Case Digest CREDIT TRANSACTIONS

CREDIT TRANSACTION

Wednesday 6:00 – 9:00pm

DEPOSIT GUARANTY and SURETYSHIP

BPI vs IAC and ZSHORNACK TUPAZ IV & TUPAZ vs CA & BPI

Gr. No. L-66826, August 19, 1988 Gr. No. 145578, November 18, 2005, 475 SCRA 398

TRIPLE-V vs FILIPINO MERCHANTS SECURITY BANK & TRUST CO. vs CUENCA

Gr. No. 160544, February 21, 2005 Gr. No. 138544, October 3, 2000, 341 SCRA 781

CA AGRO-INDUSTRIAL DEVELOPMENT CORP vs CA PALMARES vs CA & MB LENDING CORP

Gr. No. 90027, March 3, 1993 Gr. No. 126490, March 31, 1998, 288 SCRA 422

ROMAN CATHOLIC BISHOP OF JARO vs DELA PENA E. ZOBEL INC. vs CA

Gr. No. L-6913, November 21, 1913 Gr. No. 113931, May 6, 1998, 290 SCRA 1

YHT REALTY CORP vs CA INTERNATIONAL FINANCE CORPORATION vs IMPERIAL

Gr. No. 126780, February 17, 2005 TEXTILE MILLS, INC.
Gr. No. 160324, November 15, 2005, 475 SCRA 149

PHILIPPINE BLOOMING MILLS INC & CHING vs CA

Gr. No. 142381, October 15, 2003, 413 SCRA 455

ESCANO & SILOS vs ORTIGAS JR.

Gr. No. 151953, June 29, 2007, 526 SCRA 26

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Case Digest - Deposit
DEPOSIT
BPI vs IAC and ZSHORNACK,
Gr. No. L-66826, August 19, 1988
Facts:
Rizaldy T. Zshornack and his wife maintained in
COMTRUST a dollar savings account and a peso current account. An
application for a dollar drat was accomplished by Virgillo Garcia
branch manager of COMTRUST payable to a certain Leovigilda Dizon.
In the PPLICtion, Garcia indicated that the amount was to be
charged to the dolar savings account of the Zshornacks. There wasa
no indication of the name of the purchaser of the dollar draft.
Comtrust issued a check payable to the order of Dizon. When
Zshornack noticed the withdrawal from his account, he demanded
an explainaiton from the bank. In its answer, Comtrust claimed that
the peso value of the withdrawal was given to Atty. Ernesto
Zshornack, brother of Rizaldy. When he encashed with COMTRUST a
cashiers check for P8450 issued by the manila banking corporation
payable to Ernesto.
Arguments:
COMTRUST (BPI): The parties entered into a contract of depositum
which banks do not enter into. Thus, Garcia exceeded his powers
when he entered into the contract on behalf of the bank, hence, the
bank cannot be liable under the contract.
Issue:
Whether or not the contract between petitioner and
respondent bank is a deposit.
Held:
Yes. The document which embodies the contract states
that the US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the
return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under
Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the contract, there is
no deposit but some other contract.
Note: But because the subject of the contract here is
a foreign exchange, it is covered by Central Bank Circular No.
20 which requires that, “All receipts of foreign exchange by
any resident person, firm, company or corporation shall be sold to
authorized agents of the Central Bank by the recipients within one
business day following the receipt of such foreign exchange.”
Since the document and the subsequent acts of the parties
show that they intended the bank to safekeep the foreign exchange,
and return it later to Zshornack, who alleged in his complaint that he
is a Philippine resident, the parties did not intend to sell the US
CREDIT TRANSACTIONS
dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been
entered into at all.
In other words, the transaction between Zshornack and
the bank was void having been executed against the provisions of a
mandatory law (CB Circ No. 20). Being in pari delicto, the law cannot
afford either of them remedy.
TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS
INSURANCE COMPANY
GR. No. 160554, February 21, 2005
Facts:
Mary Jo-Anne De Asis dined at petitioner's Kamayan
Restaurant. De Asis was using a Mitsubishi Galant Super Saloon
Model 1995 issued by her employer Crispa Textile Inc.. On said date,
De Asis availed of the valet parking service of petitioner and
entrusted her car key to petitioner's valet counter. Afterwards, a
certain Madridano, valet attendant, noticed that the car was not in
its parking slot and its key no longer in the box where valet
attendants usually keep the keys of cars entrusted to them. The car
was never recovered. Thereafter, Crispa filed a claim against its
insurer, herein respondent Filipino Merchants Insurance Company,
Inc. Having indemnified Crispa for the loss of the subject vehicle,
FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati
City an action for damages against petitioner Triple-V Food Services,
Inc. Petitioner claimed that the complaint failed to adduce facts to
support the allegations of recklessness and negligence committed in
the safekeeping and custody of the subject vehicle. Besides, when
De Asis availed the free parking stab which contained a waiver of
petitioner’s liability in case of loss, she had thereby waived her
rights.
Issue:
Whether or not petitioner Triple-V Food Services, Inc. is
liable for the loss.
Held:
Yes. The Supreme Court ruled in the affirmative. In a
contract of deposit, a person receives an object belonging to
another with the obligation of safely keeping it and returning the
same. A deposit may be constituted even without any consideration.
It is not necessary that the depositary receives a fee before it
becomes obligated to keep the item entrusted for safekeeping and
to return it later to the depositor. Petitioner cannot evade liability by
arguing that neither a contract of deposit nor that of insurance,
guaranty or surety for the loss of the car was constituted when De
Asis availed of its free valet parking service.
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Case Digest - Deposit
CA AGRO-INDUSTRIAL DEVELOPMENT CORP. VS CA
291 SCRA 426, Gr. No 90027, March 3, 1993
Facts:
Petitioner CA Agro-Industrial Development Corp. and the
spouses Ramon and Paula Pugao rented a Safety Deposit Box
Security Bank and Trust Company. Certificates of title of parcels of
land were then stored therein. Thereafter, a certain Mrs. Margarita
Ramos offered to buy two lots from petitioner. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed
the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the Bank to open
the safety deposit box and get the certificates of title. However,
when opened in the presence of the Bank's representative, the box
yielded no such certificates. By virtue of which, petitioner filed an
action against the bank for the loss. The bank, however, contended
that they are not liable for the loss because, aside from the waiver
signed by the petitioner, what transpired between them is a
contract of lease and not deposit.
Issue:
Whether or not the contractual relation between a
commercial bank and another party in a contract of rent of a safety
deposit box with respect to its contents placed by the latter one of
bailor and bailee or one of lessor and lessee.
Held:
The contract for the rent of the safety deposit box is not
an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, the Court do not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit; the contract in the case at
bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not
given to the joint renters — the petitioner and the Pugaos. The
guard key of the box remained with the respondent Bank; without
this key, neither of the renters could open the box. On the other
hand, the respondent Bank could not likewise open the box without
the renter's key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.
BISHOP OF JARO vs DELA PENA
26 Phil 144, Gr. No. L-6913, November 21, 1913
Facts:
In 1898, Fr. Agustin Dela Pena deposited in his personal
account a sum of money entrusted to him for the construction of a
leper hospital. Thereafter, Father De la Peña was arrested by the
military authorities as a political prisoner. While under detention, Fr.
Dela Pea made an order on said bank in favor of the United States
Army officer under whose charge he was then for the sum thus
CREDIT TRANSACTIONS
deposited in said bank. The arrest of Father De la Peña and the
confiscation of the funds in the bank were the result of the claim of
the military authorities that he was an insurgent and that the funds
thus deposited had been collected by him for revolutionary
purposes. The money was taken from the bank by the military
authorities by virtue of such order and was turned over to the
Government.
Issue:
Whether or not Father de la Peña is liable for the loss of
the money under his trust.
Held:
No. The Supreme Court ruled in the negative. Father De la
Peña's liability is determined by those portions of the Civil Code
which relate to obligations. Although the Civil Code states that "a
person obliged to give something is also bound to preserve it with
the diligence pertaining to a good father of a family". It also
provides, following the principle of the Roman law, major casus est,
cui humana infirmitas resistere non potest, that "no one shall be
liable for events which could not be foreseen, or which having been
foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares."
YHT REALTY CORPORATION vs. CA
GR. No. 126780, February 17, 2005
Facts:
Maurice Mcloughlin is an Australian philanthropist,
businessman, and a tourist. In his various trips from Australia going
to different countries, one of which is the Philippines, he would stay
in Tropicana Inn which is owned by YHT Realty Corp. After series of
transactions with the inn as depositary of his belongings, he noticed
that his money and several jewelries would be either reduced or
lost. He then decided to file an action against Tropicana and its inn-
keepers. However, the latter argued that they have no liability with
regard to the loss by virtue of the undertaking signed by Mcloughlin.
Such undertaking is a waiver of the inn’s liability in case of any loss.
The RTC and CA both decided that such undertaking is null and void
as contrary to the express provisions of the law. Hence, the petition.
Issue:
Whether or not the subject undertaking is null and void
Held:
Yes. The court ruled in the affirmative. Art. 2003 of the Civil Code
provides that, the hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not liable for
the articles brought by the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility of the former as set
forth in Articles 1998 to 2001 is suppressed or diminished shall be
void.
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Case Digest – Guaranty and Suretyship CREDIT TRANSACTIONS

GUARANTY and SURETYSHIP party to the trust receipt dated 30 September 1981, petitioner
Petronila Tupaz is not liable under such trust receipt.

TUPAZ IV & TUPAZ vs CA & BPI

Gr. No. 145578, November 18, 2005, 475 SCRA 398

Facts:
SECURITY BANK & TRUST CO. vs CUENCA
Petitioners Jose Tupaz IV and Petronila Tupaz were Vice-
Gr. No. 138544, October 3, 2000, 341 SCRA 781
President for Operations and Vice-President/Treasurer, respectively,
of El Oro Engraver Corporation. El Oro Corporation had a contract
Petitioner bank cannot hold herein respondent liable for
with the Philippine Army to supply the latter with survival bolos.
loans obtained in excess of the amount or beyond the period
Petitioners, on behalf of El Oro Corporation, applied with
stipulated in the original agreement, absent any clear stipulation
respondent Bank of the Philippine Island for two commercial letters
showing that the latter waived his right to be notified thereof, or to
of credit to finance the purchase of the raw materials for the survival
give consent thereto.
bolos. The letters of credit were in favor of El Oro Corporation’s
suppliers, Tanchaoco Manufacturing Incorporated and Maresco
Facts:
Rubber and Retreading Corporation. Respondent bank granted
Defendant-appellant Sta. Ines Melale (‘Sta. Ines’/SIMC) is a
petitioners’ application and issued two letters of credit.
corporation engaged in logging operations. It was a holder of a
Simultaneously, petitioners signed trust receipts in favor
Timber License Agreement issued by the DENR.
of respondent bank. On September 30, 1981, petitioner Jose Tupaz
On 10 November 1980, Security Bank and Trust Co.
signed, in his personal capacity, a trust receipt corresponding to one
granted appellant Sta. Ines a credit line in the amount of
letter of credit while on October 9, 1981, both petitioners signed, in
(P8,000,000.00) effective til November 30, 1981 to assist the latter
their capacities as officers of El Oro Corporation, a trust receipt
in meeting the additional capitalization requirements of its logging
corresponding to the other. After Tanchaoco Incorporated and
operations.
Maresco Corporation delivered the raw materials to El Oro
To secure payment, it executed a chattel mortgage over
Corporation, respondent bank paid the former.
some of its machineries and equipments. And as an additional
When petitioners did not comply with their undertaking
security, its President and Chairman of the Board of Directors
under the trust receipts after respondent bank’s several demands,
Rodolfo Cuenca, executed an Indemnity agreement in favor of
the latter charged petitioners with estafa under the Trust Receipts
Security Bank whereby he bound himself jointly and severally with
Law. The trial court acquitted petitioners of estafa on reasonable
Sta. Ines.
doubt however it found petitioners solidarily liable with El Oro
Specific stipulations: The bank reserves the right to amend
Corporation for the balance of El Oro Corporation’s principal debt
any of the aforementioned terms and conditions upon written
under the trust receipts. Petitioners appealed to the Court of
notice to the Borrower. As additional security for the payment of the
Appeals contending that their acquittal operates to extinguish their
loan, Rodolfo M. Cuenca executed an Indemnity Agreement dated
civil liability and so they are not personally liable for El Oro
17 December 1980 solidary binding himself: ‘Rodolfo M. Cuenca x x
Corporation’s debts. The Court of Appeals affirmed the trial court’s
x hereby binds himself x x x jointly and severally with the client
ruling. Hence, this petition.
(SIMC) in favor of the bank for the payment, upon demand and
without the benefit of excussion of whatever amount x x x the client
Issue:
may be indebted to the bank x x x by virtue of aforesaid credit
Whether or not petitioners are personally (solidarily) liable
accommodation(s) including the substitutions, renewals,
with El Oro Corporation.
extensions, increases, amendments, conversions and revivals of
the aforesaid credit accommodation(s) x x x .’
Held:
1985: Cuenca resigned as President and Chairman of the
No. In the trust receipt dated 9 October 1981, petitioners
Board of Directors of defendant-appellant Sta. Ines. Subsequently,
signed as officers of El Oro Corporation. By so signing that trust
the shareholdings of Cuenca in Sta. Ines were sold at a public
receipt, petitioners did not bind themselves personally liable for El
auction to Adolfo Angala. Before and after this, Sta Ines availed of its
Oro Corporation’s obligation.
credit line.
Hence, for the trust receipt dated 9 October 1981,
Sta Ines encountered difficulty in making the amortization
petitioners are not personally liable for El Oro Corporation’s
payments on its loans and requested SBTC for a complete
obligation. For the trust receipt dated 30 September 1981,
restructuring of its indebtedness. SBTC accommodated SIMC’s
petitioner Jose Tupaz signed alone in his personal capacity, he did
request and signified its approval in a letter dated 18 February 1988
not indicate that he was signing as El Oro Corporation’s Vice-
wherein SBTC and Sta. Ines, without notice to or the prior consent of
President for Operations. Hence, petitioner Jose Tupaz bound
] Cuenca, agreed to restructure the past due obligations of
himself personally liable for El Oro Corporation’s debts. Not being a
defendant-appellant Sta. Ines. To formalize their agreement to

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Case Digest – Guaranty and Suretyship
restructure the loan obligations of Sta. Ines, Security Bank and Sta.
Ines executed a Loan Agreement dated 31 October 1989 ‘
Sta Ines made payments up to (P1,757,000.00) The
defaulted in the payment of its restructured loan obligations to SBTC
despite demands made upon appellant SIMC and CUENCA,
SBTC filed a complaint for collection of sum of resulting
after trial on the merits in a decision by the court a quo, from which
Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan
Agreement novated the 1980 credit accommodation which
extinguished the Indemnity Agreement for which Cuenca was liable
solidarily. No notice/consent to restructure. Since with expiration
date, liable only up to that date and up to that amount (8M).
Amounted to extension.of time with no notice to suret therefore
released from liability.
Issue:
(a) Whether or not the 1989 Loan Agreement novated the
original credit accommodation and Cuenca’s liability under the
Indemnity Agreement YES
(b) Whether or not Cuenca waived his right to be notified
of and to give consent to any substitution, renewal, extension,
increase, amendment, conversion or revival of the said credit
accommodation. NO
Held: Petition of Bank no merit.CA affirmed.
RATIO:
A. Original Obligation Extinguished by Novation
An obligation may be extinguished by novation,
pursuant to Article 1292 of the Civil Code, Novation of a contract is
never presumed. Indeed, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties
concerned agree to a new contract; (3) the old contract is
16
extinguished; and (4) there is a valid new contract.
We reject these contentions. Clearly, the requisites of
novation are present in this case. The 1989 Loan Agreement
18
extinguished the obligation obtained under the 1980 credit
accomodation. This is evident from its explicit provision to
"liquidate" the principal and the interest of the earlier indebtedness,
as the following shows:
"1.02. Purpose. The First Loan shall be applied
to liquidate the principal portion of the Borrower’s present total
outstanding Indebtedness to the Lender (the "Indebtedness") while
the Second Loan shall be applied to liquidatethe past due interest
and penalty portion of the Indebtedness.
Since the 1989 Loan Agreement had extinguished the
original credit accommodation, the Indemnity Agreement
1) NOT mere renewal/ Extension
1989 Loan Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding indebtedness.
Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed
extinguished, "[a]n extension granted to the debtor by the creditor
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without the consent of the guarantor extinguishes the guaranty. x x
x."
2) Binding Nature of the Credit Approval Memorandum
Bank objects to the appellate court’s reliance on that document,
contending that it was not a binding agreement because it was not
signed by the parties. It adds that it was merely for its internal use.
Indeed, it cannot take advantage of that document by agreeing to be
bound only by those portions that are favorable to it, while denying
those that are disadvantageous.
B. NO Waiver of Consent
In the Indemnity Agreement, while respondent held
himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8
million limit and the November 30, 1981 term. It did not give the
bank or Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable.
A contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt
being resolved against enlarging the liability of the
31
surety." Likewise, the Court has ruled that "it is a well-settled legal
principle that if there is any doubt on the terms and conditions of
the surety agreement, the doubt should be resolved in favor of the
surety x x x. Ambiguous contracts are construed against the party
32
who caused the ambiguity. In the absence of an unequivocal
provision that respondent waived his right to be notified of or to
give consent to any alteration of the credit accommodation, we
cannot sustain petitioner’s view that there was such a waiver.
It should also be observed that the Credit Approval
Memorandum clearly shows that the bank did not have absolute
authority to unilaterally change the terms of the loan
accommodation. At most, the alleged basis of respondent’s waiver
is vague and uncertain. It confers no clear authorization on the bank
or Sta. Ines to modify or extend the original obligation without the
consent of the surety or notice thereto.
1) NOT Continuing Surety
That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation
inordinately.
To repeat, in the present case, the Indemnity Agreement
was subject to the two limitations of the credit accommodation: (1)
that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on
or before the aforementioned expiry date and not exceeding the
total of P8 million.
NO PROVISION: ”each suretyship is a continuing one which
shall remain in full force and effect until this bank is notified of its
revocation.
2) Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and
solidary signature") of a major stockholder or corporate officer, as
an additional security for loans granted to corporations. There are
at least two reasons for this. First, in case of default, the creditor’s
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Case Digest – Guaranty and Suretyship CREDIT TRANSACTIONS

recourse, which is normally limited to the corporate properties E. ZOBEL INC. vs CA

