CIVIL LAW | C r e d i t T r a n s a c t i o n s
received. These were intended for distribution to
THIRD DIVISION
[G.R. NO. 143304 : July 8, 2004]
SPECIAL STEEL PRODUCTS,
INC., Petitioner, v. LUTGARDO VILLAREAL AND
FREDERICK SO,Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
May an employer withhold its employees wages and
benefits as lien to protect its interest as a surety in the
latters car loan and for expenses incurred in a training
abroad?This is the basic issue for our resolution in the
instant case.
At bar is a Petition for Review on Certiorari under Rule
45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision1 dated October 29, 1999 and
Resolution2 dated May 8, 2000 of the Court of Appeals
in CA-G.R. SP No. 50957, entitled Special Steel
Products, Inc. v. National Labor Relations Commission,
Lutgardo Villareal and Frederick So.
The factual antecedents as borne by the records are:
cha nrob lesvi rtua 1awlib ra ry
Special Steel Products, Inc., Petitioner, is a domestic
corporation engaged in the principal business of
importation, sale, and marketing of BOHLER steel
products.Lutgardo C. Villareal and Frederick G. So,
respondents, worked for petitioner as assistant sales
manager and salesman, respectively.
Sometime in May 1993, respondent Villareal obtained a
car loan from the Bank of Commerce, with petitioner as
surety, as shown by a continuing suretyship agreement
and promissory note wherein they jointly and severally
agreed to pay the bank P786,611.60 in 72 monthly
installments.On January 15, 1997, respondent Villareal
resigned and thereafter joined Hi-Grade Industrial and
Technical Products, Inc. as executive vice-president.
Sometime in August 1994, petitioner sponsored
respondent Frederick So to attend a training course in
Kapfenberg, Austria conducted by BOHLER, petitioners
principal company.This training was a reward for
respondent Sos outstanding sales performance.When
respondent returned nine months thereafter, petitioner
directed him to sign a memorandum providing that
BOHLER requires trainees from Kapfenberg to continue
working with petitioner for a period of three (3) years
after the training.Otherwise, each trainee shall refund to
BOHLER $6,000.00 (US dollars) by way of set-off or
compensation.On January 16, 1997 or 2 years and 4
months after attending the training, respondent
resigned from petitioner.
Immediately, petitioner ordered respondents to render
an accounting of its various Christmas giveaways3they
162 | P a g e
petitioners customers.
In protest, respondents demanded from petitioner
payment of their separation benefits, commissions,
vacation and sick leave benefits, and proportionate
13th month pay.But petitioner refused and instead,
withheld their 13th month pay and other benefits.
On April 16, 1997, respondents filed with the Labor
Arbiter a complaint for payment of their monetary
benefits against petitioner and its president, Augusto
Pardo, docketed as NLRC NCR Case No. 04-02820-97.
In due course, the Labor Arbiter rendered a Decision
dated February 18, 1998, the dispositive portion of
which reads: chan roblesv irt ua1awli bra ry
WHEREFORE, decision is hereby rendered ordering the
respondents, Special Steel Products, Inc. and Mr.
Augusto Pardo to pay, jointly and severally,
complainants Frederick G. So and Lutgardo C. Villareal
the amounts of Seventy One Thousand Two Hundred
Seventy Nine Pesos and Fifty Eight Centavos
(P71,279.58) and One Hundred Sixty Four Thousand
Eight Hundred Seventy Three Pesos (P164,873.00),
respectively, representing their commissions, retirement
benefit (for Villareal), proportionate 13th month, earned
vacation and sick leave benefits, and attorneys fees.
xxx
SO ORDERED.
On appeal, the National Labor Relations Commission
(NLRC), in a Decision dated June 29, 1998, affirmed
with modification the Arbiters Decision in the sense that
Pardo, petitioners president, was exempted from any
liability.
On September 11, 1998, petitioner filed a motion for
reconsideration but was denied.
Hence, petitioner filed with the Court of Appeals a
Petition for Certiorari.
On October 29, 1999, the Court of Appeals rendered a
Decision dismissing the petition and affirming the
assailed NLRC Decision, thus: chan roblesv irt ua1awli bra ry
At the outset, the Court notes that despite its Seventh
Assignment of Error, petitioner does not question the
NLRCs decision affirming the labor arbiters award to
private respondents of commissions, proportionate
13th month pay, earned vacation and sick leave benefits
and retirement benefit (for Villareal) .It merely asserts
that it was withholding private respondents claims by
reason of their pending obligations.
Petitioner justifies its withholding of Villareals monetary
benefits as a lien for the protection of its right as surety
in the car loan. It asserts that it would release Villareals
monetary benefits if he would cause its substitution as
surety by Hi-Grade. It further asserts that since
Villareals debt to the Bank is now due and demandable,
it may, pursuant to Art. 2071 of the New Civil
Code, demand a security that shall protect him from any
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
proceeding by the creditor and from the danger of
insolvency of the debtor.
Petitioners posture is not sanctioned by law.It may only
protect its right as surety by instituting an action x x x
to demand a security (Kuenzle and Streiff v. Tan Sunco,
16 Phil 670) .It may not take the law into its own hands.
Indeed, it is unlawful for any person, directly or
indirectly, to withhold any amount from the wages of a
worker or induce him to give up any part of his wages
by force, stealth, intimidation, threat or by any other
means whatsoever without the workers consent(Art.
116, Labor Code).
Moreover, petitioner has made no payment on the car
loan. Consequently, Villareal is not indebted to
petitioner.On the other hand, petitioner owes Villareal
for the decreed monetary benefits.The withholding of
Villareals monetary benefits had effectively prevented
him from settling his arrearages with the Bank.
With regard to Sos money claims.We find no cogent
reason to disturb the findings of the NLRC.x x x.
Sos all-expense paid trip to Austria was a bonus for his
outstanding sales performance. Before his sojourn to
Austria, petitioner issued him a memorandum (or
memo) stating that Bohler is now imposing that trainees
coming to Kapfenberg to stay with the local
representative for at least three (3) years after training,
otherwise, a lump sum compensation of not less than
US $6,000.00 will have to be refunded to them by the
trainee. So did not affix his signature on the
memo.However, nine (9) months after coming back
from his training, he was made to sign the memo.In his
letter to Augusto Pardo dated July 18, 1997, So stated
that his signature was needed only as a formality and
that he was left with no choice but to accommodate
Augusto Pardos request.The labor arbiter gave credence
to such explanation.
Assuming arguendo that the memo is binding on So, his
more than two years post-training stay with petitioner is
a substantial compliance with the condition.Besides, So
tendered his resignation effective February 16,
1997.Instead of asking So to defer his resignation until
the expiration of the three-year period, petitioner
advanced its effectivity by one month - as of January
16, 1997. This means that petitioner no longer needed
Sos services, particularly the skill and expertise acquired
by him from the training.More importantly, the party
entitled to claim the US $6,000.00 liquidated damages
is BOHLER and not petitioner. Consequently, petitioner
has no right to insist on payment of the liquidated
damages, much less to withhold Sos monetary benefits
in order to exact payment thereof.
With regard to the Christmas giveaways. We agree with
the findings of the labor arbiter (affirmed by the NLRC)
that there is no existing memorandum requiring the
accounting of such giveaways and that no actual
accounting has ever been required before, as in the
case of then Sales Manager Benito Sayo whose
resignation took effect on December 31, 1996 but was
not required to account for the Christmas giveaways.To
make So account now for said items would amount to
discrimination.In any event, the matter of accounting of
the giveaways may be ventilated in the proper forum.
163 | P a g e #SJBL
Finally, petitioner may not offset its claims against
private respondents monetary benefits.With respect
to its being the surety of Villareal, two requisites of
compensation are lacking, to wit: that each one of the
obligors be bound principally, and that he be at the
same time a principal creditor of the otherand that (the
two debts) be liquidated and demandable (Art. 1279 (1)
and (4), New Civil Code). And in respect to its claim for
liquidated damages against So, there can be no
compensation because his creditor is not petitioner but
BOHLER (Art. 1278, New Civil Code).
Consequently, the NLRC committed no grave abuse of
discretion.
WHEREFORE, the petition is DISMISSED while the
assailed decision of the NLRC is AFFIRMED.
SO ORDERED.
On December 15, 1999, petitioner filed a motion for
reconsideration but was denied by the Appellate Court in
a Resolution dated May 8, 2000.
Hence, this Petition for Review on Certiorari .Petitioner
contends that as a guarantor, it could legally withhold
respondent Villareals monetary benefits as a preliminary
remedy pursuant to Article 2071 of the Civil Code, as
amended.4 As to respondent So, Petitioner, citing Article
113 of the Labor Code, as amended,5 in relation to
Article 1706 of the Civil Code, as amended,6 maintains
that it could withhold his monetary benefits being
authorized by the memorandum he signed.
Article 116 of the Labor Code, as amended, provides: chanro blesvi rt ua1awli bra ry
ART. 116.Withholding of wages and kickbacks
prohibited. It shall be unlawful for any person,
directly or indirectly, to withhold any amount from
the wages (and benefits) of a worker or induce him
to give up any part of his wages by force, stealth,
intimidation, threat or by any other means
whatsoever without the workers consent .
The above provision is clear and needs no further
elucidation.Indeed, petitioner has no legal authority to
withhold respondents 13th month pay and other
benefits.What an employee has worked for, his
employer must pay.7 Thus, an employer cannot simply
refuse to pay the wages or benefits of its employee
because he has either defaulted in paying a loan
guaranteed by his employer; or violated their
memorandum of agreement; or failed to render an
accounting of his employers property.8 cra lawred
Nonetheless, Petitioner, relying on Article 2071 (earlier
cited), contends that the right to demand security and
obtain release from the guaranty it executed in favor of
respondent Villareal may be exercised even without
initiating a separate and distinct action.
There is no guaranty involved herein and, therefore, the
provision of Article 2071 does not apply.
A guaranty is distinguished from a surety 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
Rights of Guarantor
CIVIL LAW | C r e d i t T r a n s a c t i o n s

