5. AGRO CONGLOMERATES, INC. vs. CA and REGENT SAVINGS and LOAN BANK, INC.

Facts:
Agro Conglomerates Inc. (Vendor) sold 2 parcels of lands to Wonderland Food Industries (vendee),
wherein they executed a Memorandum of Agreement (MOA) where the vendee would pay P5 M as
follows: P1M cash, P2M in shares of stock of Vendee Corporation and P2M in installments + 18%
interest per annum.

Subsequently, the vendor, vendee and respondent Bank executed an Addendum to the previous
MOA. The new arrangement provided that the P1M cash payment and prepaid interest of P1.36M (18%
of P2M) would be incurred as debt from the BANK by the Vendor as authorized by the Vendee. Provided
however, that said loan shall be made for and in the name of the VENDOR. The VENDEE thereby agrees
to pay the full amount of P1.36M directly to the VENDOR. It is understood that while the loan will be
secured from and in the name of the VENDOR, the VENDEE will be the one liable to pay the entire
proceeds thereof including interest and other charges.
Petitioner Mario Soriano issued PN payable to the Bank, but the former failed to pay such obligation so
the Bank filed 3 cases of collection. Thus the Bank endorsed the PN for collection.

The RTC ruled that Wonderland is not answerable. And since the loans obtained under the four
promissory notes have not been paid, despite opportunities given by plaintiff to defendants to make
payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff.
In fact, defendants failed to file a third-party complaint against Wonderland, which shows the weakness
of its stand that Wonderland is answerable to make said payments.
The Court of Appeals affirmed the decision of the trial court.

Issues:
1. W/N Petitioner-vendors is solidarily liable with Wonderland (vendee) to pay the bank (creditor).

2. W/N the Addendum signed by the Bank, the Vendor and Vendee constitutes a novation of the
contract by substitution of debtor, which exempts petitioners-vendor from any liability to pay the PN
they issued to the Bank.

Ruling:
YES. A subsidiary contract of suretyship had taken effect since petitioner-vendors signed the PN as
maker and accommodation party for the benefit of Wonderland (vendee). Petitioners became liable as
accommodation party. An accommodation party is a person who has signed the instrument as maker,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some
other person and is liable on the instrument to a holder for value, notwithstanding such holder at the
time of taking the instrument knew (the signatory) to be an accommodation party. He has the right,
after paying the holder, to obtain reimbursement from the party accommodated, since the relation
between them has in effect become one of principal and surety, the accommodation party being the
surety. Suretyship is defined as the relation which exists where one person has undertaken an obligation
and another person is also under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the other should perform.
The surety’s liability to the creditor of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal. And the creditor may proceed against any one
of the solidary debtors.
2. No. The addendum did not effect to a novation of the obligation of petitioner-vendor to pay the
PN by “substitution” of a new debtor, Wonderland (vendee).
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. In order that a novation can take place, the concurrence of the following requisites
is indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

The first requisite was lacking.

 6. FINMAN GENERAL ASSURANCE CORP. VS SALIK, 188 SCRA 740

FACTS:
Private respondents, Abdulgani Salik et al., allegedly applied with Pan Pacific Overseas Recruiting
Services, Inc. (Pan Pacific) and were assured employment abroad by a certain Mrs. Normita Egil. In
consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous assurances of
employment abroad given by Celia Arandia and Mrs. Egil, they were not employed.
They then filed a joint complaint with the Philippine Overseas Employment Administration (POEA)
against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims for
refund of a total amount of P30,000.00

The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance
Corporation (Finman), as Pan Pacific's bonding company. Summons were served upon both Pan Pacific
and Finman, but they failed to answer.

A hearing then was called, but only the private respondents appeared. Despite being deemed in default
for failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again
they failed to appear. Thus, ex-parte proceedings ensued.

