Title XIII Letters of Credit

Article 567
Letters of credit are those issued by one merchant to another, or for purpose of attending to a commercial
transaction (obsolete; get the definition stated in the decisions of the Supreme Court, which follows the Code of
Commerce, Uniform Customs and Practices by International Chamber of Commerce, or other newer
transactions).
Article 568
The essential conditions of letters of credit shall be:
1. To be issued in favor of a determined person and not to order.
2. To be limited to a fixed and specified amount, or to one or more indeterminate amounts, but all included
in a maximum sum the limit of which must be exactly stated.
Letters of credit which do not have one of these conditions shall be considered simply as letters of
recommendation.
Article 569
Who issues a letter of credit shall be liable to the person on whom it was issued for the amount paid by virtue of
the same within the maximum fixed therein.
Letters of credit cannot be protested, even when not paid, nor can the holder thereof acquire any right of action
for said nonpayment against the person who issued it.
The payor shall have a right to demand the proof of the identity of the person in whose favor the letter of credit
was issued.
Article 570
The donor of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of said
revocation.
Article 571
The holder of a letter of credit shall pay the donor the amount received without delay.
Should he not do so an action including attachment may be brought to recover said amount with the legal
interest and the current exchange in the place where the payment was made to the place where it was repaid.
Article 572
If the holder of a letter of credit does not make use thereof within the period agreed upon with the donor of the
same, or, in the absence of a fixed period, within six months from its date in any point of the Philippine Islands,
and within twelve months outside thereof, it shall be void in fact and in law.
Notes during class:
- Bank, Buyer, Seller; Tripartite, they have different obligations with one another.)
- A letter of credit expires within 6 months from the issuing date. (check expires)
- Letters of Credit can be used for security (for obligors/contractors)
- (search for independence doctrine in letters of credit)
- Condition required from the bank are those stated in the Letters of Credit.
Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717, Nov 22, 2004

Facts:
Transfield Philippines entered into a turn-key contract with Luzon Hydro Corp. Under the contract, Transfield
were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the sole responsibility for
the design, construction, commissioning, testing and completion of the Project. The contract provides for a
period for which the project is to be completed and also allows for the extension of the period provided that the
extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by
Transfield, 2 stand-by letters of credit were required to be opened. During the construction of the plant,
Transfield requested for extension of time citing typhoon and various disputes delaying the construction. LHC
did not give due course to the extension of the period prayed for but referred the matter to arbitration
committee. Because of the delay in the construction of the plant, LHC called on the stand-by letters of credit
because of default. However, the demand was objected by Transfield on the ground that there is still pending
arbitration on their request for extension of time.

Issue: WON LHC can collect from the letters of credit despite the pending arbitration case. YES

Held:
Transfield’s argument that any dispute must first be resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of
credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like
for instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter
of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and
the beneficiary, there would be no practical and beneficial use for letters of credit in commercial
transactions.
The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called “independence principle” assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle,
banks assume no liability for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods,
or any other person whomsoever.
The court held for the LHC. Following the independence principle, even granting that there is still issue to be
resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay
the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the
beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-
key contract which states that all issues between the parties must be resolved first before LHC can call on the
stand-by LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.

In case the buyer was not able to pay its obligation under the letter of credit, can the bank take possession
over the goods covered by the said letter of credit?
No.  The opening of a Letter of Credit did not vest ownership of the goods in the bank in the absence of a trust
receipt agreement. A letter of credit is a mere financial device developed by merchants as a convenient and
relatively safe mode of dealing with the sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods
before paying.

STANDBY LETTER OF CREDIT, separate contract between the beneficiary and the applicant. (Differentiate
with Surety, not the main contract and only follows the principal contract.)
Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No. 105395 December 10, 1993
Facts:

Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the Account of
General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files. Under the letter of credit, Bank
of America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary. Upon
receipt of the letter advice, Inter- Resin told Bank of America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-Resin made a
partial availment of the Letter of Credit after presentment of the required documents to Bank of America. After
confirmation of all the documents Bank of America issued a check in favor of IR. BA advised Bank of Ayudhya
of IR’s availment under the letter of credit and asked for the corresponding reimbursement. IR presented
documents for the 2nd availment under the same letter of credit. However, BA stopped the processing of such
after they received a telex from Bank of Ayudhya delaring that the LC fraudulent. BA sued IR for the recovery
of the first LC payment. The IR contended that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya

Issue: WON Bank of America may recover what it has paid under the letter of credit to Inter-Resin.

Held:

There would at least be 3 parties: (a) the buyer, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter of
credit, which undertakes to pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with
the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment.

The services of an advising (notifying) bank may be utilized to convey to the seller the existence of the
credit; or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank, to have the draft discounted.

Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of
presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of
America has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the
drawer of the draft, continues to assume a contingent liability thereon.

Furthermore, bringing the letter of credit to the attention of the seller is the primordial (existing from the
beginning) obligation of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of business communications,
before dispatching the same to Inter-Resin finds no real support.
Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991

Facts:
Villaluz entered into a contract of sale with Christiansen in which Villaluz agreed to deliver to Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB (Free on Board,
international shipping  agreements used in the transportation of goods between a buyer and a seller). On the
arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security
Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in favor
of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the latter that it
“forward the enclosed letter of credit to the beneficiary.” The letter of credit also provided that the draft to be
drawn is on Security Pacific National Bank and that it be accompanied by certain documents. The logs were
thereafter loaded on a vessel but Christiansen refused to issue the certification required in paragraph 4 of the
letter of credit, despite repeated requests by Villaluz. The logs however were still shipped and received by
consignee, to whom Christiansen sold the logs. Because of the absence of the certification by Christiansen, the
Feati Bank and Trust company refused to advance the payment on the letter of credit until such credit lapsed.
Since the demands by Villaluz for Christiansen to execute the certification proved futile, he filed an action for
mandamus and specific performance against Christiansen and Feati Bank and Trust Company before the Court
of First Instance. Christiansen however left the Philippines and Villaluz filed an amended complaint making
Feati Bank and Trust Company.

Issue: WON Feati Bank is liable for Releasing the funds to Christiansen. NO

Held:
In commercial transactions involving letters of credit, the functions assumed by a correspondent bank
are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter
of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating
bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent bank itself had issued the letter of credit.
In this case, the letter merely provided that the petitioner “forward the enclosed original credit to the
beneficiary.” Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled
by the courts below.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only
with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore
that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against
the petitioner for the enforcement of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.
At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a
negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has
no contractual relationship with the seller. Whether therefore the petitioner is a notifying bank or a negotiating
bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has
actually negotiated with Feati, the refusal by the petitioner to accept the tender of the private respondent is
justified.

STRICT COMPLIANCE RULE

Keng Hua Paper Products Co. Inc. vs. Court of Appeals, RTC Manila and Sea-land Service, Inc.
G.R. No. 116863, February 12, 1998
Shipper – Ho Kee Waste Paper; Consignee – Petitioner, Keng Hua Paper Products, Co.; Carrier – Private
Respondent Sea-land Service, Inc.
Bill of Lading- a detailed list of a shipment of goods in the form of a receipt given by the carrier to the person
consigning the goods.
Demurrage- a charge payable to the owner of a chartered ship in respect of failure to load or discharge the ship
within the time agreed.

