C. Guaranty
During the trial, respondent bank presented evidence on the
6. Right of Excussion – Art. 2062, 2058-2064, 2081
Case: Tupaz IV and Tupaz v. CA and BPI
G.R. No. 145578 November 18, 2005
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners,
vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 of the Decision2 of the Court of Appeals
dated 7 September 2000 and its Resolution dated 18 October 2000.
The 7 September 2000 Decision affirmed the ruling of the Regional
Trial Court, Makati, Branch 144 in a case for estafa under Section 13,
Presidential Decree No. 115. The Court of Appeals’ Resolution of 18
October 2000 denied petitioners’ motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners")
were Vice-President for Operations and Vice-President/Treasurer,
respectively, of El Oro Engraver Corporation ("El Oro Corporation"). El
Oro Corporation had a contract with the Philippine Army to supply the
latter with "survival bolos."
To finance the purchase of the raw materials for the survival bolos,
petitioners, on behalf of El Oro Corporation, applied with respondent
Bank of the Philippine Islands ("respondent bank") for two commercial
letters of credit. The letters of credit were in favor of El Oro
Corporation’s suppliers, Tanchaoco Manufacturing
Incorporated3 ("Tanchaoco Incorporated") and Maresco Rubber and
Retreading Corporation4 ("Maresco Corporation"). Respondent bank
granted petitioners’ application and issued Letter of Credit No. 2-00896-
3 for ₱564,871.05 to Tanchaoco Incorporated and Letter of Credit No.
2-00914-5 for ₱294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners
signed trust receipts in favor of respondent bank. On 30 September
1981, petitioner Jose C. Tupaz IV ("petitioner Jose Tupaz") signed, in
his personal capacity, a trust receipt corresponding to Letter of Credit
No. 2-00896-3 (for ₱564,871.05). Petitioner Jose Tupaz bound himself
to sell the goods covered by the letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold,
on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of
El Oro Corporation, a trust receipt corresponding to Letter of Credit No.
2-00914-5 (for ₱294,000). Petitioners bound themselves to sell the
goods covered by that letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not sold, on or before
8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the
raw materials to El Oro Corporation, respondent bank paid the former
₱564,871.05 and ₱294,000, respectively.
Petitioners did not comply with their undertaking under the trust
receipts. Respondent bank made several demands for payments but El
Oro Corporation made partial payments only. On 27 June 1983 and 28
June 1983, respondent bank’s counsel5 and its
representative6 respectively sent final demand letters to El Oro
Corporation. El Oro Corporation replied that it could not fully pay its
debt because the Armed Forces of the Philippines had delayed paying
for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13,
Presidential Decree No. 115 ("Section 13")7 or Trust Receipts Law ("PD
115"). After preliminary investigation, the then Makati Fiscal’s Office
found probable cause to indict petitioners. The Makati Fiscal’s Office
filed the corresponding Informations (docketed as Criminal Case Nos.
8848 and 8849) with the Regional Trial Court, Makati, on 17 January
1984 and the cases were raffled to Branch 144 ("trial court") on 20
January 1984. Petitioners pleaded not guilty to the charges and trial
ensued.
civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners
of estafa on reasonable doubt. However, the trial court found petitioners
solidarily liable with El Oro Corporation for the balance of El Oro
Corporation’s principal debt under the trust receipts. The dispositive
portion of the trial court’s Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both
accused Jose C. Tupaz, IV and Petronila Tupaz based upon
reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and
Petronila Tupaz, are hereby ordered, jointly and solidarily, to pay the
Bank of the Philippine Islands the outstanding principal obligation of
₱624,129.19 (as of January 23, 1992) with the stipulated interest at the
rate of 18% per annum; plus 10% of the total amount due as attorney’s
fees; ₱5,000.00 as expenses of litigation; and costs of the suit.8
In holding petitioners civilly liable with El Oro Corporation, the trial court
held:
[S]ince the civil action for the recovery of the civil liability is deemed
impliedly instituted with the criminal action, as in fact the prosecution
thereof was actively handled by the private prosecutor, the Court
believes that the El Oro Engraver Corporation and both accused Jose
C. Tupaz and Petronila Tupaz, jointly and solidarily should be held
civilly liable to the Bank of the Philippine Islands. The mere fact that
they were unable to collect in full from the AFP and/or the Department
of National Defense the proceeds of the sale of the delivered survival
bolos manufactured from the raw materials covered by the trust receipt
agreements is no valid defense to the civil claim of the said complainant
and surely could not wipe out their civil obligation. After all, they are free
to institute an action to collect the same.9
Petitioners appealed to the Court of Appeals. Petitioners contended
that: (1) their acquittal "operates to extinguish [their] civil liability" and
(2) at any rate, they are not personally liable for El Oro Corporation’s
debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the
trial court’s ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the
violation of the trust receipt agreement is distinct from the criminal
liability imposed therein. In the case of Vintola vs. Insular Bank of Asia
and America, our Supreme Court held that acquittal in the estafa case
(P.D. 115) is no bar to the institution of a civil action for collection. This
is because in such cases, the civil liability of the accused does not
arise ex delicto but rather based ex contractu and as such is distinct
and independent from any criminal proceedings and may proceed
regardless of the result of the latter. Thus, an independent civil action to
enforce the civil liability may be filed against the corporation aside from
the criminal action against the responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from the
criminal charge of estafa did not operate to extinguish their civil liability
under the letter of credit-trust receipt arrangement with plaintiff-
appellee, with which they dealt both in their personal capacity and as
officers of El Oro Engraver Corporation, the letter of credit applicant and
principal debtor.
Appellants argued that they cannot be held solidarily liable with their
corporation, El Oro Engraver Corporation, alleging that they executed
the subject documents including the trust receipt agreements only in
their capacity as such corporate officers. They said that these
instruments are mere pro-forma and that they executed these
instruments on the strength of a board resolution of said corporation
authorizing them to apply for the opening of a letter of credit in favor of
1
their suppliers as well as to execute the other documents necessary to
accomplish the same.
Such contention, however, is contradicted by the evidence on record.
The trust receipt agreement indicated in clear and unmistakable terms
that the accused signed the same as surety for the corporation and that
they bound themselves directly and immediately liable in the event of
default with respect to the obligation under the letters of credit which
were made part of the said agreement, without need of demand. Even
in the application for the letter of credit, it is likewise clear that the
undertaking of the accused is that of a surety as indicated [in] the
following words: "In consideration of your establishing the commercial
letter of credit herein applied for substantially in accordance with the
foregoing, the undersigned Applicant and Surety hereby agree, jointly
and severally, to each and all stipulations, provisions and conditions on
the reverse side hereof."
xxx
Having contractually agreed to hold themselves solidarily liable with El
Oro Engraver Corporation under the subject trust receipt agreements
with appellee Bank of the Philippine Islands, herein accused-appellants
may not, therefore, invoke the separate legal personality of the said
corporation to evade their civil liability under the letter of credit-trust
receipt arrangement with said appellee, notwithstanding their acquittal
in the criminal cases filed against them. The trial court thus did not err
in holding the appellants solidarily liable with El Oro Engraver
Corporation for the outstanding principal obligation of ₱624,129.19 (as
of January 23, 1992) with the stipulated interest at the rate of 18% per
annum, plus 10% of the total amount due as attorney’s fees, ₱5,000.00
as expenses of litigation and costs of suit.10
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE
CIVIL LIABILITY OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED
OBLIGATION WAS INCURRED BY THE CORPORATION, THE SAME
IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS
ALREADY DUE AND PAYABLE, xxx PETITIONERS ARE NOT
PERSONALLY LIABLE TO xxx RESPONDENT BANK, SINCE THEY
SIGNED THE LETTER[S] OF CREDIT AS ‘SURETY’ AS OFFICERS
OF EL ORO, AND THEREFORE, AN EXCLUSIVE LIABILITY OF EL
ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE
SIMULATED AND VOID.11
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro
Corporation’s debts under the trust receipts;
(2) If so —
(a) whether petitioners’ liability is solidary with El Oro Corporation; and
(b) whether petitioners’ acquittal of estafa under Section 13, PD 115
extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals’ ruling
with the modification that petitioner Jose Tupaz is liable as guarantor of
El Oro Corporation’s debt under the trust receipt dated 30 September
1981.
On Petitioners’ Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its directors,
officers, and employees. Debts incurred by these individuals, acting as
such corporate agents, are not theirs but the direct liability of the
corporation they represent.12 As an exception, directors or officers are
personally liable for the corporation’s debts only if they so contractually
agree or stipulate.13
Here, the dorsal side of the trust receipts contains the following
stipulation:
To the Bank of the Philippine Islands
In consideration of your releasing to …………………………………
under the terms of this Trust Receipt the goods described herein, I/We,
jointly and severally, agree and promise to pay to you, on demand,
whatever sum or sums of money which you may call upon me/us to pay
to you, arising out of, pertaining to, and/or in any way connected with,
this Trust Receipt, in the event of default and/or non-fulfillment in any
respect of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability
in this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal
remedies that you may have against the said
…………………………………. before making demand upon
me/us.14 (Capitalization in the original)
In the trust receipt dated 9 October 1981, petitioners signed below this
clause as officers of El Oro Corporation. Thus, under petitioner
Petronila Tupaz’s signature are the words "Vice-Pres–Treasurer" and
under petitioner Jose Tupaz’s signature are the words "Vice-Pres–
Operations." By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation’s obligation. In Ong
v. Court of Appeals,15 a corporate representative signed a solidary
guarantee clause in two trust receipts in his capacity as corporate
representative. There, the Court held that the corporate representative
did not undertake to guarantee personally the payment of the
corporation’s debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee
clause found on the dorsal portion of the trust receipts. Petitioner
placed his signature after the typewritten words "ARMCO INDUSTRIAL
CORPORATION" found at the end of the solidary guarantee clause.
Evidently, petitioner did not undertake to guaranty personally the
payment of the principal and interest of ARMAGRI’s debt under the two
trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain
petitioners’ claim that they are not personally liable for El Oro
Corporation’s obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of
which petitioner Jose Tupaz signed alone, we find that he did so in his
personal capacity. Petitioner Jose Tupaz did not indicate that he was
signing as El Oro Corporation’s Vice-President for Operations. Hence,
petitioner Jose Tupaz bound himself personally liable for El Oro
Corporation’s debts. Not being a party to the trust receipt dated 30
September 1981, petitioner Petronila Tupaz is not liable under such
trust receipt.
The Nature of Petitioner Jose Tupaz’s Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981
provides:
To the Bank of the Philippine Islands
In consideration of your releasing to …………………………………
under the terms of this Trust Receipt the goods described herein,
I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon
me/us to pay to you, arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of default and/or non-
2
fulfillment in any respect of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability
in this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal
remedies that you may have against the said
……………………………………………. Before making demand upon
me/us. (Underlining supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz
bound himself solidarily liable with El Oro Corporation for the latter’s
debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court,16 the Court
interpreted a substantially identical clause17 in a trust receipt signed by
a corporate officer who bound himself personally liable for the
corporation’s obligation. The petitioner in that case contended that the
stipulation "we jointly and severally agree and undertake" rendered the
corporate officer solidarily liable with the corporation. We dismissed this
claim and held the corporate officer liable as guarantor only. The Court
further ruled that had there been more than one signatories to the trust
receipt, the solidary liability would exist between the guarantors. We
held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of
the xxx clause "x x x we jointly and severally agree and undertake x x
x," and the concluding sentence on exhaustion, [respondent] Chi’s
liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no
other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which speaks
of waiver of exhaustion, which, nevertheless, is ineffective in this case
because the space therein for the party whose property may not be
exhausted was not filled up. Under Article 2058 of the Civil Code, the
defense of exhaustion (excussion) may be raised by a guarantor before
he may be held liable for the obligation. Petitioner likewise admits that
the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves.
It does not refer to the undertaking between either one or both of them
on the one hand and the petitioner on the other with respect to the
liability described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust
receipt, together with the questioned solidary guaranty clause, is on a
form drafted and prepared solely by the petitioner; Chi’s participation
therein is limited to the affixing of his signature thereon. It is, therefore,
a contract of adhesion; as such, it must be strictly construed against the
party responsible for its preparation. 18 (Underlining supplied; italicization
in the original)
However, respondent bank’s suit against petitioner Jose Tupaz stands
despite the Court’s finding that he is liable as guarantor only. First,
excussion is not a pre-requisite to secure judgment against a guarantor.
The guarantor can still demand deferment of the execution of the
judgment against him until after the assets of the principal debtor shall
have been exhausted.19 Second, the benefit of excussion may be
waived.20 Under the trust receipt dated 30 September 1981, petitioner
Jose Tupaz waived excussion when he agreed that his "liability in [the]
guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on xxx [the] part [of respondent bank] to take any steps or
exhaust any legal remedies xxx." The clear import of this stipulation is
that petitioner Jose Tupaz waived the benefit of excussion under his
guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s
principal debt and other accessory liabilities (as stipulated in the trust
receipt and as provided by law) under the trust receipt dated 30
September 1981. That trust receipt (and the trust receipt dated 9
October 1981) provided for payment of attorney’s fees equivalent to
10% of the total amount due and an "interest at the rate of 7% per
annum, or at such other rate as the bank may fix, from the date due
until paid xxx."21 In the applications for the letters of credit, the parties
stipulated that drafts drawn under the letters of credit are subject to
interest at the rate of 18% per annum.22
The lower courts correctly applied the 18% interest rate per
annum considering that the face value of each of the trust receipts is
based on the drafts drawn under the letters of credit. Based on the
guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,23 the accrued
stipulated interest earns 12% interest per annum from the time of the
filing of the Informations in the Makati Regional Trial Court on 17
January 1984. Further, the total amount due as of the date of the finality
of this Decision will earn interest at 18% per annum until fully paid since
this was the stipulated rate in the applications for the letters of credit. 24
The accounting of El Oro Corporation’s debts as of 23 January 1992,
which the trial court used, is no longer useful as it does not specify the
amounts owing under each of the trust receipts. Hence, in the execution
of this Decision, the trial court shall compute El Oro Corporation’s total
liability under each of the trust receipts dated 30 September 1981 and 9
October 1981 based on the following formula:25
TOTAL AMOUNT DUE = [principal + interest + interest on interest] –
partial payments made26
Interest = principal x 18 % per annum x no. of years from due
date27 until finality of judgment
Interest on interest = interest computed as of the filing of the complaint
(17 January 1984) x 12% x no. of years until finality of judgment
Attorney’s fees is 10% of the total amount computed as of finality of
judgment
Total amount due as of the date of finality of judgment will earn an
interest of 18% per annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal
Commercial Banking Corporation v. Alfa RTW Manufacturing
Corporation28 where we also ordered the trial court to compute the
amount of obligation due based on a formula substantially similar to that
indicated above:
The total amount due xxx [under] the xxx contract[] xxx may be easily
determined by the trial court through a simple mathematical
computation based on the formula specified above. Mathematics is an
exact science, the application of which needs no further proof from the
parties.
Petitioner Jose Tupaz’s Acquittal did not
Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the
criminal action, the civil liability is not extinguished by acquittal —
[w]here the acquittal is based on reasonable doubt xxx as only
preponderance of evidence is required in civil cases; where the court
expressly declares that the liability of the accused is not criminal but
only civil in nature xxx as, for instance, in the felonies of estafa, theft,
and malicious mischief committed by certain relatives who thereby incur
only civil liability (See Art. 332, Revised Penal Code); and, where the
civil liability does not arise from or is not based upon the criminal act of
which the accused was acquitted xxx.29 (Emphasis supplied)
Here, respondent bank chose not to file a separate civil action 30 to
recover payment under the trust receipts. Instead, respondent bank
sought to recover payment in Criminal Case Nos. 8848 and 8849.
Although the trial court acquitted petitioner Jose Tupaz, his acquittal did
not extinguish his civil liability. As the Court of Appeals correctly held,
his liability arose not from the criminal act of which he was acquitted (ex
delito) but from the trust receipt contract (ex contractu) of 30 September
3
1981. Petitioner Jose Tupaz signed the trust receipt of 30 September
1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El
Oro Corporation’s debts under the trust receipts are not yet due and
demandable. Alternatively, petitioners assail the trust receipts as
simulated. These assertions have no merit. Under the terms of the trust
receipts dated 30 September 1981 and 9 October 1981, El Oro
Corporation’s debts fell due on 29 December 1981 and 8 December
1981, respectively.
Neither is there merit to petitioners’ claim that the trust receipts were
simulated. During the trial, petitioners did not deny applying for the
letters of credit and subsequently executing the trust receipts to secure
payment of the drafts drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the
Decision of the Court of Appeals dated 7 September 2000 and its
Resolution dated 18 October 2000 with the following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount
due under the trust receipts dated 30 September 1981 and 9 October
1981, as computed by the Regional Trial Court, Makati, Branch 144,
upon finality of this Decision, based on the formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver
Corporation’s total debt under the trust receipt dated 30 September
1981 as thus computed by the Regional Trial Court, Makati, Branch
144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable
under the trust receipt dated 9 October 1981. SO ORDERED.
D. Surety
2. Obligations Secured – Civil Code: Art. 2053
G.R. No. 138544               October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain
the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement,
absent any clear stipulation showing that the latter waived his right to
be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or
major stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for
Review under Rule 45 of the Rules of Court. Petitioner assails the
December 22, 1998 Decision1 of the Court of Appeals (CA) in CA-GR
CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the
sense that defendant-appellant Rodolfo M. Cuenca [herein respondent]
is RELEASED from liability to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is
hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution,3 which denied
petitioner’s Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision4 of the Regional
Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925,
which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta.
Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and
severally, plaintiff Security Bank & Trust Company the sum of
₱39,129,124.73 representing the balance of the loan as of May 10,
1994 plus 12% interest per annum until fully paid, and the sum of
₱100,000.00 as attorney’s fees and litigation expenses and to pay the
costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows:5
"The antecedent material and relevant facts are that defendant-
appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in
logging operations. It was a holder of a Timber License Agreement
issued by the Department of Environment and Natural Resources
(‘DENR’).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co.
granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in
the amount of [e]ight [m]llion [p]esos (₱8,000,000.00) to assist the latter
in meeting the additional capitalization requirements of its logging
operations.
"The Credit Approval Memorandum expressly stated that the ₱8M
Credit Loan Facility shall be effective until 30 November 1981:
‘JOINT CONDITIONS:
‘1. Against Chattel Mortgage on logging trucks and/or inventories
(except logs) valued at 200% of the lines plus JSS of Rodolfo M.
Cuenca.
‘2. Submission of an appropriate Board Resolution authorizing the
borrowings, indicating therein the company’s duly authorized
signatory/ies;
‘3. Reasonable/compensating deposit balances in current account shall
be maintained at all times; in this connection, a Makati account shall be
opened prior to availment on lines;
‘4. Lines shall expire on November 30, 1981; and
‘5. The bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower.’ (Emphasis
supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from
the above-mentioned credit line, SIMC executed a Chattel Mortgage
dated 23 December 1980 (Exhibit ‘A’) over some of its machinery and
equipment in favor of [Petitioner] SBTC. As additional security for the
payment of the loan, [Respondent] Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 (Exhibit ‘B’) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as
follows:
x x x           x x x          x x x
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever amount
x x x the client may be indebted to the bank x x x by virtue of aforesaid
credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of
the aforesaid credit accommodation(s) x x x .’ (Emphasis supplied).
4
"On 26 November 1981, four (4) days prior to the expiration of the
period of effectivity of the ₱8M-Credit Loan Facility, appellant SIMC
made a first drawdown from its credit line with [Petitioner] SBTC in the
amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(₱6,100,000.00). To cover said drawdown, SIMC duly executed
promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
"Sometime in 1985, [Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in defendant-
appellant Sta. Ines were sold at a public auction relative to Civil Case
No. 18021 entitled ‘Adolfo A. Angala vs. Universal Holdings, Inc. and
Rodolfo M. Cuenca’. Said shares were bought by Adolfo Angala who
was the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and
obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate
amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand
[n]ineteen and 50/100 [p]esos (₱6,369,019.50). Accordingly, SIMC
executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,
DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to
cover the amounts of the abovementioned additional loans against the
credit line.
6 
"Appellant SIMC, however, encountered difficulty in making the
amortization payments on its loans and requested [Petitioner] SBTC for
a complete restructuring of its indebtedness. SBTC accommodated
appellant SIMC’s request and signified its approval in a letter dated 18
February 1988 (Exhibit ‘G’) wherein SBTC and defendant-appellant Sta.
Ines, without notice to or the prior consent of [Respondent] Cuenca,
agreed to restructure the past due obligations of defendant-appellant
Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-
appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred
[t]housand [p]esos (₱8,800,000.00), to be applied to liquidate the
principal portion of defendant-appellant Sta. Ines[‘] total outstanding
indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit ‘G’,
Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, et Vol I,
pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred
[t]housand [p]esos (₱3,400,000.00), to be applied to liquidate the past
due interest and penalty portion of the indebtedness of defendant-
appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit ‘G’,
Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, at Vol.
II, p. 33 to 34).’
"It should be pointed out that in restructuring defendant-appellant Sta.
Ines’ obligations to [Petitioner] Security Bank, Promissory Note No. TD-
TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand
[p]esos (₱6,100,000.00), which was the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30 November 1981 and
the only one covered by the Indemnity Agreement dated 19 December
1980 (Exhibit ‘3-Cuenca’, Expediente, at Vol. II, p. 331), was not
segregated from, but was instead lumped together with, the other loans,
i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and
DLS/74/47/86 (Exhibits ‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to
335) obtained by defendant-appellant Sta. Ines which were not secured
by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to
[Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed
the following promissory notes, both dated 09 March 1988 in favor of
[Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 ₱8,800,000.00
RL/74/597/88 ₱3,400,000.00
TOTAL ₱12,200,000.00
(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations of
defendant-appellant Sta. Ines, [Petitioner] Security Bank and
defendant-appellant Sta. Ines executed a Loan Agreement dated 31
October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41).
Section 1.01 of the said Loan Agreement dated 31 October 1989
provides:
‘1.01 Amount - The Lender agrees to grant loan to the Borrower in the
aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND
PESOS (₱12,200,000.00), Philippines [c]urrency (the ‘Loan’). The loan
shall be released in two (2) tranches of ₱8,800,000.00 for the first
tranche (the ‘First Loan’) and ₱3,400,000.00 for the second tranche (the
‘Second Loan’) to be applied in the manner and for the purpose
stipulated hereinbelow.
‘1.02. Purpose - The First Loan shall be applied to liquidate the principal
portion of the Borrower’s present total outstanding indebtedness to the
Lender (the ‘indebtedness’) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness.’
(Underscoring supplied.) (cf. p. 1 of Exhibit ‘5-Cuenca’, Expediente, at
Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta.
Ines made further payments to [Petitioner] Security Bank in the amount
of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos
(P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-GG-SIMC’,
Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan
obligations to [Petitioner] SBTC despite demands made upon appellant
SIMC and CUENCA, the last of which were made through separate
letters dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991 (Exhibit ‘L’),
respectively.
"Appellants individually and collectively refused to pay the [Petitioner]
SBTC. Thus, SBTC filed a complaint for collection of sum of money on
14 June 1993, resulting after trial on the merits in a decision by the
court a quo, x x x from which [Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the
1989 Loan Agreement had novated the 1980 credit accommodation
earlier granted by the bank to Sta. Ines. Accordingly, such novation
extinguished the Indemnity Agreement, by which Cuenca, who was
then the Board chairman and president of Sta. Ines, had bound himself
solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been
executed without notice to, much less consent from, Cuenca who at the
time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum
had specified that the credit accommodation was for a total amount of
₱8 million, and that its expiry date was November 30, 1981. Hence, it
ruled that Cuenca was liable only for loans obtained prior to November
30, 1981, and only for an amount not exceeding ₱8 million.
It further held that the restructuring of Sta. Ines’ obligation under the
1989 Loan Agreement was tantamount to a grant of an extension of
time to the debtor without the consent of the surety. Under Article 2079
of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the
bank and Sta. Ines decided to materially alter or modify the principal
obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our
consideration:8
"A. Whether or not the Honorable Court of Appeals erred in releasing
Respondent Cuenca from liability as surety under the Indemnity
5
Agreement for the payment of the principal amount of twelve million two
hundred thousand pesos (₱12,200,000.00) under Promissory Note No.
RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties
and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling
that Respondent Cuenca’s liability under the Indemnity
Agreement covered only availments on SIMC’s credit line to the
extent of eight million pesos (P8,000,000.00) and made on or
before 30 November 1981;
rather than literally. The right to appeal, where it exists, is an important
and valuable right. Public policy would be better served by according
the appellate court an effective opportunity to review the decision of the
trial court on the merits, rather than by aborting the right to appeal by a
literal application of the procedural rules relating to pro forma motions
for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

