FIRST DIVISION

[G.R. NO. 146511 : September 5, 2007]

TOMAS ANG, Petitioner, v. ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, Respondents.

DECISION

AZCUNA, J.:

This Petition for Certiorari under Rule 45 of the Rules on Civil Procedure seeks to review the October
9, 2000 Decision1and December 26, 2000 Resolution2 of the Court of Appeals in CA-G.R. CV No.
53413 which reversed and set aside the January 5, 1996 Decision3 of the Regional Trial Court,
Branch 16, Davao City, in Civil Case No. 20,299-90, dismissing the complaint filed by respondents
for collection of a sum of money.

On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and
now known as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng
Liong and petitioner Tomas Ang for the two (2) promissory notes that they executed as principal
debtor and co-maker, respectively.

In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the defendants obtained
a loan of P50,000, evidenced by a promissory note bearing PN-No. DVO-78-382, and P30,000,
evidenced by a promissory note bearing PN-No. DVO-78-390. As agreed, the loan would be payable,
jointly and severally, on January 31, 1979 and December 8, 1978, respectively. In addition,
subsequent amendments5 to the promissory notes as well as the disclosure statements6stipulated
that the loan would earn 14% interest rate per annum, 2% service charge per annum, 1% penalty
charge per month from due date until fully paid, and attorney's fees equivalent to 20% of the
outstanding obligation.

Despite repeated demands for payment, the latest of which were on September 13, 1988 and
September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank
claimed that the defendants failed and refused to settle their obligation, resulting in a total
indebtedness of P539,638.96 as of July 31, 1990, broken down as follows:

PN-No. DVO-78-382 PN-No. DVO-78-390

Outstanding P50,000.00 P30,000.00
Balance
Add Past due charges for Past due charges for
4,199 days (from 01-31- 4,253 days (from 12-8-
79 to 07-31-90) 78 to 07-31-90)
14% Interest P203,538.98 P125,334.41
2% Service Charge P11,663.89 P7,088.34
12% Overdue P69,983.34 P42,530.00
Charge
Total P285,186.21 P174,952.75
Less: Charges paid P500.00 None
Amount Due P334,686.21 P204,952.75

In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan amounting to P80,000.
He pleaded though that the bank "be ordered to submit a more reasonable computation"
considering that there had been "no correct and reasonable statement of account" sent to him by
the bank, which was allegedly collecting excessive interest, penalty charges, and attorney's fees
despite knowledge that his business was destroyed by fire, hence, he had no source of income for
several years.

For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim.8 He
interposed the affirmative defenses that: the bank is not the real party in interest as it is not the
holder of the promissory notes, much less a holder for value or a holder in due course; the bank
knew that he did not receive any valuable consideration for affixing his signatures on the notes but
merely lent his name as an accommodation party; he accepted the promissory notes in blank, with
only the printed provisions and the signature of Antonio Ang Eng Liong appearing therein; it was the
bank which completed the notes upon the orders, instructions, or representations of his co-
defendant; PN-No. DVO-78-382 was completed in excess of or contrary to the authority given by
him to his co-defendant who represented that he would only borrow P30,000 from the bank; his
signature in PN-No. DVO-78-390 was procured through fraudulent means when his co-defendant
claimed that his first loan did not push through; the promissory notes did not indicate in what
capacity he was intended to be bound; the bank granted his co-defendant successive extensions of
time within which to pay, without his (Tomas Ang) knowledge and consent; the bank imposed new
and additional stipulations on interest, penalties, services charges and attorney's fees more onerous
than the terms of the notes, without his knowledge and consent, in the absence of legal and factual
basis and in violation of the Usury Law; the bank caused the inclusion in the promissory notes of
stipulations such as waiver of presentment for payment and notice of dishonor which are against
public policy; and the notes had been impaired since they were never presented for payment and
demands were made only several years after they fell due when his co-defendant could no longer
pay them.

Regarding his counterclaim, Tomas Ang argued that by reason of the bank's acts or omissions, it
should be held liable for the amount of P50,000 for attorney's fees and expenses of litigation.
Furthermore, on his cross-claim against Antonio Ang Eng Liong, he averred that he should be
reimbursed by his co-defendant any and all sums that he may be adjudged liable to pay,
plus P30,000, P20,000 and P50,000 for moral and exemplary damages, and attorney's fees,
respectively.

