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CREDIT TRANSACTIONS Atty.

Rowell Ilagan 1

Warehouse Receipts Law


Guaranty and Suretyship

Warehouse Receipts Law  Receipts Nos. 18086, 18087 and 18062 (4, 5 and 1) were negotiated
and endorsed to Cresencia K. Zoleta.
PNB v. SE  Ramos and Zoleta then used the WR as security for two loan
G.R. No. 119231, April 18, 1996 agreements — one for P15.6 million and the other for P23.5 million —
Petitioner: Philippine National Bank (PNB) obtained by them from PNB. The aforementioned WRs were endorsed
Respondents: Hon. Pres. Judge Benito C. Se, Jr., (RTC, Br. 45, Manila); by them to the PNB.
Noah's Ark Sugar Refinery; Alberto T. Looyuko, Jimmy T. Go and Wilson  They failed to pay their loans upon maturity on January 9, 1990. Thus,
T. Go PNB wrote to Noah's Ark demanding delivery of the sugar stocks
covered by the WRs endorsed to it by Zoleta and Ramos. Noah's Ark
Summary: PNB as endorsee of 5 WRs, demanded the delivery of sugar refused to comply with the demand alleging ownership thereof, for
stocks covered by said WRs. Noah's Ark refused to comply alleging that the which reason the PNB filed with the RTC of Manila a verified
original purchasers of stocks never acquired ownership because of their complaint for "Specific Performance with Damages and Application for
failure to pay. PNB initially obtained favorable judgment. Private Writ of Attachment" against Noah's Ark, Alberto T. Looyuko (sole
respondents asserted their warehouseman's lien. SC upheld the proprietor), Jimmy T. Go (managing partner) and Wilson T. Go
warehouseman's lien. While PNV is entitled to stocks of sugar as indorsee (Executive Vice President)
of the WRs, delivery to it shall only be effected upon payment of storage  Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the
fees. Application for Preliminary Attachment.
 Defendants filed an Answer with Counterclaim and Third-Party
FACTS: Complaint in which they claimed that they are the owners of the subject
 Noah's Ark Sugar Refinery (Noah’s Ark) issued on several dates, the WRs and the sugar represented therein.
following Warehouse Receipts (WR):  PNB filed Motion for Summary Judgment
1. March 1, 1989, Receipt No. 18062, covering sugar deposited o RTC – denied the motion
by Rosa Sy; o CA - nullified and set aside the orders of RTC and ordered the
2. March 7, 1989, Receipt No. 18080, covering sugar deposited trial court to render summary judgment in favor of the PNB.
by RNS Merchandising (Rosa Ng Sy); Defendants were not the owners but mere warehousemen with
3. March 21, 1989, Receipt No. 18081, covering sugar deposited respect to sugar stocks.
by St. Therese Merchandising;  RTC - dismissed PNB’s complaint against private respondents for lack
4. March 31, 1989, Receipt No. 18086, covering sugar deposited of cause of action and likewise dismissed private respondents'
by St. Therese Merchandising; counterclaim against PNB and of the Third-Party Complaint and the
5. April 1, 1989, Receipt No. 18087, covering sugar deposited by Third-Party Defendant's Counterclaim.
RNS Merchandising.  PNB filed petition for certiorari.
 The receipts are substantially in the form, and contains the terms,  Argues that private respondents have lost their right to recover
prescribed for negotiable warehouse receipts by Section 2 of the law. warehouseman's lien on the sugar stocks covered by the 5 WRs for
 Warehouse Receipts Nos. 18080 and 18081 (2 and 3) were negotiated the reason that they failed to set up said claim in their Answer
and endorsed to Luis T. Ramos before the trial court and that private respondents did not appeal

