Saenz vs.

Yap Chuan, 1910

Palanca, Saenz guarantor for Govt

Yap Chuan (20k) & 4 other (5k) guarantor for Saenz

Guarantor (Saenz) seeks reimbursement for P20,000.00, the amount of the bond
executed by sub-guarantors, notwithstanding that he paid only P8,000.00 of his
bond.

Facts: By order of the court, Palanca, as judicial administrator of an estate, gave a

bond to guarantee his administration. The judicial bond was executed by Palanca,
Saenz and others jointly and severally in favor of the Government for the sum of
P60k. In turn, Palanca and five (5) others, executed in favor of Saenz another bond
as follows: Yap Chuan for P20k; and the 4 others, for P5k each to guarantee the
reimbursement of whatever amounts which Saenz might be required to pay by
reason of the judicial bond aforementioned.

Saenz was ordered by the court to pay to the estate the sum of P48k. Saenz only
paid P8k. Applying the terms of the bond executed by the guarantors of Saenz, the
TC ordered his 4 guarantors to pay the stipulated 5k each/ 20k.

Issue: Should the 4 guarantor reimburse Saenz P5,000.00 each or a total of

P20,000.00 notwithstanding that Saenz had paid only P8,000.00 of his bond?

Held: No. (1) Guarantors right of reimbursement limited to amount paid.

The right of subrogation cannot be interpreted in such absolute terms as to include
more than the surety (guarantor) has paid, for, though it is true that he puts himself
in the place of the creditor and should have the same rights as the latter in
consequence of the subrogation, it is no less certain that there would be an unjust
enrichment to the prejudice of the debtor, if the surety who pays for him were
permitted to claim more than what he paid.

Tuason v. Machuca, 1924

a) Debtor bound himself to pay surety as soon as the latter may have become
liable whether or not he shall have actually paid creditor.
b) Debtor is being held liable by surety for expenses incurred by the latter in
litigation between him and creditor.

Facts: Manila Compania de Seguros (surety) signed a note for P10k in favor of
Tuason, Tuason Inc. (creditor) to guarantee a liability of Universal Trading Co
(debtor). In turn, Debtor and its president, Machuca, bound themselves solidarily to
reimburse surety all such sums as surety may pay or become bound to pay, upon its
obligation to Credtor, whether or not it shall have actually paid such sums. Debtor
was declared insolvent. Creditor brought action against surety to recover the value
of the note, and won in court. Later, surety filed a complaint against Machuca to
recover the amount which surety was sentenced to pay, plus litigation expenses,
although surety had not, in fact, paid the amount of the judgment.

Issue:

1. Is the surety entitled to reimbursement even if it (surety) has not paid yet? Yes
2. Does such reimbursement include litigation expenses initiated by Tuason? No
a. Does such reimbursement include litigation expenses initiated by it
(surety)? Yes

Held:

1. Yes. According to the document executed solidarily by Tuason and Machuca,

Machuca bound himself to pay Surety as soon as the Surety may have
become bound and liable, whether or not it shall have actually paid. Indeed,
the Surety became bound in view of the judgement against it filed by Tuason.
2. Machuca must not be held responsible for the expenses incurred by Surety in
the litigation between it and Tuason. That litigation was originated by Surety
having failed to fulfill its surety obligation with Tuason and it cannot charge
Machuca with the expenses it was compelled to make by reason of its own
fault.
a. It is entitled, however, to the expenses incurred by it in the action
brought by it against Machua.

Kuenzle & Streiff vs. Sunco, 1909

Facts: Kuenzle & Streiff (creditor) instituted an action against Chung Chu Sing
(debtor) for the recovery of indebtedness. Before Kuenzle & Streiff could secure
judgment, Sunco (guarantor) brought an action against Chung Chu Sing for the
payment of another obligation for which Sunco acted as guarantor. Chung Chu Sing
confessed judgment in favor of Sunco. Immediately after obtaining judgment, Sunco
caused to be levied upon under execution all the properties of Chung Chu Sing.
Kuenzle & Streiff commenced an action to set aside said judgment, claiming it that
Sunco had not paid the debt for which he guarantees.

Issue: Is a guarantor, who won a judgement against his principal debtor, before
paying the latters debt himself, entitled to execute said judgment?