he obligates himself to pay if the principal does SO ORDERED.

not pay .9 cralawred

Vitug, (Chairman), Corona, and Carpio-

Based on the above distinction, it appears that the Morales, JJ., concur.
contract executed by petitioner and respondent Villareal
(in favor of the Bank of Commerce) is a contract of Endnotes:
surety.In fact, it is denominated as a continuing
suretyship agreement. Hence, petitioner could not just
unilaterally withhold respondents wages or benefits as a
preliminary remedy under Article 2071.It must file an
action against respondent Villareal. Thus, the Appellate 1
Annex A of the Petition for Review, Rollo at 27-34.
Court aptly ruled that petitioner may only protect its
right as surety by instituting an action to demand a
security.
2
Annex B, id. at 34-35.

As to respondent So, petitioner maintains that there can

3
These Christmas giveaways were worth P38,108.00,
be a set-off or legal compensation between for respondent Villareal, andP54,481.00,for respondent
them.Consequently, it can withhold his 13th month pay So.
and other benefits.
4
Article 2071 of the Civil Code, as amended,
For legal compensation to take place, the requirements provides: c han roblesv irt ua1awli bra ry

set forth in Articles 1278 and 1279 of the Civil Code,

quoted below, must be present. Art. 2071.The guarantor, even before having paid, may
proceed against the principal debtor: c han roblesv irt ua1awli bra ry

"ARTICLE 1278.Compensation shall take place when two

persons, in their own right, are creditors and debtors of (1) When he is sued for the payment; chanrob lesvi rtua llawlib ra ry

each other.
(2) In case of insolvency of the principal debtor; cha nrob lesvi rtua llawlib ra ry

"ARTICLE 1279.In order that compensation may be

proper, it is necessary:
(3) When the debtor has bound himself to relieve him
c hanro blesvi rt ua1awlib ra ry

from the guaranty within a specified period, and this

(1) That each one of the obligors be bound principally, period has expired; cha nrob lesvi rtua llawlib ra ry

and that he be at the same time a principal creditor of

the other;
(4) When the debt has become demandable, by reason
chan roblesv irtuallawl ib rary

of the expiration of the period for payment; chanrob lesvi rtua llawlib ra ry

(2) That both debts consist in a sum of money, or if the

things due are consumable, they be of the same kind,
(5) After the lapse of ten years, when the principal
and also of the same quality if the latter has been
obligation has no fixed period for its maturity, unless it
stated;
be of such nature that it cannot be extinguished except
chanrob lesvi rtua llawli bra ry

within a period longer than ten years; chanro blesvi rt uallawl ibra ry

(3) That the two debts be due; chan roblesv irtuallaw lib rary

(6) If there are reasonable grounds to fear that the

(4) That they be liquidated and demandable; chanrob lesvi rtua llawlib ra ry
principal debtor intends to abscond; chan roblesv irt uallawl ibra ry

(5) That over neither of them there be any retention or (7) If the principal debtor is in imminent danger of
controversy, commenced by third persons and becoming insolvent.
communicated in due time to the debtor." chanrob lesvi rtua llawlib ra ry

In all these cases, the action of the guarantor is to

In the present case, set-off or legal compensation obtain release from the guaranty, or to demand a
cannot take place between petitioner and respondent So security that shall protect him from any
because they are not mutually creditor and debtor of proceedings by the creditor and from the danger
each other. of insolvency of the debtor.