under the veil of separate corporate personality, would extend to Gr. No. 113931, May 6, 1998, 290 SCRA 1
the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose Facts:
agreed upon, and that it would be paid by the corporation. Private respondent spouses Raul and Elea Claveria, doing
business under the name "Agro Brokers," applied for a loan with
Following this practice, it was therefore logical and respondent Consolidated Bank and Trust Corporation (now
reasonable for the bank to have required the JSS of respondent, SOLIDBANK) to finance the purchase of two maritime barges and
who was the chairman and president of Sta. Ines in 1980 when the one tugboat which would be used in their molasses business.
credit accommodation was granted. There was no reason or logic, The loan was granted subject to the condition that
however, for the bank or Sta. Ines to assume that he would still respondent spouses will execute a chattel mortgage over the three
agree to act as surety in the 1989 Loan Agreement, because at that vessels to be acquired and that a continuing guarantee be executed
time, he was no longer an officer or a stockholder of the debtor- by Ayala International Philippines, Inc., now petitioner E. Zobel, Inc.
corporation. Verily, he was not in a position then to ensure the in favor of SOLIDBANK. Respondent spouses defaulted in the
payment of the obligation. Neither did he have any reason to bind payment of the entire obligation upon maturity.
himself further to a bigger and more onerous obligation. Hence, SOLIDBANK filed a complaint for sum of money
with a prayer for a writ of preliminary attachment against
respondent spouses and petitioner. Petitioner moved for dismissal.
The trial court denied the motion to dismiss and required petitioner
to file an answer. Petitioner assailed the trial court’s order. The
appellate court dismissed the petition.
PALMARES vs CA & MB LENDING CORP
Gr. No. 126490, March 31, 1998, 288 SCRA 422
Issue:
Whether or not petitioner E. Zobel Inc., under the
Facts:
continuing guaranty obligated itself to SOLIDBANK as a guarantor or
Private respondent M.B. Lending Corporation extended a
a surety.
loan to the spouses Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable
Held:
on or before May 12, 1990, with compounded interest at the rate of
Yes. Petitioner under the continuing guaranty obligated
6% per annum to be computed every 30 days from the date thereof.
itself to SOLIDBANK as a surety. A surety is distinguished from a
1 On four occasions after the execution of the promissory note and
guaranty in that a guarantor is the insurer of the solvency of the
even after the loan matured, petitioner and the Azarraga spouses
debtor and thus binds himself to pay if the principal is unable to pay,
were able to pay a total of P16,300.00, thereby leaving a balance of
it is the guarantor's own separate undertaking, in which the principal
P13,700.00. No payments were made after the last payment on
does not join while a surety is the insurer of the debt, and he
September 26, 1991. 2
obligates himself to pay if the principal does not pay and is usually
Consequently, on the basis of petitioner's solidary liability
bound with his principal by the same instrument, executed at the
under the promissory note, respondent corporation filed a
same time, and on the same consideration. The contract clearly
complaint 3 against petitioner Palmares as the lone party-
discloses that petitioner assumed liability to SOLIDBANK, as a regular
defendant, to the exclusion of the principal debtors, allegedly by
party to the undertaking and obligated itself as an original
reason of the insolvency of the latter.
promissor. It bound itself jointly and severally to the obligation with
the respondent spouses. The use of the term "guarantee" does
Issue:
not ipso facto mean that the contract is one of guaranty. Authorities
Whether or not Palmares is liable
recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an
Held:
intention to be bound by a primary or independent obligation. The
Yes. If a person binds himself solidarily with the principal
trial court has observed that the interpretation of a contract is not
debtor, the provisions of Section 4, Chapter 3, Title I of this Book
limited to the title alone but to the contents and intention of the
shall be observed. In such case the contract is called a suretyship. It
parties.
is a cardinal rule in the interpretation of contracts that if the terms
of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall
control. In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.

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Case Digest – Guaranty and Suretyship CREDIT TRANSACTIONS

INTERNATIONAL FINANCE CORPORATION vs IMPERIAL TEXTILE
MILLS, INC.
Gr. No. 160324, November 15, 2005, 475 SCRA 149
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 PPIC’s 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 attorney’s fees. The trial court held PPIC
liable for the payment of the outstanding loan plus interests and
attorney’s 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 ITM’s liability
as a guarantor would arise only if and when PPIC could not pay.
Since PPIC’s inability to comply with its obligation was not
sufficiently established, ITM could not immediately be made to
assume the liability. Hence, this petition.
PHILIPPINE BLOOMING MILLS INC & CHING vs CA
Gr. No. 142381, October 15, 2003, 413 SCRA 455
Facts:
Petitioner Philippine Blooming Mills, Inc. (PBM) obtained a
loan from Traders Royal Bank (TRB). Ching, the Senior Vice-President
of PBM, signed Deed of Suretyship in his personal capacity and not
as mere guarantors but as primary obligors. PBM and Ching filed a
petition for suspension of payments with the SEC, and eventually
placed under rehabilitation receivership. Consequently, TRB
dismissed complaint as to PBM. Ching then alleged that the Deed
of Suretyship executed in 1977 could not answer for obligations not
yet in existence at the time of its execution. It could not answer for
debts contracted by petitioner PBM in 1980 and 1981. No accessory
contract of suretyship could arise without an existing principal
contract of loan.
Issue:
Whether or not Ching is liable for credit obligations
contracted by Philippine Blooming Mills Inc. against Traders Royal
Bank before and after the execution of the Deed of Suretyship.
Held:
Yes. Ching is liable for credit obligations contracted by
Philippine Blooming Mills Inc. against Traders Royal Bank before and
after the execution of the Deed of Suretyship. This is evident from
the tenor of the deed itself, referring to amounts to PBM may now
be indebted or may hereafter become indebted to Traders Royal
Bank. The law expressly allows a suretyship for future debts. Article
2053 provides that a guaranty may also be given as security for
future debts, the amount of which is not yet known, there can be no
claim against the guarantor until the debt is liquidated.

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

Held:
Yes. 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
latter’s obligations under the loan agreement with IFC.

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Case Digest – Guaranty and Suretyship
ESCANO & SILOS vs ORTIGAS JR.
Gr. No. 151953, June 29, 2007, 526 SCRA 26
Facts:
Private Development Corporation of the Philippines
(PDCP) entered into a loan agreement with Falcon Minerals, Inc.
whereby PDCP agreed to make available and lend to Falcon a sum
certain. Respondent Rafael Ortigas, Jr., et al., stockholder officers of
Falcon, executed an Assumption of Solidary Liability whereby they
agreed to assume in their individual capacity, solidary liability with
Falcon for the due and punctual payment of the loan contracted by
Falcon with PDCP.
Two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and officers of
Falcon, acting in their personal and individual capacities. One
Guaranty was executed by petitioner Salvador Escaño, while the
other by petitioners Mario M. Silos, Ricardo C. Silverio, et al. Two
years later, an agreement developed to cede control of Falcon to
Escaño, Silos and Joseph M. Matti. Thus, contracts were executed
whereby Ortigas, George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their shares of stock in
Falcon to Escaño, Silos and Matti. Part of the consideration that
induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with
PDCP.
Thus, an Undertaking was executed by the concerned
parties with Escaño, Silos and Matti identified in the document as
“sureties,” on one hand, and Ortigas, Inductivo and the Scholeys as
“obligors,” on the other. However, Falcon subsequently defaulted in
its payments.
After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of P5,000,000, which Falcon did not
satisfy despite demand. In order to recover the indebtedness, PDCP
filed a complaint for sum of money against Falcon, Ortigas, Escaño,
Silos, Silverio and Inductivo. Ortigas filed together with his answer a
cross-claim against his co-defendants Falcon, Escaño and Silos, and
also manifested his intent to file a third-party complaint against the
Scholeys and Matti.
The cross-claim lodged against Escaño and Silos was
predicated on the 1982 Undertaking, wherein they agreed to
assume the liabilities of Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who
entered into a compromise agreement. In exchange, PDCP waived or
assigned in favor of Escaño 1/3 of its entire claim in the complaint
against all of the other defendants in the case.
Then Ortigas entered into his own compromise agreement
with PDCP, allegedly without the knowledge of Escaño, Matti and
Silos. Thereby, Ortigas agreed to pay PDCP P1.3M as full satisfaction
of the PDCP’s claim against Ortigas. Silos and PDCP entered into a
Partial Compromise Agreement whereby he agreed to pay P500k in
exchange for PDCP’s waiver of its claims against him.
In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escaño, Silos and Matti, on the basis of
the 1982 Undertaking. He initiated a third-party complaint against
CREDIT TRANSACTIONS
Matti and Silos, while he maintained his cross-claim against Escaño.
RTC issued the Summary Judgment, ordering Escaño, Silos and Matti
to pay Ortigas, jointly and severally, the amount of P1.3M, as well as
P20K in attorney’s fees. The trial court ratiocinated that none of the
third-party defendants disputed the 1982 Undertaking.
Issue:
Whether or not petitioners are solidarily liable to
respondent Ortigas.
Held:
No. Petitioners are not solidarily liable to respondent
Ortigas. In case there is a concurrence of two or more creditors or of
two or more debtors in one and the same obligation, Article 1207 of
the Civil Code states that among them, there is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.”
Article 1210 supplies further that the indivisibility of an
obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility. Thus, the presumption is that
the obligation is only joint. It thus becomes incumbent upon the
party alleging that the obligation is indeed solidary in character to
prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation
that the petitioners agreed “to bind themselves jointly and
severally” in their obligations to the Ortigas group, or any such terms
to that effect. Hence, such obligation established in the Undertaking
is presumed only to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the
presumption of jointness of obligations. He has failed to discharge
such burden.
The term “surety” has a specific meaning under our Civil
Code. As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor.
Thus, a surety agreement is an ancillary contract as it
presupposes the existence of a principal contract. It appears that
Ortigas’ argument rests solely on the solidary nature of the
obligation of the surety under Article2047.
In tandem with the nomenclature “sureties” accorded to
petitioners and Matti in the Undertaking, however, this argument
can only be viable if the obligations established in the Undertaking
do partake of the nature of a suretyship as defined under Article
2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature “sureties” in the
Undertaking.
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FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 145578 November 18, 2005
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners,
vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS, Respondents.
DECISION
CARPIO, J.:
The Case
1 2
This is a petition for review of the Decision of the Court of Appeals
dated 7 September 2000 and its Resolution dated 18 October 2000.
The 7 September 2000 Decision affirmed the ruling of the Regional
Trial Court, Makati, Branch 144 in a case for estafa under Section 13,
Presidential Decree No. 115. The Court of Appeals’ Resolution of 18
October 2000 denied petitioners’ motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners")
were Vice-President for Operations and Vice-President/Treasurer,
respectively, of El Oro Engraver Corporation ("El Oro Corporation").
El Oro Corporation had a contract with the Philippine Army to supply
the latter with "survival bolos."
To finance the purchase of the raw materials for the survival bolos,
petitioners, on behalf of El Oro Corporation, applied with
respondent Bank of the Philippine Islands ("respondent bank") for
two commercial letters of credit. The letters of credit were in favor
of El Oro Corporation’s suppliers, Tanchaoco Manufacturing
3
Incorporated ("Tanchaoco Incorporated") and Maresco Rubber and
4
Retreading Corporation ("Maresco Corporation"). Respondent bank
granted petitioners’ application and issued Letter of Credit No. 2-
00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of
Credit No. 2-00914-5 for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners
signed trust receipts in favor of respondent bank. On 30 September
1981, petitioner Jose C. Tupaz IV ("petitioner Jose Tupaz") signed, in
his personal capacity, a trust receipt corresponding to Letter of
Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound
himself to sell the goods covered by the letter of credit and to remit
the proceeds to respondent bank, if sold, or to return the goods, if
not sold, on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers
of El Oro Corporation, a trust receipt corresponding to Letter of
Credit No. 2-00914-5 (for P294,000). Petitioners bound themselves
to sell the goods covered by that letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not
sold, on or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered
the raw materials to El Oro Corporation, respondent bank paid the
former P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust
receipts. Respondent bank made several demands for payments but
CREDIT TRANSACTIONS
El Oro Corporation made partial payments only. On 27 June 1983
5
and 28 June 1983, respondent bank’s counsel and its
6
representative respectively sent final demand letters to El Oro
Corporation. El Oro Corporation replied that it could not fully pay its
debt because the Armed Forces of the Philippines had delayed
paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13,
7
Presidential Decree No. 115 ("Section 13") or Trust Receipts Law
("PD 115"). After preliminary investigation, the then Makati Fiscal’s
Office found probable cause to indict petitioners. The Makati Fiscal’s
Office filed the corresponding Informations (docketed as Criminal
Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on
17 January 1984 and the cases were raffled to Branch 144 ("trial
court") on 20 January 1984. Petitioners pleaded not guilty to the
charges and trial ensued. During the trial, respondent bank
presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting
petitioners of estafa on reasonable doubt. However, the trial court
found petitioners solidarily liable with El Oro Corporation for the
balance of El Oro Corporation’s principal debt under the trust
receipts. The dispositive portion of the trial court’s Decision
provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both
accused Jose C. Tupaz, IV and Petronila Tupaz based upon
reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and
Petronila Tupaz, are hereby ordered, jointly and solidarily, to pay the
Bank of the Philippine Islands the outstanding principal obligation
of P624,129.19 (as of January 23, 1992) with the stipulated interest
at the rate of 18% per annum; plus 10% of the total amount due as
attorney’s fees; P5,000.00 as expenses of litigation; and costs of the
8
suit.
In holding petitioners civilly liable with El Oro Corporation, the trial
court held:
[S]ince the civil action for the recovery of the civil liability is deemed
impliedly instituted with the criminal action, as in fact the
prosecution thereof was actively handled by the private prosecutor,
the Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily
should be held civilly liable to the Bank of the Philippine Islands. The
mere fact that they were unable to collect in full from the AFP
and/or the Department of National Defense the proceeds of the sale
of the delivered survival bolos manufactured from the raw materials
covered by the trust receipt agreements is no valid defense to the
civil claim of the said complainant and surely could not wipe out
their civil obligation. After all, they are free to institute an action to
9
collect the same.
Petitioners appealed to the Court of Appeals. Petitioners contended
that: (1) their acquittal "operates to extinguish [their] civil liability"
and (2) at any rate, they are not personally liable for El Oro
Corporation’s debts.
The Ruling of the Court of Appeals
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FULL TEXT CASES – Guaranty and Suretyship
In its Decision of 7 September 2000, the Court of Appeals affirmed
the trial court’s ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the
violation of the trust receipt agreement is distinct from the criminal
liability imposed therein. In the case of Vintola vs. Insular Bank of
Asia and America, our Supreme Court held that acquittal in the
estafa case (P.D. 115) is no bar to the institution of a civil action for
collection. This is because in such cases, the civil liability of the
accused does not arise ex delicto but rather basedex contractu and
as such is distinct and independent from any criminal proceedings
and may proceed regardless of the result of the latter. Thus, an
independent civil action to enforce the civil liability may be filed
against the corporation aside from the criminal action against the
responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from
the criminal charge of estafa did not operate to extinguish their civil
liability under the letter of credit-trust receipt arrangement with
plaintiff-appellee, with which they dealt both in their personal
capacity and as officers of El Oro Engraver Corporation, the letter of
credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with
their corporation, El Oro Engraver Corporation, alleging that they
executed the subject documents including the trust receipt
agreements only in their capacity as such corporate officers. They
said that these instruments are mere pro-forma and that they
executed these instruments on the strength of a board resolution of
said corporation authorizing them to apply for the opening of a
letter of credit in favor of their suppliers as well as to execute the
other documents necessary to accomplish the same.
Such contention, however, is contradicted by the evidence on
record. The trust receipt agreement indicated in clear and
unmistakable terms that the accused signed the same as surety for
the corporation and that they bound themselves directly and
immediately liable in the event of default with respect to the
obligation under the letters of credit which were made part of the
said agreement, without need of demand. Even in the application
for the letter of credit, it is likewise clear that the undertaking of the
accused is that of a surety as indicated [in] the following words: "In
consideration of your establishing the commercial letter of credit
herein applied for substantially in accordance with the foregoing,
the undersigned Applicant and Surety hereby agree, jointly and
severally, to each and all stipulations, provisions and conditions on
the reverse side hereof."
xxx
Having contractually agreed to hold themselves solidarily liable with
El Oro Engraver Corporation under the subject trust receipt
agreements with appellee Bank of the Philippine Islands, herein
accused-appellants may not, therefore, invoke the separate legal
personality of the said corporation to evade their civil liability under
the letter of credit-trust receipt arrangement with said appellee,
notwithstanding their acquittal in the criminal cases filed against
them. The trial court thus did not err in holding the appellants
solidarily liable with El Oro Engraver Corporation for the outstanding
principal obligation of P624,129.19 (as of January 23, 1992) with the
CREDIT TRANSACTIONS
stipulated interest at the rate of 18% per annum, plus 10% of the
total amount due as attorney’s fees, P5,000.00 as expenses of
10
litigation and costs of suit.
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE
CIVIL LIABILITY OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED
OBLIGATION WAS INCURRED BY THE CORPORATION, THE SAME IS
NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY
DUE AND PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY LIABLE
TO xxx RESPONDENT BANK, SINCE THEY SIGNED THE LETTER[S] OF
CREDIT AS ‘SURETY’ AS OFFICERS OF EL ORO, AND THEREFORE, AN
EXCLUSIVE LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE
11
SIMULATED AND VOID.
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El
Oro Corporation’s debts under the trust receipts;
(2) If so —
(a) whether petitioners’ liability is solidary with El Oro Corporation;
and
(b) whether petitioners’ acquittal of estafa under Section 13, PD 115
extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals’
ruling with the modification that petitioner Jose Tupaz is liable as
guarantor of El Oro Corporation’s debt under the trust receipt dated
30 September 1981.
On Petitioners’ Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its
directors, officers, and employees. Debts incurred by these
individuals, acting as such corporate agents, are not theirs but the
12
direct liability of the corporation they represent. As an exception,
directors or officers are personally liable for the corporation’s debts
13
only if they so contractually agree or stipulate.
Here, the dorsal side of the trust receipts contains the following
stipulation:
To the Bank of the Philippine Islands
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FULL TEXT CASES – Guaranty and Suretyship
In consideration of your releasing to ………………………………… under
the terms of this Trust Receipt the goods described herein, I/We,
jointly and severally, agree and promise to pay to you, on demand,
whatever sum or sums of money which you may call upon me/us to
pay to you, arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of default and/or
non-fulfillment in any respect of this undertaking on the part of the
said ……………………………………. I/we further agree that my/our liability
in this guarantee shall be DIRECT AND IMMEDIATE, without any
need whatsoever on your part to take any steps or exhaust any legal
remedies that you may have against the said ………………………………….
14
before making demand upon me/us. (Capitalization in the original)
In the trust receipt dated 9 October 1981, petitioners signed below
this clause as officers of El Oro Corporation. Thus, under petitioner
Petronila Tupaz’s signature are the words "Vice-Pres–Treasurer" and
under petitioner Jose Tupaz’s signature are the words "Vice-Pres–
Operations." By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation’s obligation.
15
In Ong v. Court of Appeals, a corporate representative signed a
solidary guarantee clause in two trust receipts in his capacity as
corporate representative. There, the Court held that the corporate
representative did not undertake to guarantee personally the
payment of the corporation’s debts, thus:
[P]etitioner did not sign in his personal capacity the solidary
guarantee clause found on the dorsal portion of the trust receipts.
Petitioner placed his signature after the typewritten words "ARMCO
INDUSTRIAL CORPORATION" found at the end of the solidary
guarantee clause. Evidently, petitioner did not undertake to
guaranty personally the payment of the principal and interest of
ARMAGRI’s debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain
petitioners’ claim that they are not personally liable for El Oro
Corporation’s obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of
which petitioner Jose Tupaz signed alone, we find that he did so in
his personal capacity. Petitioner Jose Tupaz did not indicate that he
was signing as El Oro Corporation’s Vice-President for Operations.
Hence, petitioner Jose Tupaz bound himself personally liable for El
Oro Corporation’s debts. Not being a party to the trust receipt dated
30 September 1981, petitioner Petronila Tupaz is not liable under
such trust receipt.
The Nature of Petitioner Jose Tupaz’s Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September
1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to ………………………………… under
the terms of this Trust Receipt the goods described herein,
I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon
me/us to pay to you, arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of default and/or
non-fulfillment in any respect of this undertaking on the part of the
CREDIT TRANSACTIONS
said ……………………………………. I/we further agree that my/our liability
in this guarantee shall be DIRECT AND IMMEDIATE, without any
need whatsoever on your part to take any steps or exhaust any legal
remedies that you may have against the said
……………………………………………. Before making demand upon me/us.
(Underlining supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz
bound himself solidarily liable with El Oro Corporation for the
latter’s debt under that trust receipt.
This is error.
16
In Prudential Bank v. Intermediate Appellate Court, the Court
17
interpreted a substantially identical clause in a trust receipt signed
by a corporate officer who bound himself personally liable for the
corporation’s obligation. The petitioner in that case contended that
the stipulation "we jointly and severally agree and undertake"
rendered the corporate officer solidarily liable with the corporation.
We dismissed this claim and held the corporate officer liable as
guarantor only. The Court further ruled that had there been more
than one signatories to the trust receipt, the solidary liability would
exist between the guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear
wording of the xxx clause "x x x we jointly and severally agree and
undertake x x x," and the concluding sentence on exhaustion,
[respondent] Chi’s liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no
other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in
this case because the space therein for the party whose property
may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner
likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of
surety. It, however, described the guaranty as solidary between the
guarantors; this would have been correct if two (2) guarantors had
signed it. The clause "we jointly and severally agree and undertake"
refers to the undertaking of the two (2) parties who are to sign it or
to the liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one hand
and the petitioner on the other with respect to the liability
described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the
solidary guaranty clause should be resolved against the petitioner.
The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner;
Chi’s participation therein is limited to the affixing of his signature
thereon. It is, therefore, a contract of adhesion; as such, it must be
strictly construed against the party responsible for its
18
preparation. (Underlining supplied; italicization in the original)
However, respondent bank’s suit against petitioner Jose Tupaz
stands despite the Court’s finding that he is liable as guarantor only.
First, excussion is not a pre-requisite to secure judgment against a
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FULL TEXT CASES – Guaranty and Suretyship
guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the
19
principal debtor shall have been exhausted. Second, the benefit of
20
excussion may be waived. Under the trust receipt dated 30
September 1981, petitioner Jose Tupaz waived excussion when he
agreed that his "liability in [the] guaranty shall be DIRECT AND
IMMEDIATE, without any need whatsoever on xxx [the] part [of
respondent bank] to take any steps or exhaust any legal remedies
xxx." The clear import of this stipulation is that petitioner Jose Tupaz
waived the benefit of excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s
principal debt and other accessory liabilities (as stipulated in the
trust receipt and as provided by law) under the trust receipt dated
30 September 1981. That trust receipt (and the trust receipt dated 9
October 1981) provided for payment of attorney’s fees equivalent to
10% of the total amount due and an "interest at the rate of 7% per
annum, or at such other rate as the bank may fix, from the date due
21
until paid xxx." In the applications for the letters of credit, the
parties stipulated that drafts drawn under the letters of credit are
22
subject to interest at the rate of 18% per annum.
The lower courts correctly applied the 18% interest rate per
annum considering that the face value of each of the trust receipts is
based on the drafts drawn under the letters of credit. Based on the
guidelines laid down in
23
Eastern Shipping Lines, Inc. v. Court of Appeals, the accrued
stipulated interest earns 12% interest per annum from the time of
the filing of the Informations in the Makati Regional Trial Court on
17 January 1984. Further, the total amount due as of the date of the
finality of this Decision will earn interest at 18% per annum until fully
paid since this was the stipulated rate in the applications for the
24
letters of credit.
The accounting of El Oro Corporation’s debts as of 23 January 1992,
which the trial court used, is no longer useful as it does not specify
the amounts owing under each of the trust receipts. Hence, in the
execution of this Decision, the trial court shall compute El Oro
Corporation’s total liability under each of the trust receipts dated 30
September 1981 and 9 October 1981 based on the following
25
formula:
TOTAL AMOUNT DUE = [principal + interest + interest on interest] –
26
partial payments made
Interest = principal x 18 % per annum x no. of years from due
27
date until finality of judgment
Interest on interest = interest computed as of the filing of the
complaint (17 January 1984) x 12% x no. of years until finality of
judgment
Attorney’s fees is 10% of the total amount computed as of finality of
judgment
Total amount due as of the date of finality of judgment will earn an
interest of 18% per annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal
Commercial Banking Corporation v. Alfa RTW Manufacturing
28
Corporation where we also ordered the trial court to compute the
CREDIT TRANSACTIONS
amount of obligation due based on a formula substantially similar to
that indicated above:
The total amount due xxx [under] the xxx contract[] xxx may be
easily determined by the trial court through a simple mathematical
computation based on the formula specified above. Mathematics is
an exact science, the application of which needs no further proof
from the parties.
Petitioner Jose Tupaz’s Acquittal did not
Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the
criminal action, the civil liability is not extinguished by acquittal —
[w]here the acquittal is based on reasonable doubt xxx as only
preponderance of evidence is required in civil cases; where the court
expressly declares that the liability of the accused is not criminal but
only civil in nature xxx as, for instance, in the felonies of estafa,
theft, and malicious mischief committed by certain relatives who
thereby incur only civil liability (See Art. 332, Revised Penal Code);
and, where the civil liability does not arise from or is not based upon
29
the criminal act of which the accused was acquitted xxx. (Emphasis
supplied)
30
Here, respondent bank chose not to file a separate civil action to
recover payment under the trust receipts. Instead, respondent bank
sought to recover payment in Criminal Case Nos. 8848 and 8849.
Although the trial court acquitted petitioner Jose Tupaz, his acquittal
did not extinguish his civil liability. As the Court of Appeals correctly
held, his liability arose not from the criminal act of which he was
acquitted (ex delito) but from the trust receipt contract (ex
contractu) of 30 September 1981. Petitioner Jose Tupaz signed the
trust receipt of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that
El Oro Corporation’s debts under the trust receipts are not yet due
and demandable. Alternatively, petitioners assail the trust receipts
as simulated. These assertions have no merit. Under the terms of
the trust receipts dated 30 September 1981 and 9 October 1981, El
Oro Corporation’s debts fell due on 29 December 1981 and 8
December 1981, respectively.
Neither is there merit to petitioners’ claim that the trust receipts
were simulated. During the trial, petitioners did not deny applying
for the letters of credit and subsequently executing the trust
receipts to secure payment of the drafts drawn under the letters of
credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the
Decision of the Court of Appeals dated 7 September 2000 and its
Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total
amount due under the trust receipts dated 30 September 1981 and
9 October 1981, as computed by the Regional Trial Court, Makati,
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