During the hearing, private respondents reiterated the allegations in their complaint that they first paid
P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and
countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they
paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total payment
of P30,000.00 allegedly represents payments for herein private respondents in the amount of P5,000.00
each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific

Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein
private respondents do not have a valid cause of action against it; that Finman is not privy to any
transaction undertaken by Pan Pacific with herein private respondents; that herein private respondents'
claims are barred by the statute of frauds and by the fact that they executed a waiver; that the receipts
presented by herein private respondents are mere scraps of paper; that it is not liable for the acts of
Mrs. Egil; that Finman has a cashbond of P75,000.00 only which is less than the required amount of
P100,000.00; and that herein private respondents should proceed directly against the cash bond of Pan
Pacific or against Mrs. Egil

Honorable Franklin M. Drilon, then the Secretary of Labor and Employment, upon the recommendation
of the POEA hearing officer ruled in favor of respondents.
A motion for reconsideration having been denied ,herein petitioner instituted the instant petition.

ISSUE: Whether or not petitioner is jointly and severally liable together with Pan Pacific on the basis of
suretyship agreement between Finman, Pan Pacific and POEA

RULING:
Yes. In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a
suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful
performance and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was
also understood that under the suretyship agreement, herein petitioner undertook itself to be jointly
and severally liable for all claims arising from recruitment violation of Pan Pacific (Ibid., p. 23), in keeping
with Section 4, Rule V, Book I of the Implementing Rules of the Labor Code, which provides:

"Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a
license fee of P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount
convertible to cash issued by banking or financial institution duly endorsed to the Ministry (now
Department) as well as a surety bond of P150,000.00 from an accredited bonding company to answer for
valid and legal claims arising from violations of the conditions of the license or the contracts of
employment and guarantee compliance with the provisions of the Code, its implementing rules and
regulations and appropriate issuances of the Ministry (now Department)."

Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the
proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a
judgment against its principal even though it was not a party to the proceedings (Leyson v. Rizal Surety
and Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA
1182 [1967]), this Court ruled that where the surety bound itself solidarily with the principal obligor, the
former is so dependent on the principal debtor "that the surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter." Applying
the foregoing principles to the case at bar, it can be very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor General,
private respondents have a legal claim against Pan Pacific and its insurer for the placement and
processing fees they paid, so much so that in order to provide a complete relief to private respondents,
petitioner had to be impleaded in the case (Rollo, p. 87).

Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume
jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the deprivation of
the former of any remedial measures under the law.

The records of the case reveal that herein Finman filed a motion for reconsideration of the adverse
decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for reconsideration,
no jurisdictional challenge was made (ibid., p. 22). It was only when it filed this petition that it assailed
the jurisdiction of the respondent Secretary of Labor, and that of the POEA. But then, it was too late.
Estoppel had barred herein petitioner from raising the issue, regardless of its merits (Akay Printing Press
v. Minister of Labor and Employment, 140 SCRA 381 (1985)).

Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and directing
herein petitioner to pay jointly and severally with Pan Pacific the claims of private respondents
constitute a grave abuse of discretion amounting to lack of jurisdiction has no basis.
 7. PNB v. CA
Facts:
Estanislao Depusoy, and the Republic of the Philippines, represented by the Director of Public Works,
entered into a building contract, for the construction of the GSIS building at Arroceros Street, Manila,
Depusoy to furnish all materials, labor, plans, and supplies needed in the construction. Depusoy applied
for credit accommodation with the plaintiff. This was approved by the Board of Directors in various
resolutions subject to the conditions that he would assign all payments to be received from the Bureau
of Public Works of the GSIS to the bank, furnish a surety bond, and the surety to deposit P10,000.00 to
the plaintiff. The total accommodation granted to Depusoy was P100,000.00. This was later extended by
another P10,000.00 and P25,000.00, but in no case should the loan exceed P100,000.00. In compliance
with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from
the GSIS to PNB.

