The lower court decided the issue in
the negative upon the following ground: .
... A careful reading of the surety bond, Exhibit F, indicates that the surety's principal
commitment is 'to guarantee that he (Haragan) will return to the Philippines on or before
September 16, 1955' (See the third 'Whereas'). In the last paragraph of said surety bond,
Exhibit F, it appears that said bond was executed in favor of the Republic of the
Philippines or its duly authorized representatives to guarantee 'thatthe herein principal
(Haragan) will return to the Philippines on or before September 16, 1955 and that should
he fail to do so, said bond will answer pro tanto for any judgment that may be rendered
against him.' As the terms of the bond so state, it appears clearly that the bond will only
answer for the judgment which may be rendered against defendant, should he
(defendant Haragan) fail to return to the Philippines. In other words, if defendant
Haragan should return to the Philippines on or before September 16, 1955, said bond
will not answer for the judgment. It is now the contention of the Associated Insurance
that since it was the Republic of the Philippines (obligee under the bond) who rendered
the return of defendantHaragan to the Philippines impossible, said surety company is
thereby released from its obligation, and cites in support thereof Articles 1266 and 2076
of the New Civil Code. Upon a consideration of this contention, the Court finds it tenable
and well grounded, for as the surety company has so well stated 'where the principal
obligation (of returning to the Philippines) has been extinguished by the action of the
36

obligee, Philippine Government in preventing such return, the accessory obligation of the
surety is likewise extinguished and the bond released of its liability.' Paraphrasing the
last paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to do
so, said bond will (not) answer pro tanto for any judgment that may be rendered against
him.
We are fully in agreement with the foregoing view, which is in accord with the principle that:
The debtor in obligation to do shall also be released when the prestationbecomes legally
or physically impossible without the fault of the obligor. (Article 1266, Civil Code of the
Philippines.).
Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:
This Court finds that despite his efforts to secure the necessary building permit for the
reconstruction, he failed because of the disapproval or unfavorable attitude of the Urban
Planning Commission toward reconstruction unless they conformed to the plan of
widening the city streets. Finding that defendant had done all he could to secure the
permit and to comply with his obligations, but because of the refusal of the government
authorities to issue said permit, he failed to fulfill his undertaking, he should be absolved
and released from said obligation.
To same effect, substantially, is the decision of this Court in House vs. De La Costa (40 Off.
Gaz. [3 S] 47).
WHEREFORE, the order appealed from is hereby affirmed, with the costs of this instance
against plaintiff-appellant. It is so ordered.
2. G.R. No. 138544

October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs.
RODOLFO M. CUENCA, respondent.
PANGANIBAN, J.:
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.
FACTS:
Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR
37

On 10 November 1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line in
the amount of (P8,000,000.00) effective til November 30, 1981 to assist the latter in meeting the
additional capitalization requirements of its logging operations.
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.
Specific stipulations:
The bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower.
As additional security for the payment of the loan, Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 solidary binding himself:
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 .
1985: Cuenca resigned as President and Chairman of the Board of Directors of defendantappellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a
public auction to Adolfo Angala. Before and after this, Sta Ines availed of its credit line.
Sta Ines encountered difficulty in making the amortization payments on its loans and requested
SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMCs
request and signified its approval in a letter dated 18 February 1988 wherein SBTC and Sta.
Ines, without notice to or the prior consent of ] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. To formalize their agreement to restructure the
loan obligations of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement dated 31
October 1989
Sta Ines made payments up to (P1,757,000.00) The defaulted in the payment of its restructured
loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA,
SBTC filed a complaint for collection of sum of resulting after trial on the merits in a decision by
the court a quo, from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement novated the 1980 credit
accommodation which extinguished the Indemnity Agreement for which Cuenca was liable
solidarily. No notice/consent to restructure. Since with expiration date, liable only up to that date
and up to that amount (8M). Amounted to extension.of time with no notice to suret therefore
released from liability.
38

ISSUES:
(a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas
liability under the Indemnity Agreement YES
(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. NO
HELD: Petition of Bank no merit.CA affirmed.