Facts:
Plaintiff is a shipping company. In 1982, Sea-land Service received at its Hong Kong terminal a sealed
container, containing 76 bales of unsorted waste paper for shipment to defendant, Keng Hua Paper Products in
Manila. A bill of lading to cover the shipment was issued by the plaintiff. The shipment was discharged at the
Manila International Container Port. Notices of arrival were transmitted to the defendant but the latter failed to
discharge the shipment from the container during the grace period. The said shipment remained inside the
plaintiff’s container from the moment the free time period expired in 1982 until the time when the shipment was
unloaded from the container in 1983, or a total of f481days.
During the 481-day period, demurrage charges accrued. Within the same period, letters demanding payment
were sent by the plaintiff to the defendant who, however, refused to settle its obligation. Numerous demands
were made on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action
for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased 50 tons of waste
paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit issued by
Equitable Banking Corporation, with partial shipment permitted; that under the letter of credit, the remaining
balance of the shipment was only 10 metric tons as shown in Invoice that the shipment plaintiff was asking
defendant to accept was 20 metric tons; that if defendant were to accept the shipment, it would be violating
Central Bank rules and regulations and custom and tariff laws; that plaintiff had no cause of action against the
defendant because the latter did not hire the former to carry the merchandise; that the cause of action should be
against the shipper which contracted the plaintiffs services and not against defendant; and that the defendant
duly notified the plaintiff about the wrong shipment through a letter in 1983.

Issues: (1) WON the petitioner was bound by the bill of lading. YES (2) WON interest may not be allowed to
run from the date of private respondents’ extrajudicial demands on March 8, 1983 for P50,260 or on April 24,
1983 for P37,800, considering that, in both cases, there was no demand for interest.

Held:
A bill of lading serves 2 functions. (1) it is a receipt for the goods shipped. (2) it is a contract by which 3
parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume
stipulated obligations.
Petitioner admits that it received the bill of lading immediately after the arrival of the shipment. Having been
afforded an opportunity to examine the said document, petitioner did not immediately object to or dissent from
any term or stipulation therein. It was only 6 months later that petitioner sent a letter to private respondent
saying that it could not accept the shipment. Petitioners inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only of
petitioner’s inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper’s failure to comply
with the terms and conditions of the letter of credit, for which reason the bill of lading and other shipping
documents were returned by the banks to the shipper. The letter merely proved petitioner’s refusal to pick up
the cargo, not its rejection of the bill of lading.
The prolonged failure of petitioner to receive and discharge the cargo from the private respondent’s vessel
constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former.
On behalf of the interest jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the  discretion of the court at the rate of  6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169) but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
This case involves an obligation not arising from a loan or forbearance of money; thus, in Article 2209, the
applicable interest rate is 6% per annum. Since the bill of lading did not specify the amount of demurrage, and
the sum claimed by private respondent increased as the days went by, the total amount demanded cannot be
deemed to have been established with reasonable certainty until the trial court rendered its judgment. Indeed,
unliquidated damages or claims, it is said, are those which are not or can’t be known until definitely ascertained,
assessed and determined by the courts after presentation of proof. Consequently, the legal interest rate is 6%, to
be computed from 1990, the date of the trial court’s decision. And in accordance with Philippine Natonal Bank
and Eastern Shipping, the rate of 12% per annum shall be charged on the total then outstanding, from the time
the judgment becomes final and executory until its satisfaction.

PRESIDENTIAL DECREE No. 115 January 29, 1973

PROVIDING FOR THE REGULATION OF TRUST RECEIPTS TRANSACTIONS

Trust Receipts- convenient business device to assist importers and merchants solve their financing problems,
had gained popular acceptance in international and domestic business practices, particularly in commercial
banking transactions; (not mandatory in letter of credit transactions)

Trust Receipt Law:

- to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and
trade;
- to provide for the regulation of trust receipts transactions in order to assure the protection of the rights
and enforcement of obligations of the parties involved therein;
- to declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods,
documents or instruments released under trust receipts as a criminal offense punishable under 315 of
RPC.
Entrustee- the person having or taking possession of goods, documents/instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose/s specified in the trust receipt
agreement.
Entruster - the person holding title over the goods, documents, or instruments subject of a trust receipt
transaction, and any successor in interest of such person.
Goods- chattels and personal property other than: money, things in action, or things so affixed to land as to
become a part thereof.
Instrument- any negotiable instrument ; any certificate of stock, or bond or debenture for the payment of money
issued by a public/private corporation, or any certificate of deposit, participation certificate or receipt, any
credit/ investment instrument of a sort marketed in the ordinary course of business/finance, whereby the
entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to
be the owner. "
Purchase- means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable.
Security Interest- a property interest in goods, documents/instruments to secure performance of some
obligations of the entrustee or of some 3rd persons to the entruster and includes title, WON expressed to be
absolute, whenever such title is in substance taken or retained for security only.
Trust Receipt- the written/printed document signed by the entrustee in favor of the entruster containing terms
and conditions substantially complying with the provisions of this Decree. No further formality of execution or
authentication shall be necessary to the validity of a trust receipt.

Trust Receipt Transaction- any transaction by and between a the entruster and the entrustee, whereby the
entruster, who owns/holds absolute title/security interests over certain specified goods, documents/instruments,
releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents/instruments in trust for the entruster and to sell/otherwise dispose of the goods,
documents/instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt/the goods, documents/instruments themselves if
they are unsold/not otherwise disposed of, in accordance with the terms and conditions in the trust receipt.
Goods/Documents:
-to sell/procure their sale;
-to manufacture/process the goods with the purpose of ultimate sale. (The entruster shall retain its title over the
goods whether in its original or processed form until the entrustee has complied fully with his obligation under
the trust receipt);
-to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale;
Instruments:
-to sell or procure their sale or exchange; or
-to deliver them to a principal; or
-to effect the consummation of some transactions involving delivery to a depository or register; or
-to effect their presentation, collection or renewal
The sale of these by a person in the business of selling goods, documents/instruments for profit who, at the
outset of the transaction, has, as against the buyer, general property rights in such goods,
documents/instruments,/who sells the same to the buyer on credit, retaining title/other interest as security for the
payment of the purchase price, does not constitute a trust receipt transaction.

Forms of Trust Receipts:

1. a description of the goods, documents/instruments subject of the trust receipt;
2. the total invoice value of the goods and the amount of the draft to be paid by the entrustee;
3. an undertaking/a commitment of the entrustee:
(a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose
of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the
goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale
within the period specified therein.
-May also contain other terms and conditions agreed upon by the parties in addition to those hereinabove
enumerated provided that they are not contrary to law….
-A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible
as part of international reserves of the Philippines. In the case of trust receipts denominated in foreign currency,
payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the
date the proceeds of the sale held in trust by the entrustee are turned over to the entruster or on such other date
as may be stipulated in the trust receipt or other agreements executed between parties.

Rights of the Entruster:

1. shall be entitled to the proceeds from the sale released under a trust receipt to the entrustee to the extent
of the amount owing to the entruster or as appears in the trust receipt, or
2. to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all
other rights conferred on him in the trust receipt.
3. may cancel the trust and take possession of the goods, documents/instruments subject of the trust or of
the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust receipt or any other agreement between the parties.
4. entruster in possession of the goods, documents or instruments may, on or after default, give notice to
the entrustee of the intention to sell, and may, not less than 5 days after serving or sending of such
notice, sell the same at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale shall be applied:
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments;
(c) to the satisfaction of the entrustee's indebtedness to the entruster.
-The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.
-Notice of sale is sufficient if given in writing, and either personally served on the entrustee or sent
by post-paid ordinary mail to the entrustee's last known business address.
5. The entruster holding a security interest shall not, be responsible as principal or as vendor under any sale
or contract to sell made by the entrustee.

Obligations of Entrustee:
1. hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt;
2. receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the trust receipt;
3. insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
4. keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster;
5. return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;
 6. observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

-The risk of loss shall be borne by the entrustee. Loss of these pending their disposition, irrespective of whether
or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.

-Any purchaser of goods from an entrustee with right to sell, who buys the goods, documents, or instruments for
value and in good faith from the entrustee, acquires these free from the entruster's security interest.

-The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust
receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

-The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not sold or disposed of shall constitute the crime of estafa,
Art. 315 para 1(b) of RPC.