Branch 144, upon finality of this Decision, based on the formula

provided above;

2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver

Corporation’s total debt under the trust receipt dated 30 September
1981 as thus computed by the Regional Trial Court, Makati, Branch
144; and

3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable

under the trust receipt dated 9 October 1981.

SO ORDERED.

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FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in favor
of the solidary debtor. The fundamental rules of fair play require the
creditor to obtain the consent of the surety to any material
alteration in the principal loan agreement, or at least to notify it
thereof. Hence, petitioner bank cannot hold herein respondent
liable for loans obtained in excess of the amount or beyond the
period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This is especially true where, as
in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations
were incurred. He was thus no longer in a position to compel the
debtor to pay the creditor and had no more reason to bind himself
anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for
Review under Rule 45 of the Rules of Court. Petitioner assails the
1 ‘3. Reasonable/compensating deposit balances in current account
December 22, 1998 Decision of the Court of Appeals (CA) in CA-GR
CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in
the sense that defendant-appellant Rodolfo M. Cuenca [herein
respondent] is RELEASED from liability to pay any amount stated in
the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is
hereby DISMISSED for lack of merit.
2 from the above-mentioned credit line, SIMC executed a Chattel
"In all other respect[s], the decision appealed from is AFFIRMED."
3
Also challenged is the April 14, 1999 CA Resolution, which denied
petitioner’s Motion for Reconsideration.
4
Modified by the CA was the March 6, 1997 Decision of the Regional
Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925,
which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants
Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly
and severally, plaintiff Security Bank & Trust Company the sum
of P39,129,124.73 representing the balance of the loan as of May
10, 1994 plus 12% interest per annum until fully paid, and the sum
of P100,000.00 as attorney’s fees and litigation expenses and to pay
the costs.
SO ORDERED."
CREDIT TRANSACTIONS
The Facts
5
The facts are narrated by the Court of Appeals as follows:
"The antecedent material and relevant facts are that defendant-
appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in
logging operations. It was a holder of a Timber License Agreement
issued by the Department of Environment and Natural Resources
(‘DENR’).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co.
granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in
the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the
latter in meeting the additional capitalization requirements of its
logging operations.
"The Credit Approval Memorandum expressly stated that the P8M
Credit Loan Facility shall be effective until 30 November 1981:
‘JOINT CONDITIONS:
‘1. Against Chattel Mortgage on logging trucks and/or inventories
(except logs) valued at 200% of the lines plus JSS of Rodolfo M.
Cuenca.
‘2. Submission of an appropriate Board Resolution authorizing the
borrowings, indicating therein the company’s duly authorized
signatory/ies;
shall be maintained at all times; in this connection, a Makati account
shall be opened prior to availment on lines;
‘4. Lines shall expire on November 30, 1981; and
‘5. The bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower.’
(Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC
Mortgage dated 23 December 1980 (Exhibit ‘A’) over some of its
machinery and equipment in favor of [Petitioner] SBTC. As additional
security for the payment of the loan, [Respondent] Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17 December 1980
(Exhibit ‘B’) in favor of [Petitioner] SBTC whereby he solidarily bound
himself with SIMC as follows:
xxx xxx xxx
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever
amount x x x the client may be indebted to the bank x x x by virtue
of aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .’ (Emphasis
supplied).
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FULL TEXT CASES – Guaranty and Suretyship
"On 26 November 1981, four (4) days prior to the expiration of the
period of effectivity of the P8M-Credit Loan Facility, appellant SIMC
made a first drawdown from its credit line with [Petitioner] SBTC in
the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed
promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
"Sometime in 1985, [Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in
defendant-appellant Sta. Ines were sold at a public auction relative
to Civil Case No. 18021 entitled ‘Adolfo A. Angala vs. Universal
Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by
Adolfo Angala who was the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line
and obtained six (6) other loan[s] from [Petitioner] SBTC in the
aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine
[t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50).
Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85,
DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and
DLS/74/47/86 to cover the amounts of the abovementioned
additional loans against the credit line.
6
"Appellant SIMC, however, encountered difficulty in making the
amortization payments on its loans and requested [Petitioner] SBTC
for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMC’s request and signified its approval
in a letter dated 18 February 1988 (Exhibit ‘G’) wherein SBTC and
defendant-appellant Sta. Ines, without notice to or the prior consent
of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security
Bank agreed to extend to defendant-appellant Sta. Ines the
following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred
[t]housand [p]esos (P8,800,000.00), to be applied to liquidate the
principal portion of defendant-appellant Sta. Ines[‘] total
outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of
Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’,
Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred
[t]housand [p]esos (P3,400,000.00), to be applied to liquidate the
past due interest and penalty portion of the indebtedness of
defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf.
Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’,
Expediente, at Vol. II, p. 33 to 34).’
"It should be pointed out that in restructuring defendant-appellant
Sta. Ines’ obligations to [Petitioner] Security Bank, Promissory Note
No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred
[t]housand [p]esos (P6,100,000.00), which was the only loan
incurred prior to the expiration of the P8M-Credit Loan Facility on 30
November 1981 and the only one covered by the Indemnity
Agreement dated 19 December 1980 (Exhibit ‘3-Cuenca’,
Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory
Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits
‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to 335) obtained by
defendant-appellant Sta. Ines which were not secured by said
Indemnity Agreement.
CREDIT TRANSACTIONS
"Pursuant to the agreement to restructure its past due obligations to
[Petitioner] Security Bank, defendant-appellant Sta. Ines thus
executed the following promissory notes, both dated 09 March 1988
in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
TOTAL P12,200,000.00
(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations of
defendant-appellant Sta. Ines, [Petitioner] Security Bank and
defendant-appellant Sta. Ines executed a Loan Agreement dated 31
October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41).
Section 1.01 of the said Loan Agreement dated 31 October 1989
provides:
‘1.01 Amount - The Lender agrees to grant loan to the Borrower in
the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the
‘Loan’). The loan shall be released in two (2) tranches
of P8,800,000.00 for the first tranche (the ‘First Loan’)
and P3,400,000.00 for the second tranche (the ‘Second Loan’) to be
applied in the manner and for the purpose stipulated hereinbelow.
‘1.02. Purpose - The First Loan shall be applied to liquidate the
principal portion of the Borrower’s present total outstanding
indebtedness to the Lender (the ‘indebtedness’) while the Second
Loan shall be applied to liquidatethe past due interest and penalty
portion of the Indebtedness.’ (Underscoring supplied.) (cf. p. 1 of
Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta.
Ines made further payments to [Petitioner] Security Bank in the
amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even
[t]housand [p]esos (P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-
GG-SIMC’, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan
obligations to [Petitioner] SBTC despite demands made upon
appellant SIMC and CUENCA, the last of which were made through
separate letters dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991
(Exhibit ‘L’), respectively.
"Appellants individually and collectively refused to pay the
[Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum
of money on 14 June 1993, resulting after trial on the merits in a
decision by the court a quo, x x x from which [Respondent] Cuenca
appealed."
Ruling of the Court of Appeals
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

In releasing Respondent Cuenca from liability, the CA ruled that the
1989 Loan Agreement had novated the 1980 credit accommodation
earlier granted by the bank to Sta. Ines. Accordingly, such novation
extinguished the Indemnity Agreement, by which Cuenca, who was
then the Board chairman and president of Sta. Ines, had bound
himself solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan Agreement had
been executed without notice to, much less consent from, Cuenca
who at the time was no longer a stockholder of the corporation.
Respondent Cuenca’s liability under the indemnity
agreement;
B. Whether or not Respondent Cuenca’s liability under the
Indemnity Agreement was extinguished by the payments made by
SIMC;
C. Whether or not petitioner’s Motion for Reconsideration was pro-
forma;

The appellate court also noted that the Credit Approval

D. Whether or not service of the Petition by registered mail
Memorandum had specified that the credit accommodation was for
sufficiently complied with Section 11, Rule 13 of the 1997 Rules of
a total amount of P8 million, and that its expiry date was November
Civil Procedure."
30, 1981. Hence, it ruled that Cuenca was liable only for loans
obtained prior to November 30, 1981, and only for an amount not
exceeding P8 million. Distilling the foregoing, the Court will resolve the following issues:
(a) whether the 1989 Loan Agreement novated the original credit
accommodation and Cuenca’s liability under the Indemnity
It further held that the restructuring of Sta. Ines’ obligation under
Agreement; and (b) whether Cuenca waived his right to be notified
the 1989 Loan Agreement was tantamount to a grant of an
of and to give consent to any substitution, renewal, extension,
extension of time to the debtor without the consent of the surety.
increase, amendment, conversion or revival of the said credit
Under Article 2079 of the Civil Code, such extension extinguished
accommodation. As preliminary matters, the procedural questions
the surety.
raised by respondent will also be addressed.

The CA also opined that the surety was entitled to notice, in case the
bank and Sta. Ines decided to materially alter or modify the principal
obligation after the expiry date of the credit accommodation.
7
Hence, this recourse to this Court.
The Issues
In its Memorandum, petitioner submits the following for our
8 Respondent contends that petitioner’s Motion for Reconsideration
consideration:
"A. Whether or not the Honorable Court of Appeals erred in
releasing Respondent Cuenca from liability as surety under the
Indemnity Agreement for the payment of the principal amount of
twelve million two hundred thousand pesos (P12,200,000.00) under
Promissory Note No. RL/74/596/88 dated 9 March 1988 and
Promissory Note No. RL/74/597/88 dated 9 March 1988, plus
stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in
ruling that Respondent Cuenca’s liability under the
Indemnity Agreement covered only availments on SIMC’s
credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November
1981;
ii. Whether or not the Honorable Court of Appeals erred in
ruling that the restructuring of SIMC’s indebtedness under
the P8 million credit accommodation was tantamount to
an extension granted to SIMC without Respondent
Cuenca’s consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil
Code;
iii. Whether or not the Honorable Court of appeals erred in
ruling that the restructuring of SIMC’s indebtedness under
the P8 million credit accommodation constituted a
novation of the principal obligation, thus extinguishing
The Court’s Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
of the CA Decision, in merely rehashing the arguments already
passed upon by the appellate court, was pro forma; that as such, it
did not toll the period for filing the present Petition for
9 10
Review. Consequently, the Petition was filed out of time.
We disagree. A motion for reconsideration is not pro forma just
because it reiterated the arguments earlier passed upon and
rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince the
11
court that its ruling was erroneous.
Moreover, there is no clear showing of intent on the part of
petitioner to delay the proceedings. In Marikina Valley Development
12
Corporation v. Flojo, the Court explained that a pro forma motion
had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not
show an intent on the part of the movant merely to delay the
proceedings, our Court has refused to characterize the motion as
simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma
motions for reconsideration impacts upon the reality and substance
of the statutory right of appeal, that doctrine should be applied
reasonably, rather than literally. The right to appeal, where it exists,
is an important and valuable right. Public policy would be better
served by according the appellate court an effective opportunity to
review the decision of the trial court on the merits, rather than by
aborting the right to appeal by a literal application of the procedural
rules relating to pro forma motions for reconsideration."