In its Reply,9 respondent Bank countered that it is the real party in interest and is the holder of the
notes since the Associated Banking Corporation and Associated Citizens Bank are its predecessors-
in-interest. The fact that Tomas Ang never received any moneys in consideration of the two (2)
loans and that such was known to the bank are immaterial because, as an accommodation maker,
he is considered as a solidary debtor who is primarily liable for the payment of the promissory
notes. Citing Section 29 of the Negotiable Instruments Law (NIL), the bank posited that absence or
failure of consideration is not a matter of defense; neither is the fact that the holder knew him to be
only an accommodation party.

Respondent Bank likewise retorted that the promissory notes were completely filled up at the time
of their delivery. Assuming that such was not the case, Sec. 14 of the NIL provides that the bank
has the prima facieauthority to complete the blank form. Moreover, it is presumed that one who has
signed as a maker acted with care and had signed the document with full knowledge of its content.
The bank noted that Tomas Ang is a prominent businessman in Davao City who has been engaged
in the auto parts business for several years, hence, certainly he is not so naïve as to sign the notes
without knowing or bothering to verify the amounts of the loans covered by them. Further, he is
already in estoppel since despite receipt of several demand letters there was not a single protest
raised by him that he signed for only one note in the amount of P30,000.

It was denied by the bank that there were extensions of time for payment accorded to Antonio Ang
Eng Liong. Granting that such were the case, it said that the same would not relieve Tomas Ang
from liability as he would still be liable for the whole obligation less the share of his co-debtor who
received the extended term.

The bank also asserted that there were no additional or new stipulations imposed other than those
agreed upon. The penalty charge, service charge, and attorney's fees were reflected in the
amendments to the promissory notes and disclosure statements. Reference to the Usury Law was
misplaced as usury is legally non-existent; at present, interest can be charged depending on the
agreement of the lender and the borrower.

Lastly, the bank contended that the provisions on presentment for payment and notice of dishonor
were expressly waived by Tomas Ang and that such waiver is not against public policy pursuant to
Sections 82 (c) and 109 of the NIL. In fact, there is even no necessity therefor since being a
solidary debtor he is absolutely required to pay and primarily liable on both promissory notes.

On October 19, 1990, the trial court issued a preliminary pre-trial order directing the parties to
submit their respective pre-trial guide.10 When Antonio Ang Eng Liong failed to submit his brief, the
bank filed an ex-parte motion to declare him in default.11 Per Order of November 23, 1990, the
court granted the motion and set the ex-parte hearing for the presentation of the bank's
evidence.12 Despite Tomas Ang's motion13 to modify the Order so as to exclude or cancel the ex-
parte hearing based on then Sec. 4, Rule 18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the
Revised Rules on Civil Procedure), the hearing nonetheless proceeded.14

Eventually, a decision15 was rendered by the trial court on February 21, 1991. For his supposed bad
faith and obstinate refusal despite several demands from the bank, Antonio Ang Eng Liong was
ordered to pay the principal amount of P80,000 plus 14% interest per annum and 2% service
charge per annum. The overdue penalty charge and attorney's fees were, however, reduced for
being excessive, thus:

WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in favor of
plaintiff, ordering the former to pay the latter:

On the first cause of action:

1) the amount of P50,000.00 representing the principal obligation with 14% interest per annum
from June 27, 1983 with 2% service charge and 6% overdue penalty charges per annum until fully
paid;

2) P11,663.89 as accrued service charge; and cralawlibrary

3) P34,991.67 as accrued overdue penalty charge.

On the second cause of action:

1) the amount of P50,000.00 (sic) representing the principal account with 14% interest from June
27, 1983 with 2% service charge and 6% overdue penalty charges per annum until fully paid;

2) P7,088.34 representing accrued service charge;

3) P21,265.00 as accrued overdue penalty charge;

4) the amount of P10,000.00 as attorney's fees; and cralawlibrary

5) the amount of P620.00 as litigation expenses and to pay the costs.

