1. G.R. No. 89561 September 13, 1990 BUENAFLOR C. UMALI, et.al. vs.

COURT OF APPEALS,
et.al.
To raise funds for the payment of a loan obligation, petitioners converted parcels of land adjacent to
their property to be handled by SRDC(Slobec Realty and Devt Co) wherein Rivera(president of
SRDC) obliged himself to pay 70k after the execution of the agreement and to pay 400k after the
property has been converted into a subdivision.
Bormaheco, Inc. and Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor with a
Chattel Mortgage over the said equipment as security for the payment of the balance. As further
security of the aforementioned unpaid balance, Slobec obtained from Insurance Corp. of the Phil. a
Surety Bond, with the Insurance company as surety and SRDC as principal, in favor of Bormaheco.
The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with Real
Estate Mortgage executed by Rivera as president of SRDC and petitioners, as mortgagors and
Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of SRDC with Bormaheco.
For violation of the T&C of the Counter-Guaranty Agreement, the properties were foreclosed by ICP,
who was also the highest bidder. The petitioners failed to redeem the property within the year period
they were provided with.
ICP sold to PM. (Phil Machinery Parts Marketing Co) the title, then requested for the plaintiffs to
vacate the said property which the latter refused.
Initiatory Action: Action for annulment filed by plaintiff and all the aforementioned transactions
starting with the Agreement of Counter-Guaranty with Real Estate Mortgage , Certificate of Sale and
the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of Ownership as well as the
Deed of Sale are void for being entered into in fraud and without the consent and approval of the
Court of First Instance of Quezon, before whom the administration proceedings has been pending.
Court of 1st instance annulled the transactions, while CA validated the sale

Issue:

The alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which
clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and
support an action for the declaration of nullity of the contract. Equity and fair play dictates that one
who commits a breach of his contract may not seek refuge under the protective mantle of the
law.

There is absolute simulation, which renders the contract null and void, when the parties do
not intend to be bound at all by the same. The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired or intended to either produce legal
effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in
receiving and making use of the tractor subject matter of the Sales Agreement and Chattel
Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant
with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be bound by these contracts.
The occurrence of these series of transactions between petitioners and private respondents is a strong
indication that the parties actually intended, or at least expected, to exact fulfillment of their respective
obligations from one another.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does
not per se affect the validity of the bond. Petitioners themselves admit in their present petition that
Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and
agreed that a part of the proceeds thereof shall be used to pay the premium for the bond.

In effect, Bormaheco accepted the payment of the premium as an agent of ICP The execution of the deed
of sale with a right of repurchase in favor of Bormaheco under such circumstances sufficiently establishes
the fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is,
therefore, binding on Rivera. He is now estopped from questioning the validity of the suretyship contract.

Except where required by the provisions of the contract of suretyship, a demand or notice of default is not
required to fix the suretys liability

2. 1979 - MALAYAN INSURANCE CO., INC., vs. HON. EMILIO V. SALAS, as Presiding Judge,
Court of First Instance of Rizal, Branch I, Pasig, Metro Manila, ROSENDO FERNANDO and JOHN
DOE,

Makati Motors Sales, Inc. posted a replevin bond executed by the Malayan Insurance Co., Inc.
where the surety bound itself to pay "for the return of the property to the defendant, if the return
thereof be adjudged, and for the payment of such sum as may in the cause be recovered against the
plaintiff ". Pursuant to the order of the court, the sheriff seized the four trucks, where two of the
trucks were returned to Fernando two weeks later.
The lower court rendered judgment ordering Makati Motor Sales, Inc. to return to Fernando the other
two trucks and to pay him for the seizure of each of them, damages daily until their return to
Fernando. Petitioner
Before the elevation of the record to the Court of Appeals, Fernando filed in the trial court an
application for damages against the replevin bond. It was opposed by the surety on the ground that
the trial court had lost jurisdiction over the case because of the perfection of the appeal. The trial
court denied the application on June 28, 1973.
On May 27, 1974 Fernando filed in the Court of Appeals his claim for damages against the replevin
bond. He prayed that the same be included in the judgment. The surety, which was furnished with a
copy of the claim, filed an opposition to it.
The Court of Appeals did not act immediately on that claim but in its 1977 decision it observed that
Fernando's motion or claim "was correct" and it ordered that his claim against Malayan Insurance
Co., Inc. "be heard before the trial court". That decision affirming the lower court's judgment became
final and executory on March 18, 1977.
On April 6, 1977, or after the remand of the record to the trial court, Fernando filed a motion to set
for hearing his application for damages against the surety on its replevin bond. The application was
heard with notice to Makati Motor Sales, Inc. and Malayan Insurance Co., Inc. Fernando submitted
documentary evidence. On December 15, 1977 Malayan Insurance Co., Inc. moved to quash the
proceeding regarding the claim for damages. It contended that the trial court has no jurisdiction to
alter or modify the final judgment of the Court of Appeals.

The trial court in its order of July 14, 1978 denied the motion to quash. It directed Malayan Insurance
Co., Inc. to pay Fernando the damages which it had adjudged against Makati Motor Sales, Inc. The
surety company appealed from that order to this Court pursuant to Republic Act No. 5440.
Section 10, Rule 60 of the Rules of Court provides that in replevin cases, as in receivership and
injunction cases, the damages "to be awarded to either party upon any bond filed by the other" "shall
be claimed, ascertained, and granted" in accordance with section 20 of Rule 57 which reads:
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 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
In this appeal, Malayan Insurance Co., Inc. contends that the trial court's judgment against it is not
warranted under section 20 of Rule 57. It assails the trial court's competence to render judgment
against the surety after the decision of the Court of Appeals against the surety's principal had
become final and executory.

We hold that the trial court has jurisdiction to pass upon Fernando's application for the recovery of
damages on the surety's replevin bond because Fernando seasonably filed his application for
damages in the Court of Appeals. It was not his fault that the damages claimed by him against the
surety were not included in the judgment of the Court of Appeals affirming the trial court's award of
damages to Fernando payable by the principal in the replevin bond. The peculiar factual situation of
this case makes it an exception to the settled rule that the surety's liability for damages should be
included in the final judgment to prevent duplicity of suits or proceedings.
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. vs. Menendez 117 Phil. 970, 976).
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 vs.
Talavera, 112 Phil. 209, 219).
We have stated earlier that in the instant case Fernando in 1974 made a timely claim in the Court of
Appeals for an award of damages against Malayan Insurance Co., Inc. enforceable against its
replevin bond. The surety was notified of that application. It registered an opposition to the claim.
The Court of Appeals did not resolve the claim immediately but in its 1977 decision it directed the
trial court to hear that claim.
Obviously, the lower court has no choice but to implement that directive which is the law of the case
(See Compagnie Franco Indochinoise vs. Deutsch, etc., 39 Phil. 474, 476).
However, the trial court's implementation of that directive was incorrect. It set the claim for hearing
but the surety assailed its jurisdiction and did not consider itself bound by the mandate of the
appellate court. The merits of the claim for damages were not threshed out at the hearing because
the surety stood pat on its contention that the trial court has no jurisdiction to allow the claim in view
of the finality of the decision of the Court of Appeals.
This Court has held that, if the surety was not given notice when the claim for damages against
the principal in the replevin bond was heard, then as a matter of procedural due process the surety
is entitled to be heard when the judgment for damages against the principal is sought to be enforced
against the surety's replevin bond.
The hearing win be summary and win be limited to such new defense, not previously set up by the
principal, as the surety may allege and offer to prove. The oral proof of damages already adduced by
the claimant may be reproduced without the necessity of retaking the testimony, but the surety
should be given an opportunity to cross-examine the witness or witnesses if it so desires." That
procedure would forestall the perpetration of fraud or collusion against the surety (Visayan Surety
and Insurance Corporation vs. Pascual, 85 Phil. 779, 785-786).

Inasmuch as in this case appellant Malayan Insurance Co., Inc. was not given the summary hearing
during which it could contest the reality or reasonableness of Fernando's claim for damages, we
have to set aside the trial court's order awarding damages against it and, in the interest of justice,
give it another opportunity to be heard on the merits of Fernando's claim for damages.
Before closing, it may be useful to make a review and synthesis of the copious jurisprudence on the
surety's liability in attachment, injunction, replevin and receivership bonds. It was observed in one
case that once upon a time the rulings on that point were in a muddled state.
Section 20 of Rule 57 is a revised version of section 20, Rule 59 of the 1940 Rules of Court which
earlier section 20 is a restatement of this Court's rulings under sections 170, 177, 223, 272 and 439
of the Code of Civil Procedure regarding the damages recoverable in case of the wrongful issuance
of the writs of preliminary injunction, attachment, mandamus and replevin and the appointment of a
receiver.

Section 170 contains the provision that the damages suffered in connection with the issuance of a
preliminary injunction shall be ascertained by the court trying the action (meaning the court where
the action is pending) and shall be included in the final judgment "against the plaintiff and against the
sureties". As to damages in case of wrongful attachment, see section 439 of the Code of Civil
Procedure and Belzunce vs. Fernandez, 10 Phil. 452.
So, as held under the Code of Civil Procedure, if the preliminary injunction was issued by this Court,
the specification of damages should be filed in this Court. The petitioner and his bondsmen should
be served with copies of the specification (Somes vs. Crossfield, 9 Phil. 13 and Macatangay vs.
Municipality of San Juan de Bocboc, 9 Phil. 19).
On the other hand, under section 439 of the Code of Civil Procedure, the damages caused by a
wrongful attachment may be adjudicated in a summary hearing but the better practice would be to
claim the damages in the answer and to offer evidence in support thereof during the trial (Gasataya
vs. Fallon 32 Phil. 245 and Raymundo vs. Carpio, 33 Phil. 395).
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.
There is an old ruling that the sureties in an injunction bond are bound by a judgment for damages
against their principal even if the sureties were not heard at the time the claim for damages was
tried. The reason for that ruling is that the sureties in an injunction bond "assume such a connection
with the suit that they are included by a judgment in it in a suit at law upon the bond, so far as the
same issues are involved; and that, upon the entry of a judgment against the principal, their liability
is absolute" (Florentino vs. Domadag, 45 O.G. 4937, 81 Phil. 882).
Also, it was held that if damages were awarded against the principal in a replevin bond without
notice to the surety, that final judgment may be enforced against the surety after it has been given
an opportunity to be heard as to the reality or reasonableness of the alleged damages. In such a
case, the trial court must order the surety to show cause why the bond should not answer for the
judgment for damages. The hearing is summary and the surety may cross-examine the witnesses
presented by the defendant (Visayan Surety & Insurance Corporation vs. Pascual, 85 Phil 779).
Insofar as those rulings in the Florentino and Visayan Surety cases allowed a claim for damages
against the surety to be ventilated in a separate proceeding or after the finality of the judgment for
damages against the principal in the bond, those rulings were jettisoned and abandoned in several
subsequent cases because they are contrary to the explicit provision of section 20 of Rule 59, now
Rule 57, that the judgment for damages against the surety should be included in the final judgment
to avoid additional proceedings (Cruz vs. Manila Surety & Fidelity Co., Inc., 92 Phil. 699; Japco vs.
City of Manila, 48 Phil. 851, 855).
The damages are recoverable on the theory that an actionable wrong was committed by the losing
party. The recovery is limited to the amount of the bond (Pacis vs. Commission on Elections, L-
29026, August 22, 1969, 29 SCRA 24, 29).
The usual procedure is to file an application for damages with due notice to the other party and his
sureties. The other part may answer the application. Upon the issues thus being Joined, the matter
will be tried and determined. A court order declaring the bond confiscated without adhering to that
procedure is void ( Fabella vs. Tancinco 86 Phil. 543; Luzon Sureo Inc. Guerrero, L-20705, June 20,
1966. 17 SCRA 100).
The claim for damages against the surety should be made it notice to the surety and before the
judgment against the principal becomes executory. The liability of the surety should be included in
the final judgment. That remedy is exclusive. If riot assailed of, the surety is released (Curilan vs.
Court of Appeals, 105 Phil. 1160 and De la Rama vs. Villarosa, 118 Phil. 42-1. 430: Jesswani vs.
Dialdas 91 Phil. 915: Estioco vs. Hamada, 103 Phil. 1145).
Therefore, the prevailing settled rule is that a court has no jurisdiction to entertain any proceeding
seeking to hold a surety upon its bond if such surety has not been given notice the claim for
damages against the principal and the judgment holding the latter liable has already become
executor (People's Surety & Insurance Co., Inc. vs. Court of Appeals, L-21627. June 29, 1961, 20
SCRA 481).
If the judgment awarding damages against the principal in a bond for the lifting of a preliminary
injunction had already become executory, that claim cannot be pressed against the surety by setting
it for hearing with notice to the surety. The failure to notify the surety of the claim for damages
against the principal relieves the surety from any liability on his bond (Sy vs. Ceniza, 115 Phil. 396;
Pacis vs. Commission on Elections, L-29026, August 22, 1969, 29 SCRA 24; Dee vs. Masloff, 116
Phil. 412).
To entertain the belated claim against the surety after the judgment for damages against the
principal has become executory would result in the alteration of that judgment. That should not be
done (De Guia vs. Alto Surety & Insurance Co., Inc., 117 Phil. 434; Visayan Surety & Insurance Co.,
Inc. vs. De Aquino, 96 P1. 900; Port Motors, Inc. vs. Raposas and Alto Surety & Insurance Co., Inc.,
100 Phil. 732; Gerardo vs. Plaridel Surety & Insurance Co., Inc., 100 Phil. 178; Luneta Motor Co. vs.
Lopez, 105 Phil. 327; Curilan vs. Court of Appeals, 105 Phil. 1160; Riel vs. Lacson, 104 Phil. 1055).