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FULL TEXT CASES – Guaranty and Suretyship
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever
practicable, the service and filing of pleadings and other papers shall
be done personally. Except with respect to papers emanating from
the court, a resort to other modes must be accompanied by a
written explanation why the service or filing was not done
personally. A violation of this Rule may be cause to consider the
paper as not filed."
Respondent maintains that the present Petition for Review does not
contain a sufficient written explanation why it was served by
registered mail.
We do not think so. The Court held in Solar Entertainment v.
13
Ricafort that the aforecited rule was mandatory, and that "only
when personal service or filing is not practicable may resort to other
modes be had, which must then be accompanied by a written
explanation as to why personal service or filing was not practicable
to begin with."
In this case, the Petition does state that it was served on the
respective counsels of Sta. Ines and Cuenca "by registered mail in
lieu of personal service due to limitations in time and
14
distance." This explanation sufficiently shows that personal service
was not practicable. In any event, we find no adequate reason to
reject the contention of petitioner and thereby deprive it of the
opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article
1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n
the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every
15
point." Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree
to a new contract; (3) the old contract is extinguished; and (4) there
16
is a valid new contract.
Petitioner contends that there was no absolute incompatibility
between the old and the new obligations, and that the latter did not
extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties
involved or the obligations incurred. It adds that the terms of the
17
1989 Contract were "not more onerous." Since the original credit
accomodation was not extinguished, it concludes that Cuenca is still
liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are
present in this case. The 1989 Loan Agreement extinguished the
18
obligation obtained under the 1980 credit accomodation. This is
CREDIT TRANSACTIONS
evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the
principal portion of the Borrower’s present total outstanding
Indebtedness to the Lender (the "Indebtedness") while the Second
Loan shall be applied to liquidatethe past due interest and penalty
19
portion of the Indebtedness." (Italics supplied.)
20
The testimony of an officer of the bank that the proceeds of the
1989 Loan Agreement were used "to pay-off" the original
21
indebtedness serves to strengthen this ruling.
Furthermore, several incompatibilities between the 1989 Agreement
and the 1980 original obligation demonstrate that the two cannot
coexist. While the 1980 credit accommodation had stipulated that
22
the amount of loan was not to exceed P8 million, the 1989
Agreement provided that the loan was P12.2 million. The periods for
payment were also different.
Likewise, the later contract contained conditions, "positive
covenants" and "negative covenants" not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines undertook
"from time to time and upon request by the Lender, [to] perform
such further acts and/or execute and deliver such additional
documents and writings as may be necessary or proper to effectively
carry out the provisions and purposes of this Loan
23
Agreement." Likewise, SIMC agreed that it would not create any
mortgage or encumbrance on any asset owned or hereafter
24
acquired, nor would it participate in any merger or consolidation.
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation,
was necessarily extinguished also, pursuant to Article 1296 of the
Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may subsist only
insofar as they may benefit third persons who did not give their
consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal
or extension of the P8 million original accommodation; it was not a
25
novation.
This argument must be rejected. To begin with, the 1989 Loan
Agreement expressly stipulated that its purpose was to "liquidate,"
not to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states
that "[a]n extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. x x x." In an
26
earlier case, the Court explained the rationale of this provision in
this wise:
"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
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FULL TEXT CASES – Guaranty and Suretyship
immediately subrogated to the creditor’s remedies against the
principal debtor upon the maturity date. The surety is said to be
entitled to protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the extended
period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the
Credit Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a period
of one year ending on November 30, 1981. Petitioner objects to the
appellate court’s reliance on that document, contending that it was
not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said
document to prove the accommodation. Attached to the Complaint
as Annex A was a copy thereof "evidencing the
27
accommodation." Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC")
was granted by the Bank a credit line in the aggregate amount of
Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the
additional capitalization requirements for its logging operations. For
this purpose, the Bank issued a Credit Approval Memorandum dated
10 November 1980."
Clearly, respondent is estopped from denying the terms and
conditions of the P8 million credit accommodation as contained in
the very document it presented to the courts. Indeed, it cannot take
advantage of that document by agreeing to be bound only by those
portions that are favorable to it, while denying those that are
disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent
Cuenca "impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to
28
give consent to, the same." Respondent’s consent or waiver
thereof is allegedly found in the Indemnity Agreement, in which he
held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original
credit accommodation by the 1989 Loan Agreement is merely its
"renewal," which "connotes cessation of an old contract and birth of
another one x x x."
29
At the outset, we should emphasize that an essential alteration in
the terms of the Loan Agreement without the consent of the surety
extinguishes the latter’s obligation. As the Court held in National
30
Bank v. Veraguth, "[i]t 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."
In this case, petitioner’s assertion - that respondent consented to
the alterations in the credit accommodation -- finds no support in
the text of the Indemnity Agreement, which is reproduced
hereunder:
CREDIT TRANSACTIONS
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines
Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext.,
Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under
and by virtue of the laws of the Philippine, 6778 Ayala Avenue,
Makati, Metro Manila hereinafter referred to as the BANK in favor of
STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter
referred to as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)],
made, executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the
CLIENT may be indebted to the BANK under and by virtue of
aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendment, conversions and
revivals of the aforesaid credit accommodation(s),as well as of the
amount or amounts of such other obligations that the CLIENT may
owe the BANK, whether direct or indirect, principal or secondary, as
appears in the accounts, books and records of the BANK, plus
interest and expenses arising from any agreement or agreements
that may have heretofore been made, or may hereafter be executed
by and between the parties thereto, including the substitutions,
renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s), and further
bind(s) himself/themselves with the CLIENT in favor of the BANK for
the faithful compliance of all the terms and conditions contained in
the aforesaid credit accommodation(s), all of which are incorporated
herein and made part hereof by reference."
While respondent held himself liable for the credit accommodation
or any modification thereof, such clause should be understood in
the context of the P8 million limit and the November 30, 1981 term.
It did not give the bank or Sta. Ines any license to modify the nature
and scope of the original credit accommodation, without informing
or getting the consent of respondent who was solidarily liable.
Taking the bank’s submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100
billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations
and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to
more than what is stipulated. It is strictly construed against the
creditor, every doubt being resolved against enlarging the liability of
31
the surety." Likewise, the Court has ruled that "it is a well-settled
legal principle that if there is any doubt on the terms and conditions
of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the
32
party who caused the ambiguity." In the absence of an unequivocal
provision that respondent waived his right to be notified of or to
give consent to any alteration of the credit accommodation, we
cannot sustain petitioner’s view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum
clearly shows that the bank did not have absolute authority to
unilaterally change the terms of the loan accommodation. Indeed, it
may do so only upon notice to the borrower, pursuant to this
condition:
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FULL TEXT CASES – Guaranty and Suretyship
"5. The Bank reserves the right to amend any of the aforementioned
33
terms and conditions upon written notice to the Borrower."
We reject petitioner’s submission that only Sta. Ines as the
borrower, not respondent, was entitled to be notified of any
34
modification in the original loan accommodation. Following the
bank’s reasoning, such modification would not be valid as to Sta.
Ines if no notice were given; but would still be valid as to respondent
to whom no notice need be given. The latter’s liability would thus be
more burdensome than that of the former. Such untenable theory is
contrary to the principle that a surety cannot assume an obligation
35
more onerous than that of the principal.
The present controversy must be distinguished from Philamgen v.
36
Mutuc, in which the Court sustained a stipulation whereby the
surety consented to be bound not only for the specified period, "but
to any extension thereafter made, an extension x x x that could be
had without his having to be notified."
In that case, the surety agreement contained this unequivocal
stipulation: "It is hereby further agreed that in case of any extension
of renewal of the bond, we equally bind ourselves to the Company
under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be notified of
any renewal or extension of the bond which may be granted under
this indemnity agreement."
In the present case, there is no such express stipulation.1âwphi1 At
most, the alleged basis of respondent’s waiver is vague and
uncertain. It confers no clear authorization on the bank or Sta. Ines
to modify or extend the original obligation without the consent of
the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a
continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989
Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a
continuing surety does not authorize the bank to extend the scope
37 38
of the principal obligation inordinately. In Dino v. CA, the Court
held that "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."
To repeat, in the present case, the Indemnity Agreement was
subject to the two limitations of the credit accommodation: (1) that
the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on
or before the aforementioned expiry date and not exceeding the
total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1
million obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not
have guaranteed the 1989 Loan Agreement, which was executed
CREDIT TRANSACTIONS
after November 30, 1981 and which exceeded the stipulated P8
million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found
the surety liable for the loan obtained after the payment of the
original one, which was covered by a continuing surety agreement.
At the risk of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that "each suretyship is a
continuing one which shall remain in full force and effect until this
bank is notified of its revocation." Since the bank had not been
notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary,
respondent’s liability was confined to the 1980 credit
accommodation, the amount and the expiry date of which were set
down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and
solidary signature") of a major stockholder or corporate officer, as
an additional security for loans granted to corporations. There are at
least two reasons for this. First, in case of default, the creditor’s
recourse, which is normally limited to the corporate properties
under the veil of separate corporate personality, would extend to
the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for
the bank to have required the JSS of respondent, who was the
chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still
agree to act as surety in the 1989 Loan Agreement, because at that
time, he was no longer an officer or a stockholder of the debtor-
corporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for
the surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit
of fair play should have impelled Sta. Ines to ask somebody else to
act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to
insist on the JSS of one who was in a position to ensure the payment
of the loan. Even a perfunctory attempt at credit investigation would
have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an
unclear Indemnity Agreement in order to collect an obligation that
could have been secured by a fairly obtained surety. For its defeat in
this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by
novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had been
an accessory to the 1980 credit accommodation, was also
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

extinguished. Furthermore, we reject petitioner’s submission that

respondent waived his right to be notified of, or to give consent to,
any modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether

the loan obtained before the expiry date of the credit
accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

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FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds
herself to be jointly and severally liable with the principal debtor in
case the latter defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a surety as an
insurer of the debt, or of a guarantor who warrants the solvency of
the debtor?
Pursuant to a promissory note dated March 13, 1990, private
respondent M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with petitioner
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 from the date thereof. On
1 stipulations;
four occasions after the execution of the promissory note and even
after the loan matured, petitioner and the Azarraga spouses were
able to pay a total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were made after the last payment on
2
September 26, 1991.
Consequently, on the basis of petitioner's solidary liability under the
3
promissory note, respondent corporation filed a complaint against
petitioner Palmares as the lone party-defendant, to the exclusion of
the principal debtors, allegedly by reason of the insolvency of the
latter.
4
In her Amended Answer with Counterclaim, petitioner alleged that
sometime in August 1990, immediately after the loan matured, she
offered to settle the obligation with respondent corporation but the
latter informed her that they would try to collect from the spouses
Azarraga and that she need not worry about it; that there has
already been a partial payment in the amount of P17,010.00; that
the interest of 6% per month compounded at the same rate per
month, as well as the penalty charges of 3% per month, are usurious
and unconscionable; and that while she agrees to be liable on the
note but only upon default of the principal debtor, respondent
corporation acted in bad faith in suing her alone without including
the Azarragas when they were the only ones who benefited from
the proceeds of the loan.
During the pre-trial conference, the parties submitted the following
issues for the resolution of the trial court: (1) what the rate of
interest, penalty and damages should be; (2) whether the liability of
the defendant (herein petitioner) is primary or subsidiary; and (3)
whether the defendant Estrella Palmares is only a guarantor with a
5 2. The promissory note contains provisions which establish
subsidiary liability and not a co-maker with primary liability.
Thereafter, the parties agreed to submit the case for decision based
on the pleadings filed and the memoranda to be submitted by them.
On November 26, 1992, the Regional Trial Court of Iloilo City, Branch
23, rendered judgment dismissing the complaint without prejudice
to the filing of a separate action for a sum of money against the
CREDIT TRANSACTIONS
spouses Osmeña and Merlyn Azarraga who are primarily liable on
6
the instrument. This was based on the findings of the court a
quo that the filing of the complaint against herein petitioner Estrella
Palmares, to the exclusion of the Azarraga spouses, amounted to a
discharge of a prior party; that the offer made by petitioner to pay
the obligation is considered a valid tender of payment sufficient to
discharge a person's secondary liability on the instrument; as co-
maker, is only secondarily liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the
trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding
balance still due and owing with interest at six percent
(6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three
percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per
7
4. Plus costs of suit.
Contrary to the findings of the trial court, respondent appellate
court declared that petitioner Palmares is a surety since she bound
herself to be jointly and severally or solidarily liable with the
principal debtors, the Azarraga spouses, when she signed as a co-
maker. As such, petitioner is primarily liable on the note and hence
may be sued by the creditor corporation for the entire obligation. It
also adverted to the fact that petitioner admitted her liability in her
Answer although she claims that the Azarraga spouses should have
been impleaded. Respondent court ordered the imposition of the
stipulated 6% interest and 3% penalty charges on the ground that
the Usury Law is no longer enforceable pursuant to Central Bank
Circular No. 905. Finally, it rationalized that even if the promissory
note were to be considered as a contract of adhesion, the same is
not entirely prohibited because the one who adheres to the contract
is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted
that:
A. The Court of Appeals erred in ruling that Palmares acted
as surety and is therefore solidarily liable to pay the
promissory note.
1. The terms of the promissory note are vague. Its
conflicting provisions do not establish Palmares' solidary
liability.
the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares'
liability is solidary.
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FULL TEXT CASES – Guaranty and Suretyship
4. The promissory note is a contract of adhesion and
should be construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this
point.
B. Assuming that Palmares' liability is solidary, the Court of
Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory
note.
The foregoing contentions of petitioner are denied and contradicted
in their material points by respondent corporation. They are further
refuted by accepted doctrines in the American jurisdiction after
which we patterned our statutory law on surety and guaranty. This
case then affords us the opportunity to make an extended
exposition on the ramifications of these two specialized contracts,
for such guidance as may be taken therefrom in similar local
controversies in the future.
The basis of petitioner Palmares' liability under the promissory note
is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
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 above-contained.
8 penalty on grounds of substantial justice. More importantly,
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph seems
to define her liability as that of a surety which is joint and solidary
with the principal maker, on the other hand, under the third
paragraph her liability is actually that of a mere guarantor because
she bound herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a contract of
guaranty. More simply stated, although the second paragraph says
that she is liable as a surety, the third paragraph defines the nature
of her liability as that of a guarantor. According to petitioner, these
are two conflicting provisions in the promissory note and the rule is
that clauses in the contract should be interpreted in relation to one
another and not by parts. In other words, the second paragraph
should not be taken in isolation, but should be read in relation to the
third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally
or solidarily liable" used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife who is likely to enter
into such transactions without fully realizing the nature and extent
CREDIT TRANSACTIONS
of her liability. On the contrary, the wordings used in the third
paragraph are easier to comprehend. Second, the law looks upon
the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar nature of a
surety agreement which holds the surety liable despite the absence
of any direct consideration received from either the principal obligor
or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The
note was brought to petitioner partially filled up, the contents
thereof were never explained to her, and her only participation was
to sign thereon. Thus, any apparent ambiguity in the contract should
be strictly construed against private respondent pursuant to Art.
9
1377 of the Civil Code.
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory
note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled
to pay the loan because the principal debtors cannot be considered
in default in the absence of a judicial or extrajudicial demand. It is
true that the complaint alleges the fact of demand, but the
purported demand letters were never attached to the pleadings
filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she
received a demand letter from respondent corporation sometime in
1990, the same did not effectively put her or the principal debtors in
default for the simple reason that the latter subsequently made a
partial payment on the loan in September, 1991, a fact which was
never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in
awarding the amount of P2,745,483.39 in favor of private
respondent when, in truth and in fact, the outstanding balance of
the loan is only P13,700.00. Where the interest charged on the loan
is exorbitant, iniquitous or unconscionable, and the obligation has
been partially complied with, the court may equitably reduce the
10
respondent corporation never refuted petitioner's allegation that
immediately after the loan matured, she informed said respondent
of her desire to settle the obligation. The court should, therefore,
mitigate the damages to be paid since petitioner has shown a
sincere desire for a compromise.
11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except
therefrom the issue anent the propriety of the monetary award
adjudged to herein respondent corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note executed between the
parties is a contract of adhesion, it has been the consistent holding
of the Court that contracts of adhesion are not invalid per se and
that on numerous occasions the binding effects thereof have been
upheld. The peculiar nature of such contracts necessitate a close
scrutiny of the factual milieu to which the provisions are intended to
apply. Hence, just as consistently and unhesitatingly, but without
categorically invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of contracts
of adhesion strictly albeit not unreasonably against the drafter
thereof when justified in light of the operative facts and surrounding
12
circumstances. The factual scenario obtaining in the case before us
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FULL TEXT CASES – Guaranty and Suretyship
warrants a liberal application of the rule in favor of respondent
corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called
a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms
of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall
13
control. In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily
liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by
an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the
contents" of the promissory note and that she is "fully aware" of her
solidary liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be
heard to claim otherwise. Any reference to the existence of fraud is
unavailing. Fraud must be established by clear and convincing
evidence, mere preponderance of evidence not even being
adequate. Petitioner's attempt to prove fraud must, therefore, fail
as it was evidenced only by her own uncorroborated and,
14
expectedly, self-serving allegations.
Having entered into the contract with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or as
15
to the legal effect of the undertaking. The rule that ignorance of
the contents of an instrument does not ordinarily affect the liability
of one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is
16
ordinarily no reason for relieving her of liability.
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the
third paragraph of her contract wherein she agreed "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," which makes her contract one of guaranty
and not suretyship. The purported discordance is more apparent
than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer
17
of the solvency of the debtor. A suretyship is an undertaking that
the debt shall be paid; a guaranty, an undertaking that the debtor
18
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
CREDIT TRANSACTIONS
19
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
20
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
21
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
22
with him, and without reference to the solvency of the principal.
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once
been judicially determined under the rule of reasonable
construction applicable to all written contracts, then the liability of
the surety, under his contract, as thus interpreted and construed, is
23
not to be extended beyond its strict meaning. The rule, however,
will apply only after it has been definitely ascertained that the
contract is one of suretyship and not a contract of guaranty. It
cannot be used as an aid in determining whether a party's
undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no
doubt that 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
24
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
25
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.
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FULL TEXT CASES – Guaranty and Suretyship
In this regard, we need only to reiterate the rule that a surety is
26
bound equally and absolutely with the principal, and as such is
27
deemed an original promisor and debtor from the beginning. This
is because in suretyship there is but one contract, and the surety is
28
bound by the same agreement which binds the principal. In
29
essence, the contract of a surety starts with the agreement, which
is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between
respondent corporation, as creditor, and the principal obligors. A
surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is
30
an original debtor, and his liability is immediate and direct. Thus, it
has been held that where a written agreement on the same sheet of
paper with and immediately following the principal contract
between the buyer and seller is executed simultaneously therewith,
providing that the signers of the agreement agreed to the terms of
the principal contract, the signers were "sureties" jointly liable with
31
the buyer. A surety usually enters into the same obligation as that
of his principal, and the signatures of both usually appear upon the
same instrument, and the same consideration usually supports the
32
obligation for both the principal and the surety.
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed
that respondent corporation may demand payment of the loan from
her in case the principal maker defaults, subject to the same
conditions expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I fail to pay in
accordance with the above schedule of payment, I hereby waive my
right to notice and demand." Hence, demand by the creditor is no
longer necessary in order that delay may exist since the contract
33
itself already expressly so declares. As a surety, petitioner is
equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary
before bringing suit against them, since the commencement of the
34
suit is a sufficient demand. On this point, it may be worth
mentioning that a surety is not even entitled, as a matter of right, to
be given notice of the principal's default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of the
surety, his mere failure to voluntarily give information to the surety
of the default of the principal cannot have the effect of discharging
the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the
creditor has not notified
him in the absence of a special agreement to that effect in the
35
contract of suretyship.
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to
its pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal
36
be called on to account. The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is
liable as much as his principal is liable, and absolutely liable as soon
as default is made, without any demand upon the principal
CREDIT TRANSACTIONS
37
whatsoever or any notice of default. As an original promisor and
debtor from the beginning, he is held ordinarily to know every
38
default of his principal.
Petitioner questions the propriety of the filing of a complaint solely
against her to the exclusion of the principal debtors who allegedly
were the only ones who benefited from the proceeds of the loan.
What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the
principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently
39
of his right to proceed against the principal. Under Article 1216 of
the Civil Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor
has the right to proceed even against the surety alone. Since,
40
generally, it is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of
the contract, the obligation of the surety is the same that of the
principal, then soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any
41
proceedings are had against the principal. Perforce, in accordance
with the rule that, in the absence of statute or agreement otherwise,
a surety is primarily liable, and with the rule that his proper remedy
is to pay the debt and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute and in the absence
of any agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort
to and exhaust his remedies against the principal, particularly where
42
both principal and surety are equally bound.
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release her
from liability. 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
43
insolvent. And, in the absence of proof of resultant injury, a surety
is not discharged by the creditor's mere statement that the creditor
44
will not look to the surety, or that he need not trouble
45
himself. The consequences of the delay, such as the subsequent
46
insolvency of the principal, or the fact that the remedies against
47
the principal may be lost by lapse of time, are immaterial.
The raison d'être for the rule is that there is nothing to prevent the
48
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 rights and remedies of the
49
creditor.
It may not be amiss to add that leniency shown to a debtor in
default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the
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FULL TEXT CASES – Guaranty and Suretyship
50
surety. In order to constitute an extension discharging the surety,
it should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and
the creditor, and that it was made without the consent of the surety
or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders
him in, enforcing the principal contract within the period during
which he could otherwise have enforced it, and which precludes the
51
surety from paying the debt.
None of these elements are present in the instant case. Verily, the
mere fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their
obligation did not effectively absolve here in petitioner from the
consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by
52
some act of the creditor, herein respondent corporation, failing in
which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is
solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order
that the interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.
53
In an affidavit executed by petitioner, which was attached to her
petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn
that Merlyn Azarraga's loan has been released and that
she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability arising from
the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from
Merlyn and Osmeña Azarraga. At the same time, I offered
to pay MB Lending the outstanding balance of the
principal obligation should he fail to collect from Merlyn
and Osmeña Azarraga. Mr. Banusing advised me not to
worry because he will try to collect first from Merlyn and
Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of
Merlyn and Osmeña Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB Lending
by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the
reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and
of the complaint filed against me by MB Lending before
the RTC-Iloilo. After learning that a complaint was filed
against me, I instructed Sheila Gatia to go to MB Lending
and reiterate my first offer to pay the outstanding balance
of the principal obligation of Merlyn Azarraga in the
amount of P30,000.00.
CREDIT TRANSACTIONS
12. Ms. Gatia talked to the secretary of Mr. Banusing who
referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña
Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from
liability. There are a number of circumstances which conjointly
inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and
she offered to pay only in case the creditor fails to collect. The delay,
if any, was occasioned by the fact that respondent corporation
merely acquiesced to the request of petitioner. At any rate, there
was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent corporation
was acting well within its rights when it refused to accept the offer.
The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value, or more
54
valuable than that which is due. The obligee is entitled to demand
fulfillment of the obligation or performance as stipulated. A change
of the object of the obligation would constitute novation requiring
55
the express consent of the parties.
3. After the complaint was filed against her, petitioner reiterated her
offer to pay the outstanding balance of the obligation in the amount
of P30,000.00 but the same was likewise rejected. Again,
respondent corporation cannot be blamed for refusing the amount
being offered because it fell way below the amount it had
computed, based on the stipulated interests and penalty charges, as
owing and due from herein petitioner. A debt shall not be
understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered,
56
as the case may be. In other words, the prestation must be
fulfilled completely. A person entering into a contract has a right to
57
insist on its performance in all particulars.
Petitioner cannot compel respondent corporation to accept the
amount she is willing to pay because the moment the latter accepts
the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, then the obligation
58
shall be deemed fully complied with. Precisely, this is what
respondent corporation wanted to avoid when it continually refused
to settle with petitioner at less than what was actually due under
their contract.
This notwithstanding, however, we find and so hold that the penalty
charge of 3% per month and attorney's fees equivalent to 25% of
the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00,
the amount of P16,300.00 had already been paid even before the
filing of the present case. Article 1229 of the Civil Code provides that
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