RATIO:
A. Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
Novation of a contract is never presumed. 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
We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation18 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 liquidatethe past due interest and penalty portion of the
Indebtedness.
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement
1) NOT mere renewal/ Extension
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, "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty. x x x."
2) Binding Nature of the Credit Approval Memorandum
Bank 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. 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.
39

B. NO Waiver of Consent
In the Indemnity Agreement, 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.
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.32In 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. 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.
1) NOT Continuing Surety
That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately.
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.
NO PROVISION: each suretyship is a continuing one which shall remain in full force and
effect until this bank is notified of its revocation.
2) 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.
40

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.
3. G.R. No. L-21109
June 26, 1967
NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,

vs.
CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE
CORPORATION, defendants-appellants.
MAKALINTAL, J.:
On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards &
Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of
steel bars, 3/8" deformed or plain, at P430.00 per ton, for a 120-day period.
A contract of purchase and sale was executed on January 13, 1959, but was subsequently
amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of
steel bars stated to be 60 metric tons in the original contract was changed to 59.31 metric tons;
the price was changed from P430.00 to P435.00 per metric ton; and the specification of the
steel bars was also changed from "plain, round or corrugated" to "deformed."
Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento
should be secured by a surety bond issued by a reputable bonding company, defendant
Torrento as principal and Mutual Security Insurance Corporation, as surety executed in favor of
plaintiff a surety bond (S. 1754) on January 23, 1960. When it was noted that the undertaking
under the bond was only P25,000.00, whereas the contract called for the payment of
P25,800.00, defendant surety executed a supplemental bond increasing the amount of
P25,800.00.
On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the
contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been
exhausted, the plaintiff and defendant Torrento executed a supplemental agreement, the
pertinent provisions of which read:
. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed
to buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of
steel bars on credit basis for size and price as follows:
3/8 deformed 20 ft or
41

30 ft. at P435.00 per tons
Whereas, after consummation of said contract, only the following amount of steel bars were
delivered to the vendee, as follows:
20-67 M.T. 3/8" deformed
and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.
Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to
modify and/or amend their said contract as follows:
1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO,
38.50 tons of steel bars on credit basis subject to availability of stock in the following sizes and
prices, to wit:
25 M.T. 1/2" x 30 deformed at P440.00 per ton.
13.50 M.T. 5/8" x 30 deformed at P430.00 per ton
2. That aside from the above amendment and/or modification, the said contract shall not be
affected, altered, or modified in any way.
Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO
delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day period
for payment lapsed. Demand letters were sent, but defendant surety made no reply. Defendant
Torrento did not question her liability, but only asked for a 3-month extension to settle her
account.
Action was brought to recover the unpaid contract price from defendant Torrento and her surety.
On October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and
severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per
annum, from August 29, 1959 until full payment, and the costs of suit. On the cross-claim,
judgment is hereby rendered, ordering the cross-defendant Caridad J. Torrento to pay the crossplaintiff Mutual Security Insurance Corporation whatever sums the latter would pay the plaintiff
by virtue of this judgment, with interest thereon at the rate of 12% per annum, from the date of
payment to plaintiff, until full payment, and the costs of this suit."
Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us
on the ground that the errors assigned raise only questions of law.
Appellant Torrento maintains that plaintiff 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. Further, with respect to the cross-claim of
the Surety, Torrento claims that it was error for the lower court to take cognizance of the same
42