"SEC. 11. Priorities in modes of service and filing. -- Whenever

ii. Whether or not the Honorable Court of Appeals erred in ruling
practicable, the service and filing of pleadings and other papers shall be
that the restructuring of SIMC’s indebtedness under the ₱8 million
done personally. Except with respect to papers emanating from the
credit accommodation was tantamount to an extension granted to
court, a resort to other modes must be accompanied by a written
SIMC without Respondent Cuenca’s consent, thus extinguishing
explanation why the service or filing was not done personally. A
his liability under the Indemnity Agreement pursuant to Article
violation of this Rule may be cause to consider the paper as not filed."
2079 of the Civil Code;

Respondent maintains that the present Petition for Review does not
iii. Whether or not the Honorable Court of appeals erred in ruling
contain a sufficient written explanation why it was served by registered
that the restructuring of SIMC’s indebtedness under the ₱8 million
mail.
credit accommodation constituted a novation of the principal
obligation, thus extinguishing Respondent Cuenca’s liability under
the indemnity agreement; We do not think so. The Court held in Solar Entertainment v.
Ricafort13 that the aforecited rule was mandatory, and that "only when
personal service or filing is not practicable may resort to other modes
B. Whether or not Respondent Cuenca’s liability under the Indemnity
be had, which must then be accompanied by a written explanation as to
Agreement was extinguished by the payments made by SIMC;
why personal service or filing was not practicable to begin with."

C. Whether or not petitioner’s Motion for Reconsideration was pro-

In this case, the Petition does state that it was served on the respective
forma;
counsels of Sta. Ines and Cuenca "by registered mail in lieu of personal
service due to limitations in time and distance." 14 This explanation
D. Whether or not service of the Petition by registered mail sufficiently sufficiently shows that personal service was not practicable. In any
complied with Section 11, Rule 13 of the 1997 Rules of Civil event, we find no adequate reason to reject the contention of petitioner
Procedure." and thereby deprive it of the opportunity to fully argue its cause.