the court shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the
debtor. And, even if there has been no performance, the penalty
may also be reduced if it is iniquitous or leonine.

In a case previously decided by this Court which likewise involved

private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:

Upon the matter of penalty interest, we agree with the

Court of Appeals that the economic impact of the penalty
interest of three percent (3 %) per month on total amount
due but unpaid should be equitably reduced. The purpose
for which the penalty interest is intended — that is, to
punish the obligor — will have been sufficiently served by
the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount
loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful)
regular compensatory interest, the penalty interest
stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by
59
eliminating such penalty interest altogether.

Accordingly, the penalty interest of 3% per month being imposed on

petitioner should similarly be eliminated.

Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney's fees
fixed in the contract when the amount thereof appears to be
60
unconscionable or unreasonable. To that end, it is not even
necessary to show, as in other contracts, that it is contrary to morals
61
or public policy. The grant of attorney's fees equivalent to 25% of
the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection of
a sum of money. We, therefore, hold that the amount of P10,000.00
62
as and for attorney's fee would be sufficient in this case.

WHEREFORE, the judgment appealed from is hereby AFFIRMED,

subject to the MODIFICATION that the penalty interest of 3% per
month is hereby deleted and the award of attorney's fees is reduced
to P10,000.00.

SO ORDERED.

meikimouse
FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the
1
decision of the Court of Appeals dated July 13, 1993 which
affirmed the Order of the Regional Trial Court of Manila, Branch 51,
denying petitioner's Motion to Dismiss the complaint, as well as the
2
Resolution dated February 15, 1994 denying the motion for
reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under
the name "Agro Brokers," applied for a loan with respondent
Consolidated Bank and Trust Corporation (now SOLIDBANK) in the
amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two (2) maritime barges
3
and one tugboat which would be used in their molasses business.
The loan was granted subject to the condition that respondent
spouses execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E. Zobel, Inc., in
favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing
4
Guaranty were executed.
Respondent spouses defaulted in the payment of the entire
obligation upon maturity. Hence, on January 31, 1991, SOLIDBANK
filed a complaint for sum of money with a prayer for a writ of
preliminary attachment, against respondents spouses and
petitioner. The case was docketed as Civil Case No. 91-55909 in the
Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its
liability as guarantor of the loan was extinguished pursuant to Article
2080 of the Civil Code of the Philippines. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the
appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of
which reads:
After a careful consideration of the matter on
hand, the Court finds the ground of the motion
to dismiss without merit. The document referred
to as "Continuing Guaranty" dated August 21,
1985 (Exh. 7) states as follows:
CREDIT TRANSACTIONS
For and in consideration of
any existing indebtedness to
you of Agro Brokers, a single
proprietorship owned by Mr.
Raul Claveria for the
payment of which the
undersigned is now obligated
to you as surety and in order
to induce you, in your
discretion, at any other
manner, to, or at the request
or for the account of the
borrower, . . .
The provisions of the document are clear, plain
and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed
as surety. Even though the title of the document
is "Continuing Guaranty", the Court's
interpretation is not limited to the title alone but
to the contents and intention of the parties
more specifically if the language is clear and
positive. The obligation of the defendant Zobel
being that of a surety, Art. 2080 New Civil Code
will not apply as it is only for those acting as
guarantor. In fact, in the letter of January 31,
1986 of the defendants (spouses and Zobel) to
the plaintiff it is requesting that the chattel
mortgage on the vessels and tugboat be waived
and/or rescinded by the bank inasmuch as the
said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting
the claim of the defendant now that the chattel
mortgage is an essential condition of the
guaranty. In its letter, it said that because of the
Continuing Guaranty in favor of the plaintiff the
chattel mortgage is rendered unnecessary and
redundant.
With regard to the claim that the failure of the
plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office
of the Collector of Customs or with the Register
of Deeds makes the obligation a guaranty, the
same merits a scant consideration and could not
be taken by this Court as the basis of the
extinguishment of the obligation of the
defendant corporation to the plaintiff as surety.
The chattel mortgage is an additional security
and should not be considered as payment of the
debt in case of failure of payment. The same is
true with the failure to register, extinction of the
liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby
denied and defendant E. Zobel, Inc., is ordered
to file its answer to the complaint within ten (10)
days from receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26,
1993.
6
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FULL TEXT CASES – Guaranty and Suretyship
Thereafter, petitioner questioned said Orders before the respondent
Court of Appeals, through a petition forcertiorari, alleging that the
trial court committed grave abuse of discretion in denying the
motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed
decision the dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has
not committed any grave abuse of discretion in
issuing the herein assailed orders, We hereby
DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack
of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the
respondent Court of Appeals erred in its finding: (1) that Article 2080
of the New Civil Code which provides: "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 preferences of the latter," is not applicable to
petitioner; (2) that petitioner's obligation to respondent SOLIDBANK
under the continuing guaranty is that of a surety; and (3) that the
failure of respondent SOLIDBANK to register the chattel mortgage
did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under
the "Continuing Guaranty" obligated itself to SOLIDBANK as a
guarantor or a surety.
A contract of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the creditor to
7
satisfy the obligation if the debtor does not. A contract of guaranty,
on the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt.
8 obligations hereinbefore referred to, and or in
Strictly speaking, guaranty and surety are nearly related, and many
of the principles are common to both. However, under our civil law,
they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and
on the same consideration. He is an original promissor and debtor
from the beginning, and is held, ordinarily, to know every default of
his principal. Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of notice of
the default of the principal, no matter how much he may be injured
thereby. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the principal does
not join. It is usually entered into before or after that of the
principal, and is often supported on a separate consideration from
that supporting the contract of the principal. The original contract of
his principal is not his contract, and he is not bound to take notice of
its non-performance. He is often discharged by the mere indulgence
of the creditor to the principal, and is usually not liable unless
notified of the default of the principal.
9 nature of the undertaking and the intention of the parties. The
Simply put, a surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the debtor and thus binds
himself to pay if the principal is unable to pay while a surety is the
insurer of the debt, and he obligates himself to pay if the
10
principal does not pay.
CREDIT TRANSACTIONS
Based on the aforementioned definitions, it appears that the
contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of surety. The
terms of the contract categorically obligates petitioner as "surety" to
induce SOLIDBANK to extend credit to respondent spouses. This can
be seen in the following stipulations.
For and in consideration of any existing
indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA,
of legal age, married and with business address .
. . (hereinafter called the Borrower), for the
payment of which the undersigned is now
obligated to you as surety and in order to
induce you, in your discretion, at any time or
from time to time hereafter, to make loans or
advances or to extend credit in any other
manner to, or at the request or for the account
of the Borrower, either with or without purchase
or discount, or to make any loans or advances
evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness . . .
upon which the Borrower is or may become
liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee,
and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of
any and all such instruments, loans, advances,
credits and/or other obligations herein before
referred to, and also any and all other
indebtedness of every kind which is now or may
hereafter become due or owing to you by the
Borrower, together with any and all expenses
which may be incurred by you in collecting all or
any such instruments or other indebtedness or
enforcing any rights hereunder, and also to make
or cause any and all such payments to be made
strictly in accordance with the terms and
provisions of any agreement (g), express or
implied, which has (have) been or may hereafter
be made or entered into by the Borrower in
reference thereto, regardless of any law,
regulation or decree, now or hereafter in effect
which might in any manner affect any of the
terms or provisions of any such agreements(s) or
your right with respect thereto as against the
Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of
payment by the Borrower of any such
instruments, obligations or indebtedness; . . .
(Emphasis Ours)
One need not look too deeply at the contract to determine the
contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated
itself as an original promissor. It bound itself jointly and severally to
the obligation with the respondent spouses. In fact, SOLIDBANK
need not resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in
the contract, to wit:
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FULL TEXT CASES – Guaranty and Suretyship
. . . If default be made in the payment of any of
the instruments, indebtedness or other
obligation hereby guaranteed by the
undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in business,
or become insolvent, . . ., or if any funds or other
property of the Borrower, or of the undersigned
which may be or come into your possession or
control or that of any third party acting in your
behalf as aforesaid should be attached of
distrained, or should be or become subject to
any mandatory order of court or other legal
process, then, or any time after the happening of
any such event any or all of the instruments of
indebtedness or other obligations hereby
guaranteed shall, at your option become (for the
purpose of this guaranty) due and payable by the
undersigned forthwith without demand of
notice, and full power and authority are hereby
given you, in your discretion, to sell, assign and
deliver all or any part of the property upon
which you may then have a lien hereunder at
any broker's board, or at public or private sale at
your option, either for cash or for credit or for
future delivery without assumption by you of
credit risk, and without either the demand,
advertisement or notice of any kind, all of which
are hereby expressly waived. At any sale
hereunder, you may, at your option, purchase
the whole or any part of the property so sold,
free from any right of redemption on the part of
the undersigned, all such rights being also
hereby waived and released. In case of any sale
and other disposition of any of the property
aforesaid, after deducting all costs and expenses
of every kind for care, safekeeping, collection,
sale, delivery or otherwise, you may apply the
residue of the proceeds of the sale and other
disposition thereof, to the payment or reduction,
either in whole or in part, of any one or more of
the obligations or liabilities hereunder of the
undersigned whether or not except for
disagreement such liabilities or obligations
would then be due, making proper allowance or
interest on the obligations and liabilities not
otherwise then due, and returning the overplus,
if any, to the undersigned; all without prejudice
to your rights as against the undersigned with
respect to any and all amounts which may be or
remain unpaid on any of the obligations or
liabilities aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time
furnish, or should be heretofore have furnished,
another surety or sureties to guarantee the
payment of his obligations to you, the
undersigned hereby expressly waives all benefits
to which the undersigned might be entitled under
the provisions of Article 1837 of the Civil Code
(beneficio division), the liability of the
undersigned under any and all circumstances
being joint and several; (Emphasis Ours)
CREDIT TRANSACTIONS
The use of the term "guarantee" does not ipso facto mean that the
contract is one of guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound
11
by a primary or independent obligation. As aptly observed by the
trial court, the interpretation of a contract is not limited to the title
alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of
the Civil Code, relied upon by petitioner, finds no application to the
case at bar. In Bicol Savings and Loan Association
12
vs. Guinhawa, we have ruled that Article 2080 of the New Civil
Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's
failure to register the chattel mortgage did not release petitioner
from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of
the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract. The pertinent
portions of the contract so provides:
. . . the undersigned (petitioner) who hereby
agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or
condition of any collateral, and notwithstanding
any such change, exchange, settlement,
compromise, surrender, release, sale,
application, renewal or extension, and
notwithstanding also that all obligations of the
Borrower to you outstanding and unpaid at any
time(s) may exceed the aggregate principal sum
herein above prescribed.
This is a Continuing Guaranty and shall remain in
full force and effect until written notice shall
have been received by you that it has been
revoked by the undersigned, but any such notice
shall not be released the undersigned from any
liability as to any instruments, loans, advances or
other obligations hereby guaranteed, which may
be held by you, or in which you may have any
interest, at the time of the receipt of such
notice. No act or omission of any kind on your
part in the premises shall in any event affect or
impair this guaranty, nor shall same be affected
by any change which may arise by reason of the
death of the undersigned, of any partner (s) of
the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or
more new partners. (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible
error was committed by respondent Court of Appeals in rendering
the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
meikimouse
FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 160324 November 15, 2005
INTERNATIONAL FINANCE CORPORATION, Petitioner,
vs.
*
IMPERIAL TEXTILE MILLS, INC., Respondent.
DECISION
PANGANIBAN, J.:
he terms of a contract govern the rights and obligations of the
contracting parties. When the obligor undertakes to be "jointly and
severally" liable, it means that the obligation is solidary.
If solidary liability was instituted to "guarantee" a principal
obligation, the law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly
that, although denominated as a "Guarantee Agreement," the
Contract was actually a surety. Notwithstanding the use of the
words "guarantee" and "guarantor," the subject Contract was
indeed a surety, because its terms were clear and left no doubt as to
the intention of the parties.
The Case
1
Before us is a Petition for Review under Rule 45 of the Rules of
2
Court, assailing the February 28, 2002 Decision and September 30,
3
2003 Resolution of the Court of Appeals (CA) in CA-GR CV No.
58471. The challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of
the trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to pay
[Petitioner] International Finance Corporation, the following
amounts:
‘(a) US$2,833,967.00 with accrued interests as provided in the Loan
Agreement;
‘(b) Interest of 12% per annum on accrued interest, which shall be
counted from the date of filing of the instant action up to the actual
payment;
‘(c) P73,340.00 as attorney’s fees;
‘(d) Costs of suit.’
"2. The guarantor Imperial Textile Mills, Inc. together with Grandtex
is HELD secondarily liable to pay the amount herein adjudged to
4
[Petitioner] International Finance Corporation."
The assailed Resolution denied both parties’ respective Motions for
Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
CREDIT TRANSACTIONS
"On December 17, 1974, [Petitioner] International Finance
Corporation (IFC) and [Respondent] Philippine Polyamide Industrial
Corporation (PPIC) entered into a loan agreement wherein IFC
extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16)
semi-annual installments of US$437,500.00 each, beginning June 1,
1977 to December 1, 1984, with interest at the rate of 10% per
annum on the principal amount of the loan advanced and
outstanding from time to time. The interest shall be paid in US
dollars semi-annually on June 1 and December 1 in each year and
interest for any period less than a year shall accrue and be pro-rated
on the basis of a 360-day year of twelve 30-day months.
"On December 17, 1974, a ‘Guarantee Agreement’ was executed
with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPIC’s obligations under the
loan agreement.
"PPIC paid the installments due on June 1, 1977, December 1, 1977
and June 1, 1978. The payments due on December 1, 1978, June 1,
1979 and December 1, 1979 were rescheduled as requested by PPIC.
Despite the rescheduling of the installment payments, however,
PPIC defaulted. Hence, on April 1, 1985, 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.
"By virtue of PPIC’s failure to pay, 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, located at Calamba, Laguna, with the regional sheriff of
Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba,
Laguna issued a notice of extrajudicial sale. IFC and DBP were the
only bidders during the auction sale. IFC’s bid was forP99,269,100.00
which was equivalent to US$5,250,000.00 (at the prevailing
exchange rate of P18.9084 = US$1.00). The outstanding loan,
however, amounted to US$8,083,967.00 thus leaving a balance of
US$2,833,967.00. PPIC failed to pay the remaining balance.
"Consequently, 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.
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of
Manila against PPIC and ITM for the payment of the outstanding
balance plus interests and attorney’s fees.
"The trial court held PPIC liable for the payment of the outstanding
loan plus interests. It also ordered PPIC to pay IFC its claimed
attorney’s fees. However, the trial court relieved ITM of its
obligation as guarantor. Hence, the trial court dismissed IFC’s
complaint against ITM.
xxxxxxxxx
"Thus, apropos the decision dismissing the complaint against ITM,
5
IFC appealed [to the CA]."
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter
exonerated ITM from any obligation to IFC. According to the
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