Hur Tin Yang vs. People, August 14, 2013

Facts:
On various occasions in April, May, July, August, September, October and November, Metrobank extended
several commercial letters of credits to Supermax, a corporation engaged in construction business. These LCs
will be used to pay for the delivery of construction materials which will be used by Supermax in its business.
Metrobank, required herein petitioner, as the vice president of the company to sign 24 Trust Receipts. These
Trust receipts will serve as security for the construction materials and to hold the materials or the proceeds of
the sales in trust for Metrobank to the extent of the amount stated in the trust receipts.
The 24 Trust Receipts fell due however Supermax failed to pay or deliver the goods or proceeds to Metrobank.
Metrobank sent demand letters but instead of complying, it requested for the restructuring of the loan which was
denied by the Metrobank. After the denial, Metrobank sent another letter of demand which was unheeded. This
prompted the bank to file a complaint against the petitioner.
On his defense, petitioner said that these trust receipts are made as an additional security for the loans extended
for the purchase of materials. He also claimed that Metrobank knew all along that the said materials were not
intended for resale but for personal use of Supermax.
RTC:found the petitioner guilty of Estafa under the Revised Penal Code.
CA: Affirmed RTC’s and denied MR
OSG: the pieces of evidence adduced from the testimony and documents submitted before the trial court are
sufficient to establish the guilt of petitioner. OSG dismissed the petition.

Issue:WON the dealing between the parties in this case is covered by Trust Receipt Law which makes the
Petitioner liable for Estafa under Art.315, par. 1(b) of the RPC in relation to PD 115? (NO)

Held:
In the instant case, the factual findings of the trial and appellate courts reveal that the dealing between petitioner
and Metrobank was not a trust receipt transaction but one of simple loan. Petitioner's admission that he signed
the trust receipts on behalf of Supermax, which failed to pay the loan or turn over the proceeds of the sale or the
goods to Metrobank upon demand does not conclusively prove that the transaction was, indeed, a trust receipts
transaction.
In contrast to the nomenclature of the transaction, the parties really intended a contract of loan. The petitioner
was charged with Estafa committed in what is called, under PD 115, a "trust receipt transaction," which is
defined as: (refer to Sec. 4 of PD 115)
A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the price of
the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are 2 obligations in a
trust receipt transaction: (1) refers to money received under the obligation involving the duty to turn it over
(entregarla) to the owner of the merchandise sold, (2) refers to the merchandise received under the obligation to
"return" it (devolvera) to the owner. A violation of any of these undertakings constitutes Estafa defined under
Art. 315, par. 1(b) of the RPC, (see Sec. 13 of PD 115)
This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods. Considering that the goods in this case were never intended for sale but for use in the
fabrication of steel communication towers, the trial court erred in ruling that the agreement is a trust receipt
transaction. Goods sold in retail are often within the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished products, these finished products if not the raw
materials or their components similarly remain in the possession of the trustee until they are sold. But the goods
and the materials that are used for a construction project are often placed under the control and custody of the
clients employing the contractor, who can only be compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal proceedings. The contractor's difficulty and uncertainty in
claiming these materials (or the buildings and structures which they become part of), as soon as the bank
demands them, disqualify them from being covered by trust receipt agreements.
People vs. Cuevo, May 7, 1981

Facts:
This case presents for reexamination the liability for estafa of the holder of a trust receipt who disposed of the
goods covered thereby and, in violation of its terms, failed to deliver to the bank the proceeds of the sale as
payment of the debt secured by the trust receipt.
We say reexamination because it is a well-entrenched rule in our jurisprudence that the conversion by the
importer of the goods covered by a trust receipt constitutes estafa through misappropriation under article 315(1)
(b) of the RPC.
In 1964, Cuevo defrauded the Prudential Bank and Trust Company when Cuevo received in trust from the
Prudential Bank merchandise, i.e., 1,000 bags of grind yellow corn and 1,000 bags of palay specified in a trust
receipt covered by a Letter of Credit, executed by him in favor of said bank, of the total value of P24,000.00, to
be sold by him, under the express obligation on Cuevo’s part to account for the said merchandise, or to deliver
and turn over to the Prudential Bank and Trust Company the proceeds of the sale thereof; But Cuevo converted
the merchandise for his own benefit despite repeated demands by the Bank.
"But said accused once in possession of said merchandise, far from complying with the aforesaid obligation,
notwithstanding repeated demands made upon him, with intent to defraud, willfully, unlawfully and feloniously
misappropriated, misapplied and converted the said merchandise or the value thereof in the sum of
P24,000.00 to his own personal use and benefit, to the damage and prejudice of the Prudential Bank and Trust
Company in the aforesaid sum of P24,000.00, Philippine Currency." 
Cuevo pleaded not guilty and filed a Motion to Dsimiss for facts alleged in the information do not constitute an
offense.

Issue: WON the dismissal of a charge for estafa for a violation of a trust receipt agreement is correct. YES

Held:
The appeal is meritorious. Judge Kapunan, Jr. erred in holding that the accused did not commit estafa under
article 315(1)(b). Judge Kapunan, in sustaining the motion to dismiss, relied on the Spanish version by which in
his opinion, that phrase is not accurately translated as "in trust" and, as he explained, it does not allegedly cover
the conversion or misappropriation of the goods covered by a trust receipt.
The lower court ratiocinated that the contract covered by a trust receipt is merely a secured where the borrower
is allowed to dispose of the collateral, whereas, in a deposit the depositary is not empowered to dispose of the
property deposited. Hence, the lower court concluded that the violation of the provisions of the trust receipt
gives rise to a civil action and not to a criminal prosecution for estafa.
A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or
purchased"
Even if the accused did not receive the merchandise for deposit, he is, nevertheless, covered by article 315(1)(b)
because after receiving the price of the sale, he did not deliver the money to the bank or, if he did not sell the
merchandise, he did not return it to the bank.
Those two situations are within the purview of article 315(1)(b). The 1 st situation is covered by the provision
which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of
the merchandise sold. The 2nd is covered by the provision which refers to merchandise received under the
obligation to "return" it (devolverla) to the owner.
The fact that in the first case the money was received from the purchaser of the merchandise and not from the
bank does not remove it from the operation of article 315(1)(b).
In this connection, it is relevant to state that the Trust Receipts Law, regulating trust receipts transactions, was
issued in 1973.
One objective of that law is "to declare the misuse and/or misappropriation of goods or proceeds realized from
the sale of goods, documents or instruments released under trust receipts as a criminal offense punishable
under" article 315. Section 13 of the decree provides that "the failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to
the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions" of article 315 of the Revised Penal Code.
 The enactment of the said penal provision is confirmatory of existing jurisprudence and should not be construed
as meaning that, heretofore, the misappropriation of the proceeds of a sale made under a trust receipt was not
punishable under article 315.

ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW

 Warehouseman-can issue warehouse receipts; liable to any person injured thereby for all damages caused by the
omission from a negotiable receipt of any of the terms herein required.

Warehouse receipts need not be in any particular form but every such receipt must embody within its written or
printed terms:
1. The location of the warehouse where the goods are stored,
2. The date of the issue of the receipt,
3. The consecutive number of the receipt,
4. A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified
person or his order,
5. The rate of storage charges,
6. A description of the goods or of the packages containing them,
7. The signature of the warehouseman which may be made by his authorized agent,
8. If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in common
with others, the fact of such ownership, and
9. A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a
lien.  If the precise amount of such advances made or of such liabilities incurred is, at the time of the issue of,
unknown to the warehouseman or to his agent who issues it, a statement of the fact that advances have been
made or liabilities incurred and the purpose thereof is sufficient.

A warehouseman may insert in a receipt issued by him any other terms provided that such shall not:
1. Be contrary to the provisions of this Act.
2. In any wise impair his obligation to exercise that degree of care in the safe-keeping of the goods entrusted to
him which is reasonably careful man would exercise in regard to similar goods of his own.