Distilling the foregoing, the Court will resolve the following issues: (a) First Issue: Original Obligation Extinguished by Novation
whether the 1989 Loan Agreement novated the original credit
accommodation and Cuenca’s liability under the Indemnity Agreement;
An obligation may be extinguished by novation, pursuant to Article 1292
and (b) whether Cuenca waived his right to be notified of and to give
of the Civil Code, which reads as follows:
consent to any substitution, renewal, extension, increase, amendment,
conversion or revival of the said credit accommodation. As preliminary
matters, the procedural questions raised by respondent will also be "ART. 1292. In order that an obligation may be extinguished by another
addressed. which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other."
The Court’s Ruling

The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Novation of a contract is never presumed. It has been held that "[i]n the
absence of an express agreement, novation takes place only when the
old and the new obligations are incompatible on every point." 15 Indeed,
the following requisites must be established: (1) there is a previous
valid obligation; (2) the parties concerned agree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract.16

Petitioner contends that there was no absolute incompatibility between

Respondent contends that petitioner’s Motion for Reconsideration of the
the old and the new obligations, and that the latter did not extinguish
CA Decision, in merely rehashing the arguments already passed upon
the earlier one. It further argues that the 1989 Agreement did not
by the appellate court, was pro forma; that as such, it did not toll the
change the original loan in respect to the parties involved or the
period for filing the present Petition for Review.9 Consequently, the
obligations incurred. It adds that the terms of the 1989 Contract were
Petition was filed out of time.10
"not more onerous."17 Since the original credit accomodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity
We disagree. A motion for reconsideration is not pro forma just because Agreement.
it reiterated the arguments earlier passed upon and rejected by the
appellate court. The Court has explained that a movant may raise the
We reject these contentions. Clearly, the requisites of novation are
same arguments, precisely to convince the court that its ruling was
present in this case. The 1989 Loan Agreement extinguished the
erroneous.11
obligation18 obtained under the 1980 credit accomodation. This is
evident from its explicit provision to "liquidate" the principal and the
Moreover, there is no clear showing of intent on the part of petitioner to interest of the earlier indebtedness, as the following shows:
delay the proceedings. In Marikina Valley Development Corporation v.
Flojo,12 the Court explained that a pro forma motion had no other
"1.02. Purpose. The First Loan shall be applied to liquidate the principal
purpose than to gain time and to delay or impede the proceedings.
portion of the Borrower’s present total outstanding Indebtedness to the
Hence, "where the circumstances of a case do not show an intent on
Lender (the "Indebtedness") while the Second Loan shall be applied
the part of the movant merely to delay the proceedings, our Court has
to liquidate the past due interest and penalty portion of the
refused to characterize the motion as simply pro forma." It held:
Indebtedness."19 (Italics supplied.)

"We note finally that because the doctrine relating to pro forma motions
for reconsideration impacts upon the reality and substance of the
statutory right of appeal, that doctrine should be applied reasonably,
6
The testimony of an officer20 of the bank that the proceeds of the 1989
Loan Agreement were used "to pay-off" the original indebtedness
serves to strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement
and the 1980 original obligation demonstrate that the two cannot
coexist. While the 1980 credit accommodation had stipulated that the
amount of loan was not to exceed ₱8 million,22 the 1989 Agreement
provided that the loan was ₱12.2 million. The periods for payment were
also different.
Likewise, the later contract contained conditions, "positive covenants"
and "negative covenants" not found in the earlier obligation. As an
example of a positive covenant, Sta. Ines undertook "from time to time
and upon request by the Lender, [to] perform such further acts and/or
execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes
of this Loan Agreement."23 Likewise, SIMC agreed that it would not
create any mortgage or encumbrance on any asset owned or hereafter
acquired, nor would it participate in any merger or consolidation. 24
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation,
was necessarily extinguished also, pursuant to Article 1296 of the Civil
Code, which provides:
"ART. 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may subsist only
insofar as they may benefit third persons who did not give their
consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or
extension of the ₱8 million original accommodation; it was not a
novation.25
This argument must be rejected. To begin with, the 1989 Loan
Agreement expressly stipulated that its purpose was to "liquidate," not
to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreement, which
had allegedly extended the original ₱8 million credit facility. Hence, his
obligation as a surety should be deemed extinguished, pursuant to
Article 2079 of the Civil Code, which specifically states that "[a]n
extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the
Court explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety’s consent would
deprive the surety of his right to pay the creditor and to be immediately
subrogated to the creditor’s remedies against the principal debtor upon
the maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the
Credit Approval Memorandum in holding that the credit accommodation
was only for ₱8 million, and that it was for a period of one year ending
on November 30, 1981. Petitioner objects to the appellate court’s
reliance on that document, contending that it was not a binding
agreement because it was not signed by the parties. It adds that it was
merely for its internal use.
We disagree. It was petitioner itself which presented the said document
to prove the accommodation. Attached to the Complaint as Annex A
was a copy thereof "evidencing the accommodation."27 Moreover, in its
Petition before this Court, it alluded to the Credit Approval
Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was
granted by the Bank a credit line in the aggregate amount of Eight
Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this purpose,
the Bank issued a Credit Approval Memorandum dated 10 November
1980."
Clearly, respondent is estopped from denying the terms and conditions
of the ₱8 million credit accommodation as contained in the very
document it presented to the courts. Indeed, it cannot take advantage
of that document by agreeing to be bound only by those portions that
are favorable to it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca
"impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give
consent to, the same."28 Respondent’s consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself
liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original
credit accommodation by the 1989 Loan Agreement is merely its
"renewal," which "connotes cessation of an old contract and birth of
another one x x x."29
At the outset, we should emphasize that an essential alteration in the
terms of the Loan Agreement without the consent of the surety
extinguishes the latter’s obligation. As the Court held in National Bank
v. Veraguth,30 "[i]t is fundamental in the law of suretyship that any
agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the
consent of the surety, will release the surety from liability."
In this case, petitioner’s assertion - that respondent consented to the
alterations in the credit accommodation -- finds no support in the text of
the Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines
Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext.,
Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos
(₱8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under and
by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati,
Metro Manila hereinafter referred to as the BANK in favor of STA. INES
MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to
as the CLIENT, with the stipulated interests and charges thereon,
evidenced by that/those certain PROMISSORY NOTE[(S)], made,
executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the
CLIENT may be indebted to the BANK under and by virtue of aforesaid
credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals of the
aforesaid credit accommodation(s), as well as of the amount or
amounts of such other obligations that the CLIENT may owe the BANK,
whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses
arising from any agreement or agreements that may have heretofore
been made, or may hereafter be executed by and between the parties
thereto, including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit
accommodation(s), and further bind(s) himself/themselves with the
CLIENT in favor of the BANK for the faithful compliance of all the terms
and conditions contained in the aforesaid credit accommodation(s), all
of which are incorporated herein and made part hereof by reference."
While respondent held himself liable for the credit accommodation or
any modification thereof, such clause should be understood in the
context of the ₱8 million limit and the November 30, 1981 term. It did
not give the bank or Sta. Ines any license to modify the nature and
scope of the original credit accommodation, without informing or getting
the consent of respondent who was solidarily liable. Taking the bank’s
submission to the extreme, respondent (or his successors) would be
liable for loans even amounting to, say, ₱100 billion obtained 100 years
after the expiration of the credit accommodation, on the ground that he
consented to all alterations and extensions thereof.
7
Indeed, it has been held that a contract of surety "cannot extend to 1989 Loan Agreement, which was executed after November 30, 1981
more than what is stipulated. It is strictly construed against the creditor, and which exceeded the stipulated P8 million ceiling.
every doubt being resolved against enlarging the liability of the
surety."31 Likewise, the Court has ruled that "it is a well-settled legal
Petitioner, however, cites the Dino ruling in which the Court found the
principle that if there is any doubt on the terms and conditions of the
surety liable for the loan obtained after the payment of the original one,
surety agreement, the doubt should be resolved in favor of the surety x
which was covered by a continuing surety agreement. At the risk of
x x. Ambiguous contracts are construed against the party who caused
being repetitious, we hold that in Dino, the surety Agreement
the ambiguity."32 In the absence of an unequivocal provision that
specifically provided that "each suretyship is a continuing one which
respondent waived his right to be notified of or to give consent to any
shall remain in full force and effect until this bank is notified of its
alteration of the credit accommodation, we cannot sustain petitioner’s
revocation." Since the bank had not been notified of such revocation,
view that there was such a waiver.
the surety was held liable even for the subsequent obligations of the
principal borrower.
It should also be observed that the Credit Approval Memorandum
clearly shows that the bank did not have absolute authority to
No similar provision is found in the present case. On the contrary,
unilaterally change the terms of the loan accommodation. Indeed, it
respondent’s liability was confined to the 1980 credit accommodation,
may do so only upon notice to the borrower, pursuant to this condition:
the amount and the expiry date of which were set down in the Credit
Approval Memorandum.
"5. The Bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower." 33
Special Nature of the JSS

We reject petitioner’s submission that only Sta. Ines as the borrower,

It is a common banking practice to require the JSS ("joint and solidary
not respondent, was entitled to be notified of any modification in the
signature") of a major stockholder or corporate officer, as an additional
original loan accommodation.34 Following the bank’s reasoning, such
security for loans granted to corporations. There are at least two
modification would not be valid as to Sta. Ines if no notice were given;
reasons for this. First, in case of default, the creditor’s recourse, which
but would still be valid as to respondent to whom no notice need be
is normally limited to the corporate properties under the veil of separate
given. The latter’s liability would thus be more burdensome than that of
corporate personality, would extend to the personal assets of the
the former. Such untenable theory is contrary to the principle that a
surety. Second, such surety would be compelled to ensure that the loan
surety cannot assume an obligation more onerous than that of the
would be used for the purpose agreed upon, and that it would be paid
principal.35
by the corporation.

The present controversy must be distinguished from Philamgen v.

Following this practice, it was therefore logical and reasonable for the
Mutuc,36 in which the Court sustained a stipulation whereby the surety
bank to have required the JSS of respondent, who was the chairman
consented to be bound not only for the specified period, "but to any
and president of Sta. Ines in 1980 when the credit accommodation was
extension thereafter made, an extension x x x that could be had without
granted. There was no reason or logic, however, for the bank or Sta.
his having to be notified."
Ines to assume that he would still agree to act as surety in the 1989
Loan Agreement, because at that time, he was no longer an officer or a
In that case, the surety agreement contained this unequivocal stockholder of the debtor-corporation. Verily, he was not in a position
stipulation: "It is hereby further agreed that in case of any extension of then to ensure the payment of the obligation. Neither did he have any
renewal of the bond, we equally bind ourselves to the Company under reason to bind himself further to a bigger and more onerous obligation.
the same terms and conditions as herein provided without the necessity
of executing another indemnity agreement for the purpose and that we
Indeed, the stipulation in the 1989 Loan Agreement providing for the
hereby equally waive our right to be notified of any renewal or
surety of respondent, without even informing him, smacks of negligence
extension of the bond which may be granted under this indemnity
on the part of the bank and bad faith on that of the principal debtor.
agreement."
Since that Loan Agreement constituted a new indebtedness, the old
loan having been already liquidated, the spirit of fair play should have
In the present case, there is no such express stipulation.1âwphi1 At impelled Sta. Ines to ask somebody else to act as a surety for the new
most, the alleged basis of respondent’s waiver is vague and uncertain. loan.
It confers no clear authorization on the bank or Sta. Ines to modify or
extend the original obligation without the consent of the surety or notice
In the same vein, a little prudence should have impelled the bank to
thereto.
insist on the JSS of one who was in a position to ensure the payment of
the loan. Even a perfunctory attempt at credit investigation would have
Continuing Surety revealed that respondent was no longer connected with the corporation
at the time. As it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have been
Contending that the Indemnity Agreement was in the nature of a
secured by a fairly obtained surety. For its defeat in this litigation, the
continuing surety, petitioner maintains that there was no need for
bank has only itself to blame.
respondent to execute another surety contract to secure the 1989 Loan
Agreement.
In sum, we hold that the 1989 Loan Agreement extinguished by
novation the obligation under the 1980 ₱8 million credit
This argument is incorrect. That the Indemnity Agreement is a
accommodation. Hence, the Indemnity Agreement, which had been an
continuing surety does not authorize the bank to extend the scope of
accessory to the 1980 credit accommodation, was also extinguished.
the principal obligation inordinately.37 In Dino v. CA,38 the Court held that
Furthermore, we reject petitioner’s submission that respondent waived
"a continuing guaranty is one which covers all transactions, including
his right to be notified of, or to give consent to, any modification or
those arising in the future, which are within the description or
extension of the 1980 credit accommodation.
contemplation of the contract of guaranty, until the expiration or
termination thereof."
In this light, we find no more need to resolve the issue of whether the
loan obtained before the expiry date of the credit accommodation has
To repeat, in the present case, the Indemnity Agreement was subject to
been paid.
the two limitations of the credit accommodation: (1) that the obligation
should not exceed ₱8 million, and (2) that the accommodation should
expire not later than November 30, 1981. Hence, it was a continuing WHEREFORE, the Petition is DENIED and the assailed
surety only in regard to loans obtained on or before the aforementioned Decision AFFIRMED. Costs against petitioner. SO ORDERED.
expiry date and not exceeding the total of ₱8 million.

