GUARANTY

See Article 2047 for its definition

Article 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.

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2 TYPES OF CREDIT TRANSACTIONS

1. SECURED TRANSACTIONS
Supported by a collateral or an encumbrance of property,
i.e. Real Estate Mortgage

2. UNSECURED TRANSACTIONS
Those the fulfillment of which is secured by a promise to pay by the debtor or a
3rd party,
i.e. guarantor, surety

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WHAT IS SURETYSHIP?

• It is a relation which exists when one person (obliger) has undertaken an

obligation and another person (surety) is also under a direct and primary
obligation or other duty to a third person who is entitled to but one performance.
• A surety is considered in law as the same party as the debtor. • Prior demand by
the creditor upon principal not required because a creditor's right to proceed
against surety alone exists independently.
• Surety is not exonerated by neglect of creditor to sue principal.

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Can a guarantor bind himself solidarilr with a debtor & still retain his right as
guarantor?
1st View - Yes, in which case, he still retains his character as a guarantor and
all rights inherent in a guarantor by reason of his payment. This case is still
different from suretyship (De Leon}

2nd view - Where a party signs a promissory note as co-maker and binds himself to
be jointly and severally liable with the principal debtor, in case the latter
defaults, such undertaking of said party is deemed to be that of a surety as
insurer of the debt, not a guarantor who warrants the solvency of the debtor.
(Palma res vs. CA}

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KINDS or GUARANTY:

PERSONAL GUARANTY:

It is where a 3rd person guarantees fulfillment of the principal obligation such as

a guarantor or a surety.
REAL GUARANTY

It is where the obligation of the principal debtor is secured by a property

• Real property/Immovable: Real Estate Mortgage; antichresis
• Personal property/Movable: Pledge; chattel mortgage

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What are the different contracts involved ia a contract of loan with a guaranty?

1. Contract of Loan between the creditor and the debtor

2. Contract of Guaranty between the creditor and guarantor
3. Contract of Indemnity between the debtor and guarantor

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WHAT IS THE RIGHT TO INDEMNITY?

It is the right of the guarantor to be indemnified by the debtor if guarantor paid

the debt. Indemnity covers (A. 2066):

• Total amount of the debt

• Interest
• Expenses
• Damages

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WHAT ARE TBE EXCEPTIONS TO INDEMNITY?

1. If guaranty is instituted w/o the knowledge of or against the will of the debtor

2. When payment is made without any intention of being reimbursed

3. Right to demand reimbursement is subject to waiver.,

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CHARACTERISTICS or GUARANTY:

1. Contract is between the Creditor and the Guarantor

2. It is unilateral because only the Guarantor is obligated to the Creditor;
3. It is consensual, nominate and accessory;
4. It is governed by the Statute of Frauds (Article 1403, par. 2, which provides,
"a special promise to answer for the debt or default or miscarriage of another" is
not enforceable if not written.

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DISTINGISH BETWEEN GUARANTY AND SURETY

GUARANTY:
1. Liability is subsidiary
2. A guarantor pays if debtor cannot pay
3. A guarantor is entitled to excussion or exhaustion
4. A guarantor is an insurer of the Debtor's solvency

SURETY
1. Liability is primary and direct
2. A surety pays if debtor does not pay
3. A surety is NOT entitled to excussion or exhaustion
4. A surety is an insurer of the debt

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What is tbe rule if guaranty is entered into without the Debtor's knowledge {.A.
2050)?

1. The guarantor can recover from debtor but only up to the extent that the debtor
is benefited (A. 1236).
2. Whoever pays without the consent of the debtor cannot compel the creditor to
subrogate him in his rights, such as those arising in a mortgage (A. 1237).

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A guaranty can be valid even if tbe principal obligation is (A. 2052):

1. Voidable, i.e. lack of legal capacity of one party; 2. Unenforceable, i.e. when
both parties incapacitated
3. Natural, i.e. performance of a civil obligation after it has expired.

Reason: Law states that it is only when the contract is void that the accessory
contract is likewise void.

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OBLIGATION OF THE GUARANTOR MAY BE LESS BUT NOT MORE TBAN TBE OBLIGATION or TBE
PRINCIPAL DEBTOR (A 2054) EXCEPTIONS:

1. If guarantor delays his payment, he becomes liable for interest;

2. If there exists a penalty clause.

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WHAT ARE TBE QUALlrlCATIONS or A GUARANTOR (A. 2056)?