Non-negotiable receipt. — A receipt in which it is stated that the goods received will be delivered to the depositor or
to any other specified person. No provision shall be inserted here, void if there is.

Negotiable receipt. — A receipt in which it is stated that the goods received will be delivered to the bearer or to the
order of any person named in such receipt.

-Duplicate receipts must be so marked, except the first one issued.

-A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it "non-negotiable," or
"not negotiable."  In case of the warehouseman's failure so to do, a holder of the receipt who purchased it for value
supposing it to be negotiable, may, at his option, treat such receipt as imposing upon the warehouseman the same
liabilities he would have incurred had the receipt been negotiable.
-Not applicable to letters, memoranda, or written acknowledgment of an informal character.

Obligation of warehousemen to deliver the goods upon a demand made either by the holder of a receipt for the goods
or by the depositor; if such demand is accompanied with:
1. An offer to satisfy the warehouseman's lien;
2. An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the
negotiation of the receipt; and
3. A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been
delivered, if such signature is requested by the warehouseman.
-If warehouseman refuses or fails to deliver the goods, the burden shall be upon him to establish the existence of a
lawful excuse for such refusal.

A warehouseman is justified in delivering the goods, subject to the provisions of the three following sections, to one
who is:
1. The person lawfully entitled to the possession of the goods, or his agent;
2. A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the
goods, or who has written authority from the person so entitled either indorsed upon the receipt or written
upon another paper;
3. A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order,
or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by
the terms of the receipt or by his mediate or immediate indorser.

-In case of misdelivery, warehouseman shall be liable as for conversion to all having a right of property or
possession  in the goods, and though he delivered these as authorized, he shall be so liable, if prior to such
delivery he had either:
1. Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the
goods, not to make such deliver; or
2. Had information that the delivery about to be made was to one not lawfully entitled to the possession of
the goods.

-Negotiable receipt must be cancelled when goods delivered.

-Negotiable receipts must be cancelled or marked when part of goods delivered.
-In both above instances, if warehouseman did not, shall be liable to anyone who purchases for value in good faith
such receipt for failure to deliver all the goods specified in the receipt.

-The alteration of a receipt shall not excuse the warehouseman who issued it from any liability if such alteration was:
Immaterial, Authorized, or Made without fraudulent intent. If the authorized, liable according to the terms of the
receipt as altered.  If unauthorized but made without fraudulent intent, liable according to the terms of the receipt as
they were before alteration.

-Warehouseman cannot set up title in himself, unless such title or right is derived directly or indirectly from a transfer
made by the depositor at the time of or subsequent to the deposit for storage, or from the warehouseman's lien, shall
excuse the warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.

-If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an
action brought against him for non-delivery of the goods or as an original suit, whichever is appropriate, require all
known claimants to interplead.

Against what property the lien may be enforced:

1. Against all goods, whenever deposited, belonging to the person who is liable as debtor for the claims in
regard to which the lien is asserted, and
2. Against all goods belonging to others which have been deposited at any time by the person who is liable as
debtor for the claims in regard to which the lien is asserted if such person had been so entrusted with the
possession of goods that a pledge of the same by him at the time of the deposit to one who took the goods
in good faith for value would have been valid.

A warehouseman loses his lien upon goods:

1. By surrendering possession thereof, or
2. By refusing to deliver the goods when a demand is made with which he is bound to comply under the
provisions of this Act.
-A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him
until the lien is satisfied.
-Warehouseman's lien does not preclude other remedies allowed by law to a creditor against a debtor for the
collection from the depositor of all charges and advances which the depositor has expressly or impliedly contracted
with the warehouseman to pay.

A warehouseman's lien for a claim which has become due may be satisfied as follows:
1. An itemized statement of the warehouseman's claim, showing the sum due at the time of the notice and the
date or dates when it becomes due,
2. A brief description of the goods against which the lien exists,
3. A demand that the amount of the claim as stated in the notice of such further claim as shall accrue, shall be
paid on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally
delivered, or from the time when the notice shall reach its destination, according to the due course of post,
if the notice is sent by mail,
4. A statement that unless the claim is paid within the time specified, the goods will be advertised for sale
and sold by auction at a specified time and place.
In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim
of the warehouseman for which he has a lien on the goods. 
The sale shall:
1. in the place where the lien was acquired, or, if such place is manifestly unsuitable for the purpose of the claim
specified in the notice to the depositor has elapsed, and advertisement of the sale, describing the goods to be
sold.
2. stating the name of the owner or person on whose account the goods are held, and
3. the time and place of the sale, shall be published once a week for two consecutive weeks in a newspaper
published in the place where such sale is to be held. 
4. not be held less than 15 days from the time of the 1st publication.  If there is no newspaper published in such
place, the advertisement shall be posted at least 10 days before such sale in not less than 6 conspicuous places
therein.
-From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice,
advertisement and sale.  The balance, if any, of such proceeds shall be held by the warehouseman and delivered on
demand to the person to whom he would have been bound to deliver or justified in delivering goods.

-At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the
warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in
serving notices and advertising and preparing for the sale up to the time of such payment. 

-Other methods of enforcing lien allowed by law for the enforcement of a lien against personal property which does
not bar the right to recover so much of the warehouseman's claim as shall not be paid by the proceeds of the sale of
the property is allowed.

-Effect of sale: the warehouseman shall not thereafter be liable for failure to deliver the goods to the depositor or
owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be
negotiable.
-Know warehouse receipt here is the Quedan.

PNB vs. Se, April 18, 1996

Facts:
In accordance with the Warehouse Receipts Law, Noah’s Ark Sugar Refinery issued on several dates, 5
Warehouse Receipts (Quedans). The receipts are substantially in the form, and contains the terms, prescribed
for negotiable warehouse receipts by Section 2 of the law. Subsequently, 2 Warehouse receipts were negotiated
and endorsed to Luis Ramos; and the other 3 to Cresencia Ramos and Zoleta then used the quedans as security
for 2 loan agreements obtained by them from the Philippine National Bank.

Luis and Cresencia failed to pay their loans upon maturity in 1990. Consequently, the PNB wrote to Noah’s Ark
Sugar Refinery demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and
Ramos. Noah’s Ark Sugar Refinery refused to comply with the demand alleging ownership thereof. A verified
complaint for "Specific Performance with Damages and Application for Writ of Attachment" against Noah’s
Ark Sugar Refinery, and Looyuko, Jimmy and Wilson as officials of the said Refinery was filed.

PNB filed a Motion for Summary Judgment in favor of to the plaintiff as against the defendants for the reliefs
prayed for in the complaint. RTC denied the Motion for Summary Judgment. CA nullified and set aside the
orders of the RTC and ordered the trial court to render summary judgment in favor of the PNB. RTC rendered
judgment dismissing plaintiff’s complaint against private respondents’ or lack of cause of action and likewise
dismissed private respondents’ counterclaim against PNB and of the Third-Party Complaint and the Third-Party
Defendant’s Counterclaim. RTC denied PNB’s Motion for Reconsideration.

The PNB filed an appeal from the RTC decision with the Supreme Court, G.R No. 107243, by way of a Petition
for Review on Certiorari under Rule 45 of the Rules of Court. In this case, the SC ruled in favor of PNB
declaring it as the owner of the contended sugar stocks covered by 5 warehouse receipts. Upon demand by the
PNB of the sugar stocks in view of the favorable decision of the SC, the Refinery refused to deliver the same
without the payment of the warehouseman’s lien and sought for the deferment of the proceedings through an
Omnibus Motion and that they be heard on their claim on the warehouseman’s lien or the storage fees.
However, the PNB refused the payment of the storage fees and moved for the issuance of a Writ of Execution
and an Opposition to the Omnibus Motion.