appellate court, ITM bound itself under the "Guarantee Agreement" "(A) By an Agreement of even date herewith between IFC and
6
to pay PPIC’s obligation upon default. ITM was not discharged from PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein called
its obligation as guarantor when PPIC mortgaged the latter’s the Company), which agreement is herein called the Loan
7
properties to IFC. The CA, however, held that ITM’s liability as a Agreement, IFC agrees to extend to the Company a loan (herein
guarantor would arise only if and when PPIC could not pay. Since called the Loan) of seven million dollars ($7,000,000) on the terms
PPIC’s inability to comply with its obligation was not sufficiently therein set forth, including a provision that all or part of the Loan
established, ITM could not immediately be made to assume the may be disbursed in a currency other than dollars, but only on
8
liability. condition that the Guarantors agree to guarantee the obligations of
the Company in respect of the Loan as hereinafter provided.
The September 30, 2003 Resolution of the CA denied
9 10
reconsideration. Hence, this Petition. "(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said
The Issues Agreement, have agreed so to guarantee such obligations of the
18
Company."
Petitioner states the issues in this wise:
The obligations of the guarantors are meticulously expressed in the
11 following provision:
"I. Whether or not ITM and Grandtex are sureties and therefore,
jointly and severally liable with PPIC, for the payment of the loan.
"Section 2.01. The Guarantors jointly and severally, irrevocably,
absolutely and unconditionally guarantee, asprimary obligors and
"II. Whether or not the Petition raises a question of law.
not as sureties merely, the due and punctual payment of the
principal of, and interest and commitment charge on, the Loan, and
"III. Whether or not the Petition raises a theory not raised in the the principal of, and interest on, the Notes, whether at stated
12
lower court." maturity or upon prematuring, all as set forth in the Loan Agreement
19
and in the Notes."
The main issue is whether ITM is a surety, and thus solidarily liable
with PPIC for the payment of the loan. The Agreement uses "guarantee" and "guarantors," prompting ITM
20
to base its argument on those words. This Court is not convinced
The Court’s Ruling that the use of the two words limits the Contract to a mere
guaranty. The specific stipulations in the Contract show otherwise.
The Petition is meritorious.
Solidary Liability
Main Issue:
Agreed to by ITM
Liability of Respondent Under
While referring to ITM as a guarantor, the Agreement specifically
the Guarantee Agreement stated that the corporation was "jointly and severally" liable. To put
emphasis on the nature of that liability, the Contract further stated
that ITM was a primary obligor, not a mere surety. Those
The present controversy arose from the following Contracts: (1) the stipulations meant only one thing: that at bottom, and to all legal
Loan Agreement dated December 17, 1974, between IFC and intents and purposes, it was a surety.
13
PPIC; and (2) the Guarantee Agreement dated December 17, 1974,
between ITM and Grandtex, on the one hand, and IFC on the 21
other.
14 Indubitably therefore, ITM bound itself to be solidarily liable with
PPIC for the latter’s obligations under the Loan Agreement with IFC.
ITM thereby brought itself to the level of PPIC and could not be
IFC claims that, under the Guarantee Agreement, ITM bound itself as deemed merely secondarily liable.
a surety to PPIC’s obligations proceeding from the Loan
15
Agreement. For its part, ITM asserts that, by the terms of the
16
Guarantee Agreement, it was merely a guarantor and not a surety. Initially, ITM was a stranger to the Loan Agreement between PPIC
Moreover, any ambiguity in the Agreement should be construed and IFC. ITM’s liability commenced only when it guaranteed PPIC’s
against IFC -- the party that drafted it.
17 obligation. It became a surety when it bound itself solidarily with the
principal obligor. Thus, the applicable law is as follows:

Language of the
"Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in case
Contract the latter should fail to do so.

The premise of the Guarantee Agreement is found in its preambular "If a person binds himself solidarily with the principal debtor, the
clause, which reads: provisions of Section 4, Chapter 3, Title I of this Book shall be
22
observed. In such case the contract shall be called suretyship."
"Whereas,

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FULL TEXT CASES – Guaranty and Suretyship
The aforementioned provisions refer to Articles 1207 to 1222 of the
Civil Code on "Joint and Solidary Obligations." Relevant to this case is
Article 1216, which states:
"The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in
taking action directly against respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the
Guarantee Agreement. When qualified by the term "jointly and
severally," the use of the word "guarantor" to refer to a "surety"
23
does not violate the law. As Article 2047 provides, a suretyship is
created when a guarantor binds itself solidarily with the principal
obligor. Likewise, the phrase in the Agreement -- "as primary obligor
and not merely as surety" -- stresses that ITM is being placed on the
same level as PPIC. Those words emphasize the nature of their
liability, which the law characterizes as a suretyship.
The use of the word "guarantee" does not ipso facto make the
24
contract one of guaranty. This Court has recognized that the word
is frequently employed in business transactions to describe the
intention to be bound by a primary or an independent
25
obligation. The very terms of a contract govern the obligations of
the parties or the extent of the obligor’s liability. Thus, this Court has
ruled in favor of suretyship, even though contracts were
26
denominated as a "Guarantor’s Undertaking" or a "Continuing
27
Guaranty."
28
Contracts have the force of law between the parties, who are free
to stipulate any matter not contrary to law, morals, good customs,
29
public order or public policy. None of these circumstances are
present, much less alleged by respondent. Hence, this Court cannot
give a different meaning to the plain language of the Guarantee
Agreement.
Indeed, the finding of solidary liability is in line with the premise
provided in the "Whereas" clause of the Guarantee Agreement. The
execution of the Agreement was a condition precedent for the
approval of PPIC’s loan from IFC. Consistent with the position of IFC
as creditor was its requirement of a higher degree of liability from
ITM in case PPIC committed a breach. ITM agreed with the
stipulation in Section 2.01 and is now estopped from feigning
ignorance of its solidary liability. The literal meaning of the
stipulations control when the terms of the contract are clear and
30
there is no doubt as to the intention of the parties.
We note that the CA denied solidary liability, on the theory that the
parties would not have executed a Guarantee Agreement if they had
31
intended to name ITM as a primary obligor. The appellate court
opined that ITM’s undertaking was collateral to and distinct from
the Loan Agreement. On this point, the Court stresses that a
suretyship is merely an accessory or a collateral to a principal
32
obligation. Although a surety contract is secondary to the principal
CREDIT TRANSACTIONS
obligation, the liability of the surety is direct, primary and absolute;
33
or equivalent to that of a regular party to the undertaking. A surety
becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations
34
constituted by the latter.
ITM’s Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA
35
erred in declaring the former secondarily liable. A surety is
considered in law to be on the same footing as the principal debtor
36
in relation to whatever is adjudged against the latter. Evidently,
the dispositive portion of the assailed Decision should be modified
to require ITM to pay the amount adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities
allegedly justifying the denial of the present Petition. Before the trial
court and the CA, IFC had allegedly instituted different arguments
that effectively changed the corporation’s theory on appeal, in
37
violation of this Court’s previous pronouncements. ITM further
claims that the main issue in the present case is a question of fact
38
that is not cognizable by this Court.
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioner’s arguments before the trial court (that ITM was a
"primary obligor") and before the CA (that ITM was a "surety") were
related and intertwined in the action to enforce the solidary liability
of ITM under the Guarantee Agreement. We emphasize that the
terms "primary obligor" and "surety" were premised on the same
stipulations in Section 2.01 of the Agreement. Besides, both terms
had the same legal consequences. There was therefore effectively
no change of theory on appeal. At any rate, ITM failed to show to
this Court a disparity between IFC’s allegations in the trial court and
those in the CA. Bare allegations without proof deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition
39 40
for Review, the Court has recognized exceptions, one of which
applies to the present case. The assailed Decision was based on a
41
misapprehension of facts, which particularly related to certain
stipulations in the Guarantee Agreement -- stipulations that had not
been disputed by the parties. This circumstance compelled the Court
to review the Contract firsthand and to make its own findings and
conclusions accordingly. WHEREFORE, the Petition is
hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is
declared a surety to Philippine Polyamide Industrial Corporation.
ITM isORDERED to pay International Finance Corporation the same
amounts adjudged against PPIC in the assailed Decision. No costs. SO
ORDERED.
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