• Integrity
• Capacity to bind himself
• Has sufficient property to answer for the obligation which he guarantees.

N.B. These qualifications do not have to be present throughout the duration of the
loan. It only needs to be present at the time of the perfection. Subsequent loss
does not exonerate the guarantor.

In case of loss of the qualifications, the creditor's remedy would be to demand for
a different guarantor.

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EFFECTS or GUARANTY:

1. What is the effect of compromise between creditor and debtor? It should benefit
but not prejudice the guarantor.

2. When does the benefit of division arise? If there are several guarantors, they
are entitled to division (A. 2065).
Conditions for division to arise:
• Several guarantors for only one debtor and one debt
• Claimed in a timely manner
• Solidarity is not expressly stipulated

3. Right of contribution of a guarantor who pays ifthere is solidary liability

4. Right to subrogation (A. 2067)

5. Right to be indemnified (A. 2066)

6. Right to proceed against debtor before paying (A 2071)

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WHAT IS SUBROGATION?

1. It transfers to person subrogated the credit with all the rights against the
debtor

2. Results by operation of law thus there is no necessity for guarantor to ask

creditor to expressly assign his rights of actions.

3. It enables guarantor to enforce indemnity

4. May be availed of only by a guarantor who became such with knowledge and consent
of principal debtor

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WBAT IS EXCUSSION OR EXHAUSTION.

It is the benefit of the guarantor of first exhausting the properties of the
principal debtor before he can be proceeded against according to Article 2058.

Requisites:
1. Guarantor sets it up as a defense
2. Guarantor did not pledge or mortgage his own property to the creditor
3. Does not fall under A 2059
4. Complies with A 2060, i.e. must set it up against creditor upon latter's demand
for payment and must point out to the creditor property of the debtor.

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INSTANCES WBEN THERE CAN BE NO EXCUSSION ON TBE PART OF THE GUARANTOR {A. 2059)

1. Guarantor renounced it
2. Guarantor bound himself solidarily
3. In case of insolvency of the debtor proven by an unsatisfied writ of execution.
4. If debtor has absconded
5. If it is presumed that an execution on the property of the debtor would not
result in the satisfaction of the obligation.

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WBAT SHOULD CREDITOR DO TO BOLD

GUARANTOR LIABLE?

1. Exhaust all property of debtor

2. Resort to legal remedies against debtor
3. Prove that debtor is unable to pay, i.e. show unsatisfied writ of execution
4. Notify guarantor; in the absence notice guarantor cannot be made to pay except
when he issues waiver of notice.

N.B. Creditor cannot sue the guarantor directly except when the guarantor is not
entitled to excussion.

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RULES WHEN GUARANTOR'S ACTS AITECTS THE GUARANTY.

1. Guarantor compromises with creditor - Benefits but does not prejudice the
debtor. Guarantor cannot demand from the debtor more than what he paid

2. Guarantor pays without notifying the debtor - Debtor may enforce against the
guarantor all defenses which he could have set up against the creditor. (A. 2068)

3. Guarantor pays before due date - He cannot ask for reimbursement until expiry of
the period (A. 2069)

4. Guarantor pays without notifying debtor and debtor repeats payment - Guarantor's
remedy is to go after the creditor (A. 2070)

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WBAT IS AN ACCELERATION CLAUS

It is a clause in a contract stating that upon the happening of a certain event

like non-payment of any installment due shall make all the balance become
immediately due and payable.

Illustration:

Payable in installments and with acceleration clause and a one month extension is
granted w/o guarantor's consent. Here, the guarantor is released because with the
acceleration clause it were as if the whole amount became due and payable.

In the example given above, if there is no acceleration clause, guarantor is

released but only for that one month installment.

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G.R. Guarantor has no cause of action against debtor until after the former has
paid the obligation.

Exceptions: Article 2071

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GUARANTOR MAY PROCEED AGAINST DEBTOR EVEN IF FORMER HAS NOT THE DEBT WBEN: (A.
2071)

1. When he is sued for payment

2. In case of insolvency of debtor
3. When debtor bound himself to relieve guarantor from the guaranty after a
specified period
4. When debt has become demandable
5. After lapse of 10 years when obligation has no period for its maturity
6. If debtor may abscond
7. If debtor is in danger of becoming insolvent

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DISTINGUISH:

ARTICLE 2071
• This article refers to instances when no payment has yet been made by the
guarantor
• Refers to guarantor's rights before payment
• No right to obtain judgment in his favor
• Article speaks of a preliminary remedy
• Remedy is to exercise two rights which is to be released from the guaranty or
demand security

ARTICLE 2066
• Payment has already been made
• Refers to guarantor's rights after payment
• To seek money judgment would be proper
• Article speaks of a substantive right
• Gives a right to legal action

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What is an acconunodation party?