Noah’s Ark et al. moved for reconsideration of the SC’s decision. The 2 nd MR with leave of court filed by them
was denied. They likewise filed a Motion Seeking Clarification of the Decision, which was also denied. They
thereupon filed before the RTC an Omnibus Motion seeking among others the deferment of the proceedings
until they are heard on their claim for warehouseman’s lien. PNB filed a Motion for the Issuance of a Writ of
Execution and an Opposition to the Omnibus Motion. The RTC granted the Omnibus Motion and found that
there exists in favor of the Noah’s Ark a valid warehouseman’s lien under Section 27 of RA 2137.
Consequently, the PNB filed the present petition to seek the nullification of the assailed order of Judge Se.

Issue: Can the warehouseman enforce his warehouseman’s lien before delivering the sugar stocks as ordered by
the Court of Appeals or need he file a separate action to enforce payment of storage fees? YES

Held:

Even in the absence of such a provision, law and equity dictate the payment of the warehouseman’s lien
pursuant to Sections 27 and 31 of the Warehouse Receipts Law. (see Secs. 27 and 31 of the Warehouse Receipts
Law)

Pursuant to Section 31, the goods under storage may not be delivered until said lien is satisfied. Considering
that PNB does not deny the existence, validity and genuineness of the Warehouse Receipts on which it anchors
its claim for payment against PRs, it can’t disclaim liability for the payment of the storage fees stipulated
therein. PNB is in estoppel in disclaiming liability for the payment of storage fees due the private
respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject
Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks.
The unconditional presentment of the receipts by PNB for payment against private respondents on the
strength of the provisions of the Warehouse Receipts Law carried with it the admission of the existence
and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts,
including the unqualified recognition of the payment of warehouseman’s lien for storage fees and preservation
expenses.

While the PNB is entitled to the stocks of sugar as the endorse of the quedans, delivery to it shall be effected
only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his
lien at this juncture, because in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman
loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his lien, because a
warehouseman’s lien is possessory in nature.

PNB may not now retrieve the sugar stocks without paying the lien due private respondents as warehouseman.
Considering that PNB does not deny the existence, validity and genuineness of the Warehouse Receipts on
which it anchors its claim for payment against PRs, it cannot disclaim liability for the payment of the storage
fees stipulated therein. While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to
demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts
Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien
may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his
lien, because a warehouseman’s lien is possessory in nature.
WHEREFORE, the petition is hereby dismissed for lack of merit. The questioned orders issued by public
respondent judge are affirmed. Costs against the petitioner.

PICZON vs. PICZON and SOSING-LOBOS & CO., INC., (G.R. No. L-29139, November 15, 1974)

Facts:
This an appeal from the decision of the CFI in its Civil Case, entitled Consuelo P. Piczon, et al. vs. Esteban
Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon, as
guarantor, to pay CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA "the sum of
P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have been
duly paid, and the costs." Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in
the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of the
corporation known as the "SOSINGLOBOS and CO., INC.," as controlling stockholder, and at the same
time as guarantor for the same, do by these presents contract a loan of P12,500 Philippine Currency, the
receipt of which is hereby acknowledged, from the "Piczon and Co., Inc." another corporation, the main
offices of the 2 corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use
the loan as surety cash deposit for registration with the Securities and Exchange Commission of the
incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount
with 12% interest per annum, commencing from the date of execution hereof, to the "Piczon and Co.,
Inc., as soon as the said incorporation papers are duly registered and the Certificate of Incorporation
issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th day
of September, 1956. (signed)Esteban Piczon.

Issues: (a) SHOULD THE PAYMENT OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM
AUGUST 6, 1964, ONLY, OR FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY
EXECUTED? SEPTEMBER 28, 1956 (b) Is Esteban Piczon liable a guarantor or a surety? GUARANTOR

Held:
a. Instead of requiring appellees to pay interest at 12% only from August 6, 1964, the trial court should have
adhered to the terms of the agreement which plainly provides that Esteban Piczon had obligated Sosing-Lobos
and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00) with 12%
interest per annum commencing from the date of the execution hereof", Annex A, which was on September 28,
1956.
Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is 6% per
annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to commence from the
execution of said document.
b. Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and
there are no circumstances in the record from which it can be deduced that his liability could be that of a surety.
A guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a party
to be bound as a surety when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the
express assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question,
thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of the
agreement, Piczon necessarily must have bound himself as insurer. As already explained earlier, appellants'
prayer for payment of legal interest upon interest due from the filing of the complaint can no longer be
entertained, the same not having been made an issue in the pleadings in the court below.
We do not believe that such a substantial matter can be deemed included in a general prayer for "any other relief
just and equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in the
enumeration of the issues to be resolved by the court.
DIÑO and UY vs. CA and METROPOLITAN BANK AND TRUST COMPANY

Facts:
In 1977, Uy Tiam Enterprises and Freight Services, thru its representative Uy Tiam, applied for and obtained
credit accommodations (LOC and TRA) METROBANK in the sum of P700,000.00. To secure the
aforementioned credit accommodations Uy and Diño executed separate Continuing Suretyships, where
Norberto UY agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of
P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00. This obligation
was settled and paid by UTEFS. Again in 1979, UTEFS secured another credit accommodation which was fully
settled. They then applied and obtained an irrevocable letter of credit in the sum of P815, 600.00, covered
UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain
by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document
denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter
of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall
guarantee its payment. UTEFS executed and delivered to METROBANK the Trust Receipt whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which
amounted to P815, 600.00.
Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale
or, if sold, the proceeds of the sale thereof, on or before September 2, 1979. However, UTEFS did not acquiesce
to the obligatory stipulations in the trust receipt. METROBANK sent letters to the said principal obligor and its
sureties, Uy and Uy Diño, demanding payment of the amount due. Diño denied his liability saying that he
cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Accordingly,
the Continuing Suretyships executed in 1977 can’t be availed of to secure Uy Tiam's Letter of Credit obtained
in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they cannot be
held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without
their participation. METROBANK contends that the terms and conditions embodied in the comprehensive
suretyships separately executed by sureties defendants, the bank argued that sureties movants bound themselves
as solidary obligors of defendant Uy Tiam to both existing obligations and future ones based on Article 2053.

Issue: Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by
virtue of the Continuing Suretyship Agreements they separately signed in 1977. YES but only for the amount or
limit stated in the surety contract.

Held:
A continuing guaranty is one which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof.
A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states
that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a
continuing one. The use of particular words and expressions such as payment of "any debt," "any indebtedness,"
"any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal
debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a
continuing guaranty.
The Court looked into the provisions of the Surety entered by Diño. It shows that the suretyship agreement are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied
the fact that they had not revoked the suretyship agreements. The purpose of the execution of the Continuing
Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust
receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one
which shall remain in full force and effect until the bank is notified of its revocation. The Continuing Suretyship
Agreements CAN be made applicable to the 1979 obligation even if the latter was not yet in existence when the
agreements were executed in 1977, as stated in Art 2053 par 2. The limit of the petitioners respective liabilities
must be determined from the suretyship agreement each had signed. The Continuing Suretyship Agreements
signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. It is also stated in the contract that they are bound to pay for the
interest and for a reasonable amount of cost of suit in case of judicial proceedings. The law is clear that a
guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and
the onerous nature of the conditions. Thus, by express mandate of the Continuing Suretyship Agreements which
they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides that … A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein. If it be simple or indefinite, it shall comprise not only the
principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter,
that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest should run only from the date
when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to
Article 2208 of the Civil Code.

FORTUNE MOTORS CORPORATION and EDGAR L. RODRIGUEZA vs. CA and FILINVEST

CREDIT CORPORATION

Facts:
In 1981, Joseph Chua and Edgar Rodrigueza executed separate surety agreements in favor of Fortune Motors
(Phils.) Corporation to cover obligations incurred by Fortune Motors whether they be enforced or thereafter
made (from the time of said surety contracts). In 1982, Fortune Motors secured cars from Canlubang
Automotive Resources Corporation (CARCO) via trust receipts and drafts made by CARCO. These were
assigned to Filinvest Credit Corporation. Later Filinvest, when the obligation matured, demanded payment from
Fortune Motor as well as from Chua and Rodrigueza. No payment was made. A case was filed. Rodrigueza
averred that the surety agreement was void because when it was signed in 1981, the principal obligation (1982)
did not yet exist.