even before payment by said surety to NASSCO had been made. In other words, Torrento
argues that the cause of action alleged in the cross-claim does not arise until after payment has
been made by the surety to the plaintiff.
We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear
terms that both principal and surety are held and firmly bound unto the NASSCO in the sum of
P25,800.00 for the payment of which they bind themselves, jointly and severally. "If a person
binds himself solidarity with the principal debtor, . . . the contract is called suretyship" (Art. 2047,
C.C.) in which case the provisions of the Civil Code with respect to joint and solidary obligations
apply; and Article 1216 of the Civil Code provides that "the creditor may proceed against any of
the solidary debtors or all of them simultaneously. . . ." It has been repeatedly held that although
as a rule sureties . . . are only subsidiarily liable for an obligation, nevertheless, if they bind
themselves jointly and severally, or in solidum, with the principal debtor, the creditor may bring
an action against anyone of them, either alone or together with the principal debtor (Molina vs.
de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406; La Yebana vs.
Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).
With respect to the contention that the lower court erred in taking cognizance of the surety's
cross-claim, suffice it to say that this point was not raised in the court a quo and, consequently
may not be raised for the first time on appeal. Besides, as the lower court also stated in its
decision, "defendant Torrento made no effort to dispute this (cross-claim) of defendant surety
and did not even bother to cross-examine the witness who identified the said indemnity
agreement," which is the basis of the cross-claim.1wph1.t
For its part, appellant surety company maintains that the execution of the supplemental
agreement of February 6, 1959 without its knowledge and consent released it from any liability
under the surety bond as there was a material alteration of the principal contract. We find the
contention without merit. The court a quo analyzed the factual set-up as follow:
x x x An examination and comparison of the contract and the supplemental agreement
will reveal that the only change or alteration consists of the following: Instead of the
original stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at
P435.00 per ton, which kind of steel bars were no longer available in stock, the
supplemental agreement provides for the sale by the plaintiff to defendant Torrento of
other sizes of deformed steel bars at prices of P430.00 and P440.00 per metric ton.
Specifically, the changes are in the diameter of the steel bars which originally was 3/8",
to 1/2 and 5/8"; and the price from P435.00 per ton, to P430.00 per ton for the 1/211
bars. The amount of steel bars to be sold to defendant Torrento remained the same. The
length and the deformed quality of the bars likewise remained unchanged. It is even
specifically provided in Par. 2 of the supplemental agreement that "aside from the above
amendments and/or modifications, the said contract (referring to the original contract)
shall not be affected, altered or modified in any way." There was no alteration in the
principal condition of the contract. The period of payment was not changed, and the
amount of the liability of the principal debtor and of the surety was also untouched.
43

There was no added burden imposed upon or assumed by the buyer." (Emphasis
Supplied)
x x x In short, the supplemental agreement did not result in the principal debtor's
assuming more onerous conditions than those stipulated in the original contract, and for
which the surety furnished the 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.
We see no error in the ruling of the lower court just quoted.
In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held:
"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 (Visayan Distributors, Inc. vs.
Flores, 92 Phil. 145).
4. G.R. No. L-57757 August 31, 1987

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, PRAGMACIO VITUG AND MAXIMO
VITUG, respondents.
GANCAYCO, J.:
Does the presumption of conjugality of properties acquired by the spouses during coverture
provided for in Article 160 of the Civil Code apply to property covered by a Torrens certificate of
44