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 2

from the decision in this regard, dated June 18, 1992. Petitioner private respondents' unqualified right to establish its claim to recover
asseverates that the denial by this Court on March 9, 1994 of the storage fees which is recognized under Republic Act No. 2137.
motion seeking clarification of our decision has foreclosed private  Petitioner is in estoppel in disclaiming liability for the payment of
respondents' right to enforce their warehouseman's lien for storage storage fees due the private respondents as warehouseman while
fees and preservation expenses under the Warehouse Receipts Act. claiming to be entitled to the sugar stocks covered by the subject
 Respondents’ arguments Warehouse Receipts on the basis of which it anchors its claim for
 They could not have claimed the right to a warehouseman's lien in payment or delivery of the sugar stocks. The unconditional presentment
their Answer to the complaint before the trial court as it would of the receipts by the petitioner for payments against private
have been inconsistent with their stand that they claim ownership respondents on the strength of the provisions of the Warehouse
of the stocks covered by the WRs since the checks issued for Receipts Law (R.A. 2137) carried with it the admission of the existence
payment thereof were dishonored. and validity of the terms, conditions and stipulations written on the face
 If they were still the owners, it would have been absurd for them to of the Warehouse Receipts, including the unqualified recognition of the
ask payment for storage fees and preservation expenses. payment of warehouseman's lien for storage fees and preservation
 The resolution denying their motion for clarification did not expenses. Petitioner may not now retrieve the sugar stocks without
preclude their right to claim their warehouseman's lien under paying the lien due private respondents as warehouseman.
Sections 27 and 31 of RA 2137.  While the PNB is entitled to the stocks of sugar as the endorsee of
the WRs, delivery to it shall be effected only upon payment of the
ISSUE: WON the orders of Judge Se are valid storage fees. Imperative is the right of the warehouseman to demand
payment of his lien at this juncture, because, in accordance with
HELD: Section 29 of the Warehouse Receipts Law, the warehouseman loses
his lien upon goods by surrendering possession thereof. In other
SECTION 27. What claims are included in the warehouseman's lien. — words, the lien may be lost where the warehouseman surrenders the
Subject to the provisions of section thirty, a warehouseman shall have lien possession of the goods without requiring payment of his lien, because
on goods deposited or on the proceeds thereof in his hands, for all lawful a warehouseman's lien is possessory in nature.
charges for storage and preservation of the goods; also for all lawful claims  WHEREFORE, the petition should be, as it is, hereby dismissed for
for money advanced, interest, insurance, transportation, labor, weighing lack of merit. The questioned orders issued by public respondent judge
coopering and other charges and expenses in relation to such goods; also for are affirmed.
all reasonable charges and expenses for notice, and advertisement of sale,
and for sale of the goods where default has been made in satisfying the
warehouseman's lien. PNB v. SAYO
G.R. No. 129918, July 9, 1998
SECTION 31. Warehouseman need not deliver until lien is satisfied. — A
warehouseman having a lien valid against the person demanding the goods Facts:
may refuse to deliver the goods to him until the lien is satisfied.  Noah’s Ark Sugar Refinery (Noah’s) issued on several dates, the
following Warehouse Receipts (Quedans) –– substantially in the form,
 Yes. There is no taint of abuse of discretion on the part of the Judge Se and contains the terms, prescribed for negotiable warehouse receipts by
in issuing the questioned orders which recognized the legitimate right Section 2 of the Act No. 2137:
of Noah's Ark, after being declared as warehouseman, to recover (a) Receipt No. 18062, covering sugar deposited by Rosa Sy;
storage fees before it would release to the PNB sugar stocks covered by (b) Receipt No. 18080, covering sugar deposited by RNS
the 5 WRs. Our resolution, dated March 9, 1994, did not preclude Merchandising (Rosa Ng Sy);