SO ORDERED.16

The decision became final and executory as no appeal was taken therefrom. Upon the bank's ex-
parte motion, the court accordingly issued a writ of execution on April 5, 1991.17

Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas
Ang,18 who, in turn, filed a Motion to Dismiss19 on the ground of lack of jurisdiction over the case in
view of the alleged finality of the February 21, 1991 Decision. He contended that Sec. 4, Rule 18 of
the old Rules sanctions only one judgment in case of several defendants, one of whom is declared in
default. Moreover, in his Supplemental Motion to Dismiss,20 Tomas Ang maintained that he is
released from his obligation as a solidary guarantor and accommodation party because, by the
bank's actions, he is now precluded from asserting his cross-claim against Antonio Ang Eng Liong,
upon whom a final and executory judgment had already been issued.

The court denied the motion as well as the motion for reconsideration thereon.21 Tomas Ang
subsequently filed a Petition for Certiorari and prohibition before this Court, which, however,
resolved to refer the same to the Court of Appeals.22 In accordance with the prayer of Tomas Ang,
the appellate court promulgated its Decision on January 29, 1992 in CA G.R. SP No. 26332, which
annulled and set aside the portion of the Order dated November 23, 1990 setting the ex-
parte presentation of the bank's evidence against Antonio Ang Eng Liong, the Decision dated
February 21, 1991 rendered against him based on such evidence, and the Writ of Execution issued
on April 5, 1991.23

Trial then ensued between the bank and Tomas Ang. Upon the latter's motion during the pre-trial
conference, Antonio Ang Eng Liong was again declared in default for his failure to answer the cross-
claim within the reglementary period.24

When Tomas Ang was about to present evidence in his behalf, he filed a Motion for Production of
Documents,25reasoning:

xxx

2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a] need for him
to examine original records in the custody and possession of plaintiff, viz:

A. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3, 1978[;]

b. original of Disclosure Statement in reference to PN # DVO-78-382;

c. original of PN # DVO-78-390 dated October 9, 1978;

d. original of Disclosure Statement in reference to PN # DVO-78-390;

e. Statement or Record of Account with the Associated Banking Corporation or its successor, of
Antonio Ang in CA No. 470 (cf. Exh. O) including bank records, withdrawal slips, notices, other
papers and relevant dates relative to the overdraft of Antonio Eng Liong in CA No. 470;
f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos. DVO-78-382 and
DVO-78-390 (supra);

g. Other supporting papers and documents submitted by Antonio Ang Eng Liong relative to his loan
application vis - à-vis PN. Nos. DVO-78-382 and DVO-78-390 such as financial statements, income
tax returns, etc. as required by the Central Bank or bank rules and regulations.

3. That the above matters are very material to the defenses of defendant Tomas Ang, viz:

- the bank is not a holder in due course when it accepted the [PNs] in blank.

- The real borrower is Antonio Ang Eng Liong which fact is known to the bank.

- That the PAYEE not being a holder in due course and knowing that defendant Tomas Ang is merely
an accommodation party, the latter may raise against such payee or holder or successor-in-interest
(of the notes) PERSONAL and EQUITABLE DEFENSES such as FRAUD in INDUCEMENT, DISCHARGE
ON NOTE, Application of [Articles] 2079, 2080 and 1249 of the Civil Code, NEGLIGENCE in delaying
collection despite Eng Liong's OVERDRAFT in C.A. No. 470, etc.26

In its Order dated May 16, 1994,27 the court denied the motion stating that the promissory notes
and the disclosure statements have already been shown to and inspected by Tomas Ang during the
trial, as in fact he has already copies of the same; the Statements or Records of Account of Antonio
Ang Eng Liong in CA No. 470, relative to his overdraft, are immaterial since, pursuant to the
previous ruling of the court, he is being sued for the notes and not for the overdraft which is
personal to Antonio Ang Eng Liong; and besides its non-existence in the bank's records, there would
be legal obstacle for the production and inspection of the income tax return of Antonio Ang Eng
Liong if done without his consent.