Moreover, the damages claimed by the defendant should be pleaded as a compulsory counterclaim
in his answer. Hence, a separate action to claim those damages is unwarranted (Ty Tion and Yu vs.
Marsman & Co. and Alpha Insurance & Surety Co., Inc., 115 Phil. 746, 749; Medina vs. Maderera
del Norte de Catanduanes, Inc., 51 Phil. 240; Nueva-Espaa vs. Montelibano, 58 Phil. 807; Tan
Suyco vs. Javier, 21 Phil. 82).
It may be noted that in the Visayan Surety case, 85 Phil 779, Visayan Surety & Insurance
Corporation filed a replevin bond for one Yu Sip who sued Victoria Pascual for the recovery of a
truck. The trial court found that the writ of replevin was wrongfully procured, that Victoria Pascual
was the lawful owner of the truck and that she suffered damages on account of its wrongful seizure
by the sheriff at the instance of plaintiff Yu Sip.

The trial court ordered Yu Sip to return the truck to Victoria Pascual or to pay its value of P2,300 in
case of his inability to return it and, in either case, to pay thirty pesos daily from January 6, 1947 up
to the date of the return of the truck or until its value was fully paid. The Court of Appeals affirmed
that judgment.

After the return of the record to the trial court, Victoria Pascual filed a "petition for execution of the
surety bond" wherein she prayed for a writ of execution against the surety to satisfy the judgment out
of its replevin bond. The surety opposed that petition. It contended that it was never notified by
Victoria Pascual regarding her presentation of evidence covering the damages which she had
suffered. The trial court granted the petition and ordered the issuance of a writ of execution against
the surety. That order was assailed in a certiorari in this Court.
It was held that the writ of execution should be set aside and that the surety should be given a
chance to be heard in a summary proceeding. That proceeding was conducted after the judgment
against Yu Sip, the principal in the replevin bond, had become final and executory.
What was done in the Visayan Surety case, as recounted above, was not allowed in subsequent
cases. Thus, inManila Underwriters Insurance Co., Inc. vs. Tan, 107 Phil. 911, the trial court
rendered in 1954 a judgment dissolving the preliminary attachment and ordering the plaintiff to pay
the defendant the damages which the latter suffered by reason of the wrongful attachment. The
surety in the attachment bond was not notified of the hearing but it was furnished with a copy of the
decision.
In 1957 the Court of Appeals affirmed that judgment. After it became final, the defendant filed in the
trial court against the surety a motion for execution winch the latter opposed. At the hearing of the
motion, the defendant offered to reproduce the evidence which he had presented at the trial. The
offer was accepted by the trial court. It issued the writ of execution against the surety.
It was held that, because the surety was not notified of the hearing on the damages suffered by the
defendant in the manner prescribed in section 20 of Rule 59, now Rule 57, it was not liable for
damages under its attachment bond.
The surety is notified so that he may cross-examine the witnesses testifying as to the damages and
question the evidence presented by the claimant and interpose any appropriate defense (Riel vs.
Lacson, 104 Phil. 1055; Liberty Construction Supply Co. vs. Pecson, 89 Phil. 50).
So, if plaintiff's claim for damages resulting from the wrongful lifting of the writ of preliminary
injunction was awarded in the main decision without notice to the surety and the decision had
become executory, the failure to notify the surety on time relieves him from liability under the bond
(Alliance Insurance & Surety Co., Inc. vs. Piccio, 105 Phil. 1192).
The surety may be held liable only if before the judgment for damages against the principal becomes
executory, an order is entered against him after a hearing with notice to him. After the judgment
becomes executory, it is too late to file such claim for damages with notice to the surety (Abelow vs.
Riva 105 Phil. 159; Visayan Surety & Insurance Corp. vs. Lacson, 96 Phil. 878).
Where the Court of Appeals dismissed a mandamus action originally filed in that court and dissolved
the preliminary injunction which it had issued and after entry of judgment was made the record was
remanded to the trial court, it was error for the Court of Appeals to allow the respondent in that case
to file a claim for damages against the principal and surety in the injunction bond. The claim should
have been filed before the judgment of dismissal became final (Luzon Surety Co. Inc. vs. Court of
Appeals, 108 Phil. 157).
Section 20 of Rule 57 contemplates one judgment for damages against the principal and the surety
in the injunction, replevin, attachment and receivership bonds. Since the judicial bondsman has no
right to demand the exhaustion of the property of the principal debtor, there is no justification for
entering separate judgments against them. The claim for damages against the surety should be
made before entry of judgment (Del Rosario vs. Nava, 95 Phil. 637).

In the Del Rosario case a judgment for damages was rendered against the principal in an
attachment bond but there was no notice to the surety of the claim for damages. That judgment
became final. After the execution against the principal was returned unsatisfied, the claimant filed a
motion praying that the surety company be required to show cause why it should not answer for the
judgment against the principal.
It was held that, while the prevailing party may apply for an award of damages against the surety
even after the award has already been obtained against the principal, nevertheless, in order that all
awards for damages may be included in the final judgment, the application and notice to the surety
must be made before the judgment against the principal becomes final and executory.
In another case, it was held that as the winning party sought to hold the surety liable on its replevin
bond almost a year after the judgment of the Court of Appeals became final, the trial court erred in
enforcing its judgment against the surety. "The surety may only be held liable if, before judgment
becomes final, an order against the surety is entered after a hearing with notice to the surety". The
claim against the surety should be included in the final judgment. It is not sufficient that the surety be
afforded an opportunity to oppose the writ of execution. (Plaridel Surety & Insurance Company vs.
De los Angeles, L-25550, July 31, 1968, 24 SCRA 487).
After this Court's judgment dissolving a preliminary injunction had become final and executory, it
would be too late to entertain in the trial court the defendant's application for damages allegedly
caused by the injunction (Santos vs. Moir 36 Phil. 350).
The defendant in a replevin case cannot file a separate action for damages due to the wrongful
issuance of the writ. He should have claimed the damages as a counterclaim in the original replevin
suit (Pascua vs. Sideco 24 Phil. 26, Ty Tion and Yu vs. Marsman & Co. and Alpha Ins. & Surety Co.
Inc., 115 Phil. 746).
A final judgment for damages against the principal in a replevin bond cannot be enforced against the
surety company which was not notified of the claim for damages and was not afforded a chance to
be heard (People's Surety and Ins. Co., Inc. vs. Aragon, 117 Phil, 257).
Where an injunction was dissolved and only attorney's fees and costs were adjudged against the
principal, and the procedure for claiming damages against the surety was not followed, no recourse
could be had against the injunction bond in case the writ of execution against the principal was not
satisfied. Moreover, the attorney's fees and costs could be recovered from the principal even without
the filing of the bond (People's Surety & Insurance Co., Inc. vs. Bayona, 103 Phil. 1109).
Where after the dismissal of a petition for relief from the judgment of a municipal court, the Court of
First Instance ordered ex parte the issuance of a writ of execution against the petitioner's injunction
bond, that order is void because there was no formal claim for damages and there was no hearing
with notice to the petitioner and his surety. The court should hold a hearing. (Luzon Surety Co., Inc.
vs. Guerrero, L-20705, June 20, 1966, 17 SCRA 400).

Where on June 11, 1959 an action to stop the foreclosure of a chattel mortgage was dismissed,
without prejudice, for failure to prosecute and, before that dismissal became final, the defendant did
not prove any damages resulting from the issuance of the preliminary injunction, defendant's motion
of September 7, 1959 praying that judgment be rendered against the surety's bond could no longer
be entertained. The claim for damages should have been made before entry of final judgment. It
must be duly substantiated at the proper hearing with notice to the surety (Jao and Sia vs. Royal
Financing Corporation, 114 Phil. 1152; Visayan Surety & Insurance Corp. vs. Lacson, 96 Phil. 878).
If the case wherein the injunction was issued was dismissed for failure to prosecute and no damages
were awarded to the defendant by reason of the issuance of the injunction, it was error for the trial
court to issue a writ of execution against the surety since there was no claim nor evidence of
damages suffered the defendant. The order of dismissal did not include in final of damages. (Vet
Bros. and Co., Inc. vs. Movido 11 4 Phil, 211).
The case of Vadil vs. De Venecia, 118 Phil. 1217, involves a queer situation. Plaintiff corporation in
that case filed an action to recover a sum of money. It asked for a writ of attachment. Before any
attachment could be issued, the defendant filed a counterbond. But this bond provided that
the defendant and his sureties would pay "all damages that the defendant (sic) may suffer by reason
of" the attachment. In other words, the defendant executed a bond in favor of himself.
Judgment was rendered for the plaintiff. As the execution was returned unsatisfied, the trial court on
plaintiff's motion ordered execution against defendant's bond. It was held that the execution was
wrongfully issued.
However, where an injunction was issued in a forcible entry case but on certiorari to the Court of
First Instance, the justice of the peace court was held to be without jurisdiction to entertain the
ejectment case, that ejectment suit is not considered dismissed and it may still be regarded as
pending in the justice of the peace court for the purpose of allowing the defendant's claim for
damages on the injunction bond (Cruz vs. Manila Surety & Fidelity Co., 92 Phil. 699).
Section 10 of Rule 60 makes section 20 of Rule 57 applicable not only to the replevin bond but also
to the redelivery bond posted by the defendant for the lifting of the order of seizure. The requisites
for holding the surety liable on thereplevin bond are also the requisites for holding the surety hable
on the redelivery bond. So, if the surety on theredelivery bond was not notified of the plaintiff's claim
for damages, the surety cannot be held liable on its redelivery bond for the damages adjudged
against the principal. It is necessary that the surety be notified and that its liability be included in the
final judgment against the principal (Luneta Motor Co. vs. Menendez 117 Phil. 970).
The writ of execution issued against the counterbond for the dissolution of an injunction is void if it
was issued without notice to the surety and after the judgment on the merits had become executory.
The surety's liability should have been included in the final judgment (Cajefe vs. Fernandez, 109
Phil. 743).

If the judgment awarding damages against the principals in the counterbonds filed for the lifting of
the receivership was appealed to the Court of Appeals and the plaintiff-appellee filed in the trial court
(not in the appellate court) his application for damages against the sureties in the counterbonds, the
trial court cannot hear the said application after the record is remanded to it because, by then, the
decision of the appellate court had become final and the damages to be awarded against the
sureties could no longer be included in that judgment. The application for damages against the
sureties should have been filed in the Court of Appeals (Luneta Motor Co. vs. Menendez 117 Phil.
970, 976).
The procedure in section 20 of Rule 57 should not be confounded with the procedure in section 17 of
the same rule regarding the surety's liability on the counterbond for the lifting of the preliminary
attachment. Under section 17, the surety may be held liable after notice and summary hearing
conducted after the judgment had become executory and the execution was returned unsatisfied
(Towers Assurance Corporation vs. Ororama Supermart, L-45848, November 9, 1977, 80 SCRA
262; Vanguard Assurance Corporation vs. Court of Appeals, L-25921, May 27, 1975, 64 SCRA 148).
The case contemplated in section 17 of Rule 57 is different from the case envisaged in section 20 of
that rule (Dizon vs. Valdes, L-23920, April 25, 1968, 23 SCRA 200; Visayan Surety & Insurance
Corp. vs. De Aquino, 96 Phil. 900).
Nor does section 20 of Rule 57 apply to cases where the surety bound himself to abide by the
judgment against his principal and thereby renounced his right to be sued or cited, or where the
surety guaranteed the return of certain goods and he did not raise the issue of lack of notice, or
where the sureties bound themselves to pay the plaintiff a definite amount (Aguasin vs. Velasquez,
88 Phil. 357; Lawyers Cooperative Publishing Co. vs. Periquet, 71 Phil. 204; Mercado vs.
Macapayag and Pineda, 69 Phil. 403 cited in Alliance Insurance case, 105 Phil. 1201).