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime in
September, 1957, the Bureau of Public Works rescinded its contract with Depusoy. No further amounts
were thereafter paid by the GSIS to plaintiff bank. The amount of the loan of Depusoy which remains
unpaid, including interest, is over P100,000.00. Demands for payment were made upon Depusoy and
Luzon, and as no payment was made, therefore herein petitioner filed with the trial court a complaint
against Estanislao Depusoy and private respondent Luzon Surety Co. Inc. (LSCI).

It is also contended that if what was intended to be guaranteed by Luzon is the Deed of Assignment, the
surety bond guaranteed nothing, because with the execution of the Deed of Assignment, nothing
thereafter remained to be done. This is not true, for the terms of the Deed of Assignment, Depusoy
authorized the PNB to receive all monies due from the Bureau of Public Works and to endorse for
deposit all instruments of credit that might be issued in connection with the payments therein assigned.
Under this stipulation, Luzon guaranteed that all the monies due Depusoy under his building contract
with the Bureau of Public Works should be paid to the PNB. It is true that all the checks and warrants
issued by the GSIS were to be made payable to the PNB. But under the arrangement between the PNB,
GSIS, and the Bureau of Public Works, and Depusoy, it was Depusoy who received the warrants or
checks either from the Bureau of Public Works or from the GSIS, and Depusoy delivered the same to the
PNB. The PNB did not take the trouble of going to the GSIS or the Bureau of Public Works to get the
checks. One reason because the PNB did not know when any amount would be due. There is nothing
then that could prevent an arrangement thereafter between Depusoy and the GSIS, or the Bureau of
Public Works to make the checks payable to Depusoy, and Depusoy from forging the signature of the
PNB and appropriating the money. This would be a violation of the Deed of Assignment for which Luzon
would be liable.

Issue: What is the obligation of Luzon under the surety bonds, or, stated otherwise, what obligation had
been guaranteed by Luzon under the terms of the surety bonds?

Held:

The bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy
of his obligation under the Deed of Assignment and not to guarantee payment of the loans or the debt
of Depusoy to petitioner to the extent of P100,000.00. Besides, even if there had been any doubt on the
terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. As
concretely put in Article 2055 of the Civil Code, "A guaranty is not presumed, it must be ex-pressed and
cannot extend to more than what is stipulated therein." LSCI is liable to the full extent thereof, such
liability is strictly limited to that assumed by its terms."
 8. TOWERS ASSURANCE Corp vs. ORORAMA SUPERMART, its owner-proprietor, SEE HONG

Facts:
This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary
attachment.

On February 17, 1976, See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the
spouses Ernesto Ong and Conching Ong in the CFI Misamis Oriental for the collection of the sum of P
58,400. See Hong asked for a writ of preliminary attachment to which the lower court granted thus
attaching the properties of the Ong spouses.

To lift the attachment, the Ong spouses filed on March 1976 a counterbond in the amount of P58,400
with Towers Assurance Corp as surety. In that undertaking, both the Ong spouses and Towers Assurance
Corp. Bound themselves to pay solidarily to See Hong the sum of P58,400.

For non-appearance at the pre-trial, the Ong spouses were declared in default.

On Oct 1976, the lower court ordered the Ong spouses and their surety Towers Assurance to pay
solidarily to See Hong the sum of P58,400 and the Ong spouses alone to pay P10,000 for litigation
expenses and attorney’s fees.

Ernesto Ong manifested that he did not want to appeal. Upon motion for execution by Ororama Super
mart filed a motion for execution to which the lower court granted, a writ of execution was issued
against the judgment debtors and their surety.

On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari assailing the
decision and writ of execution alleging that the court acted with grave abuse of discretion in issuing a
writ of execution against the surety without first giving it an opportunity to be heard as required in Rule
57 of Rules of Court.

Issue: WON the lower court acted with grave abuse of discretion in issuing a writ of execution against
the surety without first giving it an opportunity to be heard.