Person who signed the instruments as maker, drawer, acceptor or indorser, without
receiving value therefore and for the purpose of lending his name to some other
person.

He is liable even if creditor knew that he was only an accommodation party.

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Two causes of Extiaguishmeat

1. DIRECT Where the guaranty is extinguished

2. INDIRECT When principal obligation ends.

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RULES AS TO WBEN GUARANTOR IS RELEASED:

1. When there is novation and guarantor does not consent, guarantor is released

2. When debtor is substituted and guarantor does not consent, guarantor is released

3. Loan is increased without guarantor's consent, guarantor is released

4. If only interest is increased and guarantor does not consent, guarantor is not
liable for the increase but liable for the original interest.

5. Dacion en pago and creditor accepts, guarantor is released (A. 2077)

6. Inaction of the creditor such as when he does not foreclose or does not register
the REM, guarantor is released (A. 2080).
7. Extension is granted without guarantor's consent, guaranty is extinguished (A.
2079)

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Cases

*Vizconde v. IAC, G.R. 74231

FACTS: Perlas called Vizconde and asked her to sell an 8 carat diamond ring on a
commission for P85k Vizconde later returned the ring. Afterwards, Vizconde called
on Perlas and claimed that there was a sure buyer for the ring, Pilar Pagulayan
Pagulayan gave a post-dated check; Perlas and Vizconde signed a receipt (Exh. A)
The check was dishonoured. After 9 days, Pagulayan paid Perlas P5k against the
value of the ring and gave 3 Certificates of Title to guarantee delivery of the
balance of such value (Exh D) Perlas filed a complaint against Pagulayan and
Vizconde for estafa. TC and CA Vizconde and Pagulayan had assumed a joint agency in
favour of Perlas for the sale of the latters ring, which rendered them criminally
liable, upon failure to return the ring or deliver its agreed value, under Art 315,
par 1(b) of the Revised Penal Code SOL GEN disagreed; Vizconde cant be convicted of
estafa based on the Exhibits presented

ISSUE: WON Vizconde was considered as agent of Perlas or mere guarantor of

obligation of Pagulayan?

RULING: Mere guarantor Nothing in the language of the receipt, Exh A, or in the
proven circumstances attending its execution can logically be considered as
evidencing the creation of an agency between Perlas, as principal, and Vizconde as
agent, for the sale of the formers ring. If any agency was established, it was one
between Perlas and Pagulayan only, this being the logical conclusion from the use
of the singular I in said clause, in conjunction with the fact that the part of the
receipt in which the clause appears bears only the signature of Pagulayan. To
warrant anything more than a mere conjecture that the receipt also constituted
Vizconde the agent of Perlas for the same purpose of selling the ring, the cited
clause should at least have used the plural we, or the text of the receipt
containing that clause should also have carried Vizcondes signature. The joint and
several undertaking assumed by Vizconde in a separate writing below the main body
of the receipt, Exhibit A, merely guaranteed the civil obligationPagulayan to pay
Perlas the value of the ring in the event of her (Pagulayans) failure to return
said article.

What is clear from Exh A is that the ring was entrusted to Pagulayan to be sold on
commission; there is no mention therein that it was simultaneously delivered to and
received by Vizconde for the same purpose or, therefore, that Vizconde was
constituted, or agreed to act as, agent jointly with Pagulayan for the sale of the
ring. What Vizconde solely undertook was to guarantee the obligation of Pagulayan
to return the ring or deliver its value; and that guarantee created only a civil
obligation, without more, upon default of the principal. Thus, the theory that by
standing as surety for Pagulayan, Vizconde assumed an obligation more than merely
civil in character, and staked her very liberty on Pagulayan's fidelity to her
trust is utterly unacceptable; it strikes at the very essence of guaranty (or
suretyship) as creating purely civil obligations on the part of the guarantor or
surety. Upon the evidence, Vizconde was a mere guarantor, a solidary one to be
sure, of the obligation assumed by Pagulayan to complainant Perlas for the return
of the latters ring or the delivery of its value. Whatever liability was incurred
by Pagulayan for defaulting on such obligation and this is not inquired into that
of Vizconde consequent upon such default was merely civil, not criminal.