Note that a different rule also obtains with respect to the surety in the bond of an administrator or
executor The nature of a surety's obligation on an administrator's bond, which makes him privy to the
proceeding against his principal, is such that he is bound and concluded, in the absence of fraud or
collusion, by a judgment against his principal, even though the surety was not a party to the
proceedings (Laurente vs. Rizal Surety & Insurance Co., Inc., L-21250, March 31, 1966, 16 SCRA
551, citing Philippine Trust Co. vs. Luzon Surety Co., Inc., 112 Phil. 44. See Cosme de Mendoza vs.
Pacheco and Cordero, 64 Phil. 34).
It should be underscored that in the instant case, although the surety's liability was not included in
the final judgment, which became executory, nevertheless, there was a timely application for
damages in the Court of Appeals which in its decision ordered the trial court to hear defendant-
appellee Fernando's claim for damages against the surety. That feature of the case removes it from
the coverage of the rule that the surety should be heard before the judgment becomes executory
and that his liability should be included in the final judgment.
WHEREFORE, we hold that the trial court has jurisdiction to comply with the directive of the Court of
Appeals but we reverse and set aside its order of July 14, 1978, requiring petitioner-appellant
Malayan Insurance Co., Inc. to pay the damages which it had adjudged against Makati Motor Sales,
Inc.
The trial court is required to hold a summary hearing wherein appellant surety should be given a
chance to contest the reality or reasonableness of respondent-appellee Rosendo Fernando's claim
for damages. After such hearing, or if the surety should waive it, the trial court should render the
proper judgment. No costs.
SO ORDERED.
A surety not given notice when the claim for damages against the principal in the replevin was
heard, is however entitled as a matter of procedural due process, to be heard when the judgment for
damagesagainst the principal is sought to be enforced against the suretys replevin bond

3. G.R. No. 172041 December 18, 2008 GATEWAY ELECTRONICS CORPORATION and
GERONIMO B. DELOS REYES, JR.vs. ASIANBANK CORPORATION
Petitioner is a domestic corporation that is engaged in semi-conductor business. During the period
material, petitioner was its president and one Andrew Delos Reyes was its Executive VP. They both
executed separate but identical deeds of suretyship in favor of respondent Asiabank.
Later developments saw Asiabank extending to Gateway several export packing loans, that was
later consolidated with Dollar Promissory Note and secured by a Chattel Mortgage.
Gateway initially made payments but eventually defaulted its obligations. Upon Gateways request,
Asiabank extended the maturity dates of the loan several times. Gateway filed for insolvency.
Because of the failure of the petitioner to pay, Asiabank sued Gateway and Geronimo for the non-
payment in the Regular Courts.

I & R:
Gateway may be discharged but not Geronimo because Gateway is already handled by the
insolvency court. The law states that any pending action against its properties and assets must be
dismissed, and the claimant mst be relegated to the insolvency proceedings for the claimants relief,
and all pending civil proceedings against said insolvent must be stayed.
Geronimo however is not freed from accountability. He solidarily bound himself to the obligation of
Gateway, and undertakes directly for the payment and is so responsible at once if the principal
debtor makes default. A creditors right to proceed against the surety exists independently of
his right to proceed against the principal debtor. Thus, a surety of a distressed corporation can
be sued separately to enforce his liability as such, notwithstanding an order by the SEC declaring
the corporation under a state of suspension of payment.
Continuing guaranty

4. G.R. No. L-30096 September 27, 1977CONRADO SINGSON vs. DAVID BABIDA, et.al.
xx
A supersedeas bond in an ejectment case not signed by the principal obligors, but only by the
sureties were void as they do not evidence any principal obligation and are devoid of consideration
as to the sureties who have no privity with the judgment creditor nor any liability to them
A surety bond is primarily a contract between the surety and the principal oblige, and the signature
of the surety is not only a representation by him of the existence of the principal obligor but more
importantly, an indubitable manifestation of is consent to be liable in case of default by the principal
obligor. In the absence of a law requiring the signature of the principal obligor to a particular surety,
the lack of such signature should not affect the validity of the bond where the existence of the
principal obligor is not in issue.

5. G.R. No. L-158025 November 5, 1920CARMEN CASTELLVI DE HIGGINS and HORACE L.

HIGGINS vs. GEORGE C. SELLNER
CASTELLVI DE HIGGINS V SELLNER
Difference bet. Guarantor and Surety; Effect where Guarantor is Sued First before the Principal
Debtor
QF: Letter reads: DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns
that if the promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H.
Clarke, and John Maye, jointly and severally, in your favor and due six months after date for Pesos
10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such default,
pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand
shares of stock of the Keystone Mining Co. held by you as security for the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
HELD: The points of difference between a surety and a guarantor are familiar to American
authorities. A surety and a guarantor are alike in that each promises to answer for the debt or default
of another. A surety and a guarantor are unlike in that the surety assumes liability as a regular party
to the undertaking, while the liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the
engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary.
xxx xxx xxx
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be
more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner
recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such
default and upon surrender to him of the three thousand shares of Keystone Mining Company stock,
he will assume responsibility. Sellner is not bound with the principals by the same instrument
executed at the same time and on the same consideration, but his responsibility is a secondary one
found in an independent collateral agreement, Neither is Sellner jointly and severally liable with the
principal debtors.
6. G.R. No. 150931 July 16, 2008DR. CECILIA DE LOS SANTOS vs. DR. PRISCILA BAUTISTA
VIBAR

xxxFACTS: De Leon borrowed P100k from Vibar. De Leon issued a promissory note and bound
himself to pay the loan three months from date with a monthly interest rate. Delos Santos signed as
a guarantor of de Leons loan.
Later, de Leon asked Vibar for another loan. Together with Delos Santos and Conte, de Leon went
to Vibars house. After some discussion, they all agreed that the outstanding P100k loan together
with the accrued interest would be deducted from the new loan of P500,000
de Leon signed a typewritten promissory note acknowledging the debt of P500k payable within 12
months. Then, Delos Santos signed as a witness under the phrase signed in the presence of.
However, de Leon, in his own handwriting, inserted the word guarantor besides Delos Santoss
name, as Delos Santos nodded her head to what de Leon was doing. De Leon also added the
phrase, as security for this loan this TCT No. T-47375, Registry of Baguio City, is being submitted
by way of mortgage.

On maturity date, de Leon failed to pay any of the monthly installments. Vibar made several verbal
and written demands on de Leon for payment but to no avail asDe Leon failed to respond. Vibars
counsel again sent a demand letter not only to de Leon as principal debtor, but also to
delos Santos.delosSantos was being made to answer for de Leons debt as the latters guarantor.
delos Santos then remitted to Vibar P15k to pay one months interest on the loan. However, this was
the only payment Delos Santos made to Vibar as Delos Santos claimed she had no money to pay
the full amount of the loan
Vibar filed an action for recovery of money with the RTC, which although ruled that De Leon is liable,
Delos Santos is not a guarantor. The trial court ruled that there was no express consent given by
Delos Santos binding her as guarantor.

However, Ca ruled that Delos santos is guarantor of De Leons loan. Delos Santos filed an MR
which was denied. Hence this petition for review on certiorari.
ISSUE: WON Delos Santos is liable as guarantor of de Leons loan from Vibar
HELD: petition denied
YES
We are convinced that the insertion was made with the express consent of Delos Santos. Delos
Santoss act of nodding her head showed her consent to be a guarantor. Also, Vibar would not have
extended a loan to de Leon without the representations of Delos Santos. Also, Delos Santos
acknowledged her liability as guarantor but simply claimed that she had no money to pay Vibar. In
fact, Delos Santos made an initial payment of P15K as partial compliance of her obligation as
guarantor. This only shows that Delos Santos never denied her liability to Vibar as guarantor until
this case was filed in court. Lastly, Delos Santos wrote a letter to the RD of Baguio City inquiring on
the status of the property mentioned in the promissory note as a mortgage security for de Leons
loan. Here, Delos Santos clearly stated that she appears to be a guarantor in the promissory note.
This serves as a written admission that Delos Santos knew she was a guarantor. During the trial,
Delos Santos did not impugn the letter or its contents.
Further, It is axiomatic that the written word guarantor prevails over the typewritten word witness.
In case of conflict, the written word prevails over the printed word. Section 15 of Rule 130 provides:
Sec. 15. Written words control printed. When an instrument consists partly of written words and
partly of a printed form, and the two are inconsistent, the former controls the latter.
We agree with CA that estoppel in pais arose in this case. estoppel is a doctrine that prevents a
person from adopting an inconsistent position, attitude, or action if it will result in injury to
anotherOne who, by his acts, representations or admissions, or by his own silence when he ought to
speak out, intentionally or through culpable negligence, induces another to believe certain facts to
exist and such other rightfully relies and acts on such belief, can no longer deny the existence of
such fact as it will prejudice the latter
xxx
7. G.R. No. L-16666 April 10, 1922ROMULO MACHETTIvs. HOSPICIO DE SAN JOSE,
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS
MACHETTI V HOSPICIO DE SAN JOSE

Guaranty as Actually Suretyship; Distinction

QF: Romulo Machetti undertook to construct a building for hospicio de san jose. In accordance with
the latters requirement, fidelity and surety co guaranteed compliance with the terms and conditions
of the contract. Hospicio sued Machetti for failure to meet the standard required in the construction.
Machetti was declared insolvent. Hospicio now goes after fidelity alone.
HELD: xxx It is very true that notwithstanding the use of the words "guarantee" or "guaranty"
circumstances may be shown which convert the contract into one of suretyship but such
circumstances do not exist in the present case; on the contrary it appear affirmatively that the
contract is the guarantor's separate undertaking in which the principal does not join, that its rests on
a separate consideration moving from the principal and that although it is written in continuation of
the contract for the construction of the building, it is a collateral undertaking separate and distinct
from the latter. All of these

How Inability to Pay is Proved

HELD: xxx The Fidelity and Surety Company having bound itself to pay only the event its principal,
Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the
return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the
mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which
the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.
Xxx

8. G.R. No. L-30554 February 28, 1983 PLARIDEL SURETY & INSURANCE COMPANY vs.
ARTEX DEVELOPMENT COMPANY, INC., and HON. JESUS P. MORFE
xxx
Artex withdrew from the bureau of Customs shipments of imported goods which were subject to
customs duties and other taxes after posting surety bonds to cover the taxes due thereon pursuant
to the law because its applications for tax exemptions for said goods were not then approved by the
board of industries.
On consideration of the obligation assumed by the Surety Company, Artex agreed to pay the
premiums and cost of documentary stamps in advance due on the bonds for each period of 12
months beginning march 1965 until said bonds and its renewals, extensions or substitutions be
cancelled in full by the person or entity guaranteed thereby, or by a court of competent jurisdiction
Condition no. 2 of the original surety bonds reads: that in case the application of tax exemption is
approved by the board of industries, then this bond shall be null and void and of no force and effect.
Artex stopped paying premiums and costs of documentary stamps after it was granted tax
exemption on December 1966. Surety maintains that it has renewed the surety bonds in march
1966, more or less 8 months, before the application for that exemptions was granted.
Issue: Is Artex liable for accrued premiums and costs of documentary stamps on renewals of the
surety bonds after the grant of tax exemption to Surety?
No, Suretyship cannot exist without a valid obligation. The purported renewals were without
consideration at all. S incurred no risk from the time Ps tax exemption application was approved.
Any renewals were void from the beginning because the cause or object of said renewals did not
exist at the time of the purported transaction. S would not possibly be liable for any violation under
the original surety bonds which were already void and of no force and effect nor was there a need
for a formal release of the surety bonds by the Board of Industries or the Bureau of Customs.
By express stipulation of the parties themselves, the surety bonds became null and void upon the
grant of tax exemption.
9. G.R. No. 107062 February 21, 1994PHILIPPINE PRYCE ASSURANCE CORPORATIONvs.CA
and GEGROCO, INC.
PHIL. PRYCE ASSURANCE CORP. V CA
Effect if Principal has not Paid the Premium
QF: Phil. Pryce was sued by Gregroco, Inc. as bonodsman of Sagum Gen. Merchandise. Pryce
denies liability because checks for payment of premiums bounced therefore there is no contract to
vvspeak of.