D. Surety
Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 4. Distinguishement from Guaranty
million obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit accommodation, G.R. No. 126490 March 31, 1998
that were obtained in 1986. Certainly, he could not have guaranteed the
8
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself
to be jointly and severally liable with the principal debtor in case the
latter defaults in the payment of the loan, is such undertaking of the
former deemed to be that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private
respondent M.B. Lending Corporation extended a loan to the spouses
Osmeña and Merlyn Azarraga, together with petitioner Estrella
Palmares, in the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. 1 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. 2
Consequently, on the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint3 against
petitioner Palmares as the lone party-defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
4 the co-maker's liability as that of a guarantor.
In her Amended Answer with Counterclaim,  petitioner alleged that
sometime in August 1990, immediately after the loan matured, she
offered to settle the obligation with respondent corporation but the latter
informed her that they would try to collect from the spouses Azarraga
and that she need not worry about it; that there has already been a
partial payment in the amount of P17,010.00; that the interest of 6% per
month compounded at the same rate per month, as well as the penalty
charges of 3% per month, are usurious and unconscionable; and that
while she agrees to be liable on the note but only upon default of the
principal debtor, respondent corporation acted in bad faith in suing her
alone without including the Azarragas when they were the only ones
who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following
issues for the resolution of the trial court: (1) what the rate of interest,
penalty and damages should be; (2) whether the liability of the
defendant (herein petitioner) is primary or subsidiary; and (3) whether
the defendant Estrella Palmares is only a guarantor with a subsidiary
liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on
the pleadings filed and the memoranda to be submitted by them. On
November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23,
rendered judgment dismissing the complaint without prejudice to the
filing of a separate action for a sum of money against the spouses
Osmeña and Merlyn Azarraga who are primarily liable on the
instrument.6 This was based on the findings of the court a quo that the
filing of the complaint against herein petitioner Estrella Palmares, to the
exclusion of the Azarraga spouses, amounted to a discharge of a prior
party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a person's
secondary liability on the instrument; as co-maker, is only secondarily
liable on the instrument; and that the promissory note is a contract of
adhesion.
Respondent Court of Appeals, however, reversed the decision of the
trial court, and rendered judgment declaring herein petitioner Palmares
liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still
due and owing with interest at six percent (6%) per month computed
from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%)
per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself to
be jointly and severally or solidarily liable with the principal debtors, the
Azarraga spouses, when she signed as a co-maker. As such, petitioner
is primarily liable on the note and hence may be sued by the creditor
corporation for the entire obligation. It also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that
the Azarraga spouses should have been impleaded. Respondent court
ordered the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, it rationalized that
even if the promissory note were to be considered as a contract of
adhesion, the same is not entirely prohibited because the one who
adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted
as surety and is therefore solidarily liable to pay the
promissory note.
1. The terms of the promissory note are vague. Its conflicting
provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish
3. There is no sufficient basis for concluding that Palmares'
liability is solidary.
4. The promissory note is a contract of adhesion and should
be construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this
point.
B. Assuming that Palmares' liability is solidary, the Court of
Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in
their material points by respondent corporation. They are further refuted
by accepted doctrines in the American jurisdiction after which we
patterned our statutory law on surety and guaranty. This case then
affords us the opportunity to make an extended exposition on the
ramifications of these two specialized contracts, for such guidance as
may be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is
expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-
quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of
this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the
same conditions above-contained. 8
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph seems to
define her liability as that of a surety which is joint and solidary with the
principal maker, on the other hand, under the third paragraph her
9
liability is actually that of a mere guarantor because she bound herself
to fulfill the obligation only in case the principal debtor should fail to do
so, which is the essence of a contract of guaranty. More simply stated,
although the second paragraph says that she is liable as a surety, the
third paragraph defines the nature of her liability as that of a guarantor.
According to petitioner, these are two conflicting provisions in the
promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words,
the second paragraph should not be taken in isolation, but should be
read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally or
solidarily liable" used in the second paragraph are technical and legal
terms which are not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter into such
transactions without fully realizing the nature and extent of her liability.
On the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship
with a jealous eye and the rule is that the obligation of the surety cannot
be extended by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement which holds the
surety liable despite the absence of any direct consideration received
from either the principal obligor or the creditor. Third, the promissory
note is a contract of adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner partially filled
up, the contents thereof were never explained to her, and her only
participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory note to
be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to
pay the loan because the principal debtors cannot be considered in
default in the absence of a judicial or extrajudicial demand. It is true that
the complaint alleges the fact of demand, but the purported demand
letters were never attached to the pleadings filed by private respondent
before the trial court. And, while petitioner may have admitted in her
Amended Answer that she received a demand letter from respondent
corporation sometime in 1990, the same did not effectively put her or
the principal debtors in default for the simple reason that the latter
subsequently made a partial payment on the loan in September, 1991,
a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding
the amount of P2,745,483.39 in favor of private respondent when, in
truth and in fact, the outstanding balance of the loan is only P13,700.00.
Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with, the
court may equitably reduce the penalty 10 on grounds of substantial
justice. More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured, she
informed said respondent of her desire to settle the obligation. The
court should, therefore, mitigate the damages to be paid since petitioner
has shown a sincere desire for a compromise.11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except
therefrom the issue anent the propriety of the monetary award adjudged
to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that
the promissory note executed between the parties is a contract of
adhesion, it has been the consistent holding of the Court that contracts
of adhesion are not invalid per se and that on numerous occasions the
binding effects thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the
Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably
against the drafter thereof when justified in light of the operative facts
and surrounding circumstances.12 The factual scenario obtaining in the
case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall control. 13 In
the case at bar, petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the note. The
terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable"
contained in the second paragraph of her contract are technical and
legal terms which could not be easily understood by an ordinary layman
like her is diametrically opposed to her manifestation in the contract that
she "fully understood the contents" of the promissory note and that she
is "fully aware" of her solidary liability with the principal maker.
Petitioner admits that she voluntarily affixed her signature thereto; ergo,
she cannot now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being
adequate. Petitioner's attempt to prove fraud must, therefore, fail as it
was evidenced only by her own uncorroborated and, expectedly, self-
serving allegations.14
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking.15 The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship. And the mistake of a surety as to the
legal effect of her obligation is ordinarily no reason for relieving her of
liability.16
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case
the principal maker, Mrs. Merlyn Azarraga defaults in the payment of
the note," which makes her contract one of guaranty and not
suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of
the solvency of the debtor.17 A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking that the debtor shall
pay.18 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.19 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.20 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.21
Quintessentially, the undertaking to pay upon default of the principal
debtor does not automatically remove it from the ambit of a contract of
suretyship. The second and third paragraphs of the aforequoted portion
of the promissory note do not contain any other condition for the
enforcement of respondent corporation's right against petitioner. It has
not been shown, either in the contract or the pleadings, that respondent
corporation agreed to proceed against herein petitioner only if and
when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit by joining in
the principal debtor's obligation, so as to render himself directly and
primarily responsible with him, and without reference to the solvency of
the principal.22
10
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.23 The rule, however, will apply only after it
has been definitely ascertained that the contract is one of suretyship
and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a
guarantor.
Prescinding from these jurisprudential authorities, there can be no
doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made more
specific the obligation of petitioner as generally defined in the second
paragraph thereof. Resultantly, the theory advanced by petitioner, that
she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall
also be principally considered.24 Several attendant factors in that genre
lend support to our finding that petitioner is a surety. For one, when
petitioner was informed about the failure of the principal debtor to pay
the loan, she immediately offered to settle the account with respondent
corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is
most revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the last, which were
all issued in her name and of the Azarraga spouses.25 This can only be
construed to mean that the payments made by the principal debtors
were considered by respondent corporation as creditable directly upon
the account and inuring to the benefit of petitioner. The concomitant
and simultaneous compliance of petitioner's obligation with that of her
principals only goes to show that, from the very start, petitioner
considered herself equally bound by the contract of the principal
makers.
In this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal,26 and as such is deemed an
original promisor and debtor from the beginning. 27 This is because in
suretyship there is but one contract, and the surety is bound by the
same agreement which binds the principal.28 In essence, the contract of
a surety starts with the agreement, 29 which is precisely the situation
obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between
respondent corporation, as creditor, and the principal obligors. A surety
is usually bound with his principal by the same instrument, executed at
the same time and upon the same consideration; he is an original
debtor, and his liability is immediate and direct.30 Thus, it has been held
that where a written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer and
seller is executed simultaneously therewith, providing that the signers of
the agreement agreed to the terms of the principal contract, the signers
were "sureties" jointly liable with the buyer.31 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.32
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions
expressed in the promissory note. Significantly, paragraph (G) of the
note states that "should I fail to pay in accordance with the above
schedule of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so
declares.33 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.34 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.35
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to its
pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account.36 The underlying principle therefor is that a suretyship is a
direct contract to pay the debt of another. A surety is liable as much as
his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of
default.37 As an original promisor and debtor from the beginning, he is
held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely
against her to the exclusion of the principal debtors who allegedly were
the only ones who benefited from the proceeds of the loan. What
petitioner is trying to imply is that the creditor, herein respondent
corporation, should have proceeded first against the principal before
suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of
his right to proceed against the principal.39 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.40 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.41 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.42
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. 43 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,44 or that he need
not trouble himself.45 The consequences of the delay, such as the
subsequent insolvency of the principal, 46 or the fact that the remedies
against the principal may be lost by lapse of time, are immaterial.47
The raison d'être for the rule is that there is nothing to prevent the
creditor from proceeding against the principal at any time.48 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.49
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
11
of payment, which would release the surety.50 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.51
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, 52 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.
In an affidavit53 executed by petitioner, which was attached to her
petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the
same upon its maturity. I received a telephone call from Mr.
Augusto Banusing of MB Lending informing me of this fact and of
my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and
Osmeña Azarraga. At the same time, I offered to pay MB Lending
the outstanding balance of the principal obligation should he fail to
collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised
me not to worry because he will try to collect first from Merlyn and
Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary
of Mr. Banusing who reminded that the loan of Merlyn and Osmeña
Azarraga, together with interest and penalties thereon, has not
been paid. Since I had no available funds at that time, I offered to
pay MB Lending by delivering to them a parcel of land which I own.
Mr. Banusing's secretary, however, refused my offer for the reason
that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-Iloilo.
After learning that a complaint was filed against me, I instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to pay
the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred
her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the principal
obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable.
Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from
liability. There are a number of circumstances which conjointly inveigh
against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and she
offered to pay only in case the creditor fails to collect. The delay, if any,
was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no
actual offer of payment to speak of but only a commitment to pay if the
principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering
a parcel of land which she owned. Respondent corporation was acting
well within its rights when it refused to accept the offer. The debtor of a
thing cannot compel the creditor to receive a different one, although the
latter may be of the same value, or more valuable than that which is
due.54 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her
offer to pay the outstanding balance of the obligation in the amount of
P30,000.00 but the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the amount being offered
because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. 56 In other words, the
prestation must be fulfilled completely. A person entering into a contract
has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount
she is willing to pay because the moment the latter accepts the
performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, then the obligation shall be
deemed fully complied with.58 Precisely, this is what respondent
corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty
charge of 3% per month and attorney's fees equivalent to 25% of the
total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the
amount of P16,300.00 had already been paid even before the filing of
the present case. Article 1229 of the Civil Code provides that the court
shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. And, even if there
has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved
private respondent M.B. Lending Corporation, and which is substantially
on all fours with the one at bar, we decided to eliminate altogether the
penalty interest for being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree with the Court of
Appeals that the economic impact of the penalty interest of three
percent (3 %) per month on total amount due but unpaid should be
equitably reduced. The purpose for which the penalty interest is
intended — that is, to punish the obligor — will have been
sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original
amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties'
promissory note is iniquitous and unconscionable and may be
equitably reduced further by eliminating such penalty interest
altogether.59
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney's fees fixed in
the contract when the amount thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy.61 The grant
of attorney's fees equivalent to 25% of the total amount due is, in our
opinion, unreasonable and immoderate, considering the minimal unpaid
amount involved and the extent of the work involved in this simple
action for collection of a sum of money. We, therefore, hold that the
12
amount of P10,000.00 as and for attorney's fee would be sufficient in
this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the penalty interest of 3% per month
is hereby deleted and the award of attorney's fees is reduced to
P10,000.00. SO ORDERED.
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the
decision 1 of the Court of Appeals dated July 13, 1993 which affirmed
the Order of the Regional Trial Court of Manila, Branch 51, denying
petitioner's Motion to Dismiss the complaint, as well as the
Resolution 2 dated February 15, 1994 denying the motion for
reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the
name "Agro Brokers," applied for a loan with respondent Consolidated