G.R. No. 142381 October 15, 2003 owing to said TRADERS ROYAL BANK, hereafter called the
CREDITOR, as evidenced by all notes, drafts, overdrafts
PHILIPPINE BLOOMING MILLS, INC., and ALFREDO and other credit obligations of every kind and nature
CHING, petitioners, contracted/incurred by said DEBTOR(S) in favor of said
vs. CREDITOR.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
In case of default by any and/or all of the DEBTOR(S) to
DECISION pay the whole or part of said indebtedness herein secured
at maturity, I/We, jointly and severally, agree and engage
to the CREDITOR, its successors and assigns, the prompt
CARPIO, J.:
payment, without demand or notice from said CREDITOR,
of such notes, drafts, overdrafts and other credit
The Case obligations on which the DEBTOR(S) may now be indebted
or may hereafter become indebted to the CREDITOR,
1
This is a petition for review on certiorari to annul the together with all interests, penalty and other bank charges
2
Decision dated 16 July 1999 of the Court of Appeals in CA-G.R. CV as may accrue thereon and all expenses which may be
No. 39690, as well as its Resolution dated 17 February 2000 denying incurred by the latter in collecting any or all such
the motion for reconsideration. The Court of Appeals affirmed with instruments.
3
modification the Decision dated 31 August 1992 rendered by
Branch 113 of the Regional Trial Court of Pasay City ("trial court"). I/WE further warrant the due and faithful performance by
The trial court’s Decision declared petitioner Alfredo Ching ("Ching") the DEBTOR(S) of all the obligations to be performed
liable to respondent Traders Royal Bank ("TRB") for the payment of under any contracts, evidencing indebtedness/obligations
the credit accommodations extended to Philippine Blooming Mills, and any supplements, amendments, charges or
Inc. ("PBM"). modifications made thereto, including but not limited to,
the due and punctual payment by the said DEBTOR(S).
Antecedent Facts
I/WE hereby expressly waive notice of acceptance of this
This case stems from an action to compel Ching to pay TRB the suretyship, and also presentment, demand, protest and
following amounts: notice of dishonor of any and all such instruments, loans,
advances, credits, or other indebtedness or obligations
1. P959,611.96 under Letter of Credit No. 479 AD covered hereinbefore referred to.
4
by Trust Receipt No. 106;
MY/OUR liability on this Deed of Suretyship shall be
2. P1,191,137.13 under Letter of Credit No. 563 AD solidary, direct and immediate and not contingent upon
5
covered by Trust Receipt No. 113; and the pursuit by the CREDITOR, its successors or assigns, of
whatever remedies it or they may have against the
DEBTOR(S) or the securities or liens it or they may possess;
3. P3,500,000 under the trust loan covered by a notarized and I/WE hereby agree to be and remain bound upon this
6
Promissory Note. suretyship, irrespective of the existence, value or
condition of any collateral, and notwithstanding also that
Ching was the Senior Vice President of PBM. In his all obligations of the DEBTOR(S) to you outstanding and
personal capacity and not as a corporate officer, Ching unpaid at any time may exceed the aggregate principal
signed a Deed of Suretyship dated 21 July 1977 binding sum herein above stated.
himself as follows:
In the event of judicial proceedings, I/WE hereby expressly
xxx as primary obligor(s) and not as mere guarantor(s), agree to pay the creditor for and as attorney’s fees a sum
hereby warrant to the TRADERS ROYAL BANK, its equivalent to TEN PER CENTUM (10%) of the total
successors and assigns, the due and punctual payment by indebtedness (principal and interest) then unpaid,
the following individuals and/or companies/firms, exclusive of all costs or expenses for collection allowed by
7
hereinafter called the DEBTOR(S), of such amounts law. (Emphasis supplied)
whether due or not, as indicated opposite their respective
names, to wit: On 24 March and 6 August 1980, TRB granted PBM letters
of credit on application of Ching in his capacity as Senior
AMOUNT OF
NAME OF DEBTOR(S) Vice President of PBM. Ching later accomplished and
OBLIGATION delivered to TRB trust receipts, which acknowledged
receipt in trust for TRB of the merchandise subject of the
PHIL. BLOOMING MILLS letters of credit. Under the trust receipts, PBM had the
TEN MILLION PESOS right to sell the merchandise for cash with the obligation
CORP.
to turn over the entire proceeds of the sale to TRB as
payment of PBM’s indebtedness. Letter of Credit No. 479
(P 10,000,000.00) AD, covered by Trust Receipt No. 106, has a face value of
US$591,043, while Letter of Credit No. 563 AD, covered by
Trust Receipt No. 113, has a face value of US$155,460.34.
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FULL TEXT CASES – Guaranty and Suretyship
Ching further executed an Undertaking for each trust
receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement
of trusts shall bear interest at the rate of __ per centum (
__%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned
hereby jointly and severally undertake and agree to pay on
demand on the said BANK, all sums and amounts of money
which said BANK may call upon them to pay arising out of,
pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered
by the Trust Receipt by or through an attorney-at-law, the
undersigned hereby further agree(s) to pay an additional
of 10% of the total amount due on the draft as attorney’s
fees, exclusive of all costs, fees and other expenses of
collection but shall in no case be less
8
than P200.00" (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB.
Ching signed as co-maker in the notarized Promissory Note
evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and
severally, promise to pay the TRADERS ROYAL BANK or order, at its
Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the
sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY
(P3,500,000.00), Philippine Currency, with the interest rate of
Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and
severally, agree to pay an additional amount equivalent to two per
cent (2%) of the principal sum per annum, as penalty and collection
charges in the form of liquidated damages until fully paid, and the
further sum of ten percent (10%) thereof in full, without any
deduction, as and for attorney’s fees whether actually incurred or
not, exclusive of costs and other judicial/extrajudicial expenses;
moreover, I/We jointly and severally, further empower and
authorize the TRADERS ROYAL BANK at its option, and without
notice to set off or to apply to the payment of this note any and all
funds, which may be in its hands on deposit or otherwise belonging
to anyone or all of us, and to hold as security therefor any real or
personal property which may be in its possession or control by
9
virtue of any other contract. (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of
Credit No. 479 AD) for P959,611.96, and of Trust Receipt No. 113
(Letter of Credit No. 563 AD) for P1,191,137.13. PBM also defaulted
on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of
payments with the Securities and Exchange Commission ("SEC"),
10
docketed as SEC Case No. 2250. The petition sought to suspend
payment of PBM’s obligations and prayed that the SEC allow PBM to
continue its normal business operations free from the interference
11
of its creditors. One of the listed creditors of PBM was TRB.
CREDIT TRANSACTIONS
On 9 July 1982, the SEC placed all of PBM’s assets, liabilities, and
obligations under the rehabilitation receivership of Kalaw, Escaler
12
and Associates.
On 13 May 1983, ten months after the SEC placed PBM under
rehabilitation receivership, TRB filed with the trial court a complaint
for collection against PBM and Ching. TRB asked the trial court to
order defendants to pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and
bank charges [representing its indebtedness arising from
the letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and
other bank charges [due and owing from the trust loan of
27 April 1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other
bank charges [due and owing from the money market loan
of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under
the Deed of Suretyship in the event plaintiff can not
recover the full amount of PBM’s indebtedness from the
latter;
(5) The sum equivalent to 10% of the total sum due as and
for attorney’s fees;
(6) Such other amounts that may be proven by the plaintiff
during the trial, by way of damages and expenses for
13
litigation.
On 25 May 1983, TRB moved to withdraw the complaint against
PBM on the ground that the SEC had already placed PBM under
14
receivership. The trial court thus dismissed the complaint against
15
PBM.
On 23 June 1983, PBM and Ching also moved to dismiss the
complaint on the ground that the trial court had no jurisdiction over
the subject matter of the case. PBM and Ching invoked the
assumption of jurisdiction by the SEC over all of PBM’s assets and
16
liabilities.
TRB filed an opposition to the Motion to Dismiss. TRB argued that
(1) Ching is being sued in his personal capacity as a surety for PBM;
(2) the SEC decision declaring PBM in suspension of payments is not
binding on TRB; and (3) Presidential Decree No. 1758 ("PD No.
17
1758"), which Ching relied on to support his assertion that all
claims against PBM are suspended, does not apply to Ching as the
18
decree regulates corporate activities only.
19
In its order dated 15 August 1983, the trial court denied the
motion to dismiss with respect to Ching and affirmed its dismissal of
the case with respect to PBM. The trial court stressed that TRB was
holding Ching liable under the Deed of Suretyship. As Ching’s
obligation was solidary, the trial court ruled that TRB could proceed
against Ching as surety upon default of the principal debtor PBM.
The trial court also held that PD No. 1758 applied only to
corporations, partnerships and associations and not to individuals.
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FULL TEXT CASES – Guaranty and Suretyship
Upon the trial court’s denial of his Motion for Reconsideration,
20
Ching filed a Petition for Certiorari and Prohibition before the Court
of Appeals. The appellate court granted Ching’s petition and ordered
the dismissal of the case. The appellate court ruled that the SEC
assumed jurisdiction over Ching and PBM to the exclusion of courts
or tribunals of coordinate rank.
21
TRB assailed the Court of Appeals’ Decision before this Court.
22
In Traders Royal Bank v. Court of Appeals, this Court upheld TRB
and ruled that Ching was merely a nominal party in SEC Case No.
2250. Creditors may sue individual sureties of debtor corporations,
like Ching, in a separate proceeding before regular courts despite
the pendency of a case before the SEC involving the debtor
corporation.
In his Answer dated 6 November 1989, Ching denied liability as
surety and accommodation co-maker of PBM. He claimed that the
23
SEC had already issued a decision approving a revised
rehabilitation plan for PBM’s creditors, and that PBM obtained the
credit accommodations for corporate purposes that did not redound
to his personal benefit. He further claimed that even as a surety, he
has the right to the defenses personal to PBM. Thus, his liability as
surety would attach only if, after the implementation of payments
scheduled under the rehabilitation plan, there would remain a
24
balance of PBM’s debt to TRB. Although Ching admitted PBM’s
availment of the credit accommodations, he did not show any proof
of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by
25
PBM itself and by the SEC-appointed receiver. Thus, the trial court
had to resolve the following remaining issues:
1. How much exactly is the corporate defendant’s
outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and
26
for exactly how much?
TRB presented Mr. Lauro Francisco, loan officer of the Remedial
Management Department of TRB, and Ms. Carla Pecson, manager of
the International Department of TRB, as witnesses. Both witnesses
testified to the following:
1. The existence of a Deed of Suretyship dated 21 July
1977 executed by Ching for PBM’s liabilities to TRB up
27
to P10,000,000;
2. The application of PBM and grant by TRB on 13 March
1980 of Letter of Credit No. 479 AD for US$591,043, and
the actual availment by PBM of the full proceeds of the
28
credit accommodation;
3. The application of PBM and grant by TRB on 6 August
1980 of Letter of Credit No. 563 AD for US$156,000, and
the actual availment by PBM of the full proceeds of the
29
credit accommodation; and
4. The existence of a trust loan of P3,500,000 evidenced by
a notarized Promissory Note dated 27 April 1981 wherein
30
Ching bound himself solidarily with PBM; and
CREDIT TRANSACTIONS
5. Per TRB’s computation, Ching is liable
31
for P19,333,558.16 as of 31 October 1991.
Ching presented Atty. Vicente Aranda, corporate secretary and First
Vice President of the Human Resources Department of TRB, as
witness. Ching sought to establish that TRB’s Board of Directors
adopted a resolution fixing the PBM account at an amount lower
than what TRB wanted to collect from Ching. The trial court allowed
Atty. Aranda to testify over TRB’s manifestation that the Answer
failed to plead the subject matter of his testimony. Atty. Aranda
produced TRB Board Resolution No. 5935, series of 1990, which
contained the minutes of the special meeting of TRB’s Board of
32
Directors held on 8 June 1990. In the resolution, the Board of
Directors advised TRB’s Management "not to release Alfredo Ching
33
from his JSS liability to the bank." The resolution also stated the
following:
a) Accept the P1.373 million deposits remitted over a period of 17
years or until 2006 which shall be applied directly to the account (as
remitted per hereto attached schedule). The amount of P1.373
million shall be considered as full payment of PBM’s account. (The
receiver is amenable to this alternative)
The initial deposit/remittance which amounts to P150,000.00 shall
be remitted upon approval of the above and conforme to PISCOR
and PBM. Subsequent deposits shall start on the 3rd year and
annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole
obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373
million to remain outstanding in the books of the Bank. Said balance
will equal the deposits to be remitted to the Bank for a period of 17
34
years.
However, Atty. Aranda himself testified that both items (a) and (b)
quoted above were never complied with or implemented. Not only
was there no initial deposit of P150,000 as required in the
resolution, TRB also disapproved the document prepared by the
35
receiver, which would have released Ching from his suretyship.
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under
the Deed of Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently from his
capacity as a stockholder of the Philippine Blooming Mills.
Indisputably, under the Deed of Suretyship defendant Ching
unconditionally agreed to assume PBM’s liability to the plaintiff in
the event PBM defaulted in the payment of the said obligation in
addition to whatever penalties, expenses and bank charges that may
occur by reason of default. Clear enough, under the Deed of
Suretyship (Exh. J), defendant Ching bound himself jointly and
severally with PBM in the payment of the latter’s obligation to the
plaintiff. The obligation being solidary, the plaintiff Bank can hold
Ching liable upon default of the principal debtor. This is explicitly
provided in Article 1216 of the New Civil Code already quoted
36
above.
The dispositive portion of the trial court’s Decision reads:
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FULL TEXT CASES – Guaranty and Suretyship
WHEREFORE, judgment is hereby rendered declaring defendant
Alfredo Ching liable to plaintiff bank in the amount
of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY
THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of
October 31, 1991, and to pay the legal interest thereon from such
date until it is fully paid. To pay plaintiff 5% of the entire amount by
way of attorney’s fees.
37
SO ORDERED.
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary debtor, he
should benefit from the changed nature of the obligation as
provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor,
avail himself of all defenses which are derived from the nature of
the obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the
debt for which the latter are responsible.
Ching claimed that his liability should likewise be reduced since the
equitable apportionment of PBM’s remaining assets among its
creditors under the rehabilitation proceedings would have the effect
of reducing PBM’s liability. He also claimed that the amount for
which he was being held liable was excessive. He contended that the
outstanding principal balance, as stated in TRB Board Resolution No.
38
5893-1990, was only P5,650,749.09. Ching also contended that he
was not liable for interest, as the loan documents did not stipulate
39
the interest rate, pursuant to Article 1956 of the Civil Code. Finally,
Ching asserted that the Deed of Suretyship executed on 21 July 1977
40
could not guarantee obligations incurred after its execution.
TRB did not file its appellee’s brief. Thus, the Court of Appeals
41
resolved to submit the case for decision.
The Court of Appeals considered the following issues for its
determination:
1. Whether the Answer of Ching amounted to an
admission of liability.
2. Whether Ching can still be sued as a surety after the SEC
placed PBM under rehabilitation receivership, and if in the
42
affirmative, for how much.
The Court of Appeals resolved the first two questions in favor of
TRB. The appellate court stated:
Ching did not deny under oath the genuineness and due execution
of the L/Cs, Trust Receipts, Undertaking, Deed of Surety, and the 3.5
Million Peso Promissory Note upon which TRB’s action rested. He is,
therefore, presumed to be liable unless he presents evidence
showing payment, partially or in full, of these obligations
(Investment and Underwriting Corporation of the Philippines v.
Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725
[1990]).
CREDIT TRANSACTIONS
As surety of a corporation placed under rehabilitation receivership,
Ching can answer separately for the obligations of debtor PBM (Rizal
Banking Corporation v. Court of Appeals, Philippine Blooming Mills,
Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal
Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788
[1989]).
Even a[n] SEC injunctive order cannot suspend payment of the
surety’s obligation since the rehabilitation receivers are limited to
43
the existing assets of the corporation.
The dispositive portion of the Decision of the Court of Appeals
reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED
but modified with respect to the amount of liability of defendant
Alfredo Ching which is lowered from P19,333,558.16
to P15,773,708.78 with legal interest of 12% per annum until it is
fully paid.
44
SO ORDERED.
The Court of Appeals denied Ching’s Motion for Reconsideration for
lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN
IT RULED THAT PETITIONER ALFREDO CHING WAS LIABLE
FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE
EXECUTION OF THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN
IT RULED THAT THE PETITIONERS WERE LIABLE FOR THE
TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE
RESPONDENT HAD PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN
IT FOUND PETITIONER ALFREDO CHING LIABLE
FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER
ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT
UNDER THE REHABILITATION PLAN OF PETITIONER PBM,
WHICH WAS APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY
ENTITLED TOP1,373,415.00.
45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could
not answer for obligations not yet in existence at the time of its
execution. Specifically, Ching maintained that the Deed of Suretyship
could not answer for debts contracted by PBM in 1980 and 1981.
Ching contended that no accessory contract of suretyship could arise
without an existing principal contract of loan. Ching likewise argued
that TRB could no longer claim on the trust receipts because TRB
had already taken the properties subject of the trust receipts. Ching
likewise maintained that his obligation as surety could not exceed
the P1,373,415 apportioned to PBM under the SEC-approved
rehabilitation plan.
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FULL TEXT CASES – Guaranty and Suretyship
In its Comment, TRB asserted that the first two assigned errors
raised factual issues not brought before the trial court. Furthermore,
TRB pointed out that Ching never presented PBM’s rehabilitation
plan before the trial court. TRB also stated that the Supreme Court
46
ruling in Traders Royal Bank v. Court of Appeals constitutes res
judicata between the parties. Therefore, TRB could proceed against
Ching separately from PBM to enforce in full Ching’s liability as
47
surety.
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court’s denial of Ching’s
motion to have the case dismissed against him. The petition is a
thinly veiled attempt to make this Court reconsider its decision in
48
the prior case of Traders Royal Bank v. Court of Appeals. This Court
has already resolved the issue of Ching’s separate liability as a surety
despite the rehabilitation proceedings before the SEC. We held in
Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-
petitioner of PBM, the SEC could not assume jurisdiction over his
person and properties. The Securities and Exchange Commission was
empowered, as rehabilitation receiver, to take custody and control
of the assets and properties of PBM only, for the SEC has jurisdiction
over corporations only [and] not over private individuals, except
stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and
Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250,
Ching’s properties were not included in the rehabilitation
receivership that the SEC constituted to take custody of PBM’s
assets. Therefore, the petitioner bank was not barred from filing a
suit against Ching, as a surety for PBM. An anomalous situation
would arise if individual sureties for debtor corporations may escape
liability by simply co-filing with the corporation a petition for
suspension of payments in the SEC whose jurisdiction is limited only
to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for
PBM, as expressly provided by Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and
separate from its individual stockholders and members. Being an
officer or stockholder of a corporation does not make one’s property
the property also of the corporation, for they are separate entities
(Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching’s act of joining as a co-petitioner with PBM in SEC Case No.
2250 did not vest in the SEC jurisdiction over his person or property,
for jurisdiction does not depend on the consent or acts of the parties
but upon express provision of law (Tolentino vs. Social Security
System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City,
Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Ching’s
liability as a surety of the credit accommodations TRB extended to
49
PBM. The decision amounts to res judicata which bars Ching from
raising the same issue again. Hence, the only question that remains
CREDIT TRANSACTIONS
is the amount of Ching’s liability. Nevertheless, we shall resolve the
issues Ching has raised in his attempt to escape liability under his
surety.
Whether Ching is liable for obligations PBM contracted after
execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB
before and after the execution of the 21 July 1977 Deed of
Suretyship. This is evident from the tenor of the deed itself, referring
to amounts PBM "may now be indebted or may hereafter become
indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053
of the Civil Code provides:
A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may
also be secured. (Emphasis supplied)
50
Furthermore, this Court has ruled in Diño v. Court of Appeals that:
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
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 states that the
guaranty is to secure advances to be made "from time to time," it
will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular
words and expressions such as payment of "any debt," "any
indebtedness," or "any sum," or the guaranty of "any transaction,"
or money to be furnished the principal debtor "at any time," or "on
such time" that the principal debtor may require, have been
construed to indicate a continuing guaranty.
Whether Ching’s liability is limited to the amount stated in PBM’s
rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most,
to the amount stated in PBM’s rehabilitation plan. In claiming this
reduced liability, Ching invokes Article 1222 of the Civil Code which
reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor,
avail himself of all defenses which are derived from the nature of
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FULL TEXT CASES – Guaranty and Suretyship
the obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the
debt for which the latter are responsible.
In granting the loan to PBM, TRB required Ching’s surety precisely to
insure full recovery of the loan in case PBM becomes insolvent or
fails to pay in full. This was the very purpose of the surety. Thus,
Ching cannot use PBM’s failure to pay in full as justification for his
own reduced liability to TRB. As surety, Ching agreed to pay in full
PBM’s loan in case PBM fails to pay in full for any reason, including
its insolvency.
TRB, as creditor, has the right under the surety to proceed against
Ching for the entire amount of PBM’s loan. This is clear from Article
1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution
No. 5935. This resolution states that PBM’s outstanding loans may
be reduced to P1.373 million subject to certain conditions like the
51
payment of P150,000 initial payment. The resolution also states
that TRB should not release Ching’s solidary liability under his surety.
The resolution even directs TRB’s management to study Ching’s
52
criminal liability under the trust documents.
Ching’s own witness testified that Resolution No. 5935 was never
implemented. For one, PBM or its receiver never paid the P150,000
initial payment to TRB. TRB also rejected the document that PBM’s
receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to
escape liability under his suretyship.
Ching’s attempts to have this Court review the factual issues of the
case are improper. It is not a function of the Supreme Court to
assess and evaluate again the evidence, testimonial and evidentiary,
adduced by the parties particularly where the findings of both the
53
trial court and the appellate court coincide on the matter.
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit
covered by the trust receipts. Other than his bare allegations, Ching
has not shown proof of payment or settlement with TRB. Atty.
Vicente Aranda, TRB’s corporate secretary and First Vice President
of its Human Resource Management Department, testified that the
conditions in the TRB board resolution presented by Ching were not
met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation
ha[s] been outlined, and may I refer you to condition or
step No. 1, which reads: "a) Accept the P1.373 million
deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted
per hereto attached schedule). The amount of P1.373
CREDIT TRANSACTIONS
million shall be considered as full payment of PBM’s
account. (The receiver is amenable to this alternative.) The
initial deposit/remittance which amounts to P150,000.00
shall be remitted upon approval of the above and
conforme of PISCOR [xxx] and PBM. Subsequent deposits
shall start on the 3rd year and annually thereafter (every
June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole
obligation due and demandable. Now Mr. Witness, would
you be in a position to inform [the court] if these
conditions listed in item (a) in Resolution No. 5935, series
of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more
particularly the initial deposit/remittance in the amount
ofP150,000.00 which have to be done with approval was
not remitted or met.
Q Will you clarify your answer. Would you be in a position
to inform the court if those conditions were met? Because
your initial answer was yes.
A Yes sir, I am in a position to state that these conditions
were not met.
Q Let me refer you to the condition listed as item (b) of the
same resolution which I read and quote: "Write off
immediately P4.278 million. The balance of P1.373 million
to remain outstanding in the books of the bank. Said
balance will be remitted to the Bank for a period of 17
years." Mr. Witness, would you be in a position to inform
the court if the bank implemented that particular
condition?
A In the implementation of this settlement the receiver
prepared a document for approval and conformity of the
bank. The said document would in effect release the
suretyship of Alfredo Ching and for that reason the bank
refused or denied fixing its conformity and approval with
the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff
bank did not implement these conditionalities [sic] was
because the former defendant corporation requested that
the suretyship of Alfredo Ching be released, is that
correct?
A I did not say that. I said that in effect the document
prepared by the lawyer of the receiver xxx the bank would
release the suretyship of Alfredo Ching, that is why the
bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of
said requirement or conformity did not seek to implement
these conditionalities [sic]?
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FULL TEXT CASES – Guaranty and Suretyship
A Yes sir because the conditions imposed by the board is
not being followed in that document because it was the
condition of the board that the suretyship should not be
released but the document being presented to the bank
for signature and conformity in effect if signed would
release the suretyship. So it would be a violation with the
approval of the board so the bank did not sign the
54
conformity.
Ching also claims that TRB prevented PBM from fulfilling its
obligations under the trust receipts when TRB, together with other
creditor banks, took hold of PBM’s inventories, including the goods
covered by the trust receipts. Ching asserts that this act of TRB
released him from liability under the suretyship. Ching forgets that
he executed, on behalf of PBM, separate Undertakings for each trust
receipt expressly granting to TRB the right to take possession of the
goods at any time to protect TRB’s interests. TRB may exercise such
right without waiving its right to collect the full amount of the loan
to PBM. The Undertakings also provide that any suspension of
payment or any assignment by PBM for the benefit of creditors
renders the loan due and demandable. Thus, the separate
Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust
and take possession of said merchandise with the right to sell and
dispose of the same under such terms and conditions it may deem
best, or of the proceeds of such of the same as may then have been
sold, wherever the said merchandise or proceeds may then be found
and all the provisions of the Trust Receipt shall apply to and be
deemed to include said above-mentioned merchandise if the same
shall have been made up or used in the manufacture of any other
goods, or merchandise, and the said BANK shall have the same rights
and remedies against the said merchandise in its manufactured
state, or the product of said manufacture as it would have had in the
event that such merchandise had remained [in] its original state and
irrespective of the fact that other and different merchandise is used
in completing such manufacture. In the event of any suspension, or
failure or assignment for the benefit of creditors on the part of the
undersigned or of the non-fulfillment of any obligation, or of the
non-payment at maturity of any acceptance made under said
credit, or any other credit issued by the said BANK on account of the
undersigned or of the non-payment of any indebtedness on the
part of the undersigned to the said BANK, all obligations,
acceptances, indebtedness and liabilities whatsoever shall
thereupon without notice mature and become due and payable
and the BANK may avail of the remedies provided
55
herein. (Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the
Trust Receipts Law, expressly allows TRB to take possession of the
goods covered by the trust receipts. Thus, Section of 7 of PD No. 115
states:
SECTION 7. Rights of the entruster. — The entruster shall be entitled
to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the
extent of the amount owing to the entruster or as appears in the
trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other
rights conferred on him in the trust receipt provided such are not
contrary to the provisions of this Decree.
CREDIT TRANSACTIONS
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and
the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to
the entrustee of the intention to sell, and may, not less than five
days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds
of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents
or instruments; (c) to the satisfaction of the entrustee’s
indebtedness to the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing, and either
personally served on the entrustee or sent by post-paid ordinary
mail to the entrustee’s last known business address. (Emphasis
supplied)
Thus, even though TRB took possession of the goods covered by the
trust receipts, PBM and Ching remained liable for the entire amount
of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Ching’s credit
obligations with TRB, Ching’s liability is what the Deed of Suretyship
stipulates, plus the applicable interest and penalties. The trust
receipts, as well as the Letter of Undertaking dated 16 April
56
1980 executed by PBM, stipulate in writing the payment of interest
without specifying the rate. In such a case, the applicable interest
57
rate shall be the legal rate, which is now 12% per annum. This is in
accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No.
2655, as amended, otherwise known as the "Usury Law," the
Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has
prescribed that the rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in judgments, in
the absence of express contract as to such rate of interest, shall be
twelve per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000
trust loan provides for 18% interest per annum plus 2% penalty
interest per annum in case of default. This stipulated interest should
continue to run until full payment of the P3,500,000 trust loan. In
addition, the accrued interest on all the credit accommodations
should earn legal interest from the date of filing of the complaint
pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point.
The trial court found and the appellate court affirmed that the
outstanding principal amounts as of the filing of the complaint with
the trial court on 13 May 1983 were P959,611.96 under Trust
Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113,
and P3,500,000 for the trust loan. As extracted from TRB’s
58
Statement of Account as of 31 October 1991, the accrued interest
on the trust receipts and the trust loan as of the filing of the
59
complaint on 13 May 1983 were P311,387.51 under Trust Receipt
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FULL TEXT CASES – Guaranty and Suretyship CREDIT TRANSACTIONS

60
No. 106, P338,739.81 under Trust Receipt No. 113,
61
and P1,287,616.44 under the trust loan. The penalty interest on
62
the trust loan amounted to P137,315.07. Ching did not rebut this
Statement of Account which TRB presented during trial.

Thus, the following is the summary of Ching’s liability under the

suretyship as of 13 May 1983, the date of filing of TRB’s complaint
with the trial court:

1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P 959,611.96

Accrued Interest (12% per annum) 311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P 1,191,137.13

Accrued Interest (12% per annum) 338,739.82

3. On the Trust Loan (Promissory Note)

Outstanding Principal P 3,500,000.00

Accrued Interest (18% per annum) 1,287,616.44

Accrued Penalty Interest (2% per annum)

137,315.07

WHEREFORE, we AFFIRM the decision of the Court of Appeals with

MODIFICATION. Petitioner Alfredo Ching shall pay respondent
Traders Royal Bank the following (1) on the credit accommodations
under the trust receipts, the total principal amount of P2,150,749.09
with legal interest at 12% per annum from 14 May 1983 until full
payment; (2) on the trust loan evidenced by the Promissory Note,
the principal sum of P3,500,000 with 20% interest per annum from
14 May 1983 until full payment; (3) on the total accrued interest as
of 13 May 1983, P2,075,058.84 with 12% interest per annum from
14 May 1983 until full payment. Petitioner Alfredo Ching shall also
pay attorney’s fees to respondent Traders Royal Bank equivalent to
5% of the total principal and interest.

SO ORDERED.