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 3

(c) Receipt No. 18081, covering sugar deposited by St. Therese (b) 10. *** Considering that the vendees and first endorsers of
Merchandising; subject quedans did not acquire ownership thereof, the
(d) Receipt No. 18086, covering sugar deposited by St. Therese subsequent endorsers and plaintiff itself did not acquire a
Merchandising; and better right of ownership than the original vendees/first
(e) Receipt No. 18087, covering sugar deposited by RNS endorsers.
Merchandising.  PNB filed a Motion for Summary Judgment in favor of the plaintiff
 Subsequently, Warehouse Receipts Nos. 18080 and 18081 were as against the defendants for the reliefs prayed for in the complaint.
negotiated and endorsed to Luis T. Ramos, and Receipts Nos. 18086,  RTC issued an order denying the Motion for Summary Judgment;
18087 and 18062 were negotiated and endorsed to Cresencia K. elevating the case to CA
Zoleta. Ramos and Zoleta then used the quedans as security for two  CA nullified and set aside the orders of RTC and ordered the trial court
loan agreements one for P15.6 million and the other for P23.5 million to render summary judgment in favor of the PNB.
obtained by them from the Philippine National Bank.
 The aforementioned quedans were endorsed by them to the Issue: WON PNB is entitled to the stocks of sugar as the endorsee of
Philippine National Bank. thequedans, without paying the lien
 Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon
maturity thereby causing PNB to write Noah’s, demanding delivery of Held:
the sugar stocks covered by the quedans endorsed to it by Zoleta and YES.While PNB is entitled to the stocks of sugar as the endorsee of
Ramos. thequedans, delivery to it shall be effected only upon payment of the
 Noahs Ark Sugar Refinery refused to comply with the demand alleging storagefees.
ownership thereof Imperative is the right of the warehouseman to demand payment of his lien
 PNB filed a verified complaint for Specific Performance with Damages at this juncture, because, in accordance with Section 29 of the Warehouse
and Application for Writ of Attachment against Noah’s, its sole Receipts Law, the warehouseman loses his lien upon goods by surrendering
proprietor, managing partner, and Exec. VP possession thereof. In other words, the lien may be lost where the
 Judge Benito Se, Jr., denied the Application for Preliminary warehouseman surrenders the possession of the goods without requiring
Attachment; also its MR. payment of his lien, because a warehouseman’s lien is possessory in nature.
 Noah’s Ark and its co-defendants claimed that they [were] the owners
of the subject quedans and the sugar represented therein, averring as The warehouseman is entitled to the warehouseman’s lien thatattaches to
they did that: the goods invokable against anyone who claims a right ofpossession
(a) 9. *** In an agreement dated April 1, 1989, defendants thereon.
agreed to sell to Rosa Ng Sy of RNS Merchandising and
Teresita Ng of St. Therese Merchandising the total volume of SECTION 31. Warehouseman need not deliver until lien is satisfied. A
sugar indicated in the quedans stored at Noahs Ark Sugar warehouseman having a lien valid against the person demanding the goods
Refinery for a total consideration of P63,000,000.00, *** The may refuse to deliver the goods to him until the lien is satisfied.
corresponding payments in the form of checks issued by the
vendees in favor of defendants were subsequently dishonored Simply put, where a valid demand by the lawful holder of
by the drawee banks by reason of payment stopped and the quedans for the delivery of the goods is refused by the warehouseman,
drawn against insufficient funds, *** Upon proper despite the absence of a lawful excuse provided by the statute itself, the
notification to said vendees and plaintiff in due course, warehouseman’s lien is thereafter concomitantly lost. As to what the law
defendants refused to deliver to vendees therein the quantity deems a valid demand, Section 8 enumerates what must accompany a
of sugar covered by the subject quedans.

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 4

demand; while as regards the reasons which a warehouseman may invoke to any negligence on his part, unless he has contracted so as to be liable
legally refuse to effect delivery of the goods covered by the quedans, these in such case, or that the goods have been taken by the mistake of a
are: third person without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-delivery. (67
(1) That the holder of the receipt does not satisfy the conditions prescribed C.J. 532)
in Section 8 of the Act. (See Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself on the goods, such Regrettably, the factual settings do not sufficiently indicate whether the
title or right being derived directly or indirectly from a transfer made demand to obtain possession of the goods complied with Section 8 of the
by the depositor at the time of or subsequent to the deposit for storage, law. The presumption, nevertheless, would be that the law was complied
or from the warehouseman’s lien. (Sec. 16, Act No. 2137) with, rather than breached, by petitioner. Upon the other hand, it would
(3) That the warehouseman has legally set up the title or right of third appear that the refusal of private respondents to deliver the goods was not
persons as lawful defense for non-delivery of the goods as follows: anchored on a valid excuse, i.e., non-satisfaction of the warehouseman’s
(a) Where the warehouseman has been requested, by or on behalf lien over the goods, but on an adverse claim of ownership. Private
of the person lawfully entitled to a right of property of or respondents justified their refusal to deliver the goods, as stated in their
possession in the goods, not to make such delivery (Sec. 10, Answer with Counterclaim and Third-Party Complaint in Civil Case No.
Act No. 2137), in which case, the warehouseman may, either 90-53023, by claiming that they are still the legal owners of the
as a defense to an action brought against him for non-delivery subject quedans and the quantity of sugar represented therein. Under the
of the goods, or as an original suit, whichever is appropriate, circumstances, this hardly qualified as a valid, legal excuse.
require all known claimants to interplead (Sec. 17, Act No.
2137); The loss of the warehouseman’s lien, however, does not necessarily mean
(b) Where the warehouseman had information that the delivery the extinguishment of the obligation to pay the warehousing fees and
about to be made was to one not lawfully entitled to the charges which continues to be a personal liability of the owners, i.e., the
possession of the goods (Sec. 10, Act No. 2137), in which pledgors, not the pledgee, in this case. But even as to the owners-pledgers,
case, the warehouseman shall be excused from liability for the warehouseman fees and charges have ceased to accrue from the date of
refusing to deliver the goods, either to the depositor or person the rejection by Noah’s Ark to heed the lawful demand by petitioner for the
claiming under him or to the adverse claimant, until the release of the goods.
warehouseman has had a reasonable time to ascertain the
validity of the adverse claims or to bring legal proceedings to
compel all claimants to interplead (Sec. 18, Act No. 2137); Guaranty and Suretyship
and
(c) Where the goods have already been lawfully sold to third ATOK FINANCE CORPORATION v. CA
persons to satisfy a warehouseman’s lien, or have been 222 SCRA 232 (1996)
lawfully sold or disposed of because of their perishable or Parties: Atok Finance Corporation (petitioner)
hazardous nature. (Sec. 36, Act No. 2137). Court of Appeals, Sanyu Chemical Corporation, Danilo E. Arrieta,
(4) That the warehouseman having a lien valid against the person Nenita B. Arrieta, PablitoBermundo and Leopoldo Halili
demanding the goods refuses to deliver the goods to him until the lien (respondents)
is satisfied. (Sec. 31, Act No. 2137)
(5) That the failure was not due to any fault on the part of the FACTS:
warehouseman, as by showing that, prior to demand for delivery and  July 27, 1979 – Sanyu Chemical, as principal and Sanyu Trading along
refusal, the goods were stolen or destroyed by fire, flood, etc., without with individual private stockholders of Sanyu Chemical, namely