A careful reading of the Memorandum10 dated August 5

Article 113 of the Labor Code, as amended,
22, 1994 reveals thatthe lump sum compensation of not provides: c han roblesv irt ua1awli bra ry

less than US $6,000.00 will have to be refunded by each

trainee to BOHLER, not to petitioner.
ART. 113. Wage Deduction. No employer, in his own
behalf or in behalf of any person, shall make any
In fine, we rule that petitioner has no legal right to deduction from the wages of his employees, except: c hanroblesv irt ua1awli bra ry

withhold respondents 13th month pay and other benefits

to recompense for whatever amount it paid as security
(a) In cases where the worker is insured with his
for respondent Villareals car loan; and for the expenses
consent by the employer, and the deduction is to
incurred by respondent So in his training abroad.
recompense the employer for the amount paid by him
as premium on the insurance; chan roble svirtual lawlib rary

WHEREFORE, the petition is DENIED.The Decision

dated October 29, 1999 and Resolution dated May 8,
(b) For union dues, in cases where the right of the
2000 of the Court of Appeals in CA-G.R. SP No. 50957
worker or his union to check-off has been recognized by
are hereby AFFIRMED.

164 | P a g e #SJBL Rights of Guarantor

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the employer or authorized in writing by the individual

worker concerned; and cralaw lib rary

(c) In cases where the employer is authorized by law or

regulations issued by the Secretary of Labor.

6
Article 1706 of the Civil Code, as amended,
provides: c han roblesv irt ua1awli bra ry

Article 1706.Withholding of the wages, except for a debt

due, shall not be made by the employer.

7
See Azucena, C.A., Everyones Labor Code, 2001
Edition at 90.

8
Id. at 92.

9
See E. Zobel, Inc. v. Court of Appeals,G.R. No.
113931, May 6, 1998, 290 SCRA 1, 7, citing
Machetti v. Hospiciode San Jose and Fidelity & Surety
Co., 43 Phil. 297 (1922).