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*Severino and Vergara v. Severino, 56 Phil 185

FACTS: Upon the death of Melecio Severino, who left considerable property, a
litigation ensued between Felicitas, Melecio’s widow, and other heirs of Melecio. A
compromise was effected by which Guillermo, a son of Melecio, took over the
property pertaining to the estate of Melecio at the same time agreeing to pay
P100,000.00 to Felicitas, payable, first, in P40,000.00 cash upon the execution of
the document of compromise and the balance, in three equal installments. Enrique
Echaus affixed his name as guarantor.

Upon Guillermo’s failure to pay the balance, Felicitas instituted action against
Guillermo and Enrique Echaus, the latter contending that he received nothing for
affi xing his signature as guarantor to the contract and that in effect the
contract was lacking in consideration as to him.

It is neither necessary that the guarantor or surety should receive any part of the
benefit, if such there be accruing to his principal. The true consideration of this
contract was the detriment suffered by Felicitas in the former action in dismissing
that proceeding and it is immaterial that no benefi t may have accrued either to
the principal (Guillermo) or his guarantor (Enrique Echaus).

ISSUE: WON there a consideration for the guaranty?

RULING:

(1) A guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. The compromise and
dismissal of a lawsuit is recognized in law as a valuable consideration; and the
dismissal of the action which Felicitas instituted against Guillermo was an
adequate consideration to support the promise on the part of Guillermo to pay the
sums stipulated in the contract subject of the action.

(2) It is neither necessary that the guarantor or surety should receive any part of
the benefi t, if such there be accruing to his principal. The true consideration of
this contract was the detriment suffered by Felicitas in the former action in
dismissing that proceeding and it is immaterial that no benefi t may have accrued
either to the principal (Guillermo) or his guarantor (Enrique Echaus).

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*Inciong v. CA, 257 SCRA 578

FACTS: Petitioner signed a promissory note with two others holding themselves
jointly and
severally liable to respondent bank. When petitioner and another obligor failed to
respond to respondent bank's demand for payment, an action for collection of money
was filed against all three promisors.

ISSUE: WON petitioner was a guarantor.

RULING:

NO. Petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the promissory note which
states:

Ninety one (91) days after date, for value received, 1/We, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City
of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,ooo.oo) Pesos,
Philippine Currency, together with interest ... at the rate of SIXTEEN (16) per
cent per annum until fully paid.

Because the promissory note expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of them may be proceeded against
for the entire obligation. The choice is left to the solidary creditor to determine
against whom he will enforce collection.

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Lim v. SBC, G.R. 188539

FACTS: Petitioner executed a Continuing Suretyship in favor of respondent to secure

ny and all types of credit accommodation that may be granted by the bank hereinto
and hereinafterin favor of Raul Arroyo for the amount of P2,000,000.00 which is
covered by a Credit Agreement/Promissory Note. The promissory note contained a
stipulation that the interest on the loan shall be 19% per annum, compounded
monthly, for the first 30 days from the date thereof, and if the note is not fully
paid when due, an additional penalty of 2% per month of the total outstanding
principal and interest due and unpaid, shall be imposed.

Debtor Raul Arroyo defaulted on his loan obligation. Petitioner, thereafter,

received a Notice of Final Demand dated August 2, 2001, informing him that he was
liable to pay the loan obtained by Raul and Edwina Arroyo, including the interests
and penalty fees amounting to P7,703,185.54, and demanding payment thereof.
Petitioner failed to comply with said demand, hence, respondent filed a complaint
for collection of sum of money against him and the Arroyo spouses. The Arroyo
spouses can no longer be located and summons was not served on them, hence, only
the petitioner actively participated in the case.

The Regional Trial Court of Davao (RTC) rendered judgment against petitioner. Upon
appeal to the CA, the Court affirmed the decision of the RTC. Hence, the present
petition for review on certiorari.
ISSUE: May petitioner validly be held liable for the principal debtor's loan
obtained six months after the execution of the Continuing Suretyship?

HELD: A contract of suretyship is an agreement whereby a party, called the surety,

guarantees the performance by another party, called the principal or obligor, of an
obligation or undertaking in favor of another party, called the obligee. The case
of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, G.R. No.
147561 citing Garcia v. Court of Appeals, enunciated that although the contract of
a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the
principal.