title in the name of the widow? This is the issue posed in this petition to review on certiorari of
the decision of the Court of Appeals in CA-G.R. No. 60903 which is an action for reconveyance
and damages. *
On November 28, 1952, Donata Montemayor, through her son, Salvador M. Vitug, mortgaged to
the Philippine National Bank (PNB) several parcels of land covered by Transfer Certificate of
Title (TCT) No. 2289 Pampanga to guarantee the loan granted by the PNB to Salvador
Jaramilla and Pedro Bacani in the amount of P40,900.00 which was duly registered in the Office
of the Register of Deeds of Pampanga. 1
On December 1, 1963, Donata Montemayor also mortgaged in favor of PNB certain properties
covered by TCT Nos. 2887 and 2888-Pampanga to guarantee the payment of the loan account
of her son Salvador Vitug in the amount of P35,200.00, which mortgage was duly registered in
the Register of Deeds of Pampanga. 2
The above-mentioned Transfer Certificates of Titles covering said properties were all in the
name of Donata Montemayor, of legal age, Filipino, widow and a resident of Lubao, Pampanga
at the time they were mortgaged to PNB 3 and were free from all hens and encumbrances. 4
Salvador Vitug failed to pay his account so the bank foreclosed the mortgaged properties
covered by TCT Nos. 2887 and 2888. They were sold at public auction on May 20, 1968 in
which the PNB was the highest bidder. The titles thereto were thereafter consolidated in the
name of PNB.
Likewise, Salvador Jaramilla and Pedro Bacani failed to settle their accounts with the PNB so
the latter foreclosed the properties covered by TCT No. 2889 which were sold at public auction
and likewise PNB was the buyer thereof. On August 30, 1968, a certificate of sale was issued by
the Register of Deeds covering said properties in favor of the PNB. When the title of the PNB
was consolidated a new title was issued in its name. 5
On September 2, 1969, the PNB sold the properties covered by TCT Nos. 2887 and 2888
Pampanga to Jesus M. Vitug, Anunciacion V. de Guzman, Prudencia V. Fajardo, Salvador Vitug
and Aurora V. Gutierrez in those names the corresponding titles were issued. 6
During the lifetime of Clodualdo Vitug he married two times. His first wife was Gervacia Flores
with whom he had 3 children, namely, Victor, Lucina and Julio all surnamed Vitug. Victor now
45

dead is survived by his 5 children: Leonardo, Juan, Candida Francisco and Donaciano, an
surnamed Vitug. Juan Vitug is also dead and is survived by his only daughter Florencia Vitug.
The second wife of Clodualdo Vitug was Donata Montemayor with whom he had 8 children,
namely, Pragmacio, Maximo, Jesus, Salvador, Prudencio and Anunciacion, all surnamed Vitug,
the late Enrique Vitug represented by his wife Natalia Laquian, and the late Francisco Vitug who
is survived by 11 children, namely, Antonio, Francisco, Aurora, Pedro, Honorio, Corazon,
Anselmo, Benigno, Eligio Jesus and Luz.
Clodualdo Vitug died intestate on May 20, 1929 so his estate was settled and distributed in
Special Proceeding No. 422 in the Court of First Instance of Pampanga wherein Donata
Montemayor was the Administratrix. 7
Meanwhile, on May 12,1958, Donata Montemayor executed a contract of lease of Lot No. 24,
which is covered by TCT No. 2887-R in favor of her children Pragmacio and Maximo both
surnamed Vitug. This lease was extended on August 31, 1963. By virtue of a general power of
attorney executed by Donata Montemayor on Sept. 19, 1966 in favor of Pragmacio Vitug, the
latter executed a contract of lease on Sept. 19, 1967 of the said lot in favor of Maximo Vitug.
On March 21, 1970 Pragmacio Vitug and Maximo Vitug filed an action for partition and
reconveyance with damages in the Court of First Instance of Pampanga against Marcelo
Mendiola, special administrator of the intestate estate of Donata Montemayor who died earlier,
Jesus Vitug, Sr., Salvador, Natalia, Prudencia, Anunciacion, all surnamed Vitug, Antonio,
Francisco, Aurora, Pedro, Honorio, Corazon, Anselmo, Benigno, Eligio Jesus and Luz, all
surnamed Fajardo and the PNB.
The subject of the action is 30 parcels of land which they claim to be the conjugal property of
the spouses Donata Montemayor and Clodualdo Vitug of which they claim a share of 2/11 of 1/2
thereof. They assailed the mortgage to the PNB and the public auction of the properties as null
and void. They invoked the case of Vitug vs. Montemayor, L-5297 decided by this Court on Oct.
20, 1953 which is an action for partition and liquidation of the said 30 parcels of land wherein
the properties were found to be conjugal in nature.
In a decision of Sept. 15, 1975, the lower court dismissed the complaint with costs against the
plaintiffs and ordered them to pay attorney's fees of P5,000.00 to the defendant's counsel.
46