10
Rollo at 142.

165 | P a g e #SJBL Rights of Guarantor

CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. 26833. April 1, 1927.]
PHILIPPINE NATIONAL BANK, Plaintiff-Appellant,
v. EUGENIO VERAGUTH ET AL., Defendants-
Appellees.
Roman J. Lacson for Appellant.
Jose F. Orozco for the appellee Eugenio Veraguth.
R. Nolan, Feria & La O, Sumulong, Lavides &
Hilado and Ortiz & Ortiz for other appellees.
SYLLABUS
1. CONTRACTS; SURETYSHIP; INCREASE OF CREDIT
SECURED. — The increase of a credit opened by a bank
in current account in favor of a person, without the
consent of the surety who guaranteed said credit,
completely releases said surety.
2. ID.; ID.; APPLICATION OF PAYMENTS. — Payments
made by a debtor who has various debts are applied to
the oldest before the more recent ones and, therefore,
the total of said payments exceeding the amount of the
credit originally opened by the bank in current account
in favor of the debtor, although they do not cover the
amount of the original credit and the increase, the
surety of the original credit is relieved from all liability
by the extinction of the debt represented by the original
credit by means of said payments.
DECISION
VILLAMOR, J.:
Plaintiff Philippine National Bank seeks to recover from
the defendants jointly and severally the sum of
P41,432.55, plus interest on the sum of P34,241.77, at
8 per cent per annum from February 16, 1925, until
fully paid. It is alleged, as grounds for this action, that
on January 18, 1919, "La Union de Agricultores de
Negros y Panay, Inc.," asked for and obtained from said
plaintiff a credit of P40,000 in current account, payment
of which was secured by the defendants by means of a
bond Exhibit A; that on September 11, 1919, the same
plaintiff granted the "La Union de Agricultores de Negros
y Panay, Inc.," another credit of P30,000 in current
account at 8 per cent per annum, in addition to the
former credit of P40,000, payment of which was secured
by bond Exhibit B; that on June 30, 1922, when "La
Union de Agricultores de Negros y Panay, Inc.,"
discontinued business relations with the plaintiff, the
former had an overdraft of P34,241.77 in its current
account which to this date has not been paid to the
plaintiff, which overdraft, together with interest thereon,
amounts to the P41,432.55 claimed in the complaint.
The defendants, in their respective answers, deny being
166 | P a g e #SJBL
indebted to the plaintiff in the sum claimed, and as
special defenses allege that the obligation of P40,000
plus interest at 8 per cent per annum, secured by
Exhibit A, has already been extinguished by the
payments made by the "La Union de Agricultores de
Negros y Panay, Inc.," and that, not having subscribed
to the second bond for P30,000, Exhibit B, they cannot
be held liable for said obligation.
At the hearing of the case, the parties submitted the
following stipulation of facts: jgc:chan roble s.com.p h
"1. That ’La Union de Agricultores de Negros y Panay,
Inc.,’ obtained a credit in current account from the
plaintiff, as specified in annex A of the complaint. It is
also admitted that annex A was duly signed by those
whose signatures appear thereon.
"2. It is likewise admitted that annex B of the complaint
contains a true statement of the facts noted therein,
and that it was signed by the persons whose signatures
appear at the bottom thereof.
"3. That the only amounts involved in the transactions
had between said Union and the plaintiff are the sums
appearing in the debit and credit of the document
marked Exhibit C.
"4. That the sums referred to in annexes A and B were
obtained from the plaintiff by virtue of a resolution of
the board of directors of the said Union.
"5. The parties are agreed that some of the sureties
named in annexes A and B whose names are mentioned
below, executed promissory notes and solidary contracts
in favor of the plaintiff on account of the sum which is
the subject-matter of the complaint, as follows: chan rob1es v irt ual 1aw li bra ry
Ruperto Montinola P6,341.72
Tito Silverio 6,341.72
Jose Gaston 2,959.46
Carlos L. Locsin 6,341.72
Albino Sison 2,959.47
Teodulo M. Infante 2,959.47
Esteban de la Rama 3,382.25
Total 31,285.81
"6. That from February 7, 1919 to January 10, 1921,
the plaintiff granted the sum of P128,425.96 in current
account, payable in monthly installments to the said
Union. That on June 30, 1922, the said Union was
indebted to the plaintiff for the principal and interest, in
the sum total of P140,214.43 as appears in the debit of
Exhibit C. That from March 3, 1919 to September 11,
1924, as appears in the credit in Exhibit C, the said
Union paid the plaintiff in partial payments and on
account of said P140,214.43, the sum of P105,972.66,
leaving a balance of P34,241.77 due from the Union.
"7. That a demand was made upon the herein
defendants to pay the sum which is the subject of the
complaint." cralaw virt ua1aw lib ra ry
In view of this statement of facts, and of the oral
evidence introduced at the trial, which evidence has not
been forwarded to this court, the trial court absolved
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
the defendants Ricardo Nolan, Eugenio Veraguth and
Emilio Gaston from the complaint, without express
finding as to costs.
Plaintiff appealed from said decision, and assigns
several errors as committed by the trial court as
grounds for his petition that the judgment appealed
from be reversed.
The first and, indeed, the most important question
presented by the appellant is whether or not bond
Exhibit B is an alteration of bond Exhibit A.
It is admitted by both parties that the granting of a
credit by plaintiff of P30,000 in current account to the
"Union de Agricultores de Negros y Panay, Inc.," on
September 13, 1919 is an increase of the credit of
P40,000 previously granted and that the payment of
said increase was secured jointly and severally by the
bond Exhibit B, by Tito Silverio, Ruperto Montinola, Jose
Gaston, Agustin Amenabar, Teodulo Infante, Carlos L.
Locsin and Albino Jison who bound themselves to pay
the Philippine National Bank, upon the date of maturity,
the sum of P30,000 in addition to the credit of P40,000
with interest or such part of said amounts and interest
as may be due from the "La Union de Agricultores de
Negros y Panay, Inc.," on the date of maturity. This
being so, and considering the facts established in
paragraph 6 of the statement of facts, the extent of the
liability assumed by the defendants as solidary sureties
of the said debt of P40,000 must now be determined.
Article 1827 of the Civil Code provides: "Guaranty shall
not be presumed; it must be express and cannot be
extended beyond its specified limits." It appearing from
Exhibit A that the herein defendants guaranteed the
payment of a credit in current account not to exceed
P40,000 at 8 per cent per annum granted by plaintiff to
"La Union de Agricultores de Negros y Panay, Inc.," and
it further appearing from Exhibit B that defendants did
not sign a bond for the additional credit of P30,000
obtained by the said "Union de Agricultores," their
liability can in no way be extended to the payment of
the said additional credit of P30,000.
Besides, the increase in the credit of P40,000 secured
by the defendants by an additional P30,000 without
their consent, constitutes a material change in the
principal contract and, as we have held in the case of
Asiatic Petroleum Co. v. Hizon and David (45 Phil. . 532)
"A material alteration of the principal contract, effected
by the creditor and principal debtor without the
knowledge and consent of the surety, completely
discharges the surety from all liability on the contract of
suretyship." In the course of this decision the court
said: "It is fundamental in the law of suretyship that any
agreement between the creditor and the principal debtor
which essentially varies the terms of the principal
contract, without the consent of the surety, will release
the surety from liability. (21 R. C. L., 1004.) This
principle is equally valid under the civil as under the
common law; and though not specifically expressed in
the Civil Code, it may be deduced, so far as its
application to the facts of this case is concerned, from
the second paragraph of article 1822 in relation with
article 1143 of the same Code. . . ."cralaw virtua1aw l ibra ry
On the other hand, it appears from Exhibit C that from
March 3, 1919 until September 11, 1924, "La Union de
Agricultores de Negros y Panay, Inc.," had made partial
payments to the plaintiff amounting to P105,972.66, on
the debt of P140,214.43, which was principal and
interest from February 7, 1919 until June 30, 1922. The
question now raised is whether or not the principal
167 | P a g e
debtor, "La Union de Agricultores de Negros y Panay,
Inc.," has al- ready paid its debt of P40,000, payment of
which was secured by the defendants, because if so, the
obligation of the latter has been extinguished. (Art.
1847, Civil Code.) Considering the question on the
supposition that the bonds Exhibits A and B are two
independent contracts evidenced by two public
documents, we believe article 1924, No. 3, is applicable
to the case in the sense that said credits shall have
preference among themselves in the order of priority of
dates of the documents. Manresa, in his commentaries
on said article 1924, among other things, says: "This
number of the article under examination means credits
appearing in a public instrument or final judgment
without any special preference. . . ." cralaw virt ua1aw li bra ry
"These credits have preference among themselves in
the order of priority of the dates of the documents and
judgments in which they are stated or acknowledged. It
is so provided in the last paragraph of the present
article, which does no more than restate the settled rule
laid down by the Supreme Court, based on the juridical
principle prior tempore potium jure, according to which,
all other legal conditions being equal, the oldest of
scriptory credits (known also by the name of
chirographs) has preference as among themselves. (See
also, among others, the decision of May 1, 1896.)" (Vol.
XII, 2d. ed., pp. 714-715.)
The same rule is more expressly stated, and with special
reference to the case now before us, in 21 R. C. L., p.
103:jgc:chan roble s.com. ph
"110. RUNNING ACCOUNTS. — In cases of running
accounts with many debits and credits and no balances
other than for the mere purpose of making rests,
payments ought to be applied to extinguish the debts
according to the priority of time; so that the credits are
to be deemed payments pro tanto of the debts
antecedently due. This is done because it is most just
and equitable between the parties, and also because
when no different intention has been expressed, such is
presumed to be the intention of both parties, as being in
accordance with the ordinary and usual course of
dealing. And between banker and depositor the general
rule of appropriation of payments is ordinarily
applicable, and indeed it has been held that in the case
of a banking account, there is no room for any other
appropriation than that which arises from the order in
which the receipts and payments take place and are
carried into the account. Presumably it is the sum first
paid in that is first drawn out, the first item on the debit
side that is discharged by the first item on the credit
side. The general rule is applicable only to open
accounts, and does not apply where the account has
been closed." cralaw vi rtua 1aw lib rary
In view of Exhibit C and of the authorities cited, we are
of opinion that the credit of P40,000 secured by the
appellees and evidenced by a public instrument of prior
date, has already been settled by the principal debtor,
and therefore the solidary sureties have already been
relieved of the obligation contracted by them in Exhibit
A.
In virtue of the foregoing, the judgment appealed from
must be, as it is hereby, affirmed with costs against the
appellant. So ordered.
Johnson, Street, Malcolm, and Villa-Real, JJ., concur.
Separate Opinions
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CIVIL LAW | C r e d i t T r a n s a c t i o n s

OSTRAND, J., concurring: chanro b1es vi rtua l 1aw l ibra ry

I concur in the result on the ground that the contract of

surety, Exhibit A, expressly provided that the credit to
be granted the "Union de Agricultores de Negros y
Panay, Inc.," should not exceed the sum of P40,000.