Clear and unequivocal are the terms of the Continuing Suretyship executed by
petitioner. It states that petitioner, as surety, shall, without need for any
notice, demand or any other act or deed, immediately become liable and shall pay
all credit accommodations extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings, amendments or novations thereof,
as well as (i) all obligations of the Debtor presently or hereafter owing to the
Bank, as appears in the accounts, books and records of the Bank, whether direct or
indirect, and (ii) any and all expenses which the Bank may incur in enforcing any
of its rights, powers and remedies under the Credit Instruments as defined
hereinbelow.

The foregoing stipulations are valid and legal and, therefore, constitute as law
between the parties. Under Article 2053 of the Civil Code, guaranty may also be
given as security for future debts, the amount of which is not yet known; x x
x.Thus, petitioner is unequivocally bound by the terms of the Continuing
Suretyship. There can be no cavil then that petitioner is liable for the principal
of the loan, together with the interest and penalties due thereon, even if said
loan was obtained by the principal debtor even after the date of execution of the
Continuing Suretyship. PARTIALLY GRANTED.

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*Dino v. CA, 216 SCRA 91

FACTS: In 1977, Uy Tiam Enterprises and Freight Services (UTEFS). thru its
representative Jy Tiam. applied for and obtained credit accommodations from
Metrobank in the sum Of php700,OOO. T h's was secured by Continuing Suretyships
separately executed by petitioners Norberto Uy (who agreed to pay Phpaoo,ooo) and
Jacinto Dit,o (who bound himself liable up to Phpeoo,000). uy Tiam paid the
obligation under this letter Of credit in 1977. UTEFS obtained another credit
accommodation in 1978, which was likewise settled before he applied and obtained
another in 1979 in the sum of Php815,600. This sum covered UTEFS• purchase Of
fertilizers from Planters Producst. Uy and Dino did not sign the application for
this credit and were not asked to execute suretyship or guarantee. JTEFS executed a
trust receipt whereby it agreed to delver to Metrobank the goods in the event of
nonsale, and if sold, the proceeds will be delrvered to Metrobank, However. UTEFS
did not comply With its obligatlon. As a result, Metrobank demanded payment from
UTEFS and the sureties, Uy & Diffo. The sureties refused to pay on the ground that
the obligation for which they executed the continuing suretyship agreement has been
patd. R TC ruled in favor of the petitioners, CA affirmed.

ISSUE: WON petitioners are liable for payment Of the 1979 transactlon under the
continuing suretyshlp agreement they executed in 1977. Assuming that they are, what
is the extent of ther liability?

RULING: The Supreme Court held that Uy & Diho are liable. The agreement they
executed in 1977 is a contnuing suretyship, one which IS not "rnted to a sngle
transaction but which contemplates a succession of liabilities, for which. as they
accrue, the guarantor becomes liable. The agreement that petitioners signed
expressly provided that it IS a continuing guaranty and shall be in full force and
effect until written notice to the bank that it has been revoked by the surety. As
to the Ssue, petitioners are only liable up to the maximum limit fixed in the
continuing suretyshlp agreements (Php800,OOO for Dino and Php300,OOO for Jy). The
law is clear that a guarantor may bind himself for less, but not for more than the
principal debtor. both as regards the amount and the onerous nature of the
conditions (Art 2054). CA decision ordering petitioners to pay P2.297.883.68 which
represents the amount due Inclusive Of interest and charges, is modified.

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*Fortune Motors Corp. v. CA, GR 112191, 7 February 1997

FACTS: Petitioners herein executed an undated “Surety Undertaking” where they

“absolutely, unconditionally and solidarily guarantee the “full, faithful and
prompt performance, payment and discharge of any and all obligations and
agreements” of Fortune Motor (Phils) Corporation to Respondent and its affiliated
and subsidiary companies. The following year, Petitioner Fortune, Respondent
Filinvest and Canlubang Automotive Resources Corporation (“CARCO”) entered into an
“Automotive Wholesale Financing Agreement” wherein CARCO will deliver motor
vehicles to Fortune for the purpose of resale in the latter’s ordinary course of
business; Fortune, in turn, will execute trust receipts over said vehicles and
accept drafts drawn by CARCO, which will discount the same together with the trust
receipts and invoices and assign them in favor of Respondent Filinvest, which will
pay the motor vehicles for Fortune. Under the same agreement, Petitioner Fortune,
as trustee of the motor vehicles, was to report and remit proceeds of any sale for
cash or on terms to Respondent Filinvest immediately without necessity of demand.