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 5

NenitaArrieta, Leopoldo Halili and PablitoBermundo as sureties o Any indebtedness of the Principal now or hereafter held by
executed a Continuing Suretyship Agreement in favor of Atok the Surety is hereby subordinated to the indebtedness of
Finance as creditor. the Principal to the Creditor; and if the Creditor so requests,
 Under this agreement, SanyuTraing and the private respondents such indebtedness of the Principal to the Surety shall be
incurred the following obligations: collected, enforced and received by the Surety as trustee for
o They are jointly and severally unconditionally guarantee to the Creditor and shall be paid over to the Creditor on account
Atok Finance for value and/other consideration. of the indebtedness of the Principal to the Creditor but without
o They shall make the full, faithful and prompt payment and reducing or affecting in any manner the liability of the Surety
discharge of any and all indebtedness of Sanyu Chemical to under the other provisions of this suretyship.
the Atok Finance.  November 27, 1981 – Sanyu Chemical assigned its trade receivables
 Indebtedness (used in the agreement) shall outstanding as of 27 November 1981 with a total face value of Php
include any and all advances, debts, obligations and 125,871 to Atok Finance in consideration of receipt from Atok Finance
liabilities of the Principal (Sanyu Chemical) or any of the amount of Php 105,000.
one or more of themhere[to]fore, now or hereafter  The assigned receivables carried a standard term of thirty (30) days; it
made, incurred or created, whether voluntary or appeared, however, that the standard commercial practice was to grant
involuntary and however arising, whether direct or an extension of up to one hundred twenty (120) days without penalties.
acquired by the Creditor by assignment or  The relevant provisions of the deed of assignment include as follows:
succession, whether due or not due, absolute or o FOR VALUE RECEIVED, the ASSIGNOR does hereby
contingent, liquidated or unliquidated, determined or SELL, TRANSFER and ASSIGN all his/its rights, title and
undetermined and whether the Principal may be interest in the contracts, receivables, accounts, notes,
liable individually or jointly with others, or whether leases, deeds of sale with reservation of title, invoices,
recovery upon such indebtedness may be or hereafter mortgages, checks, negotiable instruments and evidences
become barred by any statute of limitations, or of indebtedness listed in the schedule forming part
whether such indebtedness may be or otherwise hereinafter called `Contract' or 'Contracts.'
become unenforceable. o Eight warranties that will induce the assignee to purchase the
 Other relevant provisions of the Agreement are as follows: above contracts. (See full text for the warranties)
o This is a continuing suretyship relating to any  Later, additional trade receivables were assigned by Sanyu Chemical to
indebtedness, including that arising under successive Atok Finance with a total face value ofPhp100,378.45.
transactions which shall either continue the indebtedness from  January 13, 1984 –A tok Finance commenced action against Sanyu
time to time or renew it after it has been satisfied. Chemical, the Arrieta spouses, PablitoBermundo and Leopoldo Halili
o The obligations hereunder are joint and several and before the Regional Trial Court of Manila to collect the sum of
independent of the obligations of the Principal. P120,240.00 plus penalty charges amounting to P0.03 for every peso
o In addition to all liens upon, and rights of set-off against the due and payable for each month starting from 1 September 1983.
moneys, securities or other property of the Surety given to o Atok Finance alleged that Sanyu Chemical had failed to
the Creditor by law, the Creditor shall have a lien upon collect and remit the amounts due under the trade
and a right of set-off against all moneys, securities, and receivables.
other property of the Surety now or hereafter in the  Private Respondents’ Contention: contended that the Continuing
possession of the Creditor; and every such lien or right of set- Suretyship Agreement, being an accessory contract, was null and
off may be exercised without need of demand upon or notice voidsince, at the time of its execution, Sanyu Chemical had no pre-
to the Surety. existing obligation due to Atok Finance.