HELD: Finally, there is reason to believe that partitioner does not really have a good defense.
Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal
which were supposed to pay for the premiums, bounced, hence there is no contract of surety to
speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld
Assurance Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue
such bonds.
The Insurance Code states that:
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid
and binding unless and until the premium therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether
or not the premium has been paid by the obligor to the surety. . . .
The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape
liability, petitioner further asserts that the above provision is not applicable because the respondent
allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum
Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which
are on record.
Where a surety bond has been accepted by the oblige, it becomes valid and enforceable
irrespective of whether the premium has been paid by the obligor to the surety

10. G.R. No. 160324 November 15, 2005INTERNATIONAL FINANCE CORPORATION vs.
IMPERIAL TEXTILE MILLS, INC.
xx

INTERNATIONAL FINANCE CORP. vs. IMPERIAL TEXTILE MILLS INC. GR. No.
160324, Nov. 15, 2005
FACTS: Petitioner International Finance Corporation (IFC) and respondent Philippine
Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to
PPIC a loan payable in 16 semi-annual installments with interest at the rate of 10% per annum on
the principal amount of the loan advanced and outstanding from time to time. A guarantee
agreement was executed with Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC as parties. ITM and Grandtex agreed to guarantee PPICs
obligations under the loan agreement. There was a reschedule of payments as requested by
PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence,
IFC served a written notice of default to PPIC demanding the latter to pay the outstanding
principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and
its interests. IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on
the real estate, buildings, machinery, equipment plant and all improvements owned by
PPIC. IFC and DBP were the only bidders during the auction sale. PPIC failed to pay the
remaining balance, thus, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, despite the demand made by IFC, the outstanding balance
remained unpaid. Consequently, IFC filed a complaint against PPIC and ITM for the payment of
the outstanding balance plus interests and attorneys fees. The trial court held PPIC liable for the
payment of the outstanding loan plus interests and attorneys fees. However, the trial court
relieved ITM of its obligation as guarantor. On appeal of the case, the Court of Appeals reversed
the decision of the trial court. The CA, however, held that ITMs liability as a guarantor would
arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation
was not sufficiently established, ITM could not immediately be made to assume the liability.
Hence, this petition.

Issue: Whether or not ITM is a surety, and thus solidarily liable with PPIC for the payment of the
loan.

Held: ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan. As
Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. While referring to ITM as a guarantor, the agreement specifically stated that
the corporation was jointly and severally liable. It further stated that ITM was a primary
obligor, not a mere surety. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable. Those words emphasize the nature of their liability, which the
law characterizes as a suretyship. Therefore, ITM bound itself to be solidarily liable with PPIC
for the latters obligations under the loan agreement with IFC.
11. G.R. No. 171820 December 13, 2007 DIAMOND BUILDERS CONGLOMERATION, ROGELIO
S. ACIDRE, TERESITA P. ACIDRE, GRACE C. OSIAS, VIOLETA S. FAIYAZ and EMMA S.
CUTILLAR vs. COUNTRY BANKERS INSURANCE CORPORATION

Xx
Borja filed a petition in RTC against Rogelio S. Acidre (Rogelio) for the latter s breach of his
obligation to construct a residential and commercial building.
Rogelio is the sole proprietor of petitioner Diamond Builders Conglomeration (DBC). To end the
litigation, the parties entered into a Compromise Agreement. The RTC Caloocan approved the
Compromise Agreement and rendered a Decision in accordance with the terms and conditions
contained therein. The Compromise Agreement provides that [Petitioner Rogelio] admits full
payment of plaintiff to him the amount of P1,530,000.00 leaving the balance of P570,000.00 of
the contractual price of P2,100,000.00 for the construction of the buildings. P370,000.00 shall be
paid on the 5th day from approval of this compromise agreement by the Court and also the start
of the 75 days for [petitioner Rogelio] to complete the construction of the building. The
remaining 200k shall be paid out when the building is fully constructed.
However, in the event [petitioner Rogelio] shall fail to fully complete the construction of
the building within 75 days he shall not be entitled to any further payments and the performance
of a surety bond shall be fully implemented by way of penalizing [petitioner Rogelio] and/or as
award for damages in favor of plaintiff. That any violation and/or avoidance of the terms and
conditions of this Compromise Agreement by either of the parties herein shall forthwith entitle
the aggrieved party to an immediate execution hereof. DBC obtained a Surety Bond from
Country Bankers in favor of the spouses Borja. In this regard, Rogelio and his spouse, petitioner
Teresita P. Acidre, together with DBC employees Grace C. Osias, Violeta S. Faiyaz and Emma
S. Cutillar (the other petitioners herein), signed an Indemnity Agreement consenting to their joint
and several liability to Country Bankers should the surety bond be executed upon. On April 23,
1992, Country Bankers received a Motion for Execution of the surety bond filed by Borja with
the RTC Caloocan for Rogelio s alleged violation of the Compromise Agreement. Rogelio then
filed an Urgent Omnibus Motion to suspend the Writ of Execution, it was not immediately acted
upon and so DBP was constrained to pay the amount of the surety bond. In the meantime, after
Country Bankers was compelled to pay the amount of the surety bond, it demanded
reimbursement from the petitioners under the Indemnity Agreement. However, petitioners
refused to reimburse Country Bankers. In addition, upon the dismissal of their petition in CA,
petitioners wrote Country Bankers and informed the latter that the voluntary payment of the bond
effectively prevented them from contesting the validity of the issuance of the Writ of Execution.
As a result, Country Bankers filed a complaint for sum of money against the petitioners which
the RTC Manila dismissed. In reversing the trial court, the CA ruled that Country Bankers, as
surety of Rogelio s loan obligation, did not effect voluntary payment on the bond. The appellate
court found that what Country Bankers paid was an obligation legally due and demandable. It
declared that Country Bankers acted upon compulsion of a writ of execution which is validly
issued. Hence this appeal.
Issue: Whether petitioners should indemnify Country Bankers for the payment of the surety
bond. Yes.
Held: The Compromise Agreement between Borja and Rogelio explicitly provided that the
latters failure to complete construction of the building within the stipulated period shall cause the
full implementation of the surety bond as a penalty for the default, and as an award of damages
to Borja. Furthermore, the Compromise Agreement contained a default executory clause in case
of a violation or avoidance of the terms and conditions thereof. Therefore, the payment made by
Country Bankers to Borja was proper, as failure to pay would have amounted to contumacious
disobedience of a valid court order. Article 2047 of the Civil Code specifically calls for the
application of the provisions on solidary obligations to suretyship contracts.
In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-
debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (i.e., the
surety). In contrast, Article 1218 of the Civil Code is definitive on when reimbursement is
unavailing, such that only those payments made after the obligation has prescribed or became
illegal shall not entitle a solidary debtor to reimbursement. Nowhere in the invoked CA Decision
does it declare that a surety who pays, by virtue of a writ of execution, is not entitled to
reimbursement from the principal codebtor.
Nevertheless, a distinction must be made between a surety as a co-debtor under a suretyship
agreement and a sjoint and solidary co0debtor. As elucidated in Escano v Ortigas: A suretyship
requires a separate debtor to whom the surety is solidarily bound by way of an ancillary
obligation of segregate identity from the obligation between the principal debtor and the creditor.
The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right
to proceed against the former to collect the credit in lieu of proceeding against the principal
debtor for the same obligation. At the same time, there is also a legal tie created between the
surety and the principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the principal debtor, such
obligation is extinguished.
At the same time, the surety may seek reimbursement form the principal debtor for the amount
paid, for the surety does in fact become subrogated to all the rights and remedies of the
creditor
12. G.R. No. 126490 March 31, 1998 ESTRELLA PALMARES vs. COURT OF APPEALS and
M.B. LENDING CORPORATION
xx
with the principal maker of the note in case, the latter defaults in the payments of the loan, such
undertaking of the said party is deemed to be that of a surety as an insurer of the debt, not of a
guarantor who warrants the solvency of the debtor
Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In
other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis
the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge the surety whether given at the
principal's request or without it, and whether it is yielded by the creditor through sympathy or
from an inclination to favor the principal, or is only the result of passiveness. The neglect of the
creditor to sue the principal at the time the debt falls due does not discharge the surety, even if
such delay continues until the principal becomes insolvent. And, in the absence of proof of
resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will
not look to the surety, or that he need not trouble himself. The consequences of the delay, such as
the subsequent insolvency of the principal, or the fact that the remedies against the principal may
be lost by lapse of time, are immaterial.
The raison d' etre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the right and remedies of the creditor.
as soon as the principal is in default, the surety is likewise in default, and may be sued
immediately and before any proceedings are had against the principal
13. G.R. No. 110086 July 19, 1999 PARAMOUNT INSURANCE CORPORATION vs. COURT OF
APPEALS and DAGUPAN ELECTRIC CORPORATION

McAdore Finance and Investment, Inc. (McAdore) was the owner and Operator of McAdore
International Palace Hotel in Dagupan City. Private respondent (Decorp) was the grantee of a
franchise to operate and maintain electric services in the province of Pangasinan, including
Dagupan City. McAdore and Decorp entered into a contract whereby Decorp shall provide electric
power to McAdores Hotel. During the term of their contract for power service, it was discovered
that the terminal transformers connected to the meter had been interchanged thereby resulting in
the slow rotation of the meter, hence, McAdore paid smaller billings. Decorp issued a corrected
bill, but McAdore refused to pay. As a result, Decorp disconnected power supply to the
hotel. McAdore filed a suit for damages with prayer for a writ of preliminary injunction against
Decorp. McAdore posted injunction bonds taken from several sureties, one of which, is herein
petitioner Paramount. Accordingly, a writ was issued ordering Decorp to continue supplying
electric power to the hotel and restrained from further disconnecting it. After due hearing, the trial
court rendered a judgment in favor of Decorp. McAdore was ordered to pay Decorp and held the
bonding companies jointly and severally liable. McAdore did not appeal the decision; however,
Paramount appealed to the Court of Appeals (CA). The CA affirmed the decision of the trial
court. Hence, this appeal. The core issue to be resolved here is whether or not petitioner was
denied due process when the trial court found the injunction bond it issued in favor of McAdore
liable to Decorp.
According to the Supreme Court, Paramount cannot hide under the cloak of non-liability on
its injunction bond on the mere expediency that it was deprived of due process. What the law
abhors is not the absence of previous notice but rather the absolute lack of opportunity to ventilate
a partys side. The petitioner cannot successfully invoke denial of due process where it was given
a chance to be heard. When petitioner issued the bond in favor of its principal, it undertook to
assume all the damages that may be suffered after finding that the principal is not entitled to the
relief being sought. The instant petition was denied.

ISSUE:
Whether Paramount is liable to pay actual and material damages only
HELD:
 It may not be amiss to point out that by the contract of suretyship, it is not for the obligee tosee
to it that the principal pays the debt or fulfills the contract, but for the surety to see to it that
theprincipal pay or perform. The purpose of the injunction bond is to protect the defendant against
lossor damage by reason of the injunction in case the court finally decides that the plaintiff was
notentitled to it, and the bond is usually conditioned accordingly.
Thus, the bondsmen are obligated to account to the defendant in the injunction suit for all
damages, or costs and reasonable counsels fees, incurred or sustained by the latter in case it is
determined that the injunction was wrongfully issued.
The posting of a bond in connection with a preliminary injunction (or attachment under
Rule57, or receivership under Rule 59, or seizure or delivery of personal property under Rule 60)
does notoperate to relieve the party obtaining an injunction from any and all responsibility for the
damages that the writ may thereby cause. It merely gives additional protection to the party against
whom the injunction is directed. It gives the latter a right of recourse against either the applicant
or hissurety, or against both. In the same manner, when petitioner PARAMOUNT issued the bond
in favorof its principal, it undertook to assume all the damages that may be suffered after finding
that theprincipal is not entitled to the relief being sought
It is not for the oblige to see to it that the principal debtor pays the debt or fulfill the contract,
but for the surety to see to it that the principal debtor pays or performs.
14. G.R. No. 156571 July 9, 2008 INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE
HOME ASSURANCE CORPORATION vs. REPUBLIC OF THE PHILIPPINES, represented by the
BUREAU OF CUSTOMS
xx
Grant textile imported textile-making equipment. These articles were transferred to a customs
warehouse. The customs duties amounted to P2M

Petitioners each issued general warehouse bonds in favor of Bureau of Customs. These bonds
commonly provide that the goods shall be withdrawn from the bonded warehouse on the payment
of legal customs duties, internal revenue and other charges that to which they shall be subject
Without payment of the taxes, customs duties, and charges due, and for purposes of domestic
consumption, Grand textile withdrew the goods from the storage.
The Bureau of Customs demanded payment from Grand Textile as importer, and from Intra-Strata
and PhilHome as sureties. All failed to pay.

The government responded on 1983 by filing a collection suit. The RTC found Grand Textile liable.
The CA fully affirmed the RTC Decision. Hence this petition

Issue: since there was no notice, are petitioners still liable?