Several vehicles were delivered by CARCO to Petitioner Fortune and trust receipts
covered by demand drafts and deeds of assignment were executed in favor of
Respondent Filinvest. But when the demand drafts matured, not all the proceeds of
the vehicles which petitioner had sold were remitted and likewise failed to turn
over several unsold vehicles covered by the trust receipts. ! ! ! ! Thus,
Respondent Filinvest through counsel, sent a demand letter to petitioner fortune.
Despite said demands, the amount was still not paid. Hence, respondent filed in the
RTC of Manila a complaint for a sum of money with preliminary attachment against
the petitioners. The trial court declared that there was no factual issue to be
resolved except for the correct balance of defendant’s account with Filinvest as
agreed upon by the parties during pre-trial.! ! ! Filinvest presented testimonial
and documentary evidence but defendants, instead of presenting their evidence filed
a “motion for judgement on demurrer to evidence” anchored principally on the ground
that the Surety Undertakings were null and void because at the time they were
executed, there was no principal obligation existing. The trial court denied the
motion and scheduled the case for reception of defendant’s evidence, however,
defendats failed to present their evidence prompting the court to deem them have
waived their right to present evidence

ISSUE: WON the Court of Appeals erred when it declared that there was no novation?

RULING: NO. On the matter of novation, this has already been ruled upon when this
Court denied defendants’ Motion to dismiss on the argument that what happened was
really an assignment of credit, and not a novation of contract, which does not
require the consent of the debtors. The fact of knowledge is enough. Besides, as
explained by the plaintiff, the mother or the principal contract was the Financing
Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds of
assignment were only collaterals or accidental modifications which do not
extinguish the original contract by way of novation. This proposition holds true
even if the subsequent agreement would provide for more onerous terms for, at any
rate, it is the principal or mother contract that is to be followed. When the
changes refer to secondary agreements and not to the object or principal conditions
of the contract, there is no novation; such changes will produce modifications of
incidental facts, but will not extinguish the original obligation.

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*PNB vs CA, 198 SCRA 767

FACTS: January 15, 1962, one Augusto Lim deposited in his current account with the
PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of
P57,415.00, drawn against the PNB; that, following an established banking practice
in the Philippines, the check was, on the same date, forwarded, for clearing,
through the Central Bank, to the PNB, which did not return said check the next day,
or at any other time, but retained it and paid its amount to the PCIB, as well as
debited it against the account of the GSIS in the PNB; that, subsequently, or on
January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited
to the latter’s account, for the reason that the signatures of its officers on the
check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded
from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the
present action against the PCIB, which was dismissed by the Court of First Instance
of Manila, whose decision was, in turn, affirmed by the Court of Appeals, hence
this case.
ISSUE: WON the lower court erred in not finding that the PCIB had been guilty of
negligence in not discovering that the check was forged.

RULING: No, Assuming that there had been such negligence on the part of the PCIB,
it is undeniable, however, that the PNB has, also, been negligent, with the
particularity that the PNB had been guilty of a greater degree of negligence,
because it had a previous and formal notice from the GSIS that the check had been
lost, with the request that payment thereof be stopped. Just as important, if not
more important and decisive, is the fact that the PNB’s negligence was the main or
proximate cause for the corresponding loss.

It is a well-settled maxim of law and equity that when one of two (2) innocent
persons must suffer by the wrongful act of a third person, the loss must be borne
by the one whose negligence was the proximate cause of the loss or who put it into
the power of the third person to perpetrate the wrong.

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*Security Bank and Trust Company v. Mar Tierra Corp, 508

SCRA 419

FACTS:
Respondent Mar Tierra Corporation, through its president, Wilfrido C. Martinez,
applied for a P12,000,000 credit accommodation with petitioner Security Bank and
Trust Company. Petitioner approved the application and entered into a credit line
agreement with respondent corporation. It was secured by an indemnity agreement
executed by individual respondents Wilfrido C. Martinez, Miguel J. Lacson and
Ricardo A. Lopa who bound themselves jointly and severally with respondent
corporation for the payment of the loan. Respondent corporation was not able to pay
all its debt balance as it suffered business reversals, eventually ceasing
operations. Petitioner filed a complaint against respondent corp and individual
respondents.

RTC issued a writ of attachment on all real and personal properties of respondent
corporation and individual respondent Martinez including the conjugal house and lot
of the spouses but it found that it did not redound to the benefit of his family,
hence, it ordered the lifting of the attachment on the conjugal house and lot of
the spouses Martinez. Petitioner appealed to CA. It affirmed RTC decision.
Petitioned to SC.