168 | P a g e #SJBL Rights of Guarantor

CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. 154183. August 7, 2003.]
SPOUSES VICKY TAN TOH and LUIS
TOH, Petitioners, v. SOLID BANK CORPORATION,
FIRST BUSINESS PAPER CORPORATION, KENNETH
NG LI and MA. VICTORIA NG LI, Respondents.
DECISION
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO
EXTEND an "omnibus line" credit facility worth P10
million in favor of respondent First Business Paper
Corporation (FBPC). The terms and conditions of the
agreement as well as the checklist of documents
necessary to open the credit line were stipulated in a
"letter-advise" of the Bank dated 16 May 1993
addressed to FBPC and to its President, respondent
Kenneth Ng Li. 1 The "letter-advise" 2 was effective
upon "compliance with the documentary requirements."
3 information that respondent-spouses Kenneth Ng Li and
The documents essential for the credit facility and
submitted for this purpose were the (a) Board
Resolution or excerpts of the Board of Directors
Meeting, duly ratified by a Notary Public, authorizing the
loan and security arrangement as well as designating
the officers to negotiate and sign for FBPC specifically
stating authority to mortgage, pledge and/or assign the
properties of the corporation; (b) agreement to
purchase Domestic Bills; and, (c) Continuing Guaranty
for any and all amounts signed by petitioner-spouses
Luis Toh and Vicky Tan Toh, and respondent-spouses
Kenneth and Ma. Victoria Ng Li. 4 The spouses Luis Toh
and Vicky Tan Toh were then Chairman of the Board and
Vice-President, respectively, of FBPC, while respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li were
President and General Manager, respectively, of the
same corporation. 5
It is not disputed that the credit facility as well as its
terms and conditions was not cancelled or terminated,
and that there was no prior notice of such fact as
required in the "letter-advise," if any was done. chanrob1es v irt ua1 1aw 1 ibra ry
On 10 May 1993, more than thirty (30) days from date
of the "letter-advise," petitioner-spouses Luis Toh and
Vicky Tan Toh and respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li signed the required Continuing
Guaranty, which was embodied in a public document
prepared solely by respondent Bank. 6 The terms of the
instrument defined the contract arising therefrom as a
surety agreement and provided for the solidary liability
of the signatories thereto for and in consideration of
"loans or advances" and "credit in any other manner to,
or at the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on
the indebtedness that respondent FBPC may incur and
for which the sureties may be liable, stating that the
169 | P a g e
credit facility "covers any and all existing indebtedness
of, and such other loans and credit facilities which may
hereafter be granted to FIRST BUSINESS PAPER
CORPORATION." The surety also contained a de facto
acceleration clause if "default be made in the payment
of any of the instruments, indebtedness, or other
obligation" guaranteed by petitioners and respondents.
So as to strengthen this security, the Continuing
Guaranty waived rights of the sureties against delay or
absence of notice or demand on the part of respondent
Bank, and gave future consent to the Bank’s action to
"extend or change the time payment, and/or the
manner, place or terms of payment," including renewal,
of the credit facility or any part thereof in such manner
and upon such terms as the Bank may deem proper
without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not
contingent upon any event or cause other than the
written revocation thereof with notice to the Bank that
may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of
the credit facility and procure letters of credit. 7 On 17
November 1993 FBPC opened thirteen (13) letters of
credit and obtained loans totaling P15,227,510.00. 8 As
the letters of credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor
Padilla as signatories executed a series of trust receipts
over the goods allegedly purchased from the proceeds
of the loans. 9
On 13 January 1994 respondent Bank received
Ma. Victoria Ng Li had fraudulently departed from their
conjugal home. 10 On 14 January 1994 the Bank served
a demand letter upon FBPC and petitioner Luis Toh
invoking the acceleration clause 11 in the trust receipts
of FBPC and claimed payment for P10,539,758.68 as
unpaid overdue accounts on the letters of credit plus
interests and penalties within twenty-four (24) hours
from receipt thereof. 12 The Bank also invoked the
Continuing Guaranty executed by petitioner-spouses
Luis Toh and Vicky Tan Toh who were the only parties
known to be within national jurisdiction to answer as
sureties for the credit facility of FBPC. 13
On 17 January 1994 respondent Bank filed a complaint
for sum of money with ex parte application for a writ of
preliminary attachment against FBPC, spouses Kenneth
Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and
Vicky Tan Toh, docketed as Civil Case No. 64047 of
RTC-Br. 161, Pasig City. 14 Alias summonses were
served upon FBPC and spouses Luis Toh and Vicky Tan
Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li
who had apparently absconded. 15
Meanwhile, with the implementation of the writ of
preliminary attachment resulting in the impounding of
purported properties of FBPC, the trial court was
deluged with third-party claims contesting the propriety
of the attachment. 16 In the end, the Bank relinquished
possession of all the attached properties to the third-
party claimants except for two (2) insignificant items as
it allegedly could barely cope with the yearly premiums
on the attachment bonds. 17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a
joint answer to the complaint where they admitted
being part of FBPC from its incorporation on 29 August
1991, which was then known as "MNL Paper, Inc.," until
its corporate name was changed to "First Business Paper
Corporation." 18 They also acknowledged that on 6
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
March 1992 Luis Toh was designated as one of the
authorized corporate signatories for transactions in
relation to FBPC’s checking account with respondent
Bank. 19 Meanwhile, for failing to file an answer,
respondent FBPC was declared in default. 20
Petitioner-spouses however could not be certain
whether to deny or admit the due execution and
authenticity of the Continuing Guaranty. 21 They could
only allege that they were made to sign papers in blank
and the Continuing Guaranty could have been one of
them.
Still, as petitioners asserted, it was impossible and
absurd for them to have freely and consciously executed
the surety on 10 May 1993, the date appearing on its
face 22 since beginning March of that year they had
already divested their shares in FBPC and assigned
them in favor of respondent Kenneth Ng Li although the
deeds of assignment were notarized only on 14 June
1993. 23 Petitioners also contended that through FBPC
Board Resolution dated 12 May 1993 petitioner Luis Toh
was removed as an authorized signatory for FBPC and
replaced by respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li and Redentor Padilla for all the
transactions of FBPC with respondent Bank. 24 They
even resigned from their respective positions in FBPC as
reflected in the 12 June 1993 Secretary’s Certificate
submitted to the Securities and Exchange Commission
25 as petitioner Luis Toh was succeeded as Chairman by
respondent Ma. Victoria Ng Li, while one Mylene C.
Padilla took the place of petitioner Vicky Tan Toh as
Vice-President. 26
Finally, petitioners averred that sometime in June 1993
they obtained from respondent Kenneth Ng Li their
exclusion from the several surety agreements they had
entered into with different banks, i.e., Hongkong and
Shanghai Bank, China Banking Corporation, Far East
Bank and Trust Company, and herein respondent Bank.
27 As a matter of record, these other banks executed
written surety agreements that showed respondent
Kenneth Ng Li as the only surety of FBPC’s
indebtedness. 28
On 16 May 1996 the trial court promulgated its Decision
in Civil Case No. 64047 finding respondent FBPC liable
to pay respondent Solid Bank Corporation the principal
of P10,539,758.68 plus twelve percent (12%) interest
per annum from finality of the Decision until fully paid,
but absolving petitioner-spouses Luis Toh and Vicky Tan
Toh of any liability to respondent Bank. 29 The court a
quo found that petitioners "voluntarily affixed their
signature[s]" on the Continuing Guaranty and were thus
"at some given point in time willing to be liable under