Plaintiffs then interposed an appeal to the Court of Appeals, wherein in due course a decision
was rendered on May 20, 1981, the dispositive part of which reads as follows:
WHEREFORE, in the light of the foregoing, the decision appealed from is hereby
reversed and set aside, and another one entered in accordance with the tenor of
the prayer of appellant's complaint with the modification that the sale at public
auction of the 22 parcels be considered valid with respect to the 1/2 thereof. No
costs.
Hence the herein petition for certiorari filed by the PNB raising the following assignments of
error:
I
THE RESPONDENT COURT OF APPEALS ERRED IN APPLYING TO THE
CASE AT BAR THE RULING OF THIS HONORABLE SUPREME COURT IN
FLORENCIA VITUG VS. DONATA MONTEMAYOR, ET AL., 91 PHIL. 286 (1953)
BECAUSE:
A. BETWEEN A PROVISION OF A SPECIAL LAW AND THE
JUDICIAL INTERPRETATION AND/OR APPLICATION OF A
PROVISION OF A GENERAL LAW, THE FORMER PREVAILS.
B. THE DOCTRINE OF STARE DECISIS IS NOT A MECHANICAL
FORMULA OF ADHERENCE.
C. PNB WAS NOT A PARTY, AND HAD NO KNOWLEDGE OF
THE ABOVECITED CASE.
D. SIMILARLY, PRAGMACIO VITUG AND MAXIMO VITUG
WERE NOT PARTIES IN SAID CASE.
II
THE RESPONDENT COURT OF APPEALS ERRED IN NOT RECOGNIZING
THE CONCLUSIVENESS OF THE CERTIFICATE, OF TITLE, AS PROVIDED IN
ACT 496, AS AMENDED (THE LAND REGISTRATION).
47

III
THE RESPONDENT COURT OF APPEALS ERRED IN IGNORING THE
CONCLUSIVENESS OF OWNERSHIP OF DONATA MONTEMAYOR OVER
THE PROPERTIES WHICH WERE REGISTERED EXCLUSIVELY IN HER
NAME WHEN PRIVATE RESPONDENTS (PRAGMACIO VITUG AND MAXIMO
VITUG), AS LESSEES, ENTERED INTO A CONTRACT OF LEASE WITH
DONATA MONTEMAYOR AS THE OWNER-LESSOR.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT
PNB WAS A MORTGAGEE IN BAD FAITH.
The petition is impressed with merit.
When the subject properties were mortgaged to the PNB they were registered in the name of
Donata Montemayor, widow. Relying on the torrens certificate of title covering said properties
the mortgage loan applications of Donata were granted by the PNB and the mortgages were
duly constituted and registered in the office of the Register of Deeds.
In processing the loan applications of Donata Montemayor, the PNB had the right to rely on
what appears in the certificates of title and no more. On its face the properties are owned by
Donata Montemayor, a widow. The PNB had no reason to doubt nor question the status of said
registered owner and her ownership thereof. Indeed, there are no liens and encumbrances
covering the same.
The well-known rule in this jurisdiction is that a person dealing with a registered land has a right
to rely upon the face of the torrens certificate of title and to dispense with the need of inquiring
further, except when the party concerned has actual knowledge of facts and circumstances that
would impel a reasonably cautious man make such inquiry. 9
A torrens title concludes all controversy over ownership of the land covered by a final degree of
registration. 10 Once the title is registered the owner may rest assured without the necessity of
stepping into the portals of the court or sitting in the mirador de su casa to avoid the possibility
of losing his land. 11
48