Bank and Trust Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00)
to finance the purchase of two (2) maritime barges and one
tugboat 3 which would be used in their molasses business. The loan
was granted subject to the condition that respondent spouses execute a
chattel mortgage over the three (3) vessels to be acquired and that a
continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The
respondent spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire obligation
upon maturity. Hence, on January 31, 1991, SOLIDBANK filed a
complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was
docketed as Civil Case No. 91-55909 in the Regional Trial Court of
Manila.
Petitioner moved to dismiss the complaint on the ground that its liability
as guarantor of the loan was extinguished pursuant to Article 2080 of
the Civil Code of the Philippines. It argued that it has lost its right to be
subrogated to the first chattel mortgage in view of SOLIDBANK's failure
to register the chattel mortgage with the appropriate government
agency.
SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which
reads:
After a careful consideration of the matter on hand, the Court
finds the ground of the motion to dismiss without merit. The
document referred to as "Continuing Guaranty" dated August
21, 1985 (Exh. 7) states as follows:
For and in consideration of any existing
indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the
payment of which the undersigned is now obligated
to you as surety and in order to induce you, in your
discretion, at any other manner, to, or at the
request or for the account of the borrower, . . .
The provisions of the document are clear, plain and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed as surety.
Even though the title of the document is "Continuing Guaranty",
the Court's interpretation is not limited to the title alone but to
the contents and intention of the parties more specifically if the
language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and
Zobel) to the plaintiff it is requesting that the chattel mortgage
on the vessels and tugboat be waived and/or rescinded by the
bank inasmuch as the said loan is covered by the Continuing
Guaranty by Zobel in favor of the plaintiff thus thwarting the
claim of the defendant now that the chattel mortgage is an
essential condition of the guaranty. In its letter, it said that
because of the Continuing Guaranty in favor of the plaintiff the
chattel mortgage is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register
the chattel mortgage with the proper government agency, i.e.
with the Office of the Collector of Customs or with the Register
of Deeds makes the obligation a guaranty, the same merits a
scant consideration and could not be taken by this Court as the
basis of the extinguishment of the obligation of the defendant
corporation to the plaintiff as surety. The chattel mortgage is an
additional security and should not be considered as payment of
the debt in case of failure of payment. The same is true with the
failure to register, extinction of the liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint within ten (10) days from receipt of a copy of this
Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent
Court of Appeals, through a petition for certiorari, alleging that the trial
court committed grave abuse of discretion in denying the motion to
dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision
the dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has
not committed any grave abuse of discretion in
issuing the herein assailed orders, We hereby
DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack of
merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent
Court of Appeals erred in its finding: (1) that Article 2080 of the New
Civil Code which provides: "The guarantors, even though they be
solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to petitioner; (2) that
petitioner's obligation to respondent SOLIDBANK under the continuing
guaranty is that of a surety; and (3) that the failure of respondent
SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the
"Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or
a surety.
A contract of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not. 7 A contract of guaranty, on
the other hand, is a collateral undertaking to pay the debt of another in
case the latter does not pay the debt. 8
Strictly speaking, guaranty and surety are nearly related, and many of
the principles are common to both. However, under our civil law, they
may be distinguished thus: A surety is usually bound with his principal
by the same instrument, executed at the same time, and on the same
consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the
creditor to the principal, or by want of notice of the default of the
13
principal, no matter how much he may be injured thereby. On the other
hand, the contract of guaranty is the guarantor's own separate
undertaking, in which the principal does not join. It is usually entered
into before or after that of the principal, and is often supported on a
separate consideration from that supporting the contract of the
principal. The original contract of his principal is not his contract, and he
is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and
is usually not liable unless notified of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor
is the insurer of the solvency of the debtor and thus binds himself to pay
if the principal is unable to pay while a surety is the insurer of the debt,
and he obligates himself to pay if the principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract
executed by petitioner in favor of SOLIDBANK, albeit denominated as a
"Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to
extend credit to respondent spouses. This can be seen in the following
stipulations.
For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL
P. CLAVERIA, of legal age, married and with business
address . . . (hereinafter called the Borrower), for the payment
of which the undersigned is now obligated to you as surety and
in order to induce you, in your discretion, at any time or from
time to time hereafter, to make loans or advances or to extend
credit in any other manner to, or at the request or for the
account of the Borrower, either with or without purchase or
discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances,
checks or other instruments or evidences of indebtedness . . .
upon which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the undersigned agrees to
guarantee, and does hereby guarantee, the punctual payment,
at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations
herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter
become due or owing to you by the Borrower, together with any
and all expenses which may be incurred by you in collecting all
or any such instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the terms and
provisions of any agreement (g), express or implied, which has
(have) been or may hereafter be made or entered into by the
Borrower in reference thereto, regardless of any law, regulation
or decree, now or hereafter in effect which might in any manner
affect any of the terms or provisions of any such agreements(s)
or your right with respect thereto as against the Borrower, or
cause or permit to be invoked any alteration in the time, amount
or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine the nature of
the undertaking and the intention of the parties. The contract clearly
disclose that petitioner assumed liability to SOLIDBANK, as a regular
party to the undertaking and obligated itself as an original promissor. It
bound itself jointly and severally to the obligation with the respondent
spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold
petitioner liable for the obligation. This can be gleaned from a reading of
the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business, or become insolvent, . . ., or if any funds
or other property of the Borrower, or of the undersigned which may
be or come into your possession or control or that of any third party
acting in your behalf as aforesaid should be attached of distrained,
or should be or become subject to any mandatory order of court or
other legal process, then, or any time after the happening of any
such event any or all of the instruments of indebtedness or other
obligations hereby guaranteed shall, at your option become (for the
purpose of this guaranty) due and payable by the undersigned
forthwith without demand of notice, and full power and authority are
hereby given you, in your discretion, to sell, assign and deliver all or
any part of the property upon which you may then have a lien
hereunder at any broker's board, or at public or private sale at your
option, either for cash or for credit or for future delivery without
assumption by you of credit risk, and without either the demand,
advertisement or notice of any kind, all of which are hereby
expressly waived. At any sale hereunder, you may, at your option,
purchase the whole or any part of the property so sold, free from
any right of redemption on the part of the undersigned, all such
rights being also hereby waived and released. In case of any sale
and other disposition of any of the property aforesaid, after
deducting all costs and expenses of every kind for care,
safekeeping, collection, sale, delivery or otherwise, you may apply
the residue of the proceeds of the sale and other disposition
thereof, to the payment or reduction, either in whole or in part, of
any one or more of the obligations or liabilities hereunder of the
undersigned whether or not except for disagreement such liabilities
or obligations would then be due, making proper allowance or
interest on the obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect to
any and all amounts which may be or remain unpaid on any of the
obligations or liabilities aforesaid at any time (s).
x x x           x x x          x x x
Should the Borrower at this or at any future time furnish, or should
be heretofore have furnished, another surety or sureties to
guarantee the payment of his obligations to you, the undersigned
hereby expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under any
and all circumstances being joint and several; (Emphasis Ours)
The use of the term "guarantee" does not ipso facto mean that the
contract is one of guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business transactions to describe
not the security of the debt but an intention to be bound by a primary or
independent obligation. 11 As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the
contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the
Civil Code, relied upon by petitioner, finds no application to the case at
bar. In Bicol Savings and Loan Association vs. Guinhawa, 12 we have
ruled that Article 2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure
to register the chattel mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK from any fault
or negligence that may impair the contract. The pertinent portions of the
contract so provides:
. . . the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence,
value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also
that all obligations of the Borrower to you outstanding and unpaid at
any time(s) may exceed the aggregate principal sum herein above
prescribed.
This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that it has
been revoked by the undersigned, but any such notice shall not be
released the undersigned from any liability as to any instruments,
loans, advances or other obligations hereby guaranteed, which may
be held by you, or in which you may have any interest, at the time
of the receipt of such notice. No act or omission of any kind on your
part in the premises shall in any event affect or impair this guaranty,
nor shall same be affected by any change which may arise by
reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such
partnership of any one or more new partners. (Emphasis supplied)
14
In fine, we find the petition to be without merit as no reversible error
was committed by respondent Court of Appeals in rendering the
assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is
hereby AFFIRMED. Costs against the petitioner. SO ORDERED.
G.R. No. 142381             October 15, 2003
PHILIPPINE BLOOMING MILLS, INC., and ALFREDO
CHING, petitioners,
vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 to annul the Decision2 dated 16
July 1999 of the Court of Appeals in CA-G.R. CV No. 39690, as well as
its Resolution dated 17 February 2000 denying the motion for
reconsideration. The Court of Appeals affirmed with modification the
Decision3 dated 31 August 1992 rendered by Branch 113 of the
Regional Trial Court of Pasay City ("trial court"). The trial court’s
Decision declared petitioner Alfredo Ching ("Ching") liable to
respondent Traders Royal Bank ("TRB") for the payment of the credit
accommodations extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the
following amounts:
1. ₱959,611.96 under Letter of Credit No. 479 AD covered by Trust
Receipt No. 106;4
2. ₱1,191,137.13 under Letter of Credit No. 563 AD covered by Trust
Receipt No. 113;5 and
3. ₱3,500,000 under the trust loan covered by a notarized Promissory
Note.6
Ching was the Senior Vice President of PBM. In his personal capacity
and not as a corporate officer, Ching signed a Deed of Suretyship
dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby
warrant to the TRADERS ROYAL BANK, its successors and assigns,
the due and punctual payment by the following individuals and/or
companies/firms, hereinafter called the DEBTOR(S), of such amounts
whether due or not, as indicated opposite their respective names, to
wit:
NAME OF AMOUNT OF
DEBTOR(S) OBLIGATION
PHIL. BLOOMING TEN MILLION
MILLS CORP. PESOS
(₱ 10,000,000.00)
owing to said TRADERS ROYAL BANK, hereafter called the
CREDITOR, as evidenced by all notes, drafts, overdrafts and other
credit obligations of every kind and nature contracted/incurred by said
DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the
whole or part of said indebtedness herein secured at maturity, I/We,
jointly and severally, agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, without demand or
notice from said CREDITOR, of such notes, drafts, overdrafts and
other credit obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the CREDITOR,
together with all interests, penalty and other bank charges as may
accrue thereon and all expenses which may be incurred by the latter
in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the
DEBTOR(S) of all the obligations to be performed under any
contracts, evidencing indebtedness/obligations and any supplements,
amendments, charges or modifications made thereto, including but
not limited to, the due and punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship,
and also presentment, demand, protest and notice of dishonor of any
and all such instruments, loans, advances, credits, or other
indebtedness or obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct
and immediate and not contingent upon the pursuit by the
CREDITOR, its successors or assigns, of whatever remedies it or
they may have against the DEBTOR(S) or the securities or liens it or
they may possess; and I/WE hereby agree to be and remain bound
upon this suretyship, irrespective of the existence, value or condition
of any collateral, and notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed
the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to
pay the creditor for and as attorney’s fees a sum equivalent to TEN
PER CENTUM (10%) of the total indebtedness (principal and interest)
then unpaid, exclusive of all costs or expenses for collection allowed
by law.7 (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit
on application of Ching in his capacity as Senior Vice President of
PBM. Ching later accomplished and delivered to TRB trust receipts,
which acknowledged receipt in trust for TRB of the merchandise
subject of the letters of credit. Under the trust receipts, PBM had the
right to sell the merchandise for cash with the obligation to turn over
the entire proceeds of the sale to TRB as payment of PBM’s
indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt
No. 106, has a face value of US$591,043, while Letter of Credit No.
563 AD, covered by Trust Receipt No. 113, has a face value of
US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which
uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts
shall bear interest at the rate of __ per centum ( __%) per annum
from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby
jointly and severally undertake and agree to pay on demand on the
said BANK, all sums and amounts of money which said BANK may
call upon them to pay arising out of, pertaining to, and/or in any
manner connected with this receipt. In case it is necessary to collect
the draft covered by the Trust Receipt by or through an attorney-at-
law, the undersigned hereby further agree(s) to pay an additional of
10% of the total amount due on the draft as attorney’s fees, exclusive
of all costs, fees and other expenses of collection but shall in no case
be less than ₱200.00"8 (Emphasis supplied)
On 27 April 1981, PBM obtained a ₱3,500,000 trust loan from TRB.
Ching signed as co-maker in the notarized Promissory Note evidencing
this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly
and severally, promise to pay the TRADERS ROYAL BANK or order, at
its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City,
the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND
ONLY (₱3,500,000.00), Philippine Currency, with the interest rate of
Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and
severally, agree to pay an additional amount equivalent to two per
cent (2%) of the principal sum per annum, as penalty and
collection charges in the form of liquidated damages until fully
paid, and the further sum of ten percent (10%) thereof in full, without
any deduction, as and for attorney’s fees whether actually incurred or
not, exclusive of costs and other judicial/extrajudicial expenses;
15
moreover, I/We jointly and severally, further empower and authorize the
TRADERS ROYAL BANK at its option, and without notice to set off or
to apply to the payment of this note any and all funds, which may be in
its hands on deposit or otherwise belonging to anyone or all of us, and
to hold as security therefor any real or personal property which may be
in its possession or control by virtue of any other contract. 9 (Emphasis
supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit
No. 479 AD) for ₱959,611.96, and of Trust Receipt No. 113 (Letter of
Credit No. 563 AD) for ₱1,191,137.13. PBM also defaulted on its
₱3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of
payments with the Securities and Exchange Commission ("SEC"),
docketed as SEC Case No. 2250. 10 The petition sought to suspend
payment of PBM’s obligations and prayed that the SEC allow PBM to
continue its normal business operations free from the interference of its
creditors. One of the listed creditors of PBM was TRB.11
On 9 July 1982, the SEC placed all of PBM’s assets, liabilities, and
obligations under the rehabilitation receivership of Kalaw, Escaler and
Associates.12
On 13 May 1983, ten months after the SEC placed PBM under
rehabilitation receivership, TRB filed with the trial court a complaint for
collection against PBM and Ching. TRB asked the trial court to order
defendants to pay solidarily the following amounts:
PD No. 1758 applied only to corporations, partnerships and
associations and not to individuals.
Upon the trial court’s denial of his Motion for Reconsideration, Ching
filed a Petition for Certiorari and Prohibition 20 before the Court of
Appeals. The appellate court granted Ching’s petition and ordered the
dismissal of the case. The appellate court ruled that the SEC assumed
jurisdiction over Ching and PBM to the exclusion of courts or tribunals
of coordinate rank.
TRB assailed the Court of Appeals’ Decision21 before this Court.
In Traders Royal Bank v. Court of Appeals,22 this Court upheld TRB
and ruled that Ching was merely a nominal party in SEC Case No.
2250. Creditors may sue individual sureties of debtor corporations, like
Ching, in a separate proceeding before regular courts despite the
pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety
and accommodation co-maker of PBM. He claimed that the SEC had
already issued a decision23 approving a revised rehabilitation plan for
PBM’s creditors, and that PBM obtained the credit accommodations for
corporate purposes that did not redound to his personal benefit. He
further claimed that even as a surety, he has the right to the defenses
personal to PBM. Thus, his liability as surety would attach only if, after
the implementation of payments scheduled under the rehabilitation
plan, there would remain a balance of PBM’s debt to TRB.24 Although
Ching admitted PBM’s availment of the credit accommodations, he did
not show any proof of payment by PBM or by him.