When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang filed a Petition
for Certiorari and prohibition with application for preliminary injunction and restraining order before
the Court of Appeals docketed as CA G.R. SP No. 34840.28 On August 17, 1994, however, the Court
of Appeals denied the issuance of a Temporary Restraining Order.29

Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have waived his right
to present evidence for failure to appear during the pendency of his petition before the Court of
Appeals, the trial court decided to continue with the hearing of the case.30

After the trial, Tomas Ang offered in evidence several documents, which included a copy of the
Trust Agreement between the Republic of the Philippines and the Asset Privatization Trust, as
certified by the notary public, and news clippings from the Manila Bulletin dated May 18, 1994 and
May 30, 1994.31 All the documentary exhibits were admitted for failure of the bank to submit its
comment to the formal offer.32 Thereafter, Tomas Ang elected to withdraw his petition in CA G.R. SP
No. 34840 before the Court of Appeals, which was then granted.33

On January 5, 1996, the trial court rendered judgment against the bank, dismissing the complaint
for lack of cause of action.34 It held that:

Exh. "9" and its [sub-markings], the Trust Agreement dated 27 February 1987 for the defense
shows that: the Associated Bank as of June 30, 1986 is one of DBP's or Development Bank of the
[Philippines'] non-performing accounts for transfer; on February 27, 1987 through Deeds of
Transfer executed by and between the Philippine National Bank and Development Bank of the
Philippines and the National Government, both financial institutions assigned, transferred and
conveyed their non-performing assets to the National Government; the National Government in turn
and as TRUSTOR, transferred, conveyed and assigned by way of trust unto the Asset Privatization
Trust said non-performing assets, [which] took title to and possession of, [to] conserve,
provisionally manage and dispose[,] of said assets identified for privatization or disposition; one of
the powers and duties of the APT with respect to trust properties consisting of receivables is to
handle the administration, collection and enforcement of the receivables; to bring suit to enforce
payment of the obligations or any installment thereof or to settle or compromise any of such
obligations, or any other claim or demand which the government may have against any person or
persons[.]

The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. "9-A", "9-B", "9-C",
and "9-D", show that the Monetary Board of the Bangko Sentral ng Pilipinas approved the
rehabilitation plan of the Associated Bank. One main feature of the rehabilitation plan included the
financial assistance for the bank by the Philippine Deposit Insurance Corporation (PDIC) by way of
the purchase of AB Assets worth P1.3945 billion subject to a buy-back arrangement over a 10 year
period. The PDIC had approved of the rehab scheme, which included the purchase of AB's bad loans
worth P1.86 at 25% discount. This will then be paid by AB within a 10-year period plus a yield
comparable to the prevailing market rates x x x.
Based then on the evidence presented by the defendant Tomas Ang, it would readily appear that at
the time this suit for Sum of Money was filed which was on August [28], 1990, the notes were held
by the Asset Privatization Trust by virtue of the Deeds of Transfer and Trust Agreement, which was
empowered to bring suit to enforce payment of the obligations. Consequently, defendant Tomas
Ang has sufficiently established that plaintiff at the time this suit was filed was not the holder of the
notes to warrant the dismissal of the complaint.35

Respondent Bank then elevated the case to the Court of Appeals. In the appellant's brief
captioned, "ASSOCIATED BANK, Plaintiff-Appellant v. ANTONIO ANG ENG LIONG and TOMAS ANG,
Defendants, TOMAS ANG, Defendant-Appellee," the following errors were alleged:

I.

THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG LIONG AND
DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR UNPAID LOANS
DESPITE THE LATTER'S DOCUMENTARY EXHIBITS PROVING THE SAID OBLIGATIONS.

II.

THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANT'S COMPLAINT ON THE BASIS OF

NEWSPAPER CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN CHARACTER AND IMPROPER FOR
JUDICIAL NOTICE.36

The bank stressed that it has established the causes of action outlined in its Complaint by a
preponderance of evidence. As regards the Deed of Transfer and Trust Agreement, it contended that
the same were never authenticated by any witness in the course of the trial; the Agreement, which
was not even legible, did not mention the promissory notes subject of the Complaint; the bank is
not a party to the Agreement, which showed that it was between the Government of the Philippines,
acting through the Committee on Privatization represented by the Secretary of Finance as trustor
and the Asset Privatization Trust, which was created by virtue of Proclamation No. 50; and the
Agreement did not reflect the signatures of the contracting parties. Lastly, the bank averred that
the news items appearing in the Manila Bulletin could not be the subject of judicial notice since they
were completely hearsay in character.37

On October 9, 2000, the Court of Appeals reversed and set aside the trial court's ruling. The
dispositive portion of the Decision38 reads:

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao City, Branch
16, in Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE and another one entered
ordering defendant-appellee Tomas Ang to pay plaintiff-appellant Associated Bank the following:

1. P50,000.00 representing the principal amount of the loan under PN-No. DVO-78-382 plus 14%
interest thereon per annum computed from January 31, 1979 until the full amount thereof is paid;

2. P30,000.00 representing the principal amount of the loan under PN-No. DVO-78-390 plus 14%
interest thereon per annum computed from December 8, 1978 until the full amount thereof is paid;

All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis. Defendant-
appellee's counterclaim is likewise DISMISSED for lack of legal and factual bases.