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FULL TEXT CASES – Guaranty and Suretyship
G.R. No. 151953 June 29, 2007
SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not
under obligation to reimburse respondent, a claim that can be easily
debunked. The more perplexing question is whether this obligation
to repay is solidary, as contended by respondent and the lower
courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the
1 PDCP foreclosed on the chattel mortgage, there remained a
Philippines (PDCP) entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make available and
lend to Falcon the amount of US$320,000.00, for specific purposes
2
and subject to certain terms and conditions. On the same day,
three stockholders-officers of Falcon, namely: respondent Rafael
Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey
executed an Assumption of Solidary Liability whereby they agreed
"to assume in [their] individual capacity, solidary liability with
[Falcon] for the due and punctual payment" of the loan contracted
3
by Falcon with PDCP. In the meantime, two separate guaranties
were executed to guarantee the payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and
4
individual capacities. One Guaranty was executed by petitioner
5
Salvador Escaño (Escaño), while the other by petitioner Mario M.
Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon
to Escaño, Silos and Joseph M. Matti (Matti). Thus, contracts were
executed whereby Ortigas, George A. Scholey, Inductivo and the
heirs of then already deceased George T. Scholey assigned their
6
shares of stock in Falcon to Escaño, Silos and Matti. Part of the
consideration that induced the sale of stock was a desire by Ortigas,
et al., to relieve themselves of all liability arising from their previous
joint and several undertakings with Falcon, including those related
to the loan with PDCP. Thus, an Undertaking dated 11 June 1982
7
was executed by the concerned parties, namely: with Escaño, Silos
and Matti identified in the document as "SURETIES," on one hand,
and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the
other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause
PDCP and PAIC to release OBLIGORS from their said guarantees [sic],
SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the
following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP
and/or PAIC for the payment of FALCON’s obligations with it, any of
[the] OBLIGORS shall immediately inform SURETIES thereof so that
the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or
all of OBLIGORS for collection of said loans and/or credit facilities,
SURETIES agree to defend OBLIGORS at their own expense, without
CREDIT TRANSACTIONS
prejudice to any and/or all of OBLIGORS impleading SURETIES
therein for contribution, indemnity, subrogation or other relief in
respect to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to
pay any amount to PDCP and/or PAIC, SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar days from
such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees
which may be due from FALCON arising out of, or in connection
8
with, their said guarantees[sic].
Falcon eventually availed of the sum of US$178,655.59 from the
credit line extended by PDCP. It would also execute a Deed of
Chattel Mortgage over its personal properties to further secure the
loan. However, Falcon subsequently defaulted in its payments. After
subsisting deficiency of P5,031,004.07, which Falcon did not satisfy
9
despite demand.
On 28 April 1989, in order to recover the indebtedness, PDCP filed a
complaint for sum of money with the Regional Trial Court of Makati
(RTC) against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo.
The case was docketed as Civil Case No. 89-5128. For his part,
Ortigas filed together with his answer a cross-claim against his co-
defendants Falcon, Escaño and Silos, and also manifested his intent
10
to file a third-party complaint against the Scholeys and Matti. The
cross-claim lodged against Escaño and Silos was predicated on the
1982 Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who in
December of 1993, entered into a compromise agreement whereby
he agreed to pay the bankP1,000,000.00. In exchange, PDCP waived
or assigned in favor of Escaño one-third (1/3) of its entire claim in
11
the complaint against all of the other defendants in the case. The
compromise agreement was approved by the RTC in a
12
Judgment dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
13
compromise agreement with PDCP, allegedly without the
knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to
pay PDCP P1,300,000.00 as "full satisfaction of the PDCP’s claim
14
against Ortigas," in exchange for PDCP’s release of Ortigas from
any liability or claim arising from the Falcon loan agreement, and a
renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00 in exchange for
15
PDCP’s waiver of its claims against him.
In the meantime, after having settled with PDCP, Ortigas pursued his
claims against Escaño, Silos and Matti, on the basis of the 1982
Undertaking. He initiated a third-party complaint against Matti and
16
Silos, while he maintained his cross-claim against Escaño. In 1995,
Ortigas filed a motion for Summary Judgment in his favor against
Escaño, Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escaño, Silos and Matti to pay Ortigas,
jointly and severally, the amount of P1,300,000.00, as well
17
as P20,000.00 in attorney’s fees. The trial court ratiocinated that
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none of the third-party defendants disputed the 1982 Undertaking,
and that "the mere denials of defendants with respect to non-
compliance of Ortigas of the terms and conditions of the
Undertaking, unaccompanied by any substantial fact which would be
admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary
18
judgment, even if such facts were raised in the pleadings." In an
Order dated 7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded Ortigas
legal interest of 12% per annum to be computed from 28 February
19
1994.
From the Summary Judgment, recourse was had by way of appeal to
the Court of Appeals. Escaño and Silos appealed jointly while Matti
20
appealed by his lonesome. In a Decision dated 23 January 2002,
the Court of Appeals dismissed the appeals and affirmed the
Summary Judgment. The appellate court found that the RTC did not
err in rendering the summary judgment since the three appellants
did not effectively deny their execution of the 1982 Undertaking.
The special defenses that were raised, "payment and excussion,"
were characterized by the Court of Appeals as "appear[ing] to be
merely sham in the light of the pleadings and supporting documents
21
and affidavits." Thus, it was concluded that there was no genuine
issue that would still require the rigors of trial, and that the
appealed judgment was decided on the bases of the undisputed and
established facts of the case.
Hence, the present petition for review filed by Escaño and
22
Silos. Two main issues are raised. First, petitioners dispute that
they are liable to Ortigas on the basis of the 1982 Undertaking, a
document which they do not disavow and have in fact annexed to
their petition. Second, on the assumption that they are liable to
Ortigas under the 1982 Undertaking, petitioners argue that they are
jointly liable only, and not solidarily. Further assuming that they are
liable, petitioners also submit that they are not liable for interest
and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition
or their memorandum before the Court, the appropriateness of the
summary judgment as a relief favorable to Ortigas. Under Section 3,
Rule 35 of the 1997 Rules of Civil Procedure, summary judgment
may avail if the pleadings, supporting affidavits, depositions and
admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law. Petitioner have
not attempted to demonstrate before us that there existed a
genuine issue as to any material fact that would preclude summary
judgment. Thus, we affirm with ease the common rulings of the
lower courts that summary judgment is an appropriate recourse in
this case.
The vital issue actually raised before us is whether petitioners were
correctly held liable to Ortigas on the basis of the 1982 Undertaking
in this Summary Judgment. An examination of the document reveals
several clauses that make it clear that the agreement was brought
forth by the desire of Ortigas, Inductivo and the Scholeys to be
released from their liability under the loan agreement which release
was, in turn, part of the consideration for the assignment of their
shares in Falcon to petitioners and Matti. The whereas clauses
manifest that Ortigas had bound himself with Falcon for the
payment of the loan with PDCP, and that "amongst the
consideration for OBLIGORS and/or their principals aforesaid selling
is SURETIES’ relieving OBLIGORS of any and all liability arising from
CREDIT TRANSACTIONS
23
their said joint and several undertakings with FALCON." Most
crucial is the clause in Paragraph 3 of the Undertaking wherein
petitioners "irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] to PDCP x x x under the following
24
terms and conditions."
At the same time, it is clear that the assumption by petitioners of
Ortigas’s "guarantees" [sic] to PDCP is governed by stipulated terms
and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph
3. First, upon receipt by "any of OBLIGORS" of any demand from
PDCP for the payment of Falcon’s obligations with it, "any of
OBLIGORS" was to immediately inform "SURETIES" thereof so that
the latter can timely take appropriate measures. Second, should
"any and/or all of OBLIGORS" be impleaded by PDCP in a suit for
collection of its loan, "SURETIES agree[d] to defend OBLIGORS at
their own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity,
25
subrogation or other relief" in respect to any of the claims of PDCP.
Third, if any of the "OBLIGORS is for any reason made to pay any
amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said
26
amount/s within seven (7) calendar days from such payment."
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not "made to pay" PDCP the amount now
sought to be reimbursed, as Ortigas voluntarily paid PDCP the
amount of P1.3 Million as an amicable settlement of the claims
posed by the bank against him. However, the subject clause in
paragraph 3(c) actually reads "[i]n the event that any of OBLIGORS is
27
for any reason made to pay any amount to PDCP x x x" As pointed
out by Ortigas, the phrase "for any reason" reasonably includes any
extra-judicial settlement of obligation such as what Ortigas had
undertaken to pay to PDCP, as it is indeed obvious that the phrase
was incorporated in the clause to render the eventual payment
adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had
the Undertaking made clear that the right of Ortigas to seek
reimbursement accrued only after he had delivered payment to
PDCP as a consequence of a final and executory judgment. On the
contrary, the clear intent of the Undertaking was for petitioners and
Matti to relieve the burden on Ortigas and his fellow "OBLIGORS" as
soon as possible, and not only after Ortigas had been subjected to a
final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all
efforts to cause PDCP x x x to within a reasonable time release all
28
the OBLIGORS x x x from their guarantees [sic] to PDCP x x x" In the
event that Ortigas and his fellow "OBLIGORS" could not be released
from their guaranties, paragraph 2 commits petitioners and Matti to
cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to
pledge or assign such payments to Ortigas, et al., as security for
whatever amounts the latter may be held liable under their
guaranties. In addition, paragraph 1 also makes clear that nothing in
the Undertaking "shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said
29
guarantees [sic]."
There is no argument to support petitioners’ position on the import
of the phrase "made to pay" in the Undertaking, other than an
unduly literalist reading that is clearly inconsistent with the thrust of
the document. Under the Civil Code, the various stipulations of a
contract shall be interpreted together, attributing to the doubtful
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ones that sense which may result from all of them taken
30
jointly. Likewise applicable is the provision that if some stipulation
of any contract should admit of several meanings, it shall be
understood as bearing
that import which is most adequate to render it effectual. As a
31
means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the
other conditions set in paragraph 3, as they claim. Following the
general assertion in the petition that Ortigas violated the terms of
the Undertaking, petitioners add that Ortigas "paid PDCP BANK the
amount of P1.3 million without petitioners ESCANO and SILOS’s
32
knowledge and consent." Paragraph 3(a) of the Undertaking does
impose a requirement that any of the "OBLIGORS" shall immediately
inform "SURETIES" if they received any demand for payment of
FALCON’s obligations to PDCP, but that requirement is reasoned "so
that the [SURETIES] can timely take appropriate
33
measures" presumably to settle the obligation without having to
burden the "OBLIGORS." This notice requirement in paragraph 3(a)
is markedly way off from the suggestion of petitioners that Ortigas,
after already having been impleaded as a defendant in the collection
suit, was obliged under the 1982 Undertaking to notify them before
settling with PDCP.
The other arguments petitioners have offered to escape liability to
Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first
place. They note that Ortigas had, in his answer, denied any liability
to PDCP and had alleged that he signed the Assumption of Solidary
Liability not in his personal capacity, but as an officer of Falcon.
However, such position, according to petitioners, could not be
justified since Ortigas later voluntarily paid PDCP the amount of P1.3
Million. Such circumstances, according to petitioners, amounted to
estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP and
Ortigas expressly stipulated that Ortigas’s offer to pay PDCP was
conditioned "without [Ortigas’s] admitting liability to plaintiff PDCP
Bank’s complaint, and to terminate and dismiss the said case as
34
against Ortigas solely." Petitioners profess it is "unthinkable" for
Ortigas to have voluntarily paid PDCP without admitting his
35
liability, yet such contention based on assumption cannot
supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP
after he had already assigned his obligation to petitioners through
the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial
claim against Ortigas notwithstanding the Undertaking he executed
with petitioners. Not being a party to such Undertaking, PDCP was
not precluded by a contract from pursuing its claim against Ortigas
based on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said
CREDIT TRANSACTIONS
36
guarantees [sic]." Simply put, the Undertaking did not bar Ortigas
from pursuing his own settlement with PDCP. Neither did the
Undertaking bar Ortigas from recovering from petitioners whatever
amount he may have paid PDCP through his own settlement. The
stipulation that if Ortigas was "for any reason made to pay any
amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such
37
payment" makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily,
liable to Ortigas, claiming that the Undertaking did not provide for
express solidarity. They cite Article 1207 of the New Civil Code,
which states in part that "[t]here is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly
and severally liable for the Undertaking, as the language used in the
38
agreement "clearly shows that it is a surety agreement" between
the obligors (Ortigas group) and the sureties (Escaño group). Ortigas
points out that the Undertaking uses the word "SURETIES" although
the document, in describing the parties. It is further contended that
the principal objective of the parties in executing the Undertaking
cannot be attained unless petitioners are solidarily liable "because
the total loan obligation can not be paid or settled to free or release
the OBLIGORS if one or any of the SURETIES default from their
39
obligation in the Undertaking."
In case, there is a concurrence of two or more creditors or of two or
more debtors in one and the same obligation, Article 1207 of the
Civil Code states that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity." Article 1210 supplies
further caution against the broad interpretation of solidarity by
providing: "The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of concurrence of
two or more creditors or of two or more debtors in one and the
same obligation, and in the absence of express and indubitable
terms characterizing the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes incumbent upon the
party alleging that the obligation is indeed solidary in character to
prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed "to bind themselves jointly and severally" in their
obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed
only to be joint. Ortigas, as the party alleging that the obligation is in
fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to
discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and
Matti identified themselves in the Undertaking as "SURETIES", a
term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently
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establishes that the obligation of petitioners to him was joint and
solidary in nature.
The term "surety" has a specific meaning under our Civil Code.
Article 2047 provides the statutory definition of a surety agreement,
thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself
to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. [Emphasis
40
supplied]
As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus, a
surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigas’s argument
rests solely on the solidary nature of the obligation of the surety
under Article 2047. In tandem with the nomenclature "SURETIES"
accorded to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined
under Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal
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
41
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
42
extinguished. At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid, for
the surety does in fact "become subrogated to all the rights and
43
remedies of the creditor."
Note that Article 2047 itself specifically calls for the application of
the provisions on joint and solidary obligations to suretyship
44
contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid
45
(i.e., the surety). However, a significant distinction still lies between
a joint and several debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel any one of the joint
and several debtors or the surety alone to answer for the entirety of
the principal debt. The difference lies in the respective faculties of
the joint and several debtor and the surety to seek reimbursement
for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor
and a surety:
CREDIT TRANSACTIONS
A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.
The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is
46
similar to the common law suretyship.
In the case of joint and several debtors, Article 1217 makes plain
that the solidary debtor who effected the payment to the creditor
"may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made." Such solidary
debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery
extends only to the proportional share of the other co-debtors, and
not as to the particular proportional share of the solidary debtor
who already paid. In contrast, even as the surety is solidarily bound
with the principal debtor to the creditor, the surety who does pay
the creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor or debtors.
Such right to full reimbursement falls within the other rights, actions
and benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety?
We find the right under Article 2066 of the Civil Code, which assures
that "[t]he guarantor who pays for a debtor must be indemnified by
the latter," such indemnity comprising of, among others, "the total
47
amount of the debt." Further, Article 2067 of the Civil Code
likewise establishes that "[t]he guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had against the
48
debtor."
Articles 2066 and 2067 explicitly pertain to guarantors, and one
might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the provisions
on joint and several obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentino’s observation that
"[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or
several obligations, however, does not mean that suretyship is
49
withdrawn from the applicable provisions governing guaranty." For
if that were not the implication, there would be no material
difference between the surety as defined under Article 2047 and the
joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067
extend as well to sureties as defined under Article 2047. These rights
granted to the surety who pays materially differ from those granted
under Article 1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter extends "only [to] the
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FULL TEXT CASES – Guaranty and Suretyship
share which corresponds to each [co-debtor]." It is for this reason
that the Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as "SURETIES," they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of
the general presumption favoring joint liability, the Court would
have to be satisfied that among the petitioners and Matti, there is
one or some of them who stand as the principal debtor to Ortigas
and another as surety who has the right to full reimbursement from
the principal debtor or debtors. No suggestion is made by the parties
that such is the case, and certainly the Undertaking is not revelatory
of such intention. If the Court were to give full fruition to the use of
the term "sureties" as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to
pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there
was an agreement whereby in the event that Ortigas were to seek
reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his
right to full reimbursement from the other two obligors. In such
case, there would have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas. Yet if there was
indeed such an agreement, it does not appear on the record. More
consequentially, no such intention is reflected in the Undertaking
itself, the very document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to pay
PDCP. The mere utilization of the term "SURETIES" could not work to
such effect, especially as it does not appear who exactly is the
principal debtor whose obligation is "assured" or "guaranteed" by
the surety.
Ortigas further argues that the nature of the Undertaking requires
"solidary obligation of the Sureties," since the Undertaking expressly
seeks to "reliev[e] obligors of any and all liability arising from their
said joint and several undertaking with [F]alcon," and for the
"sureties" to "irrevocably agree and undertake to assume all of
50
obligors said guarantees to PDCP." We do not doubt that a finding
of solidary liability among the petitioners works to the benefit of
Ortigas in the facilitation of these goals, yet the Undertaking itself
contains no stipulation or clause that establishes petitioners’
obligation to Ortigas as solidary. Moreover, the aims adverted to by
Ortigas do not by themselves establish that the nature of the
obligation requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would
still be accomplished through the complete execution of such a
judgment.
Petitioners further claim that they are not liable for attorney’s fees
since the Undertaking contained no such stipulation for attorney’s
fees, and that the situation did not fall under the instances under
Article 2208 of the Civil Code where attorney’s fees are recoverable
in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the
petitioners led to his being impleaded in the suit filed by PDCP. The
Undertaking was precisely executed as a means to obtain the
release of Ortigas and the Scholeys from their previous obligations
as sureties of Falcon, especially considering that they were already
CREDIT TRANSACTIONS
divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas
from his surety agreements with Falcon. Specific provisions likewise
mandate the immediate repayment of Ortigas should he still be
made to pay PDCP by reason of the guaranty agreements from
which he was ostensibly to be released through the efforts of
petitioners. None of these provisions were complied with by
petitioners, and Article 2208(2) precisely allows for the recovery of
attorney’s fees "[w]hen the defendant’s act or omission has
compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest
since the Undertaking does not contain any stipulation for interest,
and assuming that they are liable, that the rate of interest should
not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of
51
Appeals set forth the rules with respect to the manner of
computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the
court is made (at which time quantification of damages may be
deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of
52
credit.
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Since what was the constituted in the Undertaking consisted of a

payment in a sum of money, the rate of interest thereon shall be
12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus
proper. However, the computation should be reckoned from judicial
or extrajudicial demand. Per records, there is no indication that
Ortigas made any extrajudicial demand to petitioners and Matti
after he paid PDCP, but on 14 March 1994, Ortigas made a judicial
demand when he filed a Third-Party Complaint praying that
petitioners and Matti be made to reimburse him for the payments
made to PDCP. It is the filing of this Third Party Complaint on 14
March 1994 that should be considered as the date of judicial
demand from which the computation of interest should be
53
reckoned. Since the RTC held that interest should be computed
from 28 February 1994, the appropriate redefinition should be
made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the

Regional Trial Court dated 5 October 1995 is modified by declaring
that petitioners and Joseph M. Matti are only jointly liable, not
jointly and severally, to respondent Rafael Ortigas, Jr. in the amount
of P1,300,000.00. The Order of the Regional Trial Court dated 7
March 1996 is MODIFIED in that the legal interest of 12% per annum
on the amount of P1,300,000.00 is to be computed from 14 March
1994, the date of judicial demand, and not from 28 February 1994 as
directed in the Order of the lower court. The assailed rulings are
affirmed in all other respects. Costs against petitioners.

SO ORDERED.

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