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 6

 At the trial, Sanyu Chemical and the individual private respondents amount of which is not yet known; there can be no claim
failed to present any evidence on their own behalf, although the against the guarantor until the debt is liquidated. A conditional
individual private respondents submitted a memorandum in support of obligation may also be secured."
their argument.  The Court of Appeals apparently overlooked the caselaw
 April 1, 1985 - The trial court rendered a decision in favor of Atok interpreting Articles 2052 and 2053 of the Civil Code. In National
Finance. Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto
 March 21, 1986 – The appeal was dismissed by the IAC upon the Surety Co., Inc., the private respondents assailed the decision of
ground of abandonment. the trial court holding them liable under certain surety bonds filed
 August 27, 196 – Private respondents filed for a petition for relief with by private respondent Fojas and issued by private respondent Alto
the Court of Appeals. This was granted and the CA set aside the Surety Co. in favor of petitioner NARIC, upon the ground that
judgment of the IAC. those surety bonds were null and void "there being no principal
 Hence, the petition filed by Atok Finance before the SC. obligation to be secured by said bonds." In affirming the decision
of the trial court, this Court, speaking through Mr. Justice J.B.L.
ISSUES: Reyes, made short shrift of the private respondents' doctrinaire
(1) Whether or not that Agreement must be held null and void as having argument:
been executed without consideration and without a pre-existing  "Under his third assignment of error, appellant Fojas questions the
principal obligation to sustain it validity of the additional bonds (Exhs. D and D-1) on the theory
(2) Whether or not the individual private respondents may be held that when they were executed, the principal obligation referred to
solidarily liable with Sanyu Chemical under the provisions of the in said bonds had not yet been entered into, as no copy thereof was
Continuing Suretyship Agreement attached to the deeds of suretyship. This defense is untenable,
because in its complaint the NARIC averred, and the appellant did
HELD: not deny that these bonds were posted to secure the additional
(1) No. Agreement must NOT BE held null and void as having been credit that Fojas has applied for, and the credit increase over his
executed without consideration and without a pre-existing original contract was sufficient consideration for the bonds. That
principal obligation to sustain it. the latter were signed and filed before the additional credit was
 It is true that a guaranty or a suretyship agreement is an accessory extended by the NARIC is no ground for complaint. Article 1825
contract in the sense that it is entered into for the purpose of of the Civil Code of 1889, in force in 1948, expressly recognized
securing the performance of another obligation which is that 'a guaranty may also be given as security for future debts
denominated as the principal obligation. It is also true that Article the amount of which is not yet known.'"
2052 of the Civil Code states that "a guarantee cannot exist without  Comprehensive or continuing surety agreements are in fact quite
a valid obligation." This legal proposition is not, however, like commonplace in present day financial and commercial practice. A
most legal principles, to be read in an absolute and literal bank or a financing company which anticipates entering into a
manner and carried to the limit of its logic. This is clear from series of credit transactions with a particular company, commonly
Article 2052 of the Civil Code itself: Art. 2052. A guaranty requires the projected principal debtor to execute a continuing
cannot exist without a valid obligation. Nevertheless, a surety agreement along with its sureties. By executing such an
guaranty may be constituted to guarantee the performance of a agreement, the principal places itself in a position to enter into the
voidable or an unenforceable contract. It may also guarantee a projected series of transactions with its creditor; with such
natural obligation." suretyship agreement, there would be no need to execute a separate
 Moreover, Article 2053 of the Civil Code states: "Art. 2053. A surety contract or bond for each financing or credit
guaranty may also be given as security for future debts, the accommodation extended to the principal debtor. As the Court

