SPOUSES ALFREDO and SUSANA ONG, vs.

PHILIPPINE COMMERCIAL INTERNATIONAL BANK

G.R. No. 160466
January 17, 2005

FACTS:
Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and
export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and
Treasurer, respectively. The respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of money against
petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three
(3) promissory notes they issued to secure some of BMCs loans. Then, BMC filed a petition for
rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its
properties were attached by creditors. Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from petitioners-spouses as sureties..nt

A Memorandum of Agreement (MOA) was executed by debtor BMC, the petitioners-spouses as

President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank
is included). The MOA took effect upon its approval by the SEC on November 27, 1992.
Thereafter, petitioners-spouses moved to dismiss the complaint. They argued that as the SEC declared the
principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks,
including respondent bank, agreed to temporarily suspend any pending civil action against the debtor
BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMCs sureties in
their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred
from pursuing its collection case filed against them. The trial court denied the motion to dismiss. Hence
this appeal.

ISSUE: Whether or not the spouses Ong are liable as sureties?

HELD:

Yes. The court held that under the suretyship contract entered into by petitioners-spouses with
respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC
for the payment of its debts to Under Article 1216 of the Civil Code, respondent bank as creditor may

proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC. Respondent banks right to collect
payment from the surety exists independently of its right to proceed directly against the principal debtor.
In fact, the creditor bank may go against the surety alone without prior demand for payment on the
principal debtor.

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these
provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses
are not guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a
guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the
debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is
only after the creditor has proceeded against the properties of the principal debtor and the debt remains
unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of
excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is
principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to
pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially
capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal
debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is
directly, equally and absolutely bound with the principal debtor for the payment of the debt and is
deemed as an original promissor and debtor from the beginning.

Machetti vs. Hospicio de San Jose

Facts: By a written agreement, Machetti undertook to construct a building for Hospicio de San Jose.
One of the conditions was that Machetti obtain the guarantee of Fidelity & Surety Co. to the amount of
12K. It was subsequently found out that the work had not been carried out in accordance with the
specifications. Hospicio refused to pay therefore Machetti brought an action to recover the amount.
Issue: WON the undertaking assumed by FSC that of guarantor or surety?
Held: Circumstances may be shown which convert the contract into one of suretyship but that does not
exist. It appears that the contract is the guarantors separate undertaking in which the principal does
not join, that it 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 collateral undertaking
separate and distinct from the latter. All these are features of a contract of guaranty.

Castellvi de Higgins & Higgins vs. Sellner [G.R. No. L-158025, November 5, 1920]
MALCOLM, J.
Facts:

Sellner (defendant) wrote a letter to Mcleod (Castellvis agent) saying that he

would bound himself to pay the promissory note of Mining, Clarke and Maye
amounting 10K + interest if not fully paid at maturity, upon the surrender 3k
shares of Keystone Mining Company.

Plaintiffs contend that he is a surety; defendant contends that he is a guarantor.

Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and
1834 of the Civil Code govern.

Issue: WON Sellner is a guarantor or surety?

Held:

Sellner is a GUARANTOR. 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 was not bound with Castellvi by the same instrument executed at the time
and the same consideration, but his responsibility was secondary, one founded
on an independent collateral agreement. Neither was he jointly and severally
liable with Castellvi.

In the original Spanish of the Civil Code now in force in the Philippine Islands,
Title XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza" is
translated in the Washington and Walton editions of the Civil Code as "security."
"Fianza" appears in the Fisher translation as "suretyship." The Spanish world
"fiador" is found in all of the English translations of the Civil Code as "surety." The
law of guaranty is not related of by that name in the Civil Code, although indirect
reference to the same is made in the Code of Commerce. In terminology at least,
no distinction is made in the Civil Code between the obligation of a surety and
that of a guarantor.

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.

The civil law suretyship is, accordingly, nearly synonymous with the common law
guaranty; and the civil law relationship existing between codebtors liable in
solidum is similar to the common law suretyship.

E Zobel, Inc. vs. CA

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