Held: Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such
execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the
surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary
hearing in the same action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation
assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the
exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs.
Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued against him since he is
not a party in the case involving his principal. Notice and hearing constitute the essence of procedural
due process.
 9. Magdalena Estate (Appellee) v. Rodriguez (Appellant) G.R. No. L-18411, 17 December 1966

FACTS:
Spouses Rodriguez bought form the petitioner a parcel of land in Quezon City. There was an unpaid
balance of P5,000.00 on account of the price of the lot which was covered by the promissory note issued
by respondents. On the same date, Respondents and Luzon Surety Co., Inc. executed a bond in favor of
petitioner, the latter being the surety of the respondents. When the promissory note becomes due and
demandable, Luzon Surety Com., Inc. paid the amount to petitioner. Subsequently, petitioner demanded
payment from respondents herein on the alleged accumulated interests on the principal amount.
Respondents refuse to pay.

Respondents alleged that petitioner waived or condoned the interests due upon its unqualified
acceptance of the principal payment knowing its incompleteness and without exercising its rights to
apply a portion thereof to the interest as provided in the Articles 1235 and 1253 of the Civil Code. They
claimed that there was a novation and/or modification of the obligation of the appellants in favor of the
appellee because the appellee accepted without reservation the subsequent agreement set forth in the
surety bond despite its failure to provide that it also guaranteed payment of accruing interest.

ISSUE:
Whether or not there was a waiver, novation and/or modification of the obligation?

RULING:
No Appellants claim that the pleadings do not show that there was demand made by the appellee for
the payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the amount
of the principal obligation and without exercising its (appellee's) right to apply a portion of P655.89
thereof to the payment of the alleged interest due despite its presumed knowledge of its right to do so,
the appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of
the Civil Code provide:

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.

ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd-
26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to
pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as
Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment of
P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in
the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract. It
is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the
accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in
Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single
creditor. They cannot be made applicable to a person whose obligation as a mere surety is both
contingent and singular; his liability is confined to such obligation, and he is entitled to have all
payments made applied exclusively to said application and to no other. Besides, Article 1253 of the Civil
Code is merely directory, and not mandatory. Inasmuch as the appellee cannot protest for non-payment
of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a
part of that amount as payment for the interest, we cannot now say that there was a waiver or
condonation on the interest due.

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the old one,5 or
wherein the old contract is merely supplemented by the new one.6 The mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from responsibility does not
constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the
instant case, the surety bond is not a new and separate contract but an accessory of the promissory
note.
 10. Diño V CA

Facts:
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy Tiam, applied for
and obtained credit accommodations from Metrobank in the sum of Php700,000.

This was secured by Continuing Suretyships separately executed by petitioners Norberto Uy (who
agreed to pay Php300,000) and Jacinto Diño (who bound himself liable up to Php800,000). Uy Tiam paid
the obligation under this letter of credit in 1977.

UTEFS obtained another credit accommodation in 1978, which was likewise settled before he applied
and obtained another in 1979 in the sum of Php815,600. This sum covered UTEFS purchase of fertilizers
from Planters Producst.

Uy and Diño did not sign the application for this credit and were not asked to execute suretyship or
guarantee. UTEFS executed a trust receipt whereby it agreed to deliver to Metrobank the goods in the
event of non-sale, and if sold, the proceeds will be delivered to Metrobank.

However, UTEFS did not comply with its obligation.

As a result, Metrobank demanded payment from UTEFS and the sureties, Uy & Diño. The sureties
refused to pay on the ground that the obligation for which they executed the continuing suretyship
agreement has been paid.

RTC ruled in favor of the petitioners, CA affirmed.

Issue: WON petitioners are liable for payment of the 1979 transaction under the continuing suretyship
agreement they executed in 1977. Assuming that they are, what is the extent of their liability?

Ruling:
Yes. The Supreme Court held that Uy & Diño are liable. The agreement they executed in 1977 is a
continuing suretyship, one which is not limited to a single transaction but which contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable.