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 7

understands it, this is precisely what happened in the case at bar. of individual private respondent officers and stockholders of
Sanyu Chemical under the Continuing Suretyship Agreement,
were activated by the resulting obligations of Sanyu Chemical
as solidary obligor under each of the assigned receivables by
(2) Yes. Individual private respondents may be held solidarily liable virtue of the operation of the Deed of Assignment. That
with Sanyu Chemical under the provisions of the Continuing solidary liability of Sanyu Chemical is not subject to the
Suretyship Agreement. limiting period set out in Article 1629 of the Civil Code.
 It may be stressed as a preliminary matter that the Deed of  It follows that at the time the original complaint was filed by
Assignment was valid and binding upon Sanyu Atok Finance in the trial court, it had a valid and enforceable
Chemical.Assignment of receivables is a commonplace cause of action against Sanyu Chemical and the other private
commercial transaction today. It is an activity or operation respondents. The Supreme Court also agrees with the Court of
that permits the assignee to monetize or realize the value Appeals that the original obligors under the receivables
of the receivables before the maturity thereof. In other assigned to Atok Finance remain liable under the terms of
words, Sanyu Chemical received from Atok Finance the value such receivables.
of its trade receivables it had assigned; Sanyu Chemical
obviously benefited from the assignment. The payments due in ONGSIAKO v. THE WORLD WIDE INSURANCE
the first instance from the trade debtors of Sanyu Chemical 104 PHIL 61
would represent the return of the investment which Atok
Finance had made when it paid Sanyu Chemical the transfer Plaintiff: EMMANUEL C. ONGSIAKO, ET AL
value of such receivables. Defendants: THE WORLD WIDE INSURANCE and SURETY CO.,
 Article 1629 of the Civil Code invoked by private respondents INC., ET AL., defendants.
and accepted by the Court of Appeals is not, in the case at bar, Cross-defendant-appellee: CATALINA DE LEON
material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the DE LEON DOCTRINE: Where, however, one of the conditions of the bond
liability of Sanyu Chemical was not ex lege (ex Article filed by the surety provides that the latter’s liability will expire on the date
1629) but rather ex contractu. Under the Deed of of the maturity of the principal obligation, which it interposed as a defense
Assignment, the effect of non-payment by the original trade to an action instituted therefor, such stipulation is unfair and unreasonable
debtors was a breach of warranty of solvency by Sanyu for it practically nullifies the nature of the undertaking it had assumed. As
Chemical, resulting in turn in the assumption of solidary the terms of the bond should be given a reasonable interpretation, it is
liability by the assignor under the receivables assigned.In logical to hold that the liability of the surety attaches as soon as the
other words, the assignor Sanyu Chemical becomes a principal debtor defaults, and notice thereof is given the surety within a
solidary debtor under the terms of the receivables covered reasonable time to enable it to take steps to protect its interest. The surety
and transferred by virtue of the Deed of Assignment. And has a remedy under the law which is to foreclose the counterbond put up by
because assignor Sanyu Chemical became, under the terms the principal debtor
of the Deed of Assignment, solidary obligor under each of
the assigned receivables, the other private respondents (the FACTS:
Arrieta spouses, PablitoBermundo and Leopoldo Halili), ● On November 10, 1951, Catalina de Leon executed in favor of
became solidarily liable for that obligation of Sanyu Augusto V. Ongsiako a promissory note in the amount of
Chemical, by virtue of the operation of the Continuing P1,200.00, payable ninety (90) days after date, with interest at 1% per
Suretyship Agreement. Put a little differently, the obligations month. On the same date, a surety bond was executed by Catalina de