Article 160 of the Civil Code provides as follows:
Art. 160. All property of the marriage is presumed to belong to the conjugal
partnership, unless it be proved that it pertains exclusively to the husband or to
the wife.
The presumption applies to property acquired during the lifetime of the husband and wife. In this
case, it appears on the face of the title that the properties were acquired by Donata Montemayor
when she was already a widow. When the property is registered in the name of a spouse only
and there is no showing as to when the property was acquired by said spouse, this is an
indication that the property belongs exclusively to said spouse. 12 And this presumption under
Article 160 of the Civil Code cannot prevail when the title is in the name of only one spouse and
the rights of innocent third parties are involved. 13
The PNB had a reason to rely on what appears on the certificates of title of the properties
mortgaged. For all legal purposes, the PNB is a mortgagee in goodfaith for at the time the
mortgages covering said properties were constituted the PNB was not aware to any flaw of the
title of the mortgagor. 14
True it is that in the earlier cases decided by this Court, namely Vitug VS. Montemayor decided
on May 15, 1952, which is an action for recovery of possession of a share in said parcels of
land, 15 and in the subsequent action for partition between the same parties decided on Oct.
20, 1953, 16 this court found the 30 parcels of land in question to be conjugal in nature and
awarded the corresponding share to the property of Florencia Vitug, an heir of the late
Clodualdo Vitug from the first marriage. In said cases this Court affirmed the decision of the
lower court. In the dispositive part of the decision of the trial court it made the observation that
"but from the conduct of Clodualdo Vitug and Donata Montemayor during the existence of their
marital life, the inference is clear that Clodualdo had the unequivocal intention of transmitting
the full ownership of the 30 parcels of land to his wife Donata Montemayor, thus considering the
1/2 of the funds of the conjugal property so advanced for the purchase of said parcels of land as
reimbursible to the estate of Clodualdo Vitug on his death. 17 That must be the reason why the
property was registered in the name of Donata Montemayor as widow after the death of
Clodualdo Vitug. 18
49

At any rate, although actions for recovery of real property and for partition are real actions,
however, they are actions in personam that bind only the particular individuals who are parties
thereto. 19 The PNB not being a party in said cases is not bound by the said decisions. Nor
does it appear that the PNB was aware of the said decisions when it extended the above
describe mortgage loans. Indeed, if the PNB knew of the conjugal nature of said properties it
would not have approved the mortgage applications covering said properties of Donata
Montemayor without requiring the consent of all the other heirs or co-owners thereof. Moreover,
when said properties were sold at public auction, the PNB was a purchaser for value in good
faith. So its right thereto is beyond question. 20
Pragmacio and Maximo Vitug are now estopped from questioning the title of Donata
Montemayor to the said properties. They never raised the conjugal nature of the property nor
took issue as to the ownership of their mother, Donata Montemayor, over the same. Indeed
private respondents were among the defendants in said two cases wherein in their answers to
the complaint they asserted that the properties in question are paraphernal properties belonging
exclusively to Donata Montemayor and are not conjugal in nature. 21 Thus they leased the
properties from their mother Donata Montemayor for many years knowing her to be the owner.
They were in possession of the property for a long time and they knew that the same were
mortgaged by their mother to the PNB and thereafter were sold at public auction, but they did
not do anything. 22 It is only after 17 years that they remembered to assert their rights. Certainly,
they are guilty of laches. 23
Moreover, as correctly held by the lower court. Pragmacio and Maximo Vitug as occupants and
lessees of the property in question cannot now dispute the ownership of their mother over the
same who was their lessor. 24
WHEREFORE, the subject decision of the respondent Court of Appeals is hereby REVERSED
and set aside and another decision is hereby rendered DISMISSING the complaint and ordering
private respondents to pay attomey's fees and expenses of litigation to petitioner PNB in the
amount of P20,000.00 and the costs of the suit.
SO ORDERED.
5. PNB vs. Macapanga page 218, De Leon