The agreement that petitioners signed expressly provided that it is a continuing guaranty and shall be in
full force and effect until written notice to the bank that it has been revoked by the surety.

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may
not be known at the time the guaranty is executed. This is the basis for contracts denominated as a
continuing guaranty or suretyship.

A continuing guaranty is one which is not limited to a single transaction, but which contemplates a
future course of dealing, covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to provide security with respect to
future transactions within certain limits, and contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable.
Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in
the future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof.

A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to
give a standing credit to the principal debtor to be used from time to time either indefinitely or until a
certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from time to time" the
guaranty will be construed to be a continuing one.

In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by
petitioner Uy provides: "I. For and in consideration of any existing indebtedness to the BANK of UY TIAM
(hereinafter called the 'Borrower'), for the payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or
from time to time hereafter,"

The foregoing stipulations unequivocally reveal that the suretyship agreements in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements.

As to the 2nd issue, petitioners are only liable up to the maximum limit fixed in the continuing suretyship
agreements (Php800,000 for Diño and Php300,000 for Uy). The law is clear that a guarantor may bind
himself for less, but not for more than the principal debtor, both as regards the amount and the onerous
nature of the conditions (Art. 2054). CA decision ordering petitioners to pay P2,397,883.68 which
represents the amount due inclusive of interest and charges, is modified.
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño contains identical
provisions except with respect to the guaranteed aggregate principal amount which is EIGHT HUNDRED
THOUSAND PESOS (P800,000.00).

The limit of the petitioners' respective liabilities must be determined from the suretyship agreement
each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous
eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond
its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther.

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the
aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The
law is clear that a guarantor may bind himself for less, but not for more than the principal debtor, both
as regards the amount and the onerous nature of the conditions.
 11. Baylon v CA

Facts:
In 1986, petitioner Baylon introduced private respondent Tomacruz to Luanzon in order for the
respondent to grant a loan to said Luanzon. Luanzon, who is the co-manager of the petitioner's husband
in PLDT, is engaged in the business of as a contractor and the amount loaned was to become part of said
venture.

Subsequently, Luanzon issued a promissory note in favor of the private respondent for said loan.
Additionally, petitioner signed said note as a “guarantor”. Other checks were also issued by Luanzon
pertaining to said debt.

Afterwards, respondent demanded for the payment but said demands were left unheeded. Thus
constrained, private respondent filed a case for the collection of a sum of money in RTC Quezon City
Luanzon, petitioner and the latter's husband although summons were not served upon Luanzon.

[PETITIONER'S DEFENSE] - The money given by private respondent to Luanzon is not a loan but an
investment on the latter's business.

Petitioner alleged that she did not guarantee the payment of said promissory note and even if she did,
private respondent has not exhausted the property of Luanzon as the principal debtor. Likewise, there
was an extension of the maturity date without her consent, thereby releasing her from said obligation.

The RTC ruled in favor of the private respondent. The trial court stated that the record clearly indicate
that the money given by private respondent was a loan and not an investment. Furthermore, the trial
court held that petitioner's assurances that the promissory note will be paid binds said party.

The Court of Appeals affirmed said ruling.

Issue: Whether or not the petitioner is liable for the payment of the promissory note in the instant case.

Held:
No, the petitioner is liable for the payment of the promissory note in the instant case.
Article 2058 of the Civil Code provides: “The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.”

It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal
debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor
liable only after judgment has been obtained against the principal debtor and the latter is unable to pay,
for obviously the exhaustion of the principals property - the benefit of which the guarantor claims -
cannot even begin to take place before judgment has been obtained.

In the present case, there is no judgement yet on the part of Luanzon, the principal debtor. Although the
principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that
summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal
debtor. The Supreme Court held that private respondent must first obtain a judgment against the
principal debtor before assuming to run after the alleged guarantor.