Held: No, while the guarantor, even before he pays, has the right (under 2071) to
obtain judgment against his principal debtor, he will not be permitted to execute
said judgment or collection, until he has satisfied the payment of the obligation of
which he guarantees.
 Cochingyan & Villanueva vs. R&B Surety and Insurance, 1987

2071 guarantor, even before paying, can sue debtor

2079 extension; theory of 2079; debtor may become insolvent during extended
period, to the prejudice of guarantor

Facts PAGRICO (debtor) obtained a P400k increase in its credit line from PNB
(creditor). The increased amount was secured by a surety bond executed by R&B
(surety). In turn, Cochingyan and Villanueva (suretys indemnitors) executed
separate Indemnity Agreements to answer for R&Bs obligation under the surety
bond. PAGRICO defaulted and R&B made partial payments to PNB. R&B then filed a
case demanding indemnification from Cochingyan and Villanueva. Then Cochingyan
entered into a trust agreement with PNB, where PNB agreed to refrain from suing
PAGRICOs sureties.

ISSUE # 1: W/N the filing of the complaint by R&B was premature since PNB had
not yet sued R&B for the forfeiture of the surety bond. (NO) = 2071

RATIO:

The indemnity agreements allow R&B to recover from the indemnitors even before
R&B shall have paid PNB. This is sanctioned by 2071.

ISSUE # 2: W/N the trust agreement extended the term of the surety bond so as
to release Villanueva from his obligation as indemnitor as he did not consent to the
execution of the trust agreement (NO) 2079 - An extension granted to the debtor by
the creditor without the consent of the guarantor(not indemnitor) extinguishes the
guaranty. The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of time referred to
herein.

RATIO # 2:

SC: Untenable, for two reasons:

Applying 2nd sentence of 2079: PNBs undertaking under the trust
agreement to refrain from enforcing its claim against R&B did not extend
the maturity of R&Bs surety obligation. In other words, the undertaking of
PNB to "hold in abeyance any action to enforce its claim" against R & B did
not amount to an "extension granted to the debtor" without Villanueva's
consent so as to release CV from their undertaking as indemnitors of R & B
Surety under the Indemnity Agreements.

Applying 1st sentence of 2079: Assuming there it was an extension,

Cochingyan and Villanueva remained bound only to R&B as its indemnitors
and are not guarantors of PNB.
 The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety's consent would deprive
the surety of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the
original maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor becoming insolvent
during the extended period.

Mercantile Insurance v. Ysmael et al, 1989

2071 applies

PNB = creditor
Ysmael etl = debtor and indemnitors of Merc
Merc = surety of PNB

Facts: Merc as surety, issued 2 bonds in favor of PNB. Ysmael et al executed with
the Mercantile Insurance Co., Inc. an indemnity agreement binding to indemnify the
Merc, from any payments which said company as surety shall incur or become
liable to pay pursuant to Paragraph 3 of the indemnity agreement.

The Bonds were reduced by P40,000.00 so that the total liability of Merc to PNB.

Ysmael et al failed to pay PNB. PNB demanded from Mercantile.

Merc sued the Ysmael et al regarding the said demand of PNB.

Lower court dismissed case for lack of cause of action, as Merc has paid nothing in
the surety bonds, therefore, they have not suffered any actual loss.

Issue: Is Merc allowed indemnification from even before it has paid to the creditor?
Yes = 2071

Held: The defendants executed with Merc indemnity agreements which provide that
payment of indemnity may be claimed whether or not Merc has actually paid the
same as provided in paragraph 3 of contract.

Escao, Silos v. Ortigas, 2007

Ortigas - argues that a surety and solidary debtor are no different, hence, since
Escano et al are identified sureties, their liabilities are solidary

SC No! Tolentino says they are different.

Facts:

Falcon Minerals, Inc. (Falcon/debtor) availed a credit line from PDCP (creditor).

Ortigas guaranteed this loan.

An additional separate guaranty in favor of Falcon were executed by other officers of

Falcon; Escao, Silos and Matti

Falcon eventually availed of the credit line extended by PDCP. However, Falcon
subsequently defaulted in its payments.

Ortigas paid the obligation to PDCP and sued Escao, Silos and Matti.

RTC rulef for Ortigas and held defendants as solidary. CA affirms.