TRB admitted certain partial payments on the PBM account made by

(1) ₱6,612,132.74 exclusive of interests, penalties, and bank
PBM itself and by the SEC-appointed receiver.25 Thus, the trial court
charges [representing its indebtedness arising from the letters of
had to resolve the following remaining issues:
credit issued to its various suppliers];

1. How much exactly is the corporate defendant’s outstanding

(2) ₱4,831,361.11, exclusive of interests, penalties, and other bank
obligation to the plaintiff?
charges [due and owing from the trust loan of 27 April 1981
evidenced by a promissory note];
2. Is defendant Alfredo Ching personally answerable, and for
exactly how much?26
(3) ₱783,300.00 exclusive of interests, penalties, and other bank
charges [due and owing from the money market loan of 1 April
1981 evidenced by a promissory note]; TRB presented Mr. Lauro Francisco, loan officer of the Remedial
Management Department of TRB, and Ms. Carla Pecson, manager of
the International Department of TRB, as witnesses. Both witnesses
(4) To order defendant Ching to pay ₱10,000,000.00 under the
testified to the following:
Deed of Suretyship in the event plaintiff can not recover the full
amount of PBM’s indebtedness from the latter;
1. The existence of a Deed of Suretyship dated 21 July 1977
executed by Ching for PBM’s liabilities to TRB up to ₱10,000,000; 27
(5) The sum equivalent to 10% of the total sum due as and for
attorney’s fees;
2. The application of PBM and grant by TRB on 13 March 1980 of
Letter of Credit No. 479 AD for US$591,043, and the actual
(6) Such other amounts that may be proven by the plaintiff during
availment by PBM of the full proceeds of the credit
the trial, by way of damages and expenses for litigation. 13
accommodation;28

On 25 May 1983, TRB moved to withdraw the complaint against PBM

3. The application of PBM and grant by TRB on 6 August 1980 of
on the ground that the SEC had already placed PBM under
Letter of Credit No. 563 AD for US$156,000, and the actual
receivership.14 The trial court thus dismissed the complaint against
availment by PBM of the full proceeds of the credit
PBM.15
accommodation;29 and

On 23 June 1983, PBM and Ching also moved to dismiss the complaint
4. The existence of a trust loan of ₱3,500,000 evidenced by a
on the ground that the trial court had no jurisdiction over the subject
notarized Promissory Note dated 27 April 1981 wherein Ching
matter of the case. PBM and Ching invoked the assumption of
bound himself solidarily with PBM;30 and
jurisdiction by the SEC over all of PBM’s assets and liabilities. 16

5. Per TRB’s computation, Ching is liable for ₱19,333,558.16 as of

TRB filed an opposition to the Motion to Dismiss. TRB argued that (1)
Ching is being sued in his personal capacity as a surety for PBM; (2)
the SEC decision declaring PBM in suspension of payments is not
binding on TRB; and (3) Presidential Decree No. 1758 ("PD No.
1758"),17 which Ching relied on to support his assertion that all claims
against PBM are suspended, does not apply to Ching as the decree
regulates corporate activities only.18
In its order dated 15 August 1983,19 the trial court denied the motion to
dismiss with respect to Ching and affirmed its dismissal of the case with
respect to PBM. The trial court stressed that TRB was holding Ching
liable under the Deed of Suretyship. As Ching’s obligation was solidary,
the trial court ruled that TRB could proceed against Ching as surety
upon default of the principal debtor PBM. The trial court also held that
31 October 1991.31
Ching presented Atty. Vicente Aranda, corporate secretary and First
Vice President of the Human Resources Department of TRB, as
witness. Ching sought to establish that TRB’s Board of Directors
adopted a resolution fixing the PBM account at an amount lower than
what TRB wanted to collect from Ching. The trial court allowed Atty.
Aranda to testify over TRB’s manifestation that the Answer failed to
plead the subject matter of his testimony. Atty. Aranda produced TRB
Board Resolution No. 5935, series of 1990, which contained the
minutes of the special meeting of TRB’s Board of Directors held on 8
June 1990.32 In the resolution, the Board of Directors advised TRB’s
Management "not to release Alfredo Ching from his JSS liability to the
bank."33 The resolution also stated the following:
16
a) Accept the ₱1.373 million deposits remitted over a period of 17 years pursuant to Article 1956 of the Civil Code. 39 Finally, Ching asserted that
or until 2006 which shall be applied directly to the account (as remitted the Deed of Suretyship executed on 21 July 1977 could not guarantee
per hereto attached schedule). The amount of ₱1.373 million shall be obligations incurred after its execution. 40
considered as full payment of PBM’s account. (The receiver is
amenable to this alternative)
TRB did not file its appellee’s brief. Thus, the Court of Appeals resolved
to submit the case for decision.41
The initial deposit/remittance which amounts to ₱150,000.00 shall be
remitted upon approval of the above and conforme to PISCOR and
The Court of Appeals considered the following issues for its
PBM. Subsequent deposits shall start on the 3rd year and annually
determination:
thereafter (every June 30th of the year) until June 30, 2006.

1. Whether the Answer of Ching amounted to an admission of

Failure to pay one annual installment shall make the whole obligation
liability.
due and demandable.

2. Whether Ching can still be sued as a surety after the SEC

b) Write-off immediately ₱4.278 million. The balance [of] ₱1.373 million
placed PBM under rehabilitation receivership, and if in the
to remain outstanding in the books of the Bank. Said balance will equal
affirmative, for how much.42
the deposits to be remitted to the Bank for a period of 17 years.34

The Court of Appeals resolved the first two questions in favor of TRB.
However, Atty. Aranda himself testified that both items (a) and (b)
The appellate court stated:
quoted above were never complied with or implemented. Not only was
there no initial deposit of ₱150,000 as required in the resolution, TRB
also disapproved the document prepared by the receiver, which would Ching did not deny under oath the genuineness and due execution of
have released Ching from his suretyship.35 the L/Cs, Trust Receipts, Undertaking, Deed of Surety, and the 3.5
Million Peso Promissory Note upon which TRB’s action rested. He is,
therefore, presumed to be liable unless he presents evidence showing
The Ruling of the Trial Court
payment, partially or in full, of these obligations (Investment and
Underwriting Corporation of the Philippines v. Comptronics Philippines,
The trial court found Ching liable to TRB for ₱19,333,558.16 under the Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
Deed of Suretyship. The trial court explained:
As surety of a corporation placed under rehabilitation receivership,
[T]he liability of Ching as a surety attaches independently from his Ching can answer separately for the obligations of debtor PBM (Rizal
capacity as a stockholder of the Philippine Blooming Mills. Indisputably, Banking Corporation v. Court of Appeals, Philippine Blooming Mills,
under the Deed of Suretyship defendant Ching unconditionally agreed Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank
to assume PBM’s liability to the plaintiff in the event PBM defaulted in v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).
the payment of the said obligation in addition to whatever penalties,
expenses and bank charges that may occur by reason of default. Clear
Even a[n] SEC injunctive order cannot suspend payment of the surety’s
enough, under the Deed of Suretyship (Exh. J), defendant Ching bound
obligation since the rehabilitation receivers are limited to the existing
himself jointly and severally with PBM in the payment of the latter’s
assets of the corporation.43
obligation to the plaintiff. The obligation being solidary, the plaintiff Bank
can hold Ching liable upon default of the principal debtor. This is
explicitly provided in Article 1216 of the New Civil Code already quoted The dispositive portion of the Decision of the Court of Appeals reads:
above.36
WHEREFORE, the judgment of the lower court is hereby AFFIRMED
The dispositive portion of the trial court’s Decision reads: but modified with respect to the amount of liability of defendant Alfredo
Ching which is lowered from ₱19,333,558.16 to ₱15,773,708.78 with
legal interest of 12% per annum until it is fully paid.
WHEREFORE, judgment is hereby rendered declaring defendant
Alfredo Ching liable to plaintiff bank in the amount of ₱19,333,558.16
(NINETEEN MILLION THREE HUNDRED THIRTY THREE SO ORDERED.44
THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of October
31, 1991, and to pay the legal interest thereon from such date until it is
The Court of Appeals denied Ching’s Motion for Reconsideration for
fully paid. To pay plaintiff 5% of the entire amount by way of attorney’s
lack of merit.
fees.

Hence, this petition.

SO ORDERED.37

Issues
The Ruling of the Court of Appeals

Ching assigns the following as errors of the Court of Appeals:

On appeal, Ching stated that as surety and solidary debtor, he should
benefit from the changed nature of the obligation as provided in Article
1222 of the Civil Code, which reads: 1. THE COURT OF APPEALS COMMITTED AN ERROR
WHEN IT RULED THAT PETITIONER ALFREDO CHING
WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM
Article 1222. A solidary debtor may, in actions filed by the creditor, avail
LONG AFTER THE EXECUTION OF THE DEED OF
himself of all defenses which are derived from the nature of the
SURETYSHIP.
obligation and of those which are personal to him, or pertain to his own
share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which 2. THE COURT OF APPEALS COMMITTED AN ERROR
the latter are responsible. WHEN IT RULED THAT THE PETITIONERS WERE LIABLE
FOR THE TRUST RECEIPTS DESPITE THE FACT THAT
PRIVATE RESPONDENT HAD PREVENTED THEIR
Ching claimed that his liability should likewise be reduced since the
FULFILLMENT.
equitable apportionment of PBM’s remaining assets among its creditors
under the rehabilitation proceedings would have the effect of reducing
PBM’s liability. He also claimed that the amount for which he was being 3. THE COURT OF APPEALS COMMITTED AN ERROR
held liable was excessive. He contended that the outstanding principal WHEN IT FOUND PETITIONER ALFREDO CHING LIABLE
balance, as stated in TRB Board Resolution No. 5893-1990, was only FOR ₱15,773,708.78 WITH LEGAL INTEREST AT 12% PER
₱5,650,749.09.38 Ching also contended that he was not liable for ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT
interest, as the loan documents did not stipulate the interest rate, UNDER THE REHABILITATION PLAN OF PETITIONER