50
6. National Bank vs. Escueta 50 Phil 991 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. The acceptance need
not necessarily be express or in writing, but may be indicated by acts amounting to
acceptance.
51
7. G.R. No. 42829
September 30, 1935
RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,

vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
Art. 2079 Extension granted to debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. Mere failure on part of the creditor to demand
payment after the debt has become due does not itself constitute any extension of time
referred to herein.
Radio Corp. v. Roa
CFI Manila ruled in favor of Radio Corp. against defendants Jesus Roa, Ramon Chavez,
Andres Roa and Manuel Roa.
-Jesus Roa 22, 935 Upon failure chattel mortgage to be sold at a public auctionJesus Roa, Ramon Chavez, Andres Roa and Manuel Roa to pay solidarily 22,935
Facts:
- Jesus Roa became indebted to Philippine Theater Enterprises 28, 400 payable in 71
monthly installment at 400/month.
- PET assigned its rights to Radio Corp.
-There was an accelerating clause: In case Roa fails to pay, the whole amount shall
immediately become due and demandable and the mortgage and the Luzon Surety Bond
may be foreclosed by the vendor/mortgagee
-Radio Corp, through its attorney in fact Erlanger and Galinger, Inc. Wrote a letter to
Jesus saying that it has no objection to the extension requested by Roa to pay the Feb
installment on April.
Issue:
W/N the extension granted, without the consent of the guarantors, extinguishes the
liability not only to the installments due at that time but also to the 0hole amount of their
obligation:
Held: Whole amount.
52

Ratio:
In the stipulation between Roa and PET, the creditor is given the right to treat and declare
all said installments as immediately due when there is non-payment. Under the express
provision of the contract, the whole unpaid balance becomes due and payable upon to
failure to pay one installment. The act of Radio Corp extending payment, without the
consent of the guarantors, constituted in fact an extension of the payment of the 0hole
amount of indebtedness.
53

8. E Zobel, Inc. vs. CA
Facts: Respondentr spouses applied for a loan with respondent SOLIDBANK. The loan
was granted subject to the condition that spouses execute a chattel mortgage over the 3
vessels to be acquired by them and that a continuing guarantee be executed by
petitioner EZ, Inc. in favor of Solid Bank.
The spouses defaulted in payment of the entire obligation upon maturity.
SolidBank filed a complaint for the sum of money against EZ Zobel. Petitioner moved to
dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080.
Issue:
1. WON Art. 2080 is applicable to petitioner;
2. WON petitioners obligation to SOLIDBANK under the continuing guaranty is that
of a surety;
3. WON the failure of SOLIDBANK to register the chattel mortgage extinguish
petitioners liability to SOLIDBANK
Held:
1. Art. 2080 is not applicable where liability is a surety
2. Petitioner obligated itself as a surety the contract executed is a contact of surety
3. Petitioner bound itself irrespective of existence of collateral failure to register
the chattel mortgage did not release petitioner from obligation.
Art 2080
The guarantors, even though they be solidarily, 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.
54

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16.

Guaranty and Suretyship 2047 2084

b. Guaranty vs. Suretyship 2047, 2nd Paragraph

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April 10, 1922

MACHETTI VS. HOSPICIO DE SAN JOSE & FIDELITY

Machetti was declared insolvent and Fidelity became cross-defendant

CFI ruled against Fidelity

16. Guaranty and Suretyship 2047 2084

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3. ATOK FINANCE CORPORATION vs. COURT OF APPEALS

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4. BA Finance Corp vs. CA GR 61464, May 28 1988

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6. [G.R. No. 103066. April 25, 1996]

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Art. 2052 of the Civil Code provides:

A guaranty cannot exist without a valid obligation.

7. [G.R. No. 138544. October 3, 2000]

Debtor: Sta. Ines Melale Corp. Surety: Rodolfo Cuenca

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8. G.R. No. L-26473 February 29, 1972

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August 29, 1936

WISE & CO., INC., plaintiff-appellee,

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TUASON, TUASON, INC., plaintiff-appellee, vs. ANTONIO MACHUCA, defendant-appellant.

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2. G.R. No. 138544

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HELD: Petition of Bank no merit.CA affirmed.

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June 26, 1967

NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,

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