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 8

Leon, as principal, and the World Wide Insurance & Surety Co.,
Inc., as surety, whereby they bound to pay said amount jointly and ISSUE: WON THE LIABILITY OF THE SURETY TO EXPIRE ON
severally to Augusto V. Ongsiako. MATURITY OF PRINCIPAL OBLIGATION ALSO CEASES ITS
● As the obligation was not paid on its date of maturity either of them RESPONSIBILITY?
notwithstanding the demands, Ongsiako brought this action to recover
from both the principal and the surety. HELD: No.
● Judgment having been rendered for the plaintiff, both defendants
appealed to the CFI. In the latter court, Catalina de Leon failed to ● It therefore appears that appellant has no justification whatever to
answer and so she was declared in default. In due time the surety resist the claim of the plaintiff for in the judgment appealed from it is
company filed its answer setting up a counterclaim against plaintiff precisely provided that execution of judgment should not issue against
and a cross-claim against its co-defendant. it until after it is shown that the execution of the judgment against the
● Court ordered de Leon to pay plaintiff the sum of P1,200.00, with principal has been returned by the sheriff unsatisfied, which was the
interest at the rate of 1% per month. Defendant surety company was only excuse given by said appellant in not fulfilling its commitment
likewise ordered to pay to plaintiff the same judgment but with the under the bond. And yet it appealed from said judgment just to put up
proviso that "execution should not issue against defendant surety, until the additional defense that its liability under the bond has already
a return is made by the Sheriff upon execution against defendant expired because of the condition that its liability shall expire on
Catalina de Leon showing that the judgment against her remained February 10, 1952. Even if this were true, we consider however this
unsatisfied in whole or in part; and provided, further, that de Leon stipulation as unfair and unreasonable for it practically nullifies the
shall reimburse to defendant Company whatever amount the latter nature of the undertaking assumed by appellant.
might pay under this judgment together with such expenses as may be ● It should be noted that the principal obligation is payable ninety days
necessary to effectuate said reimbursement." from date of issue, which falls on February 10, 1952. Only on this date
● Surety company appealed. Ongsiako, having died in the meantime, was can demand for payment be made on the principal debtor. If the debtor
substituted by his special administrators Emmanuel Ongsiako and should fail to pay and resort is made to the surety for payment on the
Severino Santiangco. next day, it would be unfair for the latter to allege that its liability has
● The surety bond in question was executed in November 10, 1951. already expired. And yet such is the stand taken by appellant. As the
Aside from the obligation to pay jointly, there also appears a special terms of the bond should be given a reasonable interpretation, it is
condition which recites: "The Liability of the World-Wide Insurance & logical to hold that the liability of the surety attaches as soon as the
Surety Co., Inc. under this bond will expire on February 10, 1952." principal debtor defaults, and notice thereof is given the surety within
● The note therein referred to, on the other hand, provides that the reasonable time to enable it to take steps to protect its interest. This is
obligation is payable ninety days from date of issue, November 10, what was done by appellee in the present case. After all, the surety has
1951, which means that its date of maturity is February 10, 1952. The a remedy under the law which is to foreclose the counterbond put up by
evidence shows that neither the principal nor the surety paid the the principal debtor. This is in effect what was done by the lower court.
obligation on said date of maturity and immediately thereafter ● This Court has taken note of the reprehensible attitude adopted by the
demands for payment were made upon them. Thus, it appears that as surety company in this case by resorting to improper means in an
early as February 12, or two days thereafter, the creditor wrote to the effort to evade its clear responsibility under the law. An instance of
surety company a letter notifying it of the failure of its principal to pay such attitude is the insertion in the bond of a provision which in essence
the obligation and requesting that it make good its guaranty under the tends to nullify its commitment. This is a subtle way of making money
bond. To these demands, the company merely set up the defense that it thru trickery and deception. Such practice should be stopped if only to
only acted as a guarantor and as such its liability cannot be exacted protect honest dealers or people in financial stress. Because of such
until after the property of the principal shall have been exhausted