17
 PBM, WHICH WAS APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, PRIVATE RESPONDENT IS
ONLY ENTITLED TO ₱1,373,415.00.45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could
not answer for obligations not yet in existence at the time of its
execution. Specifically, Ching maintained that the Deed of Suretyship
could not answer for debts contracted by PBM in 1980 and 1981. Ching
contended that no accessory contract of suretyship could arise without
an existing principal contract of loan. Ching likewise argued that TRB
could no longer claim on the trust receipts because TRB had already
taken the properties subject of the trust receipts. Ching likewise
maintained that his obligation as surety could not exceed the
₱1,373,415 apportioned to PBM under the SEC-approved rehabilitation
plan.
In its Comment, TRB asserted that the first two assigned errors raised
factual issues not brought before the trial court. Furthermore, TRB
pointed out that Ching never presented PBM’s rehabilitation plan before
the trial court. TRB also stated that the Supreme Court ruling
in Traders Royal Bank v. Court of Appeals46 constitutes res judicata
between the parties. Therefore, TRB could proceed against Ching
separately from PBM to enforce in full Ching’s liability as surety. 47
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court’s denial of Ching’s
motion to have the case dismissed against him. The petition is a thinly
veiled attempt to make this Court reconsider its decision in the prior
case of Traders Royal Bank v. Court of Appeals. 48 This Court has
already resolved the issue of Ching’s separate liability as a surety
despite the rehabilitation proceedings before the SEC. We held in
Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-
petitioner of PBM, the SEC could not assume jurisdiction over his
person and properties. The Securities and Exchange Commission was
empowered, as rehabilitation receiver, to take custody and control of
the assets and properties of PBM only, for the SEC has jurisdiction over
corporations only [and] not over private individuals, except stockholders
in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D.
1758). Being a nominal party in SEC Case No. 2250, Ching’s properties
were not included in the rehabilitation receivership that the SEC
constituted to take custody of PBM’s assets. Therefore, the petitioner
bank was not barred from filing a suit against Ching, as a surety for
PBM. An anomalous situation would arise if individual sureties for
debtor corporations may escape liability by simply co-filing with the
corporation a petition for suspension of payments in the SEC whose
jurisdiction is limited only to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for
PBM, as expressly provided by Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and
separate from its individual stockholders and members. Being an officer
or stockholder of a corporation does not make one’s property the
property also of the corporation, for they are separate entities (Adelio
Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching’s act of joining as a co-petitioner with PBM in SEC Case No.
2250 did not vest in the SEC jurisdiction over his person or property, for
jurisdiction does not depend on the consent or acts of the parties but
upon express provision of law (Tolentino vs. Social Security System,
138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145
SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Ching’s
liability as a surety of the credit accommodations TRB extended to
PBM. The decision amounts to res judicata49 which bars Ching from
raising the same issue again. Hence, the only question that remains is
the amount of Ching’s liability. Nevertheless, we shall resolve the
issues Ching has raised in his attempt to escape liability under his
surety.
Whether Ching is liable for obligations PBM contracted after execution
of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB
before and after the execution of the 21 July 1977 Deed of Suretyship.
This is evident from the tenor of the deed itself, referring to amounts
PBM "may now be indebted or may hereafter become indebted" to
TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of
the Civil Code provides:
A guaranty may also be given as security for future debts, the amount
of which is not yet known; there can be no claim against the guarantor
until the debt is liquidated. A conditional obligation may also be
secured. (Emphasis supplied)
Furthermore, this Court has ruled in Diño v. Court of Appeals50 that:
Under the Civil Code, a guaranty may be given to secure even future
debts, the amount of which may not be known at the time the guaranty
is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited
to a single transaction, but which contemplates a future course of
dealing, covering a series of transactions, generally for an indefinite
time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable. Otherwise stated, a
continuing guaranty is one which covers all transactions, including
those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as continuing when
by the terms thereof it is evident that the object is to give a standing
credit to the principal debtor to be used from time to time either
indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract states that
the guaranty is to secure advances to be made "from time to time," it
will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words
and expressions such as payment of "any debt," "any indebtedness," or
"any sum," or the guaranty of "any transaction," or money to be
furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a
continuing guaranty.
Whether Ching’s liability is limited to the amount stated in PBM’s
rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to
the amount stated in PBM’s rehabilitation plan. In claiming this reduced
liability, Ching invokes Article 1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail
himself of all defenses which are derived from the nature of the
obligation and of those which are personal to him, or pertain to his own
share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which
the latter are responsible.
In granting the loan to PBM, TRB required Ching’s surety precisely to
insure full recovery of the loan in case PBM becomes insolvent or fails
to pay in full. This was the very purpose of the surety. Thus, Ching
cannot use PBM’s failure to pay in full as justification for his own
reduced liability to TRB. As surety, Ching agreed to pay in full PBM’s
loan in case PBM fails to pay in full for any reason, including its
insolvency.
TRB, as creditor, has the right under the surety to proceed against
Ching for the entire amount of PBM’s loan. This is clear from Article
1216 of the Civil Code:
18
ART. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No.
5935. This resolution states that PBM’s outstanding loans may be
reduced to ₱1.373 million subject to certain conditions like the payment
of ₱150,000 initial payment. 51 The resolution also states that TRB
should not release Ching’s solidary liability under his surety. The
resolution even directs TRB’s management to study Ching’s criminal
liability under the trust documents. 52
Ching’s own witness testified that Resolution No. 5935 was never
implemented. For one, PBM or its receiver never paid the ₱150,000
initial payment to TRB. TRB also rejected the document that PBM’s
receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to
escape liability under his suretyship.
Ching’s attempts to have this Court review the factual issues of the
case are improper. It is not a function of the Supreme Court to assess
and evaluate again the evidence, testimonial and evidentiary, adduced
by the parties particularly where the findings of both the trial court and
the appellate court coincide on the matter. 53
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered
by the trust receipts. Other than his bare allegations, Ching has not
shown proof of payment or settlement with TRB. Atty. Vicente Aranda,
TRB’s corporate secretary and First Vice President of its Human
Resource Management Department, testified that the conditions in the
TRB board resolution presented by Ching were not met or
implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been
outlined, and may I refer you to condition or step No. 1, which
reads: "a) Accept the ₱1.373 million deposits remitted over a period
of 17 years or until 2006 which shall be applied directly to the
account (as remitted per hereto attached schedule). The amount of
₱1.373 million shall be considered as full payment of PBM’s
account. (The receiver is amenable to this alternative.) The initial
deposit/remittance which amounts to ₱150,000.00 shall be remitted
upon approval of the above and conforme of PISCOR [xxx] and
PBM. Subsequent deposits shall start on the 3rd year and annually
thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole
obligation due and demandable. Now Mr. Witness, would you be in
a position to inform [the court] if these conditions listed in item (a) in
Resolution No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the
initial deposit/remittance in the amount of ₱150,000.00 which have
to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform
the court if those conditions were met? Because your initial answer
was yes.
A Yes sir, I am in a position to state that these conditions were not
met.
Q Let me refer you to the condition listed as item (b) of the same
resolution which I read and quote: "Write off immediately ₱4.278
million. The balance of ₱1.373 million to remain outstanding in the
books of the bank. Said balance will be remitted to the Bank for a
period of 17 years." Mr. Witness, would you be in a position to
inform the court if the bank implemented that particular condition?
A In the implementation of this settlement the receiver prepared a
document for approval and conformity of the bank. The said
document would in effect release the suretyship of Alfredo Ching
and for that reason the bank refused or denied fixing its conformity
and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did
not implement these conditionalities [sic] was because the former
defendant corporation requested that the suretyship of Alfredo
Ching be released, is that correct?
A I did not say that. I said that in effect the document prepared by
the lawyer of the receiver xxx the bank would release the suretyship
of Alfredo Ching, that is why the bank is not amenable to such a
document.
Q Despite this approved resolution the bank, because of said
requirement or conformity did not seek to implement these
conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being
followed in that document because it was the condition of the board
that the suretyship should not be released but the document being
presented to the bank for signature and conformity in effect if
signed would release the suretyship. So it would be a violation with
the approval of the board so the bank did not sign the conformity.54
Ching also claims that TRB prevented PBM from fulfilling its obligations
under the trust receipts when TRB, together with other creditor banks,
took hold of PBM’s inventories, including the goods covered by the trust
receipts. Ching asserts that this act of TRB released him from liability
under the suretyship. Ching forgets that he executed, on behalf of PBM,
separate Undertakings for each trust receipt expressly granting to TRB
the right to take possession of the goods at any time to protect TRB’s
interests. TRB may exercise such right without waiving its right to
collect the full amount of the loan to PBM. The Undertakings also
provide that any suspension of payment or any assignment by PBM for
the benefit of creditors renders the loan due and demandable. Thus, the
separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust
and take possession of said merchandise with the right to sell and
dispose of the same under such terms and conditions it may
deem best, or of the proceeds of such of the same as may then
have been sold, wherever the said merchandise or proceeds may then
be found and all the provisions of the Trust Receipt shall apply to and
be deemed to include said above-mentioned merchandise if the same
shall have been made up or used in the manufacture of any other
goods, or merchandise, and the said BANK shall have the same rights
and remedies against the said merchandise in its manufactured state,
or the product of said manufacture as it would have had in the event
that such merchandise had remained [in] its original state and
irrespective of the fact that other and different merchandise is used in
completing such manufacture. In the event of any suspension, or
failure or assignment for the benefit of creditors on the part of the
undersigned or of the non-fulfillment of any obligation, or of the
non-payment at maturity of any acceptance made under said credit,
or any other credit issued by the said BANK on account of the
undersigned or of the non-payment of any indebtedness on the part
of the undersigned to the said BANK, all obligations, acceptances,
indebtedness and liabilities whatsoever shall thereupon without
notice mature and become due and payable and the BANK may
avail of the remedies provided herein.55 (Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the
Trust Receipts Law, expressly allows TRB to take possession of the
goods covered by the trust receipts. Thus, Section of 7 of PD No. 115
states:
SECTION 7. Rights of the entruster. — The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale,
19
and to the enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of
the trust receipt or any other agreement between the entruster and
the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days after
serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c) to
the satisfaction of the entrustee’s indebtedness to the entruster.
The entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall be deemed
sufficiently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee’s last
known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the
trust receipts, PBM and Ching remained liable for the entire amount of
the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Ching’s credit
obligations with TRB, Ching’s liability is what the Deed of Suretyship
stipulates, plus the applicable interest and penalties. The trust receipts,
as well as the Letter of Undertaking dated 16 April 1980 56 executed by
PBM, stipulate in writing the payment of interest without specifying the
rate. In such a case, the applicable interest rate shall be the legal rate,
which is now 12% per annum.57 This is in accordance with Central Bank
Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655,
as amended, otherwise known as the "Usury Law," the Monetary
Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of express
contract as to such rate of interest, shall be twelve per cent (12%) per
annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the ₱3,500,000
trust loan provides for 18% interest per annum plus 2% penalty interest
per annum in case of default. This stipulated interest should continue to
run until full payment of the ₱3,500,000 trust loan. In addition, the
accrued interest on all the credit accommodations should earn legal
interest from the date of filing of the complaint pursuant to Article 2212
of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point.
The trial court found and the appellate court affirmed that the
outstanding principal amounts as of the filing of the complaint with the
trial court on 13 May 1983 were ₱959,611.96 under Trust Receipt No.
106, ₱1,191,137.13 under Trust Receipt No. 113, and ₱3,500,000 for
the trust loan. As extracted from TRB’s Statement of Account as of 31
October 1991,58 the accrued interest on the trust receipts and the trust
loan as of the filing of the complaint on 13 May 1983 were
₱311,387.5159 under Trust Receipt No. 106, ₱338,739.8160 under Trust
Receipt No. 113, and ₱1,287,616.4461 under the trust loan. The penalty
interest on the trust loan amounted to ₱137,315.07.62 Ching did not
rebut this Statement of Account which TRB presented during trial.
Thus, the following is the summary of Ching’s liability under the
suretyship as of 13 May 1983, the date of filing of TRB’s complaint with
the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal ₱ 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal ₱ 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal ₱ 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07
WHEREFORE, we AFFIRM the decision of the Court of Appeals with
MODIFICATION. Petitioner Alfredo Ching shall pay respondent Traders
Royal Bank the following (1) on the credit accommodations under the
trust receipts, the total principal amount of ₱2,150,749.09 with legal
interest at 12% per annum from 14 May 1983 until full payment; (2) on
the trust loan evidenced by the Promissory Note, the principal sum of
₱3,500,000 with 20% interest per annum from 14 May 1983 until full
payment; (3) on the total accrued interest as of 13 May 1983,
₱2,075,058.84 with 12% interest per annum from 14 May 1983 until full
payment. Petitioner Alfredo Ching shall also pay attorney’s fees to
respondent Traders Royal Bank equivalent to 5% of the total principal
and interest. SO ORDERED.
D. Surety
5. Distinguishment from joint and solidary obligations 9 Art.
2066-2067; 1217
G.R. No. 151953              June 29, 2007
SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not
under obligation to reimburse respondent, a claim that can be easily
debunked. The more perplexing question is whether this obligation to
repay is solidary, as contended by respondent and the lower courts, or
merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP)1 entered into a loan agreement with Falcon Minerals, Inc.
(Falcon) whereby PDCP agreed to make available and lend to Falcon
the amount of US$320,000.00, for specific purposes and subject to
certain terms and conditions.2 On the same day, three stockholders-
officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas),
George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed "to assume in [their] individual
capacity, solidary liability with [Falcon] for the due and punctual
payment" of the loan contracted by Falcon with PDCP.3 In the
meantime, two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities. One Guaranty4 was
executed by petitioner Salvador Escaño (Escaño), while the other 5 by
petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L.
Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to
Escaño, Silos and Joseph M. Matti (Matti). Thus, contracts were
executed whereby Ortigas, George A. Scholey, Inductivo and the heirs
of then already deceased George T. Scholey assigned their shares of
stock in Falcon to Escaño, Silos and Matti.6 Part of the consideration
that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with
PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the
concerned parties,7 namely: with Escaño, Silos and Matti identified in
the document as "SURETIES," on one hand, and Ortigas, Inductivo and
20
the Scholeys as "OBLIGORS," on the other. The Undertaking reads in
part:
3. That whether or not SURETIES are able to immediately cause PDCP
and PAIC to release OBLIGORS from their said guarantees [sic],
SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the
following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP
and/or PAIC for the payment of FALCON’s obligations with it, any of
[the] OBLIGORS shall immediately inform SURETIES thereof so that
the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or
all of OBLIGORS for collection of said loans and/or credit facilities,
SURETIES agree to defend OBLIGORS at their own expense, without
prejudice to any and/or all of OBLIGORS impleading SURETIES therein
for contribution, indemnity, subrogation or other relief in respect to any
of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to
pay any amount to PDCP and/or PAIC, SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such
payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees
which may be due from FALCON arising out of, or in connection with,
their said guarantees[sic].8
Falcon eventually availed of the sum of US$178,655.59 from the credit
line extended by PDCP. It would also execute a Deed of Chattel
Mortgage over its personal properties to further secure the loan.
However, Falcon subsequently defaulted in its payments. After PDCP
foreclosed on the chattel mortgage, there remained a subsisting
deficiency of ₱5,031,004.07, which Falcon did not satisfy despite
demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a
complaint for sum of money with the Regional Trial Court of Makati
(RTC) against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo.
The case was docketed as Civil Case No. 89-5128. For his part, Ortigas
filed together with his answer a cross-claim against his co-defendants
Falcon, Escaño and Silos, and also manifested his intent to file a third-
party complaint against the Scholeys and Matti.10 The cross-claim
lodged against Escaño and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the liabilities of Ortigas
with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who in
December of 1993, entered into a compromise agreement whereby he
agreed to pay the bank ₱1,000,000.00. In exchange, PDCP waived or
assigned in favor of Escaño one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the case.11 The
compromise agreement was approved by the RTC in a
Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement13 with PDCP, allegedly without the knowledge of Escaño,
Matti and Silos. Thereby, Ortigas agreed to pay PDCP ₱1,300,000.00
as "full satisfaction of the PDCP’s claim against Ortigas," 14 in exchange
for PDCP’s release of Ortigas from any liability or claim arising from the
Falcon loan agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement
whereby he agreed to pay ₱500,000.00 in exchange for PDCP’s waiver
of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas pursued his
claims against Escaño, Silos and Matti, on the basis of the 1982