Held: No.
The obligation to pay duties, taxes and other charges primarily rested on the principal Grand Textile;
it was primarily allowed to warehouse the imported articles without need for prior payment of the
amounts, conditioned on the filing of a bond that shall remain in fll force and effect until the payment
of the duties., taxes and charges due.
under these terms, the fact that a withdrawal has been made and its circumstances are not material
to the sureties' liability, except to signal both the principal's default and the elevation to a due and
demandable status of the sureties' solidary obligation to pay
under the bond's plain terms, this solidary obligation subsists for as long as the amounts due on the
importations have not been paid. Thus, it is completely erroneous for the petitioners to say that they
were released from their obligations under their bond when Grand TExtile withdrew the imported
goods without payment of taxes, duties and charges From a commonsensical perspective, it may be
well asked; why else would the law require a surety when such surety would be bound only if the
withdrawal would be regular due to the payment of the required duties, taxes, and other charges?
We note in this regard that rule that a surety is released from its obligation when there is a material
alteration of the contract in connection with which the bond is given, such as a change which
imposes a new obligation on the promising party, or which takes way some obligation already
imposed. Or one which changes the legal effect of the original contract and not merely its form. A
surety, however, does not have the effect of making its obligations more onerous
We find under the facts of this case no significant or material alteration in the principal contract
between the government and the importer, nor in the obligation that the petitioners assumed as
sureties. The obligation, and one that never varied is- one the part of theimporter, to pay customs
duties, taxes, and charges due on the importation. And on the part of the sureties, to be solidaily
bound to the payment of the amounts due on the imported goods upon their withdrawal or upon the
expiration if the given terms

A surety contract is made principallyfor the benefir of the creditor-obligee and thisis ensured
by the solidary nature of the surety undertaking
A surety , however, is not released by a change in the contract which does not have the
effect of making its obligation more onerous
15. G.R. No. L-22108 August 30, 1967 GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES,
represented by the BUREAU OF SUPPLY COORDINATION vs. MARCELINO TIZON, ET AL
xx

16. Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965]

Petitioner Pedro Pastoral entered into a contract of lease with Mapada & Company, Inc. wherein the
former would lease to the latter a crane to be paid in the amount ofP900.00 monthly. The contract
stipulates that Mapada &Company, Inc. shall pay Pedro Pastoral P15,000 if the crane is not returned
10 days after notice therefor. To comply with the agreement, Mapada & Company, Inc. put up a
surety bond of P15, 000 executed by herein defendant Mutual Security Insurance Corporation
to guarantee the compliance of Mapada & Company of all the terms and conditions stipulated in the
contract. Said company requested that, since it was expecting money from a construction contract,
petitioner defer its collection of rentals for the month of October and November. Petitioner granted
the request. However, despite repeated demands, Mapada & Company failed to pay the rentals nor
to return the crane. So petitioner demanded payment from hereindefendant Mutual Insurance
Corp.The court ruled in favor of petitioner, ordering defendant to solidarily pay the unpaid rentals
until the crane was returned, or pay in the amount of P15, 000 for the crane.Defendant appealed
arguing that petitioner failed to reportto it within 5 days of the violation of the lease contract,
therefore defendant is released from its liability under the surety bond. The Court of Appeals ruled in
favor of defendants, saying that the petitioner's failure to inform the surety of the defaults is
a violation of the conditions of the bond, which releases the defendant from liability. Petitioner filed a
Motion for Reconsideration but it was dismissed.Thus, the present petition.
ISSUE: Whether or not petitioner's failure to notify releases the surety from its liability under the
surety bond.
HELD: The court ruled that before the obligation becomes fixed and binding, the guaranty requires
the action by the creditor. Prior to November 21, 1957 when petitioner received a copy of the of the
suretyship contract, he had no knowledge thereof. Therefore, such surety was not yet perfected. The
two defaults had already occurred before November 21, so petitioner was in no position to give
notice to defendants as required by the bond. He only learned ofits existence on November 21 and
the 5-day notificationperiod had already expired on November 5. By virtue of Article 1186 of the New
Civil Code, the surety is deemed tohave waived the condition to the rentals since it voluntarily
prevented the fulfillment thereof when it did not notify thepetitioner earlier. The defendants as the
gurantor was underthe obligation to notify the petitioner of the conditionsattached to the bond, since
petitioner's assent to the bondis necessary.A surety or guaranty contract does not have a
retroactiveeffect, and is only prospective, unless there is stipulation tothe contrary. Since petitioner
only knew of the conditions ofthe surety bond on November 21, such conditions cannotbe made to
apply prior to such date. The decision of theCourt of Appeals is reversed
The surety bond requires the lessor to report to the surety any violation of the lease contract by D
within 5 days, otherwise, the bond will be null and void.

The bond was executed on October 22 and copy thereof was received by the lessor on November
21. By then, D defaulted In 2 payments of the rentals, which defults C should have reported between
October 6-10 and November 6-10, as required by the bond, but C did so only on December 5.
Issue Does Cs failure to notify the surety of Ds defaults in between October 6-10 and November 6-
10, and in notiying the surety only on December 5, constitute a violation of the condition of the bond
that exonerated the surety from liability?

Held: No. By imposing on C the condition in question, the surety made necessary that C should
accept the bond; and C could not do so efore learing of it. The rule is that where the guaranty
requires action by the creditor before obligation becomes fixed, it is not binding until accepted. The
rule is grounded on common sense; otherwise, the debtor and the guarantor could easily defraud the
creditor by inserting in the bond, conditions that would render it nugatory. The suretyship conrtract,
therefore, was no t perfected and not binding on tC until November 21, when he received a copy
thereof and taitly accepted it.
A contract of guaranty or suretyhip is only prospective, and not retroactive in operation unless a
contrary intent is clearly shown.
The rule holding sureties to be favorites of the law, and teir contracts to be strictissimi juris does not
apply to compensated sureties.
A bond requiring a lessor to report to the surety any violation b the lessee of the lease
contract within 5 days does not cover defaults incurred prior to the acceptance by the lessor of
thebond and the condition. A contract of guraanty or suretyship is only prospective, and not
retroactive in operation unless a contrary intent is clearly shown
17. Palmares vs. Court of Appeals, 288 SCRA 292 [1998]
1. Solidary Guarantor does not Lose His Character as such vis--vis the Debtor
QF: M.B. Lending Corporation extended a loan to the Sps. Osmea and Merlyn Azarraga, together
with Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be computed every 30 days. The spouses were
able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 1991.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the
contents of this Promissory
Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the
above principal maker of this note; That in fact, I hereby agree that M.B. LENDING CORPORATION
may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note subject to the same conditions abovecontained.
HELD: A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that
the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal
will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so. In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made
out of the principal debtor.

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. The second and third paragraphs of the
aforequoted portion of the promissory note do not contain any other condition for the enforcement of
respondent corporation's right against petitioner. It has not been shown, either in the contract or the
pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when
the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one
lends his credit by joining in the principal debtor's obligation, so as to render himself directly and
primarily responsible with him, and without reference to the solvency of the principal.

The stipulation contained in the third paragraph of the controverted suretyship contract merely
elucidated on and made more specific the obligation of petitioner as generally defined in the second
paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor
because her liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. Several attendant
factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was
directly and primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial payment up
to the last, which were all issued in her name and of the Azarraga spouses. This can only be
construed to mean that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitioner's obligation with that of her principals only
goes to show that, from the very start, petitioner considered herself equally bound by the contract of
the principal makers.

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.
18. PNB Luzon Surety Co., Inc., 68 SCRA 207 [1975]

QF: Villarosa applied for a crop loan from PNB. A chattel mortgage was executed to guarantee said
loan. For failure to pay, the bank sought to collect against Villarosa and 3 bondsmen, Luzon Surety
being one of them. There was a question as to the liability of Luzon Surety for the increases to the
credit line of Villarosa and the interests sought.
HELD: xxx The principal obligation, therefore, has never been put in issue by then defendant now
respondent Luzon Surety
Co., Inc. On the other hand it raised as its defense the alleged material alteration of the terms and
conditions of the contract
as the basis of its prayer for release. Even this defense of respondent Luzon Surety Co., Inc. is
untenable under the facts obtaining. As a surety, said bonding company is charged as an original
promissory and is an insurer of the debt.
While it is an accepted rule in our jurisdiction that an alteration of the contract is a ground for
release, this alteration, We stress must be material. A cursory examination of the record shows that
the alterations in the form of increases were made with the full consent of Luzon Surety Co., Inc.
Paragraph 4 of the Chattel Mortgage explicitly provided for this increase(s), viz:
... the Mortgagee may increase or decrease the amount of the loan as well as the installment as it
may deem convenient ... and this contract, Exhibit "B", was precisely referred to and mentioned in
the Surety Bond itself.
In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718, this Court held:
It has been decided in many cases that the consideration named in a mortgage for future
advancements does not limit the amount for which such contract may stand as security, if from the
four corners of the document, the intent to secure future indebtedness is apparent. Where, by the
plain terms of the contract, such an intent is evident, it will control. ...

The suretys liability may be increased beyond the maximum of the bond by making it liable to pay
interest because of default and the necessity of judicial collection
19. Texas Co. vs. Alonso, 73 Phil. 90 [1941];
Rule where there is merely an Offer of Guaranty
QF: Leonor Bantug was sued for her agency contract with Texas Co. where Texas Co. filed a
collection case against her and Alonso. It appears that to ensure faithful compliance of Bantugs
obligations as agent to Texas.Co , Alonso bound herself solidarily to answer for Bantugs liability up
to P2000 bond evidenced in a document. Bantug failed in the performance of her obligations and
declared in default. Alonso averred that he merely acted as co-security of one Palanca and that no
acceptance was made by Texas, Co of the bond thus not binding on him. It was shown that the
execution of the bond was requested by Texas, Co. by virtue of the Additional Security clause in the
agency contract:
Additional Security. The Agent shall whenever requested by the Company in addition to the
guaranty herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful
performance of this contract, in such individuals of firms as joint and several sureties as shall be
satisfactory to the Company.
HELD: xxx The Court of Appeals found as a fact, and this is conclusive in this instance, that the
bond in question was executed at the request of the petitioner by virtue of the following clause of the
agency contract:
In view of the foregoing clause which should be the law between the parties, it is obvious that, before
a bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as
shall be satisfactory hereto; in other words, the bond is subject to petitioner's approval. The logical
implication arising from this requirement is that, if the petitioner is satisfied with any such bond,
notice of its acceptance or approval should necessarily be given to the property party in interest,
namely, the surety or guarantor. In this connection, we are likewise bound by the finding of the Court
of Appeals that there is no evidence in this case tending to show that the respondent, Tomas
Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied acceptance,
so as to justify the application of our decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding
the necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a
guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before
the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless
there is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he
has notice or knowledge that the creditor has performed the conditions and intends to act upon the
guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p.
899.) The acceptance need not necessarily be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand,
the transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to
make the promise binding is that the promise should act upon it, and notice of acceptance is not
necessary, the reason being that the contract of guaranty is unilateral.
20. Southern Motors, Inc. vs. Barbosa, 99 Phil. 263 [1956];
1. Benefit of Exhaustion
SOUTHERN MOTORS, INC V BARBOSA
Applies only to Personal Guaranty
QF: Southern Motors brought this action against Barbosa, to foreclose a REM, constituted by the
latter in favor of the former, as security for the payment of P2,889.53 due to said Plaintiff from one
Alfredo Brillantes, who had failed to settle his obligation.
Defendant argues that he has executed the deed of mortgage for the only purpose of guaranteeing
as surety and/or guarantor
the payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff and that
the Plaintiff has no right action against because the plaintiff, without motive whatsoever, did not
intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt
contracted by the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal
remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo
Brillantes is solvent and has many properties within the Province of Iloilo.
HELD: The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand
exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not
been given as special security for the payment of the principal obligation. Guarantees, without any
such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages
fall under Title XVI of the same Code, in which the following provisions, among others, are found.
It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor.
Although an ordinary personal guarantor not a mortgagor or pledgor may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against
him until after the properties of the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.