ISSUE: WON the conjugal partnership may be held liable for an indemnity agreement
entered into by the husband to accommodate a third party

RULING: No. SC upheld the CA. Under Article 161(1) of the Civil Code, the conjugal
partnership is liable for “all debts and obligations contracted by the husband for
the benefit of the conjugal partnership.”

The court ruled in Luzon Surety Co., Inc. v. de Garcia that, in acting as a
guarantor or surety for another, the husband does not act for the benefit of the
conjugal partnership as the benefit is clearly intended for a third party. In Ayala
Investment and Development Corporation v. Court of Appeals, we ruled that, if the
husband himself is the principal obligor in the contract, i.e., the direct
recipient of the money and services to be used in or for his own business or
profession, the transaction falls within the term “obligations for the benefit of
the conjugal partnership.” In other words, where the husband contracts an
obligation on behalf of the family business, there is a legal presumption that such
obligation redounds to the benefit of the conjugal partnership.

On the other hand, if the money or services are given to another person or entity
and the husband acted only as a surety or guarantor, the transaction cannot by
itself be deemed an obligation for the benefit of the conjugal partnership. It is
for the benefit of the principal debtor and not for the surety or his family.

In the case at bar, the principal contract, the credit line agreement between
petitioner and respondent corporation, was solely for the benefit of the latter.
The accessory contract (the indemnity agreement) under which individual respondent
Martinez assumed the obligation of a surety for respondent corporation was
similarly for the latter’s benefit. Petitioner had the burden of proving that the
conjugal partnership of the spouses Martinez benefited from the transaction. It
failed to discharge that burden.

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*Baylon v. CA, 312 SCRA 502

FACTS: Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is the
comanager of her husband in PLDT. Baylon invited Leonila to lend Rosita money for
her business as contractor and in return pay the amount and a monthly interest rate
of 5%. Persuaded by Baylon’s assurances that the business was stable and the high
interest rate Leonila lent Rosita P 150,000. Rosita on the other hand issued and
signed a promissory note acknowledging the receipt of P 150,000 payable on August
22, 1987. Baylon signed the promissory note as “guarantor”. Later on, Rosita failed
to pay the said amount forcing Leonila to file a case for collection of sum of
money against Rosita and Baylon. However summons were never served to Rosita.
Baylon denied having guaranteed the payment of the promissory note and claims that
the money given to Rosita was not a loan but an investment and that assuming that
the loan was guaranteed Leonila has not exhausted the property of Rosita nor
resorted to all legal remedies against Rosita as required by law. Trial court ruled
in favor of Leonila making Baylon liable for the said amount. This decision was
affirmed by the C.A.

ISSUE: WON Baylon should be held liable for the amount of the promissory note.

RULING: No. Rationale: Petitioner is invoking the benefit of excussion pursuant to

article 2058 of the Civil Code, which provides that — The guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies against the debtor. It is
axiomatic that the liability of the guarantor is only subsidiary. All the
properties of the principal debtor must first be exhausted before his own is levied
upon.

Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, "for
obviously the 'exhaustion of the principal's property' — the benefit of which the
guarantor claims — cannot even begin to take place before judgment has been
obtained." This rule is embodied in article 2062 of the Civil Code which provides
that the action brought by the creditor must be filed against the principal debtor
alone, except in some instances when the action may be brought against both the
debtor and the principal debtor.

Under the circumstances availing in the present case, the court held that it is
premature to even determine whether or not petitioner is liable as a guarantor and
whether she is entitled to the concomitant rights as such, like the benefit of
excussion, since the most basic prerequisite is wanting — that is, no judgment was
first obtained against the principal debtor Rosita B. Luanzon. It is useless to
speak of a guarantor when no debtor has been held liable for the obligation which
is allegedly secured by such guarantee. Although the principal debtor Luanzon was
impleaded as defendant, there is nothing in the records to show that summons was
served upon her. Thus, the trial court never even acquired jurisdiction over the
principal debtor. The court held that private respondent must first obtain a
judgment against the principal debtor before assuming to run after the alleged
guarantor.