Issue: Whether surety can exist even if there was no existing indebtedness at the time of its execution. YES

Held:
Surety May Secure Future Obligations The case at bench falls on all fours with Atok Finance Corporation vs.
Court of Appeals which reiterated our rulings in National Rice and Corn Corporation (NARIC) vs. Court of
Appeals and Rizal Commercial Banking Corporation vs. Arro. Future obligations can be covered by a surety.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and
commercial practice. A bank or financing company which anticipates entering into a series of credit transactions
with a particular company, commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be
no need to execute a separate surety contract or bond for each financing or credit accommodation extended to
the principal debtor.

BANK OF COMMERCE and TAALA, G.R. No. 174006, December 8, 2010

Facts:
Respondents borrowed money from petitioner bank in the amount of P900,000.00. Respondents executed a Real
Estate Mortgage over the condominium unit as collateral, and the same was annotated at the back of CCT No.
2130. Respondents again borrowed P1,100,000.00 from petitioner bank, which was also secured by a mortgage
over the same property annotated at the back of CCT No. 2130.

Respondents paid P1,011,555.54. On the face of the receipt, it was written that the payment was "in full
payment of the loan and interest." Respondents then asked petitioner bank to cancel the mortgage annotations
on CCT No. 2130. However, the bank refused to cancel the same and demanded payment of P 4,633,916.67.
Respondents requested for an accounting which would explain how the said amount was arrived at. However,
instead of heeding respondents request, petitioner bank applied for extra-judicial foreclosure of the mortgages
over the condominium unit.
Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and auction sale of
the property. They averred that the loans secured by the property had already been paid in full. Petitioner bank
admitted that there were only 2 mortgage loans annotated at the back of CCT No. 2130, but denied that
respondents had already fully settled their outstanding obligations with the bank. It averred that several credit
lines were granted to respondent Andres Flores by petitioner bank that were secured by promissory notes
executed by him, and which were either increased or extended from time to time.

RTC: dismissed the Complaint for Specific Performance. The evidence submitted by petitioner bank,
specifically the promissory notes and statement of account dated in 1998 negated this contention. Respondents
filed a motion for reconsideration but the same was denied. Aggrieved, respondents appealed to the CA.

CA: reversed the RTC decision. The principal obligation or loan was already extinguished by the full payment
thereof. Consequently, the real estate mortgages securing the principal obligation were also extinguished. The
CA also noted that the two mortgages were individually annotated at the back of CCT No. 2130. Thus, the CA
opined that the individual annotations clearly indicated that the said mortgages were not meant to serve as a
continuing guaranty for any future loan that respondents would obtain from petitioner bank.

Petitioners filed a motion for reconsideration but the same was denied. Hence, this petition.

Issue: Is the real estate mortgage over the subject condominium unit a continuing guaranty for the future loans
of respondent spouses despite the full payment of the principal loans annotated on the title of the subject
property?

Held:
A continuing guaranty is a recognized exception to the rule that an action to foreclose a mortgage must be
limited to the amount mentioned in the mortgage contract.
Under Article 2053 of the Civil Code, a guaranty may be given to secure even future debts, the amount of which
may not be known at the time the guaranty is executed. This is the basis for contracts denominated as a
continuing guaranty or suretyship. A continuing guaranty is not limited to a single transaction, but contemplates
a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It
is prospective in its operation and is generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable. In other words, a continuing guaranty is one that covers all transactions, including those arising
in the future, which are within the description or contemplation of the contract of guaranty, until the expiration
or termination thereof.

A guaranty shall be construed as continuing when, by the terms thereof, it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a certain
period, especially if the right to recall the guaranty is expressly reserved. In other jurisdictions, it has been
held that the use of particular words and expressions, such as payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at
any time" or "on such time" that the principal debtor may require, has been construed to indicate a continuing
guaranty.

In the instant case, the language of the real estate mortgage unambiguously reveals that the security provided in
the real estate mortgage is continuing in nature. Thus, it was intended as security for the payment of the loans
annotated at the back of CCT No. 2130, and as security for all amounts that respondents may owe petitioner
bank. It is well settled that mortgages given to secure future advance or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered.

Respondents full payment of the loans annotated on the title of the property shall not effect the release of the
mortgage because, by the express terms of the mortgage, it was meant to secure all future debts of the spouses
and such debts had been obtained and remain unpaid. Unless full payment is made by the spouses of all the
amounts that they have incurred from petitioner bank, the property is burdened by the mortgage. GRANTED.
ARROYO VS. JUNGSAY, G.R. NO. L-10168, JULY 22, 1916

The plaintiff in this case is the guardian of one Tito Jocsing, an imbecile, appointed by the court to succeed
Jungsay, the former guardian, who absconded with the funds of his ward. The defendants are the absconding
guardian and his bondsmen. From a judgment in favor of the plaintiff and against the defendants for the sum of
P6,000, together with interest and costs, the bondsmen appealed.

The principal question presented for our consideration is whether the appellants should be credited with P4,400,
the alleged value of certain property attached as that of the absconding guardian, all of which is in the exclusive
possession of third parties under claim of ownership.

The appellants in contending for the credit, rely upon article 1834 of the Civil Code, which gives to the surety
the benefit of a levy (excusion), even when a judgment is rendered against both the surety and the principal.
But, according t article 1832, before the surety is entitled to this benefit, he must point out to the creditor
property of the principal debtor which can be sold and which is sufficient to cover the amount of the debt. Upon
this point Manresa, in vol. 12, pp. 263-265, says:

As explicitly stated in the article under consideration, it is not sufficient that the surety claim the benefit
of discussion in time, nor that is so doing he designate property of the debtor wherein to satisfy the debt.
It is also necessary that another condition be fulfilled, to wit, that such property be realizable and that it
be situated in Spanish territory. This is not only logical, but just, because the attachment of property
situated a great distance away would be a lengthy and extremely difficult proceeding and one that, if
actually not opposed to, yet does not very well accord with the purpose of the bond, that is, to insure the
fulfillment of the obligation and at the same time furnish the creditor with the means of obtaining its
fulfillment without hindrance or delays. The same may be said of property that is not readily realizable,
and as the surety is the sole person who benefits by the discussion and the one most interested in
avoiding difficulties in its execution, it is he, therefore, who should designate the property out of which
the recovery is to be made, it being unquestionably convenient for him that the property he designates
unite the conditions indicated in order to facilitate the payment of the debt, whereby he will be freed
from the subsidiary obligation inherent in the bond.

In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where provisions similar to our Civil Code were under
consideration, the court said:

The surety has the right, under certain circumstances, to demand the discussion of the property of the
principal debtor. Where suit is brought against the surety alone, he may interpose the plea, and compel
the creditor to discuss the principal debtor. The effect of this is to stay proceedings against the surety
until judgment has been obtained against the principal debtor, and execution against his property has
proved insufficient. When the suit is brought against the surety and the principal debtor the plea of
discussion does not require or authorize any suspension of the proceedings; but the judgment will be so
modified as to require the creditor to proceed by execution against the property of the principal, and to
exhaust it before resorting to the property of the surety. (Bernard vs. Custis, 4 Martin, 215; Banks vs.
Brander, 13 La., 276.)

In either case, the surety who desires to avail himself of this right must demand it in limine, `on the
institution of proceedings against him.' He must, moreover, point out to the creditor property of the
principal debtor, not incumbered, subject to seizure; and must furnish a sufficient sum to have the
discussion carried into effect. (R. C. C., 3045, 3046, 3047.) A plea which does not meet these
requirements must be disregarded. (Robechot vs. Folse, 11 La., 136; Banks vs. Brander, 13 La., 276.)