1. GR L 33157 June 29 1982 Lopez v CA

Petitioner obtained a loan from prudential bank payable in one year with an interest of 10% per
annum secured by a surety bond under a promissory note with the Philippine American
insurance company (Philamgen) as his surety. In return for the security, petitioner is to be bound
under an indemnity agreement and a ded of assignment of shares of stock in favor of said
insurance company, endorsing in blank and delivering the stock certificate to the latter. The
assignment of the shares was made due to a commitment made by dterminate third parties to
the surety that in case petitioner defaults in payment said third parties would by the shares from
the surety and the oriceeds will be paid to the bank. When the obligation became due, and
petitioner faile to pay,
PPhhilamgen paid the loan and subsequently sued petitioner for reimbursement. The trial court
after hearing dismissed the complaint finding that the transfer of stock in the name of Philamgen
was absolute and had exrtinguished Petitioners obligation underthe indemnity agreement. On
appeal, the Court of Appeals held that the stock assignment made in favor of the surety was a
pledge, intended as a secuirityy for the payment of the obligation of petitioner to the surety. In
this petition for review, petitioner claims that the transfer of shares ws a dacion en pago; and that
there was novation of the indemnity contract when the surety an the determinate third parties
agreed that the latter would but the shares of stock from the former so that the bank obligations
of petitioner could be paid from the proceeds.
The Supreme court held that considering the indemnity agreement connotes a continuing
obligation fof petitioner towards the surety while the stock assignment indicates a complete
discharge of the same obligation, the existence of the indemnity greement is inconsistent with
the theory of an absolute sale for and In consideration of the same ndertaking of the surety, and
stromg cpmgemt reasons exist to conclude that the surety and petitioner intended te stock
assignement as a pledge; that the assignment of stock is not a dation in payment since the
obligation of the petitioner towards thesurety has not matured at the time the same was
executeds; and that therewas no novation of the obligation by substitution of debtor since it was
not estaboished nor shown that petitioner would be released from responsibility.
## not dation in payment because the debt or obligation of the petitioner to this surety has not
matured whien the petitioner alienated his 4000 shares of stock to his surety. PEttioners
obligation would arise only when he would default in the payment of the principal obligation (the
loan) to the bank and the surety had to pay for it. Such fact being adverse to the nature and
concepts of dation in payment, the same could not have been constituted when the stock
 assignment was executed. Moreover, there is no express provision in the terms of the stock
assignment between the surety and the petitioner that the principal obligation (which is the oan)
is immediately extinguished by reason of such assignment.
## In case of doubt, pledge is presumed
In case of doubt, pledge is presumed in case of doubt as to whether a transaction is pledge or
a dation in payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests
- If the deed of assignment of stocks executed by the principal debtor in favor of his surety
speaks of an outright sale, te fact that the debtoralso executed an indemnity agreement
(which connotes a continuing obligation of debtor to surety) to indemnify the surety against
all losses which it may incur in consequence of it having become a surety upon a bond in
favor of the principal creditor was held as inconsistent with the thory of an absolute sale and
as proof (together with other circumstances) that the parties intended the stock assignment
as a pledge to complement the indemnity agreement and should sufficiently guarantee the
indemnification of the surety should it be required to pay the creditor.

2. GR L-59355 January 13 1989 Maniila Banking Corp v Teodoro Jr

Essence of Pledge

It is of course of the essence of a contract of pledge or mortgage that when the principla
obligation becomes due., the things in which the pledge or mortgage consists may be
alienated for the payment of the creditor ()/Article 2087 NCCP
Fx: On April 265 1966, defendants together with Teodoro Senior Jointly and severally executed in
favor of plaintiff a promissory note for the sum of 10.420K payable in 129 days or on august 25 1966
at 12% interest per annum. Defendants faioled to pay the said amount inspite of repeated demands
and the obligation as of September 30, 1969 stood at 15.1377.11 including accrued interests and
service charge
On may 3 66 and june 20 66 defendants Teodoro senior and jr executed in favor of plaintiff 2
promissory notes for 8 k and 10000 respectivley payable in 120 days at 12% per annum.
Father and son made partial payment on may 3 66 promissory note but none for june 20 leaving still
an unpaid balance of 8934.74 as of September 30 1969 including accrued interest and service
charge
The 3 promissory notes stipulated that any interst due if notpaid at the endo f ever month shall be
added to the total amount then due, the whole amount to bear interest at the rate of 12% per annum
until fully paid; and in case of collection through an atty., the makers shall j and s pay 10 % of the
amount over due as attys fees which in no case shall be less than 200
An assignment of rights, receivables, title or interest under a contract to guarantee an obligation is,
in effect, a pledge or mortgage and not an absolute conveyance of title which confers ownership on
the ssignee. In case of doubt as to whether a transaction is a pledge (or mortgage) or a dation in
payment, the presumption is in favor of pledge, the latter being the leser transmission of rights and
interests
3. GR L- 6310 November 26, 1954 Parqui v PNB
Rosario Parqui entrusted the
"The land described in the complaint was originally registered in the name of the plaintiff under Original
Certificate of Title No. 2109 of the Register of Deeds of this province. Fearing that he might lose his
owner's copy of the title during his evacuations in 1944, the plaintiff entrusted it for safekeeping to one
Feliciana Ordoez. Soon after liberation, he asked her to return it to him, but she replied that it was
los. In August 0f 1950 while paying his land taxes in Tigaon, the Municipal Treasurer informed him
that the land covered by his title already belongs to the Philippine National Bank. He immediately made
inquiries at the Naga Agency of the Bank. From the information he gathered he learned that his land
was mortgaged in his name by someone to secure the payment of a loan; that the mortgage was
foreclosed due to non-payment of the loan; and that the land was finally adjudicated to the Philippine
National Bank as highest bidder at the auction sale. He also learned that Original Certificate of Title
No. 2109 was cancelled and that in lieu thereof, Transfer Certificate of Title No. 358 in the name of
the Philippine National Bank was issued. To annul the mortgage, sale and transfer Certificate of Title
and to recover damages, the plaintiff instituted the present action against the defendants.
"The evidence has clearly established that sometime in March of 1946, Feliciana Ordoez asked
Roman Oliver to affix the signature of the plaintiff on an application for a loan from the Philippine
National Bank. Oliver at first refused, but after such coaxing, Ordoez succeeded in convincing him
to go with her and with Quintina Palma her daughter, to the house of Nestor Ruedas in Tigaon,
Camarines Sur. Upon their arrival, Ruedas delivered to him a residence certificate in the name of the
plaintiff and joined Ordoez in asking him (Oliver) to sign the name of the plaintiff on the application.
Oliver again refused but Ruedas told him not to have any fear, because the land to be given in
security for the loan is covered by a Torrens title whose owner is already dead. Ruedas told Oliver
further that he would personally accompany him to the bank and attend to the negotiation of the
loan. With this assurance, Oliver finally consented and he affixed accordingly the signature of the
plaintiff on the loan. Oliver, Ruedas, Ordoez and Quintina Palma, proceeded to the Agency of the
Bank at the then municipality of Naga. Ruedas entered the Offices of the bank while the others
remained outside. After a while, Ruedas came back bringing with him the mortgage deed, Exhibit B,
and asked Oliver to affix also on it the signature of the plaintiff. Oliver again wrote the signature of
the plaintiff on this document. Later Ruedas asked him again to affix the signature of the plaintiff on
the check marked Exhibit D. This Oliver likewise did. He then delivered the signed check to the
cashier of the bank they both went to a restaurant where they joined Ordoez, Ruedas and Rosalia
Palma, the other defendant. Upon order of Ordoez, Quintina Palma gave Oliver P15 out of the
money.
"The evidence has also established that the loan application Exhibit A, was favorably
recommend for approval by the Sub-Agent at Tigaon. At the bottom of this exhibit is the
indorsement recommending approval. This was accompanied by the agent's
inspection report Exhibit 2, and by the income and expense statement of the borrower,
Exhibit 3. On the basis this recommendation and report, the bank granted the loans and
accepted the real estate mortgage, Exhibit B, for its security. This document was
subsequently registered in the office of the Register of Deeds, and because the loan was not
paid on its maturity, the mortgage was foreclosed and the land sold at public auction to the
bank as the highest bidder. On November 7, 1949, the land was finally adjudicated to the
bank (Annex B) and subsequently the bank obtained the cancellation of Original Certificate
of Title No. 2109 and the issuance of Transfer Certificate of Title No. 358 in its name in lieu
thereof".
On the basis of the foregoing facts, the Honorable Jose T. Surtida, Judge, annulled the
mortgaged deed and the foreclosure proceedings, ordered the Register of Deeds of the
Province to cancel the new certificate of title No. 358 in the name of the Philippine National
 Bank and to revive the original certificate of title in the name of Rosalio Parqui. The bank
appealed.
After carefully considering the issue, we reach the conclusion that His Honor's decision was
correct. One of the essential requisites of a valid mortgage under the Civil Code is "that the
thing pledged or mortgages it" (Art. 1875 par. 2); and there is no question that Roman Oliver
who pledge the property to the Philippine National Bank did not own it. The mortgage was
consequently void.1
The appellant argues, in substance, that inasmuch as the forged mortgage had been registered,
and the Philippine National Bank had purchased (at the foreclosure) in good faith relying
upon such registered mortgage, it acquired a good title as purchaser in accordance with the
doctrine that "under the Torrens Act a forged transfer when duly entered in the Registry of
Property can become the root of a valid title in favor of a bona fide purchaser for value"
(Cruz vs. Fabie, 35 Phil., 144). But in that case there was a forged sale (not mere mortgage)
which was registered first, and the newly issued title was thereafter transferred to a bona
fide purchaser. The principle implies that suchbona fide purchaser was not a party to and did
not know the first falsification. Anyway, it must be obvious that in this litigation, the National
Bank could acquire no better rights as purchaser than those it had as mortgagee.
The appellant also cites Blondeau vs. Nano, 61 Phil., 629. It must be admitted that such decision
contains some observations2 favoring the appellant's side. But as we remarked in a recent
decision (Lara, et al., vs. Ayroso, 95 Phil., 185; 50 Off. Gaz. (10) 4838) in Blondeau vs.
Nano "the mortgage deed had not been forged, and the owner had by this negligence or
acquiecense if not actual connivance made it possible for the for the fraud to be committed."
More applicable to the instant appeal is the aforesaid Lara Ayroso precedent wherein the
owner's daughter somehow managed to obtain possession of the father's torrens title, and in
connivance with an impostor who posed as her father and forged his signature to the
mortgaged deed, obtained a loan on the security of the father's land. We annulled the
mortgage, declining to follow the obiter considerations in the Blondeau decision.
Thru Mr. Justice Reyes (Alex) this Court ruled:
There can be no question that the mortgage under consideration is a nullity, the same having
been executed by an impostor without the authority of the owner of the interest mortgaged.
Its registration under the Land Registration law lends no validity because, accordingly to the
last proviso to the second paragraph of section 55 of that law, registration procured by the
presentation of a forged deed is null and void.
It has not escaped our notice that in this litigation the owner delivered his title to Feliciana
Ordoez, whereas in the Lara-Ayroso case the owner kept his title in his trunk. Nevertheless
there is no doubt that in both instances there was no permission granted by the owner for the
use of his title; and in both instances said owner had been illicitly deprived of the possession
of his document of ownership.
A more serious point arises in connection with appellant's argument that upon being informed by
Feliciana Ordoez of the loss of his title the herein appellant should have given prompt
notice to the Register of Deeds of such loss, in accordance with section 55 of Act 4963; and
that his failure to do so, is an element to be considered favorably to the defendant Bank.
However it does not appear that this defense was interposed in the court below, although the
complaint had alleged the reported loss in the hands of Feliciana Ordoez. At any rate, it is
not shown that before approving Oliver's mortgage, the Bank examined the records in the
Register of Deeds and had thereby been miled to its prejudice.
Plaintiff's failure to send the prescribed cautionary notice would be material if it had contributed
to the bank's deception. Obviously, none would count it against him if the mortgage had
been accomplished before he knew the loss of this title.
 Indeed it may be gathered from the evidence that what actually led the approval of the mortgage
and the payment of the money to Roman Oliver, (Personating Rosalio Parqui) was the
"inspection report" of the Bank's agent positively identifying the borrower-applicant (Oliver)
as Rosalio Parqui. In said two exhibits such agent made these remarks:
I have a guide in inspecting the property, the owner-applicant himself, who is residing at the
barrio of Tinauagan, Tigaon, Camarines Sur, with Resident Certificate No. 7386661 dated
February 21, 1946, issued at Tigaon, Camarines Sur.
Mr. Rosalia Parqui is unmarried, nor has he any body under him for support. He lives in a very
economical way and resides in the same property hereto offered by him as security.
Mr. Rosalio Parqui has never been a borrower from this Bank. In the past he always managed to
keep his expenses within his income. However, because he wants to make a general
recultivation of his property which is hereto offered as security, he naturally needs some
extra money. He is well known for his promptness in meeting his commitments.
And Narvaes did not declare under oath "that he thought Oliver was Parqui because the former
exhibited to him the Certificate of Title No. 2109". Therefore it may not be said that the false
personation happened thru Oliver's possession of the title.
An additional circumstance may be mentioned as an equitable feature of the controversy: One of
the principal actors in the fraudulent scheme was Nestor Ruedas, who gave Oliver a new
residence certificate in the name of Parqui, who persuaded him to sign for Parqui and later
presented the mortgage papers to the Bank for approval. The plaintiff-appellee repeatedly
states that Ruedas was "Chief clerk of the municipal treasurer at Tigaon", a sub-agent of the
Bank. If this is true, appellant does not deny it Ruedas was practically connected with the
Bank, his knowledge of the impersonation being imputable to the said defendant institution.
For all these reasons, the appealed judgment should be and is hereby affirmed with costs.
Paras, C.J., Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, Concepcion and Reyes,
J.B.L., JJ., concur.