those forms," 30 although it held that petitioners were
not bound by the surety contract since the letters of
credit it was supposed to secure were opened long after
petitioners had ceased to be part of FBPC. 31
The trial court described the Continuing Guaranty as
effective only while petitioner-spouses were
stockholders and officers of FBPC since respondent Bank
compelled petitioners to underwrite FBPC’s indebtedness
as sureties without the requisite investigation of their
personal solvency and capability to undertake such risk.
32 The lower court also believed that the Bank knew of
petitioners’ divestment of their shares in FBPC and their
subsequent resignation as officers thereof as these facts
were obvious from the numerous public documents that
detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC
and the Bank, including the many trust receipts being
170 | P a g e #SJBL
signed by persons other than petitioners, 33 as well as
the designation of new FBPC officers which came to the
notice of the Bank’s Vice-President Jose Chan Jr. and
other officers. 34
On 26 September 1996 the RTC-Br. 161 of Pasig City
denied reconsideration of its Decision. 35
On 9 October 1996 respondent Bank appealed the
Decision to the Court of Appeals, docketed as CA-G.R.
CV No. 55957. 36 Petitioner-spouses did not move for
reconsideration nor appeal the finding of the trial court
that they voluntarily executed the Continuing
Guaranty. chanrob1es vi rtua1 1aw 1ib rary
The appellate court modified the Decision of the trial
court and held that by signing the Continuing Guaranty,
petitioner-spouses became solidarily liable with FBPC to
pay respondent Bank the amount of P10,539,758.68 as
principal with twelve percent (12%) interest per annum
from finality of the judgment until completely paid. 37
The Court of Appeals ratiocinated that the provisions of
the surety agreement did not "indicate that Spouses
Luis and Vicky Toh . . . signed the instrument in their
capacities as Chairman of the Board and Vice-President,
respectively, of FBPC only." 38 Hence, the court a quo
deduced," [a]bsent any such indication, it was error for
the trial court to have presumed that the appellees
indeed signed the same not in their personal capacities."
39 The appellate court also ruled that as petitioners
failed to execute any written revocation of the
Continuing Guaranty with notice to respondent Bank,
the instrument remained in full force and effect when
the letters of credit were availed of by respondent FBPC.
40
Finally, the Court of Appeals rejected petitioners’
argument that there were "material alterations" in the
provisions of the "letter-advise," i.e., that only domestic
letters of credit were opened when the credit facility was
for importation of papers and other materials, and that
marginal deposits were not paid, contrary to the
requirements stated in the "letter-advise." 41 The
simple response of the appellate court to this challenge
was, first, the "letter-advise" itself authorized the
issuance of domestic letters of credit, and second, the
several waivers extended by petitioners in the
Continuing Guaranty, which included changing the time
and manner of payment of the indebtedness, justified
the action of respondent Bank not to charge marginal
deposits. 42
Petitioner-spouses moved for reconsideration of the
Decision, and after respondent Bank’s comment, filed a
lengthy Reply with Motion for Oral Argument. 43 On 2
July 2002 reconsideration of the Decision was denied on
the ground that no new matter was raised to warrant
the reversal or modification thereof. 44 Hence, this
Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue
that the Court of Appeals denied them due process
when it did not grant their motion for reconsideration
and without "bother[ing] to consider [their] Reply with
Motion for Oral Argument." They maintain that the
Continuing Guaranty is not legally valid and binding
against them for having been executed long after they
had withdrawn from FBPC. Lastly, they claim that the
surety agreement has been extinguished by the material
alterations thereof and of the "letter-advise" which were
allegedly brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the flight of
their co-sureties, respondent-spouses Kenneth Ng Li
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
and Ma. Victoria Ng Li; (c) the grant of credit facility
despite the non-payment of marginal deposits in an
amount beyond the credit limit of P10 million pesos; (d)
the inordinate delay of the Bank in demanding the
payment of the indebtedness; (e) the presence of ghost
deliveries and fictitious purchases using the Bank’s
letters of credit and trust receipts; (f) the extension of
the due dates of the letters of credit without the
required 25% partial payment per extension; (g) the
approval of another letter of credit, L/C 93-0042, even
after respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li had defaulted on their previous
obligations; and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that
the appellate court is presumed to have passed upon all
points raised by petitioners’ Reply with Motion for Oral
Argument as this pleading formed part of the records of
the appellate court. It also debunks the claim of
petitioners that they were inexperienced and ignorant
parties who were taken advantage of in the Continuing
Guaranty since petitioners are astute businessmen who
are very familiar with the "ins" and "outs" of banking
practice. The Bank further argues that the notarization
of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and
due execution thereof, and that the Decision of the trial
court in the civil case finding the surety agreement to be
valid and binding is now res judicata for failure of
petitioners to appeal therefrom. As a final point, the
Bank refers to the various waivers made by petitioner-
spouses in the Continuing Guaranty to justify the
extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners’ claim that
the Court of Appeals deprived them of their right to due
process when the court a quo did not address
specifically and explicitly their Reply with Motion for Oral
Argument. While the Resolution of the appellate court of
2 July 2002 made no mention thereof in disposing of
their arguments on reconsideration, it is presumed that
"all matters within an issue raised in a case were laid
before the court and passed upon it." 45 In the absence
of evidence to the contrary, we must rule that the court
a quo discharged its task properly. Moreover, a reading
of the assailed Resolution clearly makes reference to a
"careful review of the records," which undeniably
includes the Reply with Motion for Oral Argument, hence
there is no reason for petitioners to asseverate
otherwise.
This Court holds that the Continuing Guaranty is a valid
and binding contract of petitioner-spouses as it is a
public document that enjoys the presumption of
authenticity and due execution. Although petitioners as
appellees may raise issues that have not been assigned
as errors by respondent Bank as party-appellant, i.e.,
unenforceability of the surety contract, we are bound by
the consistent finding of the courts a quo that
petitioner-spouses Luis Toh and Vicky Tan Toh
"voluntarily affixed their signature[s]" on the surety
agreement and were thus "at some given point in time
willing to be liable under those forms." 46 In the
absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling
cannot be otherwise.
Similarly, there is no basis for petitioners to limit their
responsibility thereon so long as they were corporate
officers and stockholders of FBPC. Nothing in the
Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the
obligations assumed by them therein subsist "upon the
171 | P a g e #SJBL
undersigned, the heirs, executors, administrators,
successors and assigns of the undersigned, and shall
inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their
commitment "shall remain in full force and effect until
written notice shall have been received by [the Bank]
that it has been revoked by the undersigned." Verily, if
petitioners intended not to be charged as sureties after
their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required
notice of revocation upon the Bank as expressly allowed
therein. 47 In Garcia v. Court of Appeals 48 we ruled —
Regarding the petitioner’s claim that he is liable only as
a corporate officer of WMC, the surety agreement shows
that he signed the same not in representation of WMC
or as its president but in his personal capacity. He is
therefore personally bound. There is no law that
prohibits a corporate officer from binding himself