The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so
incumbered that third parties have, as we have indicated, full possession under claim of ownership without
leaving to the absconding guardian a fractional or reversionary interest without determining first whether the
claim of one or more of the occupants is well founded. In all these respects the sureties have failed to meet the
requirements of article 1832 of the Civil Code.

Where a guardian absconds or is beyond the jurisdiction of the court, the proper method, under article 1834 of
the Civil Code and section 577 of the Code of Civil Procedure, in order to ascertain whether such guardian is
liable and to what extent, in order to bind the sureties on his official bond, is by a proceeding in the nature of a
civil action wherein the sureties are made parties and given an opportunity to be heard. All this was done in the
instant case. The judgment appealed from, being in accordance with the law, the same is hereby affirmed, with
costs against the appellants. So ordered.

BITANGA vs PYRAMID CONSTRUCTION ENGINEERING CORPORATION G.R. No. 173526,

August 28, 2008

Facts:
In 1997, Pyramid Construction Engineering Corporation entered into an agreement with Macrogen Realty, of
which Benjamin Bitanga is the president, to construct in favor of the latter, the Shoppers Gold Building.
Pyramid commenced the construction project on May 1997. However, Macrogen Realty failed to settle
Pyramid's progress billings, which resulted to the suspension of the work. In August 1998, Pyramid once again
suspended the construction work because the conditions that is imposed for its continuation, including payment
of the unsettled accounts had not been complied with by Macrogen Realty. Pyramid then instituted a case with
the Construction Industry Association Commission against Macrogen Realty seeking payment from the latter
for the unpaid billings and project costs. On April 17, 2000, before the arbitration case could be set for trial,
both parties entered into a compromise agreement whereby Macrogen Realty agreed to pay the total amount of
P6,000,000 in six equal monthly installments. Bitanga guaranteed the obligations of Macrogen Realty under the
compromise agreement by executing a Contract of CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 99
Guaranty in favor of Pyramid, by virtue of which he irrevocably and unconditionally guaranteed the full and
complete payment of the principal liability of Macrogen Realty. However, contrary to petitioner’s assurances,
Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the Compromise
Agreement. Hence, on 7 September 2000, respondent moved for the issuance of a writ of execution8 against
Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff filed a return stating that he was unable to locate any property of Macrogen
Realty, except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch. Respondent then made,
on 3 January 2001, a written demand on petitioner, as guarantor of Macrogen Realty, to pay the P6,000,000.00,
or to point out available properties of the Macrogen Realty within the Philippines sufficient to cover the
obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were left
unheeded. As a special and affirmative defense, petitioner argued that the benefit of excussion was still
available to him as a guarantor since he had set it up prior to any judgment against him. According to petitioner,
respondent failed to exhaust all legal remedies to collect from Macrogen Realty the amount due under the
Compromise Agreement, considering that Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premises, petitioner could not be held liable as guarantor.

Issue: Whether or not Benjamin Bitanga can avail himself of the benefit of excussion – NO

Held:
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified
by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise
known as the benefit of excussion.
Article 2060 of the Civil Code reads: In order that the guarantor may make use of the benefit of excussion, he
must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory, sufficient to cover the amount of the debt.
The afore-quoted provision imposes a condition for the invocation of the defense of excussion. Article 2060 of
the Civil Code clearly requires that in order for the guarantor to make use of the benefit of excussion, he must
set it up against the creditor upon the latter’s demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the debt. It must be stressed that
despite having been served a demand letter at his office, petitioner still failed to point out to the respondent
properties of Macrogen Realty sufficient to cover its debt as required under Article 2060 of the Civil Code.
Such failure on petitioner’s part forecloses his right to set up the defense of excussion. Worthy of note as well is
the Sheriff’s return stating that the only property of Macrogen Realty which he found was its deposit of
P20,242.23 with the Planters Bank. Article 2059(5) of the Civil Code thus finds application and precludes
petitioner from interposing the defense of excussion.
We quote: Art. 2059. This excussion shall not take place: (5) If it may be presumed that an execution on the
property of the principal debtor would not result in the satisfaction of the obligation. Benjamin Bitanga had not
genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent
efforts, he was not able to locate any CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 100 property
belonging to the Macrogen Realty, except for a bank deposit with the Planter’s Bank at Buendia, in the amount
of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or inability of the
debtor to pay the amount of debt is proven by the return of the writ of execution that had not been unsatisfied.

PALMARES VS CA, G.R. No. 126490, March 31, 1998

Facts:
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a
loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. On four occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991.
Consequently, on the basis of petitioner's solidary liability under the promissory note, Respondent Corporation
filed a complaint against petitioner Palmares as the lone party defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency of the latter. In her Amended Answer with Counterclaim,
petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the
obligation with respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the
amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the
penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the
note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone
without including the Azarragas when they were the only ones who benefited from the proceeds of the loan.

Issue: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the
debtor? SURETY

Held:
The Civil Code pertinently provides: Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. It is a cardinal rule in the interpretation of contracts
that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control.
In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of
the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor
shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if
the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his
ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he
is able to do so. In other words, a surety undertakes directly for the payment and is so responsible at once if the
principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot
be made out of the principal debtor. In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity
or guaranty has once been judicially determined under the rule of reasonable construction applicable to all
written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to
be extended beyond its strict meaning. The rule, however, will apply only after it has been definitely ascertained
that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining
whether a party's undertaking is that of a surety or a guarantor. Prescinding from these jurisprudential
authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted
suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above. In this regard, we need only to reiterate the
rule that a surety is bound equally and absolutely with the principal, and as such is deemed an original promisor
and debtor from the beginning. It will further be observed that petitioner's undertaking as co-maker immediately
follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal
obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and
upon the same consideration; he is an original debtor, and his liability is immediate and direct. A surety usually
enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same
instrument, and the same consideration usually supports the obligation for both the principal and the surety.
There is no merit in petitioner's contention that the complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by
respondent corporation. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance
with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the
creditor is no longer necessary in order that delay may exist since the contract itself already expressly so
declares. As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the
sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient
demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be
given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of
the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the
principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence
of a special agreement to that effect in the contract of suretyship. A creditor's right to proceed against the surety
exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the
surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold
the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the
principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately
and before any proceedings are had against the principal. Perforce, in accordance with the rule that, in the
absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy
is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the security, require the creditor or
obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound. We agree with respondent corporation that its
mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor
refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him
by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge
the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the
creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not
discharged by the creditor's mere statement that the creditor will not look to the surety, or that he need not
trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact
that the remedies against the principal may be lost by lapse of time, are immaterial. The raison d'être for the rule
is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if
the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of the creditor. It may not be
amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an extension of the time of payment, which would
release the surety. In order to constitute an extension discharging the surety, it should appear that the extension
was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that
it was made without the consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within
the period during which he could otherwise have enforced it, and which precludes the surety from paying the
debt. None of these elements are present in the instant case. Verily, the mere fact that respondent corporation
gave the principal debtors an extended period of time within which to comply with their obligation did not
effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by some act of the creditor, herein respondent
corporation, failing in which we cannot grant the relief prayed for. As a final issue, petitioner claims that
assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan
cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said respondent, is misleading.