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 9

improper conduct, this Court finds no justification for the present  In opposing the money claim, Pascual M. Perez asserts that the
appeal and considers it frivolous and unnecessary. surety bonds and the indemnity agreements had been extinguished
by the execution of the deed of assignment.
 CFI rendered that the estate of the late Sarmiento is jointly and
CITIZENS SURETY AND INSURANCE COMPANY, INC., v. CA, severally liable to Citizens’ Surety and Insurance Co Inc. for the
PASCUAL M. PEREZ amount it paid to Singer Sewing Machine Co. Ltd.
G.R. No. L-48958. June 28, 1988  CA reversed
FACTS:
 On December 4, 1959, the petitioner issued two (2) surety bonds ISSUE: Whether or not the administrator's obligation under the surety
CSIC Nos. 2631 and 2632 to guarantee compliance by the principal bonds and indemnity agreements had been extinguished by reason of the
Pascual M. Perez Enterprises of its obligation under a "Contract execution of the deed of assignment.
of Sale of Goods" entered into with the Singer Sewing Machine
Co. In consideration of the issuance of the aforesaid bonds, Pascual M. HELD:
Perez, in his personal capacity and as attorney-in-fact of his wife,  The SC reiterated in an earlier case Lopez v CA: The respondent court
Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises stated that "by virtue of the execution of the deed of assignment,
executed on the same date two (2) indemnity agreements wherein ownership of administrator-appellant's lumber materials had been
he obligated himself and the Enterprises to indemnify the transferred to the claimant-appellant and this amounted to dation in
petitioner jointly and severally, whatever payments advances and payment whereby the former is considered to have alienated his
damage it may suffer or pay as a result of the issuance of the property in favor of the latter in satisfaction of a monetary debt
surety bonds. (Article 1245). As a consequence thereof, administrator-appellant's
 In addition to the two indemnity agreements, Pascual M. Perez obligation under the surety bonds is thereby extinguished upon the
Enterprises was also required to put up a collateral security to execution of the deed of assignment." This statement is not sustained
further insure reimbursement to the petitioner of whatever losses by the records.LLphil
or liabilities it may be made to pay under the surety bonds. Pascual
M. Perez therefore executed a deed of assignment on the same day, The transaction could not be dation in payment. As pointed out in the
December 4, 1959, of his stock of lumber with a total value of concurring and dissenting opinion of Justice Edgardo L. Paras and the
P400,000.00. On April 12, 1960, a second real estate mortgage was dissenting opinion of Justice Mariano Serrano when the deed of
further executed in favor of the petitioner to guarantee the fulfillment assignment was executed on December 4, 1959, the obligation of the
of said obligation. assignor to refund the assignee had not yet arisen. In other words,
 Pascual M. Perez Enterprises failed to comply with its obligation there was no obligation yet on the part of the petitioner, Citizens'
under the contract of sale of goods with Singer Sewing Machine Surety and Insurance Co., to pay Singer Sewing Machine Co. There
Co., Ltd. Consequently, the petitioner was compelled to pay, as it was nothing to be extinguished on that date, hence, there could not
did pay, the fair value of the two surety bonds in the total amount of have been a dation in payment.
P144,000.00. Except for partial payments in the total sum of  The deed of assignment cannot be regarded as an absolute conveyance
P55,600.00 and notwithstanding several demands, Pascual M. Perez whereby the obligation under the surety bonds was automatically
Enterprises failed to reimburse the petitioner for the losses it sustained extinguished. The subsequent acts of the private respondent bolster the
under the said surety bonds. fact that the deed of assignment was intended merely as a security for
 The petitioner filed a claim for sum of money against the estate of the issuance of the two bonds. Partial payments amounting to
the late Nicasia Sarmiento which was being administered by Pascual P55,600.00 were made after the execution of the deed of assignment to
M. Perez. satisfy the obligation under the two surety bonds. Since later payments

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY


CREDIT TRANSACTIONS Atty. Rowell Ilagan 10

were made to pay the indebtedness, it follows that no debt was


extinguished upon the execution of the deed of assignment. Moreover,
a second real estate mortgage was executed on April 12, 1960 and
eventually cancelled only on May 15, 1962. If indeed the deed of
assignment extinguished the obligation, there was no reason for a
second mortgage to still have to be executed. We agree with the two
dissenting opinions in the Court of Appeals that the only conceivable
reason for the execution of still another mortgage on April 12, 1960
was because the obligation under the indemnity bonds still existed. It
was not yet extinguished when the deed of assignment was executed
on December 4, 1959. The deed of assignment was therefore intended
merely as another collateral security for the issuance of the two surety
bonds.
 the facts of the case, the records show that the petitioner surety
company paid P144,000.00 to Singer on the basis of the two surety
bonds it had issued in behalf of Pascual Perez Enterprises. Perez in
turn was able to indemnify the petitioner for its payment to Singer in
the amount of P55,600.00 thus leaving a balance of only P88,400.00.
 The petitioner surety company was more than adequately protected.
Lumber worth P400,000.00 was assigned to it as collateral. A second
real estate mortgage was also given by Perez although it was later
cancelled obviously because the P400,000.00 worth of lumber was
more than enough guaranty for the obligations assumed by the
petitioner. As pointed out by Justice Paras in his separate opinion, the
proper procedure was for Citizens' Insurance and Surety Co., to collect
the remaining P88,400.00 from the sales of lumber and to return
whatever remained to Perez. We cannot order the return in this
decisions because the Estate of Mrs. Perez has not asked for any return
of excess lumber or its value. There appears to have been other
transactions, surety bonds, and performance bonds between the
petitioner and Perez Enterprises but these are extraneous matters
which, the records show, have absolutely no bearing on the resolution
of the issues in this petition.
 DISMISSED.

HN Notes | ANDAL AUREA BACARRO JORGIO MATEO PLANILLO UY