personally to answer for a corporate debt. While the
limited liability doctrine is intended to protect the
stockholder by immunizing him from personal liability
for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding himself
to the payment of the corporate debts. The petitioner
cannot therefore take refuge in this doctrine that he has
by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh
to the surety agreement they signed so must we also
hold respondent Bank to its representations in the
"letter-advise" of 16 May 1993. Particularly, as to the
extension of the due dates of the letters of credit, we
cannot exclude from the Continuing Guaranty the
preconditions of the Bank that were plainly stipulated in
the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the
provisions of cognate agreements whenever convenient
to enforce its contractual rights, such as, when it
harnessed a provision in the trust receipts executed by
respondent FBPC to declare its entire indebtedness as
due and demandable and thereafter to exact payment
thereof from petitioners as sureties. 49 In the same
manner, we cannot disregard the provisions of the
"letter-advise" in sizing up the panoply of commercial
obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing
Guaranty that respondent Bank "may at any time, or
from time to time, in [its] discretion . . . extend or
change the time payment," this provision even if
understood as a waiver is confined per se to the grant of
an extension and does not surrender the prerequisites
therefor as mandated in the "letter-advise." In other
words, the authority of the Bank to defer collection
contemplates only authorized extensions, that is, those
that meet the terms of the "letter-advise."cra law virt ua1aw li bra ry
Certainly, while the Bank may extend the due date at its
discretion pursuant to the Continuing Guaranty, it
should nonetheless comply with the requirements that
domestic letters of credit be supported by fifteen
percent (15%) marginal deposit extendible three (3)
times for a period of thirty (30) days for each extension,
subject to twenty-five percent (25%) partial payment
per extension. This reading of the Continuing Guaranty
is consistent with Philippine National Bank v. Court of
Appeals 50 that any doubt on the terms and conditions
of the surety agreement should be resolved in favor of
the surety.
Furthermore, the assurance of the sureties in the
Continuing Guaranty that" [n]o act or omission of any
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
kind on [the Bank’s] part in the premises shall in any
event affect or impair this guaranty" 51 must also be
read "strictissimi juris" for the reason that petitioners
are only accommodation sureties, i.e., they received
nothing out of the security contract they signed. 52
Thus said, the acts or omissions of the Bank conceded
by petitioners as not affecting nor impairing the surety
contract refer only to those occurring "in the premises,"
or those that have been the subject of the waiver in the
Continuing Guaranty, and stretch to no other. Stated
otherwise, an extension of the period for enforcing the
indebtedness does not by itself bring about the
discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where
there is no payment or there is deficient settlement of
the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases
the sureties. Under Art. 2055 of the Civil Code, the
liability of a surety is measured by the terms of his
contract, and while he is liable to the full extent thereof,
his accountability is strictly limited to that assumed by
its terms.
It is admitted in the Complaint of respondent Bank
before the trial court that several letters of credit were
irrevocably extended for ninety (90) days with
alarmingly flawed and inadequate consideration — the
indispensable marginal deposit of fifteen percent (15%)
and the twenty-five percent (25%) prerequisite for each
extension of thirty (30) days. It bears stressing that the
requisite marginal deposit and security for every thirty
(30)-day extension specified in the "letter-advise" were
not set aside or abrogated nor was there any prior
notice of such fact, if any was done.
Moreover, these irregular extensions were candidly
admitted by Victor Ruben L. Tuazon, an account officer
and manager of respondent Bank and its lone witness in
the civil case —
Q: You extended it even if there was no marginal
deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes . . .
Q: You have repeatedly extended despite the
insufficiency partial payment requirement?
A: I would say yes. 53
The foregoing extensions of the letters of credit made
by respondent Bank without observing the rigid
restrictions for exercising the privilege are not covered
by the waiver stipulated in the Continuing Guaranty.
Evidently, they constitute illicit extensions prohibited
under Art. 2079 of the Civil Code," [a]n extension
granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty."
This act of the Bank is not mere failure or delay on its
part to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off, 54 but
comprises conscious, separate and binding agreements
to extend the due date, as was admitted by the Bank
itself —
Q: How much was supposed to be paid on 14
September 1993, the original LC of P1,655,675.13?
172 | P a g e #SJBL
A: Under LC 93-0017 first matured on 14 September
1993. We rolled it over, extended it to December 13,
1993 but they made partial payment that is why we
extended it.
Q: The question to you now is how much was paid? How
much is supposed to be paid on September 14, 1993 on
the basis of the original amount of P1,655,675.13? chanrob1e s virtua1 1aw 1 ibra ry
A: Whenever this obligation becomes due and
demandable except when you roll it over so there is
novation there on the original obligations. 55 (Emphasis
supplied).
As a result of these illicit extensions, petitioner-spouses
Luis Toh and Vicky Tan Toh are relieved of their
obligations as sureties of respondent FBPC under Art.
2079 of the Civil Code.
Further, we note several suspicious circumstances that
militate against the enforcement of the Continuing
Guaranty against the accommodation sureties. Firstly,
the guaranty was executed more than thirty (30) days
from the original acceptance period as required in the
"letter-advise." Thereafter, barely two (2) days after the
Continuing Guaranty was signed, corporate agents of
FBPC were replaced on 12 May 1993 and other
adjustments in the corporate structure of FBPC ensued
in the month of June 1993, which the Bank did not
investigate although such were made known to it.
By the same token, there is no explanation on record for
the utter worthlessness of the trust receipts in favor of
the Bank when these documents ought to have added
more security to the indebtedness of FBPC. The Bank
has in fact no information whether the trust receipts
were indeed used for the purpose for which they were
obtained. 56 To be sure, the goods subject of the trust
receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC
even had the chance to intercept the surreptitious
transfer of the items under trust: "We saw two (2)
delivery vans with Plates Nos. TGH 257 and PAZ 928
coming out of the compound . . . [which were] taking
out the last supplies stored in the compound." 57 In
addition, the attached properties of FBPC, except for
two (2) of them, were perfunctorily abandoned by
respondent Bank although the bonds therefor were
considerably reduced by the trial court. 58
The consequence of these omissions is to discharge the
surety, petitioners herein, under Art. 2080 of the Civil
Code, 59 or at the very least, mitigate the liability of the
surety up to the value of the property or lien released —
If the creditor . . . has acquired a lien upon the property
of a principal, the creditor at once becomes charged
with the duty of retaining such security, or maintaining
such lien in the interest of the surety, and any release
or impairment of this security as a primary resource for
the payment of a debt, will discharge the surety to the
extent of the value of the property or lien released . . .
[for] there immediately arises a trust relation between
the parties, and the creditor as trustee is bound to
account to the surety for the value of the security in his
hands. 60
For the same reason, the grace period granted by
respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent
(15%) marginal deposit and the twenty-five percent
(25%) partial payment as fixed in the "letter-advise."
These payments are unmistakably additional securities
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CIVIL LAW | C r e d i t T r a n s a c t i o n s