PNB VS. MANILA SURETY, G.R. NO. L-20567, JULY 30, 1965

Facts:
The PNB opened a letter of credit and advanced $120,000.00 to Edington Oil Refinery for 8,000 tons of hot
asphalt, of which 2,000 tons worth P279,000.00 were delivered to Adams & Taguba Corp. (ATACO) under a
trust receipt guaranteed by Manila Surety & Fidelity Co.  To pay for the asphalt ATACO constituted PNB its
assignee and attorney-in-fact to receive and collect payments from the Bureau of Public Works.  
ATACO delivered asphalt worth P431,466.52 to the Bureau of Public Works, PNB regularly collected the
payments amounting to P106,382.01, until they ceased to collect payments. Then in 1962 PNB found that there
were more payables to ATACO from the Bureau of Public Works. PNB sued ATACO and the Surety, to
recover the balance of P158,563.18 when their demands for payment were refused.
The trial court ordered ATACO and the Surety to pay PNB the sum of P174,462.34, and the total amount
payable by the Surety shall not exceed P75,000.00. PNB recoursed to the Court of Appeals, which rendered an
adverse decision and modified the judgement of the  court of origin as to the Surety’s liability. Motions for
reconsideration were also denied.

Issue Whether or not it is the duty of the surety and not that of the creditor, to see to it that the obligor fulfils his
obligation, and that the creditor owed the surety no duty of active diligence to collect any sum from the
principal debtor.

Held:
The appealed decision is AFFIRMED.
The Court of Appeals did not hold the bank answerable for negligence in failing to collect from the principal
debtor but for its negligence in collecting the sum due to the debtor from the Bureau of Public Works, contrary
to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent
is required to act with care of a good father of a family and becomes liable for the damages which the principal
may suffer through his non-performance.
Even if the assignment with power of attorney from the principal debtor were considered as more additional
security, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the
former of any possibility of recoursing against that security. The Bank exonerated the surety, pursuant to Art.
2080 0f the Civil Code.

ESCAÑO & SILOS V. ORTIGAS, JR.

Facts:
On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into a loan agreement
with Falcon Minerals, Inc. (Falcon) amounting to $320,000.00 subject to terms and conditions. On the same
day, three (3) stockholder-officers of Falcon: Ortigas Jr., George A. Scholey, and George T. Scholey executed
an Assumption of Solidary Liability “to assume in their individual capacity, solidary liability with Falcon for
due and punctual payment” of the loan contracted by Falcon with PDCP. Two (2) separate guaranties were
executed to guarantee payment of the same loan by other stockholders and officers of Falcon, acting in their
personal and individual capacities. One guaranty was executed by Escaño, Silos, Silverio, Inductivo and
Rodriguez. Two years later, an agreement was developed to cede control of Falcon to Escaño, Silos and Matti.
Contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased
George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti. An Undertaking dated
June 11, 1982 was executed by the concerned parties, namely: with Escaño, Silos and Matti as “sureties” and
Ortigas, Inductivo and Scholeys as “obligors”. Falcon eventually availed of the sum of $178,655.59 from the
credit line extended by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to
further secure the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the
chattel mortgage, there remained a subsisting deficiency of Php 5,031,004.07 which falcon did not satisfy
despite demands.

Issue: Whether the obligation to repay is solidary, as contended by respondent and the lower courts, or merely
joint as argued by petitioners.

Held: The obligation to repay is only jointly as declared by the Court. In case there is a concurrence of two or
more creditors or of two or more debtors in one and the same obligation, Article 1207 of the Civil Code states
that among them, “there is a solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity.” Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility.” These Civil Code provisions establish that in case
of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary
in character to prove such fact with a preponderance of evidence. Note that Article 2047 itself specifically calls
for the application of the provisions on joint and solidary obligations to surety ship contracts. Article 1217 of
the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal
debtor, in case of suretyship) in favor of the one who paid (i.e. the surety). However, a significant distinction
still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the
creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to
seek reimbursement for the sums they paid out to the creditor. In the case of joint and several debtors,
Article1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim from his
codebtors only the share which corresponds to each, with the interest for the payment already made.” Such
solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor,
because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily
bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the
full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety. Decision: Petitioners and Matti are jointly liable to Ortigas, Jr. in
the amount of P1.3M; Legal interest of 12% per annum on P 1.3M computed from March 14, 1994. Assailed
rulings are affirmed. Costs against petitioners. Note: A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. SURETY SOLIDARY CODEBTOR Outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted Solidarity signifies that the creditor can compel
any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. Has
the right to recover the full amount paid, and not just any proportional share, from the principal debtor or
debtors. “May claim from his codebtors only the share which corresponds to each, with the interest for the payment
already made.” Subsidiary Solidary.
- How to know that a document is a guaranty, and not a surety? Depends upon the terms and conditions of
the contract and not based upon the title of the contract alone.

FIDELIZA J. AGLIBOT vs. INGERSOL L. SANTIA G.R. No. 185945, December 05, 2012

Facts:
Engr. Ingersol L.Santia loaned P2,500,000 to Pacific Lending and Capital Corporation, through its manager
Fideliza J. Aglibot. The loan was evidence by a promisorry note date July 1, 2003 and payable in one year
subject to interest at 24% per annum. Aglibot then issued and delivered to Santia eleven post-dated personal
checks drawn from her own demand account as a guaranty or security for the payment of the note. Upon
presentation of the checks, they were dishonored by the bank for having been drawn against insufficient funds
or closed account. Santia then demanded payment from PLCC and Aglibot of the face value of the checks, but
neither of them heeded his demand. As a result, eleven Informations for violation of BP 22 were filed against
Aglibot. Aglibot, in her defense, admitted that she did obtain the loan from Santia, but claimed that she did so in
behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security for the
repayment thereof, but with the understanding that upon remittance in case of the face amount of the checks,
Santia would correspondingly return to her each check so paid. Aglibot also mainted that she was a mere
guarantor of the PLCC's debt and Santia failed to exhaust all means to collect the debt from PLCC and therefore
she is not subsidiary liable.

Issue: Whether or not Aglibot is a guarantor and thus, can invoke the benefit of excussion - NO, Aglibot is an
accommodation party.

Held: The RTC in its decision held that Aglibot signed the promissory note on behalf of PLCC as manager and
nowhere does it appear that she signed as a accommodation party. The RTC further ruled that what Aglibot
agreed to do by issuing her personal checks was merely to guarantee the indebtedness of PLCC, and thus she
must be accorded the benefit of excussion- prior exhaustion of the property of the debtor- as provided under
Article 2058 of the Civil CodeArt. 2058. The guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.
However, in the present case, Aglibot's claim as a mere guarantor is bereft of merit for want of proof as
provided under Article 1403(2) of the Civil Code, embodying the Statute of Frauds which providesArt. 1403.
The following contracts are unenforceable, unless they are ratified: (2) Those that do not comply with the
Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents: a) An agreement that by its terms is not to be performed within
a year from the making thereof; b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry; d) An agreement for
the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept
and receive part of such goods and chattels, or the CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 98
evidences, or some of them, or such things in action, or pay at the time some part of the purchase money; but
when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of sale, price, names of purchasers and person on whose account
the sale is made, it is a sufficient memorandum; e) An agreement for the leasing of a longer period than one
year, or for the sale of real property or of an interest therein; f) A representation to the credit of a third person.
Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt or
default of another, the law clearly requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified, although under Article 1358 of the Civil Code, a contract
of guaranty does not have to appear in a public document. Under Article 2055 of the Civil Code, it is provided
that a guaranty is not presumed, but must be express and cannot extend to more than what is stipulated therein.
This is the obvious rationale why a contract of guaranty is unenforceable unless made in writing or evidenced
by some writing. For as pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s
certificate or a board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would
issue her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly,
there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an agreement
between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a showing that
PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own checks to Santia. N.B.:
Why Aglibot is an accommodation party The appellate court ruled that by issuing her own post-dated checks,
Aglibot thereby bound herself personally and solidarily to pay Santia, and dismissed her claim that she issued
her said checks in her official capacity as PLCC’s manager merely to guarantee the investment of Santia. It
noted that she could have issued PLCC’s checks, but instead she chose to issue her own checks, drawn against
her personal account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of
the loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to
Santia, and only raised payment as her defense, a clear admission of her liability for the said loan. The facts
below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate its loan to
Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable Instruments Law
calls an accommodation party.