4. GR 131679 Feb 1 2000 Cavite Development Bank v Lim

A forclosure sale, though essentially a forced sale, is still a sale in accordance with Article 1458 of
the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder, who, in turn, is obligaed to pay therefor the bid
price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing
sold also applies in a foreclosure sale This is the reason why Article 2085 of the Civil Code, in
providing for the essential requisites of the contract of mortgage and pledge, requires, among other
things, that the mortgagor or pledger be the absolute owner of the thing pledged or mortgaged, in
anticipation of a possible foreclosure saleshould the mortgagor default in the payment of the loan.
5. GR 48941 May 6 1946 Dilag v Legal heirs of Resurreccion

Future property cannot be pledged or mortgaged

6. GR 32260 Dec 29 1930 PNB v Rocha
A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is
without legal existence and registration cannot validate it.
 7. GR L- 17072 Oct 31 1961 Vda de Bautista v Marcos
The owner of the property, such as before the issuance of a patent to the mortgagor, is void and
innefective. Marcos mortg aged an unregistered parc el in favor of Vda. de Bautista. It pr ovided that it was to l ast for thr ee years, that pos sessi on of the l and mor tgaged was to be tur ned over to the mor tgagee by way of us ufr uct, but with no obligation on her part to appl y the har ves ts to the princi pal obligati on; that s ai d mor tgage would be r eleased onl y upon payment of the princi pal loan of P2,000 without any i nter es t; and that the mortgag or promis ed to defend and warrant the mortgagee's rights over the l and mortgag ed. Marc os sec ured a free patent for the mortgag ed land.

Bec ause of non payment of the loan obligati on, Vda de Bautista filed for c ollecti on, where the defendants moved to dis miss th e acti on poi nting that the l and in q ues tion is cover ed by a free patent and c oul d not be taken wi thi n the prohibiti ve peri od of 5 years .
Subs equentl y, or in Jul y, 1956, mortgagor Brigida Marc os filed i n behal f of the heirs of her deceas ed mother Vic tori ana C aing let ( who are Brigida hers elf and her three sis ters), an applic ati on for the is suance of a fr ee patent over the l and in q ues tion, on the str ength of the cul ti vati on and occupation of sai d l and by them and their predeces sor si nc e J ul y, 1915. As a res ult, Free Patent No. V- 64358 was iss ued to the applic ants on J anuar y 25, 1957, and on Februar y 22, 195 7, i t was registered i n their names under Original Certi ficate of Title No. P-888 of the office of Register of D eeds for the pr ovince of T arlac.
Defendant Brigida M arcos' i ndebtedness of P2,000 to pl ainti ff havi ng remained unpaid up to 1959, the l atter, on M arch 4, 1959, fil ed the pr esent ac tion agai nst Brigida and her husband (Ci vil C as e N o. 3382) in the c ourt below for the paym ent ther eof, or i n default of the debtors to pay, for the forecl os ure of her mortgage on the l and gi ve as s ec urity. D efendants moved to dis mis s the action, pointing out that the l and i n questi on is c overed by a free patent and coul d not, therefore, under the Public Land Law, be taken within fi ve years from the iss uanc e of the patent for the payment of any debts of the patentees c ontrac ted prior to the expiration of s aid fi ve- year peri od; but the lower c ourt denied the motion to dis miss on the ground that the law cited does not appl y bec ause the mor tgag e s ought to be for eclos ed was executed before the patent was iss ued. Defendants then fil ed their ans wer, reiterating the defens e invoked in their moti on to dismis s, and allegi ng as well that the r eal contr act b etween the parties was an antic hresis and not a mortg age. Pre-
trial of the c as e followed, after which the lower c ourt rendered j udg ment fi ndi ng the mortg age valid to the extent of the mortgagor's pro-indi vis o s har e of 15,333 sq uar e meters in the land in q ues tion, on the theor y that the Public Land Law does not appl y in this case bec aus e the mortgage in q ues tion was exec uted before a patent was iss ued over the land in questi on; that the agreement of the parties could not be antic hresis bec aus e the deed Exhi bit " A" cl earl y shows a mortgag e with us ufruc t i n favor of the mor tgagee; and or der ed the payment of the mortgage loan of P2, 000 to plai ntiff or, upon defendant's failure to do so, the forecl os ure of pl aintiff's mortgage on defendant Brigida M arcos' undi vi ded s hare i n the land i n questi on. Fr om this j udg ment, defendants Brigida Marc os and her hus band Os mondo Apoloci o appeal ed to this C ourt.
Ther e is merit i n the appeal.
The right of pl ainti ff-appell ee to forecl os e her mortgage on the l and i n ques tion depends not s o muc h on whether she c ould take sai d l and withi n the pr ohi biti ve peri od of fi ve years fr om the issuanc e of defendants' patent for the s atisfacti on of the indebtedness in question, but on whether the deed of mortgage Exhibi t "A" is at all valid and enforceable, since the l and mortgag ed was appar entl y still part of the public domai n when the deed of mortgage was c ons tituted. As it is an ess ential r equisite for the validi ty of a mortgage that the mor tgagor be the abs olute owner of the thing mortgaged ( Ar t. 2085), the mortgage here in q ues tion is voi d and i neffecti ve becaus e at the ti me it was c ons tituted, the mortg agor was not yet the owner of the land mortg aged and c oul d not, for that reas on, enc umber the s ame to the plai ntiff- appellee. N or could the s ubseq uent acq uisition by the mortgag or of titl e over s aid l and thr oug h the iss uanc e of a free patent vali date and legaliz e the deed of mortgag e under the doctrine of es toppel (c f. Art. 1434, New Ci vil Code, 1 si nce
upon the iss uanc e of s ai d pati ent, the l and i n q ues tion was thereby brought under the oper ati on of the Public Land Law that prohi bits the taki ng of s aid land for the satisfacti on of debts contr acted pri or to the expir ation of fi ve years from the date of the iss uanc e of the patent (s ec. 118, C.A. N o. 141). This pr ohi biti on should i nclude not onl y debts c ontracted during the fi ve- year peri od immediatel y preceding the iss uance of the patent but also thos e c ontracted before suc h is suance, if the purpose a nd polic y of the law, which is "to pres er ve and keep i n the famil y of the homes teader that portion of public land whic h the State has gratuitousl y given to hi m" (Pasc ua v. Tal ens, 45 O.G. No. 9 [Supp.] 413; D e l os Santos v. R oman C atholic Churc h of M i dsayap, G.R . L-6088, Feb. 24, 1954), is to be uphel d.
The invalidity of the mortgage Exhibi t "A" does not, however, i mpl y the c oncomi tant i nvalidity of the c ollate agreement i n th e s ame deed of mortgage whereby poss ession of the l and mortgag ed was tr ans ferred to pl aintiff- appell ee in us ufr uct, without any obligation on her par t to account for its har vests or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Mar c os, who, tog ether wi th her sisters, was in poss essi on of s aid l and by hersel f and thr ough her deceas ed mother before her si nc e 1915, had poss ess ory rights over the s ame even before titl e vested in her as c o-owner by the iss uanc e of the fr ee patent to her and her sisters, and thes e possessor y right s he c oul d validl y transfer and co nvey to plai ntiff-appellee, as s he di d in the deed of mortg age Exhibit "A". The l atter, upon the other hand, believi ng her mortgagor to be the owner of the l and mortgag ed and not being aware of any flaw whic h i nvali dated her mode of acquisiti on, was a possessor i n good faith (Ar t. 526, N.C.C .), and as suc h had the right to all the fr uits r ecei ved
duri ng the entire period of her poss essi on in g ood faith ( Art. 544, N.C .C.). She is, therefor e, entitled to the full payment of her credit of P2,000 fr om defendants , without any obligation to ac count for the fr uits or benefits obtained by her from the l and i n q ues tion.
WHER EF ORE, the judgment appeal ed fr om is r evers ed insofar as i t orders the forecl os ure of the mortgag e in questi on, but affir med i n all other respects . C osts ag ain defendants-appellants .
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Conc epcion, Par edes and D e Leon, JJ ., c onc ur.
Barrer a, J., took no par t.

8. GR L 13057 Montano v Lim Ang

The fact that the cattel mortgage of a car was executed on a date earlier than the transfer of the
registration certificate thereof in the naeme of the buyer-mortgagor but after the perfection of the
contract of sale, does not render the said mortgage made by the latter in favor of the seller invalid,
because the registration of the transfer of motor vehicles and of the certificates of license for their
use in the Motor Vehicles Offices (now Land Transportation Office) merely constitutes and
administrative proceeding which does not bear any essential relation to the contract entered into
between the parties
9. GR L- 64159 September 10 1985, duran v iac
Facts: A deed of sale of ten lots was made by D in favor of R who mortgaged the same property to E
in whose favor a certificate of Sale was issued by the sheriff after foreclosure proceedings and sale
at public autction of the property. D claims that the deed of sale in favor of R is a forgery.

At the time the mortgage was executed, E, in good faith, actually believed R to be the owner, as
evidenced by the registration of the property in her name.
Held. Even on the supposition that the sale was void, the general rule that the direct result of a
previous illegal contract cannot e valid (on the theory that the spring cannot rise higher than its
source) cannot apply here for we are confronted with the functionings of the Torrens System of
Registration. The Dctrine to follow is simple enough: A fraudulent or forged document of sale may
become the root of a valid title if the certificate of title has already been transferred from the name of
the owner to the name of the forger or the nae indicated by the forger
E ewas a buyer (morgagee) in good faith and for value at the time the mortgage was executed. The
fact that at the time tof the foreclusre proceedings E may have already known of Ds claim is
immaterial. A mortgagee has the right to rely on what appears in the certificate of title and, in the
absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on te face of said certificate.
If the rule were otherwise, the efficacy and conclusiveness of Torrens certificates of title would be
futile and nugatory, Where innocent third persons relying on the correctness of the certificate of title
issued, acquire rights over the property, the court cannot disregard such rights and order the total
cancellation of the certificate for that would impair ublic confidence in the certificate of title;
otherwise, everyone dealing with property registered under the Torrens System would have to
inquire in every instance as to whether the title had bee regularly or irregularly issued by the court.
Indeed thisi s contrary to the the evident purpose of the law.
Article 2085 which requires that the mortgagor must have the free disposal of the property or at least
have legal authority to do so, does not apply where the property involved is registered under the
torrens system. While it is true that under Article 2085 it is essential that the mortgagor be the
absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in
the certificate of title and does not have to inquire further. Stated differently, an innocent purchaser
for value (like mortgagee) relying on a Torrens title issued is protected.
 10. GR 150730 Jan 31 2005 Llanto v Alzona
This is the doctrine of the mortgagee in good faith The public interest in upholding the
indefeasibility of a certificate of title as evidence of lawful ownership of the land or of any
encumbrance thereon,protects a buyer or mortgagee who, in good faith, relied upon what appears
on the face of the certificate of title
> One of the essential requisites of the contract of mortgage is that the mortgagor should be the
absolute owner of the property. An exception to this rule is the doctrine of a mortgagee in good faith.
> A mortgagee has the right to rely on good faith on the certificate of title of the mortgagor to the
property given as security and in the absence of any sign that might arouse suspicion, has no
obligation to undertake further investigation
> For a mortgagee to be in good faith, jurisprudence requires that they should take necessary
precaution expected of a prudent man to ascertain the status and condition of the properties offered
as collateral and to verify the identity of the persons they transact business with