Undertaking. He initiated a third-party complaint against Matti and
Silos,16 while he maintained his cross-claim against Escaño. In 1995,
Ortigas filed a motion for Summary Judgment in his favor against
Escaño, Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escaño, Silos and Matti to pay Ortigas,
jointly and severally, the amount of ₱1,300,000.00, as well as
₱20,000.00 in attorney’s fees.17 The trial court ratiocinated that none of
the third-party defendants disputed the 1982 Undertaking, and that "the
mere denials of defendants with respect to non-compliance of Ortigas
of the terms and conditions of the Undertaking, unaccompanied by any
substantial fact which would be admissible in evidence at a hearing, are
not sufficient to raise genuine issues of fact necessary to defeat a
motion for summary judgment, even if such facts were raised in the
pleadings."18 In an Order dated 7 March 1996, the trial court denied the
motion for reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from 28
February 1994.19
From the Summary Judgment, recourse was had by way of appeal to
the Court of Appeals. Escaño and Silos appealed jointly while Matti
appealed by his lonesome. In a Decision20 dated 23 January 2002, the
Court of Appeals dismissed the appeals and affirmed the Summary
Judgment. The appellate court found that the RTC did not err in
rendering the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The special
defenses that were raised, "payment and excussion," were
characterized by the Court of Appeals as "appear[ing] to be merely
sham in the light of the pleadings and supporting documents and
affidavits."21 Thus, it was concluded that there was no genuine issue
that would still require the rigors of trial, and that the appealed judgment
was decided on the bases of the undisputed and established facts of
the case.
Hence, the present petition for review filed by Escaño and Silos.22 Two
main issues are raised. First, petitioners dispute that they are liable to
Ortigas on the basis of the 1982 Undertaking, a document which they
do not disavow and have in fact annexed to their petition. Second, on
the assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners also submit
that they are not liable for interest and if at all, the proper interest rate is
6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or
their memorandum before the Court, the appropriateness of the
summary judgment as a relief favorable to Ortigas. Under Section 3,
Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may
avail if the pleadings, supporting affidavits, depositions and admissions
on file show that, except as to the amount of damages, there is no
genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. Petitioner have not attempted
to demonstrate before us that there existed a genuine issue as to any
material fact that would preclude summary judgment. Thus, we affirm
with ease the common rulings of the lower courts that summary
judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were
correctly held liable to Ortigas on the basis of the 1982 Undertaking in
this Summary Judgment. An examination of the document reveals
several clauses that make it clear that the agreement was brought forth
by the desire of Ortigas, Inductivo and the Scholeys to be released from
their liability under the loan agreement which release was, in turn, part
of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had
bound himself with Falcon for the payment of the loan with PDCP, and
that "amongst the consideration for OBLIGORS and/or their principals
aforesaid selling is SURETIES’ relieving OBLIGORS of any and all
liability arising from their said joint and several undertakings with
FALCON."23 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to
assume all of OBLIGORs’ said guarantees [sic] to PDCP x x x under
the following terms and conditions."24
At the same time, it is clear that the assumption by petitioners of
Ortigas’s "guarantees" [sic] to PDCP is governed by stipulated terms
and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3.
First, upon receipt by "any of OBLIGORS" of any demand from PDCP
for the payment of Falcon’s obligations with it, "any of OBLIGORS" was
to immediately inform "SURETIES" thereof so that the latter can timely
take appropriate measures. Second, should "any and/or all of
OBLIGORS" be impleaded by PDCP in a suit for collection of its loan,
"SURETIES agree[d] to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity, subrogation or other
relief"25 in respect to any of the claims of PDCP. Third, if any of the
"OBLIGORS is for any reason made to pay any amount to [PDCP],
21
SURETIES [were to] reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking,
Ortigas was not "made to pay" PDCP the amount now sought to be
reimbursed, as Ortigas voluntarily paid PDCP the amount of ₱1.3
Million as an amicable settlement of the claims posed by the bank
against him. However, the subject clause in paragraph 3(c) actually
reads "[i]n the event that any of OBLIGORS is for any reason made to
pay any amount to PDCP x x x"27 As pointed out by Ortigas, the phrase
"for any reason" reasonably includes any extra-judicial settlement of
obligation such as what Ortigas had undertaken to pay to PDCP, as it is
indeed obvious that the phrase was incorporated in the clause to render
the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the
Undertaking made clear that the right of Ortigas to seek reimbursement
accrued only after he had delivered payment to PDCP as a
consequence of a final and executory judgment. On the contrary, the
clear intent of the Undertaking was for petitioners and Matti to relieve
the burden on Ortigas and his fellow "OBLIGORS" as soon as possible,
and not only after Ortigas had been subjected to a final and executory
adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to
cause PDCP x x x to within a reasonable time release all the
OBLIGORS x x x from their guarantees [sic] to PDCP x x x"28 In the
event that Ortigas and his fellow "OBLIGORS" could not be released
from their guaranties, paragraph 2 commits petitioners and Matti to
cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to
pledge or assign such payments to Ortigas, et al., as security for
whatever amounts the latter may be held liable under their guaranties.
In addition, paragraph 1 also makes clear that nothing in the
Undertaking "shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said
guarantees [sic]."29
There is no argument to support petitioners’ position on the import of
the phrase "made to pay" in the Undertaking, other than an unduly
literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.30 Likewise applicable is
the provision that if some stipulation of any contract should admit of
several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual. 31 As a means
to effect the general intent of the document to relieve Ortigas from
liability to PDCP, it is his interpretation, not that of petitioners, that holds
sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the
other conditions set in paragraph 3, as they claim. Following the
general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount
of ₱1.3 million without petitioners ESCANO and SILOS’s knowledge
and consent."32 Paragraph 3(a) of the Undertaking does impose a
requirement that any of the "OBLIGORS" shall immediately inform
"SURETIES" if they received any demand for payment of FALCON’s
obligations to PDCP, but that requirement is reasoned "so that the
[SURETIES] can timely take appropriate measures" 33 presumably to
settle the obligation without having to burden the "OBLIGORS." This
notice requirement in paragraph 3(a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the
1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to
Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first
place. They note that Ortigas had, in his answer, denied any liability to
PDCP and had alleged that he signed the Assumption of Solidary
Liability not in his personal capacity, but as an officer of Falcon.
However, such position, according to petitioners, could not be justified
since Ortigas later voluntarily paid PDCP the amount of ₱1.3 Million.
Such circumstances, according to petitioners, amounted to estoppel on
the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP and
Ortigas expressly stipulated that Ortigas’s offer to pay PDCP was
conditioned "without [Ortigas’s] admitting liability to plaintiff PDCP
Bank’s complaint, and to terminate and dismiss the said case as
against Ortigas solely."34 Petitioners profess it is "unthinkable" for
Ortigas to have voluntarily paid PDCP without admitting his
liability,35 yet such contention based on assumption cannot supersede
the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP
after he had already assigned his obligation to petitioners through the
1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim
against Ortigas notwithstanding the Undertaking he executed with
petitioners. Not being a party to such Undertaking, PDCP was not
precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly states that "nothing
herein shall prevent OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said guarantees
[sic]."36 Simply put, the Undertaking did not bar Ortigas from pursuing
his own settlement with PDCP. Neither did the Undertaking bar Ortigas
from recovering from petitioners whatever amount he may have paid
PDCP through his own settlement. The stipulation that if Ortigas was
"for any reason made to pay any amount to PDCP[,] x x x SURETIES
shall reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment"37 makes it clear that petitioners remain liable
to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily,
liable to Ortigas, claiming that the Undertaking did not provide for
express solidarity. They cite Article 1207 of the New Civil Code, which
states in part that "[t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation
requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the
agreement "clearly shows that it is a surety agreement" 38 between the
obligors (Ortigas group) and the sureties (Escaño group). Ortigas points
out that the Undertaking uses the word "SURETIES" although the
document, in describing the parties. It is further contended that the
principal objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable "because the total loan
obligation can not be paid or settled to free or release the OBLIGORS if
one or any of the SURETIES default from their obligation in the
Undertaking."39
In case, there is a concurrence of two or more creditors or of two or
more debtors in one and the same obligation, Article 1207 of the Civil
Code states that among them, "[t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity." Article 1210 supplies further caution
against the broad interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of concurrence of
two or more creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary in character to prove such
fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed "to bind themselves jointly and severally" in their
obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed only
22
to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of
obligations. We rule and so hold that he failed to discharge such
burden.
Ortigas places primary reliance on the fact that the petitioners and Matti
identified themselves in the Undertaking as "SURETIES", a term
repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that the
obligation of petitioners to him was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article
2047 provides the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. [Emphasis
supplied]40
As provided in Article 2047 in a surety agreement the surety undertakes
to be bound solidarily with the principal debtor. Thus, a surety
agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigas’s argument rests solely on the
solidary nature of the obligation of the surety under Article 2047. In
tandem with the nomenclature "SURETIES" accorded to petitioners and
Matti in the Undertaking, however, this argument can only be viable if
the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under
Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal
debtor to whom the surety is solidarily bound by way of an ancillary
obligation of segregate identity from the obligation between the principal
debtor and the creditor. The suretyship does bind the surety to the
creditor, inasmuch as the latter is vested with the right to proceed
against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation.41 At the same time, there is
also a legal tie created between the surety and the principal debtor to
which the creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal debtor,
such obligation is extinguished. 42 At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid, for the
surety does in fact "become subrogated to all the rights and remedies
of the creditor."43
Note that Article 2047 itself specifically calls for the application of the
provisions on joint and solidary obligations to suretyship
contracts.44 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).45 However, a significant distinction still lies between a joint and
several debtor, on one hand, and a surety on the other. Solidarity
signifies that the creditor can compel any one of the joint and several
debtors or the surety alone to answer for the entirety of the principal
debt. The difference lies in the respective faculties of the joint and
several debtor and the surety to seek reimbursement for the sums they
paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and
a surety:
A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the
fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil
Code.
The second paragraph of [Article 2047] is practically equivalent to the
contract of suretyship. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is similar
to the common law suretyship.46
In the case of joint and several debtors, Article 1217 makes plain that
the solidary debtor who effected the payment to the creditor "may claim
from his co-debtors only the share which corresponds to each, with the
interest for the payment already made." Such solidary debtor will not be
able to recover from the co-debtors the full amount already paid to the
creditor, because the right to recovery extends only to the proportional
share of the other co-debtors, and not as to the particular proportional
share of the solidary debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full amount
paid, and not just any proportional share, from the principal debtor or
debtors. Such right to full reimbursement falls within the other rights,
actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We
find the right under Article 2066 of the Civil Code, which assures that
"[t]he guarantor who pays for a debtor must be indemnified by the
latter," such indemnity comprising of, among others, "the total amount
of the debt."47 Further, Article 2067 of the Civil Code likewise
establishes that "[t]he guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor." 48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might
argue that the provisions should not extend to sureties, especially in
light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument,
and instead adopt Dr. Tolentino’s observation that "[t]he reference in
the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable
provisions governing guaranty."49 For if that were not the implication,
there would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both classes of
obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067
extend as well to sureties as defined under Article 2047. These rights
granted to the surety who pays materially differ from those granted
under Article 1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter extends "only [to] the share
which corresponds to each [co-debtor]." It is for this reason that the
Court cannot accord the conclusion that because petitioners are
identified in the Undertaking as "SURETIES," they are consequently
joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the
general presumption favoring joint liability, the Court would have to be
satisfied that among the petitioners and Matti, there is one or some of
them who stand as the principal debtor to Ortigas and another as surety
who has the right to full reimbursement from the principal debtor or
debtors. No suggestion is made by the parties that such is the case,
and certainly the Undertaking is not revelatory of such intention. If the
Court were to give full fruition to the use of the term "sureties" as
conclusive indication of the existence of a surety agreement that in turn
gives rise to a solidary obligation to pay Ortigas, the necessary
implication would be to lay down a corresponding set of rights and
obligations as between the "SURETIES" which petitioners and Matti did
not clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there was
an agreement whereby in the event that Ortigas were to seek
reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his right
to full reimbursement from the other two obligors. In such case, there
would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an
agreement, it does not appear on the record. More consequentially, no
23
such intention is reflected in the Undertaking itself, the very document
that creates the conditional obligation that petitioners and Matti
reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term "SURETIES" could not work to such effect,
especially as it does not appear who exactly is the principal debtor
whose obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires
"solidary obligation of the Sureties," since the Undertaking expressly
seeks to "reliev[e] obligors of any and all liability arising from their said
joint and several undertaking with [F]alcon," and for the "sureties" to
"irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP."50 We do not doubt that a finding of solidary
liability among the petitioners works to the benefit of Ortigas in the
facilitation of these goals, yet the Undertaking itself contains no
stipulation or clause that establishes petitioners’ obligation to Ortigas as
solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity.
Even if the liability of petitioners and Matti were adjudged as merely
joint, the full relief and reimbursement of Ortigas arising from his
payment to PDCP would still be accomplished through the complete
execution of such a judgment.
Petitioners further claim that they are not liable for attorney’s fees since
the Undertaking contained no such stipulation for attorney’s fees, and
that the situation did not fall under the instances under Article 2208 of
the Civil Code where attorney’s fees are recoverable in the absence of
stipulation.
We disagree. As Ortigas points out, the acts or omissions of the
petitioners led to his being impleaded in the suit filed by PDCP. The
Undertaking was precisely executed as a means to obtain the release
of Ortigas and the Scholeys from their previous obligations as sureties
of Falcon, especially considering that they were already divesting their
shares in the corporation. Specific provisions in the Undertaking
obligate petitioners to work for the release of Ortigas from his surety
agreements with Falcon. Specific provisions likewise mandate the
immediate repayment of Ortigas should he still be made to pay PDCP
by reason of the guaranty agreements from which he was ostensibly to
be released through the efforts of petitioners. None of these provisions
were complied with by petitioners, and Article 2208(2) precisely allows
for the recovery of attorney’s fees "[w]hen the defendant’s act or
omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest."
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit. 52
Since what was the constituted in the Undertaking consisted of a
payment in a sum of money, the rate of interest thereon shall be 12%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus
proper. However, the computation should be reckoned from judicial or
extrajudicial demand. Per records, there is no indication that Ortigas
made any extrajudicial demand to petitioners and Matti after he paid
PDCP, but on 14 March 1994, Ortigas made a judicial demand when he
filed a Third-Party Complaint praying that petitioners and Matti be made
to reimburse him for the payments made to PDCP. It is the filing of this
Third Party Complaint on 14 March 1994 that should be considered as
the date of judicial demand from which the computation of interest
should be reckoned.53 Since the RTC held that interest should be
computed from 28 February 1994, the appropriate redefinition should
be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the
Regional Trial Court dated 5 October 1995 is modified by declaring that
petitioners and Joseph M. Matti are only jointly liable, not jointly and
severally, to respondent Rafael Ortigas, Jr. in the amount of
₱1,300,000.00. The Order of the Regional Trial Court dated 7 March
1996 is MODIFIED in that the legal interest of 12% per annum on the
amount of ₱1,300,000.00 is to be computed from 14 March 1994, the
date of judicial demand, and not from 28 February 1994 as directed in
the Order of the lower court. The assailed rulings are affirmed in all
other respects. Costs against petitioners. SO ORDERED.

Finally, petitioners claim that they should not be liable for interest since
the Undertaking does not contain any stipulation for interest, and
assuming that they are liable, that the rate of interest should not be
12% per annum, as adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of

Appeals51 set forth the rules with respect to the manner of computing
legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts,

quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.

II. With regard particularly to an award of interest in the concept of

actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a

sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money,

is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable

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