Issue: Is the obligation of Escano et al to repay 1.3M Ortigas solidary? No Joint only,
Ortigas failed to discharge burden of proving vis 1217 there is a solidary liability
only when the obligation expressly so states

Ruling:

surety solidary debtor

Right to reimbursement only Right to indemnification 2066
Article 1217 makes plain that the In contrast, the surety who does pay
solidary debtor who effected the the creditor has the right to recover
payment to the creditor may claim the full amount paid, and not just any
from his co-debtors only the share proportional share, from the principal
which corresponds to each. Such debtor or debtors.
solidary debtor will not be able to
recover from the co-debtors the full Right to subrgation 2067
amount already paid to the creditor,
because the right to recovery
extends only to the proportional
share of the other co-debtors

EXTINGUISHMENT OF GUARANTY (2076-2081)

Asiatic Petroleum Co. v. Hizon, 1923

Shorter Facts: the agency to sell of the debtor was extended to places other than
that covered by the original contract of agency w/o knowledge of surety

Shorter Ruling: SC applied 1143 OCC (1215 NCC x x x Novation shall extinguish
the old oblig.)
Facts: A TC judgment was rendered in favor of the Asiatic to recover from David, as
principal, the sum P40k, and from Hizon, as surety, a portion of the same debt not
to exceed the sum of P5,000. As regards the liability declared by the trial court
against Hizon, an appeal was taken both Hizon claiming that he should have been
wholly absolved.

Ruling

Common law It is fundamental in the law of suretyship that any agreement

between the creditor and the principal debtor which essentially varies the terms of
the principal contract, without the consent of the surety, will release the surety from
liability.

Though not specifically expressed in the Civil Code, it may be deduced, so far as its
application to the facts of this case is concerned, from the second paragraph of
article 1822 in relation with article 1143 of the same Code. It requires no argument
to show that the increase of liability incident to the extension of the agency to other
places was prejudicial to the interest of the appellant.

DISPOSITIVE

To reverse the appealed judgment as it awards the sum of P5,000 against the Hizon,
and he will be completely absolved from the complaint.

Radio Corp. v. Roa, 1935

Facts: Roa became indebted to PTE, in the sum of P28k payable in 71 equal
monthly installments with accelerating clause. PTE assigned all its right and interest
in that contract to the Radio Corp.

Radio Corp gave Roa extension on an instalment due.

Issue: In view of the extension, which liability were guarantors released? (a) the
one month installment due, (b) or the whole amount of their obligation? The whole
amount

Law applicable Articles 1851 OCC; An extension grated to the debtor by the
creditor, without the consent of the guarantor, extinguishes the latter's liability.

NCC Article 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on the part of
the creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein. (1851a)

Ruling: In view of the acceleration clause, the act Radio Corp in extending the
payment of one instalment, without the consent of the guarantors, constituted in
fact an extension of the payment of the whole amount of the indebtedness.
Therefore the guarantors are discharged.

Peoples Bank v. Tambunting, 1971

Waiver of 2080; The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be subrogated to
the rights, mortgages, and preference of the latter.

Facts: Peoples bank approved Tambuntings request for an extension of his

payment and the release of the pledge of 135 shares of stocks. Tambunting failed to
pay and Santana (surety) along with Tambunting was sued for the recovery of the
sum of money. Santana contends that he was released from his obligation because
the Bank had extended the time of payment and released to the Tambuntings
without his consent, the 135 shares of stocks.

Issue: Can Article 2080 be waived? Yes

Ruling:

The contract of guaranty expressly authorized the bank to extend the time of
payment and to release or surrender any security or part thereof held by it without
notice to, the consent of, Santana.

Such waiver is not contrary to public policy, because the right is purely personal.

PNB v. Manila Surety, 1965

Creditor (PNB) neglected to collect from principal debtors debtors, contrary to its
duty as holder of irrevocable power of attorney from debtor.

Facts: ATACO, principal debtor of PNB (creditor), has a debt and constituted PNB as
its assignee and attorney-in-fact to collect from the Bureau of Public Works (ATACOs
debtor) the funds payable to ATACO. PNB, for 8 months, faithfully collected the sums
due from Bureau of Public Works. Thereafter, for unexplained reasons, PNB stopped
collecting before the debt was fully collected, thereby allowing such funds to be
taken and exhausted by other creditors.

PNB is now collecting from ATACO and Manila Surety to recover the balance of the
indebtedness.

Issue: Is Manila Surety exonerated from liability to PNB?

Held: Yes, even if the assignment with the power of attorney from the principal
debtor was considered as a mere additional security, still, by allowing the assigned
funds to be taken and exhausted without notifying Manila Surety, PNB deprived
the Manila Surety of the possibility of taking recourse against the security. PNB
thereby exonerated Manila Surety, pursuant to 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.