11. GR L-4080 September 21, 1953 Martinez v pnb

As of February 1942, the estate of Pedro Rodriguez was indebted to the defendant Philippine
National Bank in the amount of P22,128.44 which represented the balance of the crop loan obtained
by the estate upon its 1941-1942 sugar cane crop. Sometime in February 1942, Mrs. Amparo R.
Martinez, late administratrix of the estate upon request of the defendant bank through its Cebu
branch endorsed and delivered to the said bank two (2) quedans according to plaintiff-appellant
issued by the Bogo-Medellin Milling co. where the sugar was stored covering 2,198.11 piculs of
sugar belonging to the estate, although according to the defendant-appellee, only one quedan
covering 1,071.04 piculs of sugar was endorsed and delivered. During the last Pacific war, sometime
in 1943, the sugar covered by the quedan or quedans was lost while in the warehouse of the Bogo-
Medellin Milling Co. In the year 1948, the indebtedness of the estate including interest was paid to
the bank, according to the appellant, upon the insistence of land pressure brought to bear by the
bank. Under the theory and claim the sometime in February 1942, when the invasion of the Province
of Cebu by the Japanese Armed Forces was imminent, the administratrix of the estate asked the
bank to release the sugar so that it could be sold at a god price which was about P25 per picul in
order to avoid its possible loss due to the invasion, but that the bank refused that request and as a
result the amount of P54,952.75 representing the value of said sugar was lost, the present action
was brought against the defendant bank to recover said amount. After trial, the Court of First
Instance of Manila dismissed the complaint on the ground that the transfer of the quedan or quedans
representing the sugar in the warehouse of the Bogo-Medellin Milling Co. to the bank did not transfer
ownership of the sugar, and consequently, the loss of said sugar should be borne by the plaintiff
appellant. administrator Jose R. Martinez is now appealing from that decision. We agree with the
trial court that at the time of the loss of the sugar during the war, sometime in 1943, said sugar still
belonged to the estate of Pedro Rodriguez. It had never been sold to the bank so as to make the
latter owner thereof. The transaction could not have been a sale, first, because one of the essential
elements of the contract of sale, namely, consideration was not present. If the sugar was sold, what
was the price? We do not know, for nothing was said about it. Second, the bank by its charter is not
authorized to engage in the business of buying and selling sugar. It only accepts sugar as security
for payment of its crop loans and later on pursuant to an understanding with the sugar planters, it
sell said sugar for them, or the planters find buyers and direct them to the bank. The sugar was
given only as a security for the payment of the crop loan. This is admitted by the appellant as shown
by the allegations in its complaint filed before the trial court and also in the brief for appellant filed
before us. According to law, the mortgagee or pledge cannot become the owner of or convert and
appropriate to himself the property mortgaged r pledged (Article 1859, old Civil Code; Article 2088,
new Civil code). Said property continues t belong to the mortgagor or pledgor. The only remedy
given to the mortgagee or pledgee is to have said property sold at public auction and the proceeds
of the sale applied to the payment of the obligation secured by the mortgage or pledge. The position
and claim of plaintiff-appellant is rather inconsistent and confusing. First, he contends that the
endorsement and delivery of the quedan or quedans to the bank transferred the ownership of the
sugar to said bank so that as owner, the bank should suffer the loss of the sugar on the principle that
"a thing perishes for the owner". We take it that by endorsing the quedan, defendant was supposed
to have sold the sugar to the bank for the amount of the outstanding loan of P22,128.44 and the
interest then occured. That would mean that plaintiff's account with the bank has been entirely
liquidated and their contractual relations ended, the bank suffering the loss of the amount of the loan
and interest But plaintiff-appellant in the next breath contends that had the bank released the sugar
in February 1942, plaintiff ]could have sold it for P54,952.75, from which the amount of the loan and
interest could have been deducted, the balance to have been retained by plaintiff, and that since the
loan has been entirely liquidated in 1948, then the whole expected sale price of P54,952.75 should
now be paid by the bank to appellant. This second theory presupposes that despite the indorsement
of the quedan plaintiff still retained ownership of the sugar, a position that runs counter to the first
theory of transfer of ownership to the bank. In the course of the discussion of this case among the
members of the Tribunal, one or two them who will dissent from the majority view sought to cure and
remedy this apparent inconsistency in the claim of appellant and sustain the theory that the
endorsement of the quedan made the bank the owner of the sugar resulting in the payment of the
loan, so that now, the bank should return to appellant the amount of the loan it improperly collected
in 1948. In support of the theory of transfer of ownership of the sugar to the bank by virtue of the
endorsement of the quedan, reference was made to the Warehouse Receipts Law, particularly
section 41 thereof, and several cases decided by this court are cited. In the first place, this claim is
inconsistent with the very theory of plaintiff appellant that the sugar far from being sold to the bank
was merely given as security for the payment of the crop loan. In the second place, the authorities
cited have not directly applicable. In those cases this court held that for purposes of facilitating
commercial transaction, the endorse of transferee of a warehouse receipt or quedan should be
regarded as the owner of the goods covered by it. In other words, as regards the endoser or
transferor, even if he were the owner of the goods, he may not take possession and dispose of the
goods without the consent of the endorse or transferee of the quedan or warehouse receipt; that in
some cases the endorse of a quedan may sell the goods and apply the proceeds of the sale to the
payment of the debt; and as regards third persons, the holder of a warehouse receipt or quedan is
considered the owner of the goods covered by it. To make clear the view of this court in said court in
two of these cases cited which are typical. As to the first of action, we hold that in January, 1919, the
bank became and remained the owner of the five quedans Nos. 30, 35, 38, 41, and 42; that they
were in form negotiable, and that, as such owner, it was legally entitled to the possession and
control of the property therein described at the time the insolvency petition was filed and had a right
to sell it and apply the proceeds of the sale to its promissory notes, cured by the three quedans Nos.
33, 36, and 39, which the bank surrendered to the firm. (Philippine Trust Co. vs. National Bank, 42
Phil., 413, 427). ... Section 58 provides that within the meaning of the Act "to "purchase" includes to
take as mortgagee or pledgee' and clear that, as to the legal title to the property covered by a
warehouse receipt, a pledgee is on the same footing as a vendee except that the former is under the
obligation of surrendering his title upon the payment of the debt secured. To hold otherwise would
defeat one of the principal purposes of the Act, i. e., to furnish a basis for commercial credit. (Bank of
the Philippine Islands vs. Herridge, 47 Phil. 57, 70). It is obvious that where the transaction involved
in the transfer of a warehouse receipt or quedan is not a sale but pledge or security, the transferee
or endorsee does not become the owner of the goods but that he may only have the property sold
then satisfy the obligation from the proceeds of the sale. From all this, it is clear that at the time the
sugar in question was lost sometime during the war, estate of Pedro Rodriguez was still the owner
thereof. It is further contended in this appeal that the defendant appellee failed to excercise due care
for the preservation of the sugar, and that the loss was due to its negligence as a result of which the
appellee incurred the loss. In the first place, this question was not raised in the court below. Plaintiff's
complaint to make any allegation regarding negligence in the preservation of this sugar. In the
second place, it is a fact that the sugar was lost in the possession of the warehouse selected by the
appellant to which it had originally delivered and stored it, and for causes beyond the bank's control,
namely, the war. In connection with the claim that had the released the sugar sometime in February,
1942, when requested by the plaintiff, said sugar could have been sold at the rate of P25 a picul or a
total of P54,952.75, the amount of the present claim, there is evidence to show that the request for
release was not made to the bank itself but directly to the official of the warehouse the Bogo
Medellin Milling Co. and that bank was not aware of any such request, but that therefore April 9,
1942, when the Cebu branch of the defendant was closed, the bank through its officials offered the
sugar for sale but that there were no buyers, perhaps due to the unsettled and chaotic conditions
that obtaining by reason of the enemy occupation. In conclusion, we hold that where a warehouse
receipt or quedan is transferred or endorsed to a creditor only to secure the payment of a loan or
debt, the transferee or endorsee does not automatically become the owner of the goods covered by
the warehouse receipt or quedan but he merely retains the right to keep and with the consent of the
owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple
reason that the transaction involved is not a sale covered by the quedans of warehouse receipts is
lost without the fault or negligence of the mortgagee or pledgee or quedan, then said goods are to
be regarded as lost on account of the real owner, mortgagor or pledgor.1wphl.nt In view of the
foregoing, the decision appealed from is hereby affirmed, with costs. Bengzon, Padilla, Tuason,
Reyes, Jugo, Bautista Angelo, and Labrador, JJ., concur.
12. GR L-40018 December 15 1975 Northern motors inc v Coquia
The pledgee or mortgagee is not obligated to file an independent action for the enforcement of his
credit. To do so would be a nullification of his lien and would defeat the purpose of the pledge or
mortgage which is to give him preference over the property given as security for the satisfaction of
his credit
13. GR 128669 10-04-02 Vda de Jayme v ca
FACTS: The spouses Graciano and Mamerta Jayme are the registered owners of Lot 2700, situated
in the Municipality of Mandaue On January 8, 1973, they entered into a Contract of Lease5 with
George Neri, president of Airland Motors Corporation (now Cebu Asiancars Inc.), covering one-half
of Lot 2700. The lease was for twenty (20) years. The terms and conditions of the lease contract
stipulated that Cebu Asiancars Inc. (hereafter, Asiancars) may use the leased premises as a
collateral to secure payment of a loan which Asiancars may obtain from any bank, provided that the
proceeds of the loan shall be used solely for the construction of a building which, upon the
termination of the lease or the voluntary surrender of the leased premises before the expiration of
the contract, shall automatically become the property of the Jayme spouses (the lessors). A Special
Power of Attorney\7 dated January 26, 1974, was executed in favor of respondent George Neri, who
used the lot to secure a loan of P300,000 from the General Bank and Trust Company. The loan was
fully paid on August 14, 1977 In October 1977, Asiancars obtained a loan of P6,000,000 from the
Metropolitan Bank and Trust Company (MBTC). The entire Lot 2700 was offered as one of several
properties given as collateral for the loan. As mortgagors, the spouses signed a Deed of Real Estate
Mortgage dated November 21, 1977 in favor of MBTC. It stated that the deed was to secure the
payment of a loan obtained by Asiancars from the bank. To assure the Jayme spouses, Neri and the
other officers of Asiancars, executed an undertaking .In it they promised, in their personal capacities
and/or in representation of Cebu Asiancars, Inc., "to compensate Mr. & Mrs. Graciano Jayme for any
and all or whatever damage they may sustain or suffer by virtue and arising out of the mortgage to
MBTC. In addition, Neri wrote a letter dated September 1, 1981 addressed to Mamerta Jayme
acknowledging her "confidence and help" extended to him, his family and Asiancars. He promised to
pay their indebtedness to MBTC before the loan was due. Meeting financial difficulties and incurring
an outstanding balance on the loan, Asiancars conveyed ownership of the building on the leased
premises to MBTC, by way of "dacion en pago." Asiancars failed to pay.
Eventually, MBTC extrajudicially foreclosed the mortgage. A public auction was held on February 4,
1981. MBTC was the highest bidder for P1,067,344.35. A certificate of sale was issued and was
registered with the Register of Deeds. Petitioners claim that Neri and Asiancars did not tell them that
the indebtedness secured by the mortgage was for P6,000,000 and that the security was the whole
of Lot 2700. Petitioners allege that the deed presented to the Jayme spouses was in blank, without
explanation on the stipulations contained therein, except that its conditions were identical to those of
the stipulations when they mortgaged half the lots area previously with General Bank. Petitioners
also alleged that the Jayme spouses were illiterate and only knew how to sign their names. That
because they did not know how to read nor write, and had given their full trust and confidence to
George Neri, the spouses were deceived into signing the Deed of Real Estate Mortgage. Their
intention as well as consent was only to be bound as guarantors.
ISSUE: WON the dacion en pago by Asiancars in favor of MBTC is valid and binding despite the
stipulation in the lease contract that ownership of the building will vest on the Jaymes at the
termination of the lease.
HELD: In the case at bar, when Asiancars failed to pay its obligations with MBTC, the properties
given as security (one of them being the land owned by the Jaymes) became subject to foreclosure.
When several things are given to secure the same debt in its entirety, all of them are liable for the
debt, and the creditor does not have to divide his action by distributing the debt among the various
things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are
liable for such balance. The debtor cannot ask for the release of one or some of the several
properties pledged or mortgaged (or any portion thereof) or proportionate extinguishment of the
pledge or mortgage unless and until the debt secured has been fully paid. The alienation of the
building by Asiancars in favor of MBTC for the partial satisfaction of its indebtedness is, in our view,
also valid. The ownership of the building had been effectively in the name of the lessee-mortgagor
(Asiancars), though with the provision that said ownership be transferred to the Jaymes upon
termination of the lease or the voluntary surrender of the premises. The lease was constituted on
January 8, 1973 and was to expire 20 years thereafter, or on January 8, 1993. The alienation via
dacion en pago was made by Asiancars to MBTC on December 18, 1980, during the subsistence of
the lease. At this point, the mortgagor, Asiancars, could validly exercise rights of ownership,
including the right to alienate it, as it did to MBTC
14. GR 109305 10-02-00 insurance services and commercial traders v ca

Where the mortgagee acts with undue haste in granting mrtgage loans and does not ascertain the
ownership of the lands being mortgaged, as well as the authority of the supposed agent executing the
mortgage, it cannot be considered an innocent mortgagee.

15. Gr /l40824 February 23 1989 GSIS v CA

The rule that persons dealing with registered lands can solely on the certificate of title does not apply to
banks which solely on the certificate of title does not aply to banks which should exercise more care and
prudence in dealing with registered lands, than private individuals, for their business is one affected
with public interest. If a bank failed to observe due diligence in ascertaining the real owner of registered
land given as security for a loan especially where the amount thereof is substantial, it cannot be
considered a mortgagee in good faith. This doctrine can well apply to the GSISm, a government
corporation created for the purpose of providing social security and sinsured benefits to government
employees, whiose funds come from the monthly contributions of its members.

So long as valid consent was given, the fact that the loan was given solely for the benefit of the principal
debor would not invalidate the mortgage.