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*General Indemnity Co., Inc. v. Alvarez, 100 Phil 1059

Facts: Estanislao Alvarez took out a loan from the Philippine National Bank which
was guaranteed by an indemnity bond issued by General Indemnity Co., Inc., for
which Alvarez, as counter-guaranty, executed a mortgage on his share in a parcel of
land. Alvarez failed to pay, and PNB deducted the amount of his loan from the
deposit account of General Indemnity Co, Inc. General Indemnity filed this case to
recover its payment of Alvarez’s debt. Alvarez denied having knowledge of any
payment made by the plaintiff. The court, in a summary judgment, ruled in favor of
the plaintiff.

ISSUE: WON the guarantor may file a collection action against the principal debtor
even before the guarantor has paid the debt.

RULING: Held: No. Remanded. Ratio: There is merit in appellant's contention that
there exists a controversy in the complaint and answer as to whether or not
appellee had actually paid appellant's obligation to the Philippine National Bank,
a matter which should be decided in the affirmative before appellee, as surety, can
claim reimbursement from appellant, the principal debtor. The affidavit of
plaintiff's comptroller Pedro R Mendiola, supporting the motion for summary
judgment, simply relates to the amount of the loan in question.

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*Zobel Inc. v. CA, GR 113931, 06 May 1998

FACT: Private 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) to finance the purchase of two maritime barges and one
tugboat which would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses will execute a chattel mortgage
over the three vessels to be acquired and that a continuing guarantee be executed
by Ayala International Philippines, Inc., now petitioner E.Zobel, Inc. in favor of
SOLIDBANK. Respondent spouses defaulted in the payment of the entire obligation
upon maturity. Hence, SOLIDBANK filed a complaint for sum of money with a prayer
for a writ of preliminary attachment against respondent spouses and petitioner.
Petitioner moved for dismissal. The trial court denied the motion to dismiss and
required petitioner to file an answer. Petitioner assailed the trial court’s order.
The appellate court dismissed the petition.

ISSUE: Whether or not petitioner E. Zobel Inc., under the continuing guaranty
obligated itself to SOLIDBANK as a guarantor or a surety.

RULING: Petitioner under the continuing guaranty obligated itself to SOLIDBANK as a

surety. 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, it is the guarantor's own separate undertaking, in
which the principal does not join while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay and is usually bound with
his principal by the same instrument, executed at the same time, and on the same
consideration. The contract clearly discloses 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. The use of the term "guarantee" does not ipsofacto 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. The trial court has observed that the interpretation of a contract is
not limited to the title alone but to the contents and intention of the parties.

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*Carodan v. CA, G.R. No. 210542, February 24, 2016

FACTS: China Bank) instituted a Complaint for a sum of money against Barbara Perez
(Barbara), Rebecca Perez-Viloria (Rebecca), Rosalina Carodan (Rosalina) and
Madeline Carodan (Madeline). China Bank claimed that, Barbara and Rebecca, for
value received, executed and delivered Promissory Note No. TLS98/0076 to respondent
bank under which they promised therein to jointly and severally pay the amount of
P2.8 million. China Bank further claimed that as security for the payment of the
loan, Barbara, Rebecca and Rosalina also executed a Real Estate Mortgage over a
property registered in the name of Rosalina Respondent alleged that a Surety
Agreement in favor of China Bank as creditor was also executed by Barbara and
Rebecca as principals and Rosalina and her niece Madeline as sureties. Barbara and
Rebecca failed to pay their loan obligation despite repeated demands from China
Bank. China Bank alleged that the issue of whether Rosalina obtained material
benefit from the loan was not material, since she had voluntarily and willingly
encumbered her property, Rosalina was equally liable as principal debtor to pay the
deficiency obligation in the sum of P365,345.77

ISSUE: WON Rosalina is liable as an accommodation mortgagor.

RULING: Yes. The Court finds that Rosalina is liable as an accommodation mortgagor
and also as a surety. In Belo v. PNB, an accommodation mortgage is not necessarily
void simply because the accommodation mortgagor did not benefit from the same. The
validity of an accommodation mo1igage is allowed under Article 2085 of the New
Civil Code which provides that (t)hird persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property. An
accommodation mortgagor, ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his designation as such. Art. 2047. By guaranty
a person, called a 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.

When Rosalina affixed her signature to the Real Estate Mortgage as mortgagor and to
the Surety Agreement as surety which covered the loan transaction represented by
the Promissory Note, she thereby bound herself to be liable to China Bank in case
the principal debtors, Barbara and Rebecca, failed to pay. She consequently became
liable to respondent bank for the payment of the debt of Barbara and Rebecca when
the latter two actually did not pay.