Spouses Toh v. Solidbank, FBPC, & Spouses Li, 2003

There is a waiver by the sureties of the rights of notice on extension for the credit
line, but for every extension of 30 days, 25 % of the credit extended must be paid
first.

Facts: Spouses Toh and Li were among the stockholders of FBPC. FBPC obtained a
credit line with a Solidbank. It requires a Continuing Guaranty to be signed by both
spouses Toh & Li. It contains a waiver by the sureties of the rights of notice on
extension for the credit line, but for every extension of 30 days, 25 % of the credit
extended must be paid first.

When the credit line expired, Solidbank extended them for ninety days without
requiring FBPC to pay at least 25 percent of the amount of the L/C extended.

About a month later, Solidbank received information that the spouses Li had
fraudulently absconded. So the bank sent a demand letter to FBPC and the spouses
Toh invoking the acceleration clause and demanding the total balance of the
accommodation amounting to P10.5 million.

Sps Toh contended that the Continuing Surety Agreement has been extinguished by
the extensions of the due dates of the L/Cs without the required 25 percent
payment per extension.

Issue: Are Sps Toh discharged as surety under 2079 vis 25% deposit? Yes

Ruling: While the bank may extend the due date at its discretion pursuant to the
Continuing Guaranty, it should nonetheless comply with the requirements that the
L/Cs extension for a period of thirty (30) days is subject to 25% partial payment. Any
doubt on the terms and conditions of the surety agreement should be resolved in
favor of Sps Toh especially because they are only accommodation sureties, i.e. they
received nothing out of the security contract they signed.

Compliance with this requirement was not waived by Sps Toh. For this unwarranted
exercise of discretion, Solidbank should suffer the loss. And as a result of these illicit
extensions, Sps Toh are relived as sureties of FBPC under Art. 2079 - An extension
granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension
of time referred to herein.

Autocorp v. ISAC, BOC, 2008

FACTS: Autocorp, represented by its President, Rodriguez, secured two bonds from
(ISAC) in favor of Bureau of Customs (BOC), to guarantee the export of 2 units of car
and/or to pay the taxes and duties thereon.

In turn, Rodriguez assumed as surety to indemnify ISAC for the liability the latter
may incur on the said bonds.

Rodriguez alleges that ISAC made amendments to the two bonds w/o its consent.

Autocorp failed to export the items and pay the taxes and duties. By reason thereof,
the BOC recommended the two bonds forfeited.

Failing to secure from Rodriguez, ISAC filed with the RTC an action to recover a sum
of money.

ISSUE:

1. WON ISAC can claim indemnity even if its two bonds were not yet forfeited? Yes

2. Is Rodriguez discharged as surety to ISAC (also his surety) in view of the alleged
amendment on the bonds? No

Ruling:

1. It must be pointed out that the Indemnity Agreements explicitly provide that
Autocrop shall be liable to indemnify ISAC the moment the bonds were at the risk of
forfeiture. It also provides that Autocorp shall be liable to indemnify ISAC "whether
or not payment has actually been made".

2. The CA erred in saying that Rodriguez was a surety, Article 2079 does not apply.
The provisions of the Civil Code on Guarantee, other than the benefit of excussion,
are applicable to a surety. This, however, would not cause a reversal of the CA. The
CA was correct that even granting arguendo that there was an amendment of the
bonds, petitioners would still not be absolved from liability since they had
authorized ISAC to consent to the granting of any extension and modification of the
subject bonds, as expressly set out in the Indemnity Agreements.

Stronghold insurance v. Republic-Asahi, 2006

The death of the principal debtor does not, as a rule, extinguish the obligation and
the solidary nature of the surety
Facts: Republic Asahi Glass contracts with JDS Construction. JDS files the required
performance bond with Stronghold Insurance acting as surety. JDS fell behind
schedule on the construction, prompting RAG to rescind the contract and demand
the compliance bond. The owner of JDS died. SHI refuses to pay the bond claiming
that the death of JDS owner extinguishes the obligation. Is SHI right?

Ruling: No.

Death will only extinguish an obligation if this is personal in nature or

intransmissible (pursuant to a law or contract). In the case bar, the liabilities of
Santos under his contracts with SHI were not intransmissible. Since his death did not
result in the extinguishment of his liabilities, SHI as surety cannot use his death to
escape its obligation under its performance bond.

Morevoer, his liability to RAG is direct, primary and absolute; in other words, he is
directly and equally bound with the principal debtor.