intended to protect both respondent Bank and the

sureties in the event that the principal debtor FBPC 5. Id., p. 2.
becomes insolvent during the extension period.
Compliance with these requisites was not waived by 6. Id., pp. 505–506; Exh. "AA." cralaw virtua1aw l ibra ry

petitioners in the Continuing Guaranty. For this

unwarranted exercise of discretion, respondent Bank 7. Id., p. 652.
bears the loss; due to its unauthorized extensions to
pay granted to FBPC, petitioner-spouses Luis Toh and 8. Ibid.; CA Rollo, p. 168; TSN, 22 June 1995, pp. 9–
Vicky Tan Toh are discharged as sureties under the 11; Exhs. "A" to "M;" Exh. "BB." cralaw virt ua1aw li bra ry

Continuing Guaranty.
9. Ibid.; TSN, 6 July 1995, p. 14, Exhs. "N" to "Z." cralaw virtua1aw l ibra ry

Finally, the foregoing omission or negligence of

respondent Bank in failing to safe-keep the security 10. Original Record, p. 39; Exh. "CC." cralaw virtua 1aw lib rary

provided by the marginal deposit and the twenty-five

percent (25%) requirement results in the material
alteration of the principal contract, i.e., the "letter-
advise," and consequently releases the surety. 61 This
inference was admitted by the Bank through the
testimony of its lone witness that" [w]henever this
obligation becomes due and demandable, except when
you roll it over, (so) there is novation there on the
original obligations." As has been said, "if the suretyship
contract was made upon the condition that the principal
shall furnish the creditor additional security, and the
security being furnished under these conditions is
afterwards released by the creditor, the surety is wholly
discharged, without regard to the value of the securities
released, for such a transaction amounts to an
11. Id., p. 37; It states" [t]he Bank may at any time
cancel this trust and take possession of said goods,
documents or instruments or of the proceeds as may
then have been sold wherever the said goods or
proceeds may then be found, and in the event of any
suspension, or failure or assignment for benefit of
creditor or our non-fulfillment of any obligation, or of
the non-payment at maturity of any acceptance
specified hereon or under any credit issued by the Bank
on our account, or of any indebtedness on our part to
said Bank, all our obligations, acceptances,
indebtedness, and liabilities whatsoever shall thereupon
(with or without notice) mature and become due and
payable." cralaw virtua 1aw lib rary

alteration of the main contract." 62

12. Id., p. 509; TSN, 22 June 1995, p. 11; TSN, 3
WHEREFORE, the instant Petition for Review is August 1995, p. 5; Exh. "BB." cralaw virt ua1aw lib ra ry

GRANTED. The Decision of the Court of Appeals dated

12 December 2001 in CA-G.R. CV No. 55957, Solid Bank 13. Ibid.
Corporation v. First Business Paper Corporation,
Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky 14. Original Record, p. 1.
Tan Toh, holding petitioner-spouses Luis Toh and Vicky
Tan Toh solidarily liable with First Business Paper 15. Id., pp. 650–651.
Corporation to pay Solid Bank Corporation the amount
of P10,539,758.68 as principal with twelve percent 16. Ibid.
(12%) interest per annum until fully paid, and its
Resolution of 2 July 2002 denying reconsideration 17. Id., pp. 414–420, 449–451.
thereof are REVERSED and SET ASIDE.
18. Id., p. 224.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig
City in Civil Case No. 64047, Solid Bank Corporation v. 19. Id., pp. 225, 235.
First Business Paper Corporation, Kenneth Ng Li, Ma.
Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First 20. Id., p. 652.
Business Paper Corporation liable to pay respondent
Solid Bank Corporation the principal of P10,539,758.68 21. Id., pp. 221–222.
plus twelve percent (12%) interest per annum until fully
paid, but absolving petitioner-spouses Luis Toh and 22. Id., p. 222.
Vicky Tan Toh of any liability to respondent Solid Bank
Corporation is REINSTATED and AFFIRMED. No costs. 23. Id., pp. 227, 236–238.

SO ORDERED. 24. Id., pp. 227, 239.

Quisumbing, Austria-Martinez and Tinga, JJ., concur. 25. Id., pp. 227, 241.

Callejo, Sr., J., is on leave. 26. Ibid.

Endnotes: 27. Id., pp. 222, 227.

28. Ibid.

29. Id., p. 660; Penned by Judge Alicia P. Marina-Co.

1. TSN, 3 August 1995, p. 22; TSN, 9 November 1995,
p. 4; Exhs. "4" and "5." cralaw virt ua1aw lib rary

30. Id., p. 657.

2. Original Record, pp. 550–554; Exhs. "4" and "5." cralaw virtua1aw li bra ry

31. Ibid.

3. TSN, 9 November 1995, p. 24. 32. Ibid.

4. Original Record, p. 554. 33. Id., p. 658.

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CIVIL LAW | C r e d i t T r a n s a c t i o n s

31 August 1961, 2 SCRA 1109.

34. Ibid.; see TSN, 9 November 1995, pp. 3, 26–27.
62. A.A. Stearns, supra at 141b, see Civil Code, Art.
35. Id., pp. 708–709. 2080, People’s Bank and Trust Company v. Tambunting,
supra.
36. Id., p. 711.

37. CA Rollo, pp. 167–179; Penned by Associate Justice

Mercedes Gozo-Dadole and concurred in by Associate
Justices Salvador J. Valdez Jr. and Sergio L. Pestaño.

38. Id., p. 174.

39. Ibid.

40. Id., p. 175.

41. Id., p. 176.

42. Ibid.

43. Id., pp. 234–269.

44. Id., pp. 273–274.

45. Rules of Court, Rule 131, sec. 3 (o).

46. Original Record, p. 657.

47. Fortune Motors v. Court of Appeals, G.R. No.

112191, 7 February 1997, 267 SCRA 653.

48. G.R. No. 80201, 20 November 1990, 191 SCRA 493,

497.

49. Original Record, p. 38.

50. No. L-33174, 4 July 1991, 198 SCRA 767.

51. Emphasis added.

52. Pacific Tobacco Corporation v. Lorenzana, 102 Phil.

234 (1957).

53. TSN, 24 August 1995, pp. 42–43.

54. Original Record, pp. 36-37; These letters of credit

are LC Nos. 93-0038, 93-0036, 93-0035, 93-0039 and
93-0042.

55. TSN, 24 August 1995, p. 40.

56. TSN, 22 June 1995, pp. 32–37.

57. Original Record, p. 511.

58. Id., pp. 414–420, 449–451, 652.

59. Art. 2080 reads: "The guarantors, even though they

be solidary, are released from their obligation whenever
by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preference of the latter;"
There is no reason not to apply this provision to a surety
agreement since guaranty and surety are cognate
contracts; see People’s Bank and Trust Company v.
Tambunting, No. L-29666, 29 October 1971, 42 SCRA
119.

60. A.A. Stearns and N.P. Feinsinger, The Law of

Suretyship (1934), pp. 141, 141a, 141c, Civil Code, Art.
2080.

61. Macondray and Company, Inc. Piñon, No. L-13817,

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