No pronouncement as to costs.

SO ORDERED.39

The appellate court disregarded the bank's first assigned error for being "irrelevant in the final
determination of the case" and found its second assigned error as "not meritorious." Instead, it
posed for resolution the issue of whether the trial court erred in dismissing the complaint for
collection of sum of money for lack of cause of action as the bank was said to be not the "holder" of
the notes at the time the collection case was filed.

In answering the lone issue, the Court of Appeals held that the bank is a "holder" under Sec. 191 of
the NIL. It concluded that despite the execution of the Deeds of Transfer and Trust Agreement, the
Asset Privatization Trust cannot be declared as the "holder" of the subject promissory notes for the
reason that it is neither the payee or indorsee of the notes in possession thereof nor is it the bearer
of said notes. The Court of Appeals observed that the bank, as the payee, did not indorse the notes
to the Asset Privatization Trust despite the execution of the Deeds of Transfer and Trust Agreement
and that the notes continued to remain with the bank until the institution of the collection suit.

With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas Ang is
accountable therefor in his capacity as an accommodation party. Citing Sec. 29 of the NIL, he is
liable to the bank in spite of the latter's knowledge, at the time of taking the notes, that he is only
an accommodation party. Moreover, as a co-maker who agreed to be jointly and severally liable on
the promissory notes, Tomas Ang cannot validly set up the defense that he did not receive any
consideration therefor as the fact that the loan was granted to the principal debtor already
constitutes a sufficient consideration.

Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in business
rendered it implausible that he would just sign the promissory notes as a co-maker without even
checking the real amount of the debt to be incurred, or that he merely acted on the belief that the
first loan application was cancelled. According to the appellate court, it is apparent that he was
negligent in falling for the alibi of Antonio Ang Eng Liong and such fact would not serve to exonerate
him from his responsibility under the notes.

Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and overdue
charges as well as attorney's fees on the ground that the promissory notes made no mention of
such charges/fees.

In his motion for reconsideration,40 Tomas Ang raised for the first time the assigned errors as
follows:

xxx

2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has recently discovered
that upon the filing of the complaint on August 28, 1990, under the jurisdictional rule laid down in
BP Blg. 129, appellant bank fraudulently failed to specify the amount of compounded interest at
14% per annum, service charges at 2% per annum and overdue penalty charges at 12% per annum
in the prayer of the complaint as of the time of its filing, paying a total of only P640.00(!!!) as filing
and court docket fees although the total sum involved as of that time was P647,566.75 including
20% attorney's fees. In fact, the stated interest in the body of the complaint alone amount
to P328,373.39 (which is actually compounded and capitalized) in both causes of action and the
total service and overdue penalties and charges and attorney's fees further amount to P239,193.36
in both causes of action, as of July 31, 1990, the time of filing of the complaint. Significantly,
appellant fraudulently misled the Court, describing the 14% imposition as interest, when in fact the
same was capitalized as principal by appellant bank every month to earn more interest, as stated in
the notes. In view thereof, the trial court never acquired jurisdiction over the case and the same
may not be now corrected by the filing of deficiency fees because the causes of action had already
prescribed and more importantly, the jurisdiction of the Municipal Trial Court had been increased
to P100,000.00 in principal claims last March 20, 1999, pursuant to SC Circular No. 21-99, section 5
of RA No. 7691, and section 31, Book I of the 1987 Administrative Code. In other words, as of
today, jurisdiction over the subject falls within the exclusive jurisdiction of the MTC, particularly if
the bank foregoes capitalization of the stipulated interest.

3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO APPELLEE ANG ENG LIONG,
THE APPEALED JUDGMENT OF THE TRIAL COURT WHICH LEFT OUT TOMAS ANG'S CROSS-CLAIM
AGAINST ENG LIONG (BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG BECOME FINAL AND
EXECUTORY, AS AGAINST ENG LIONG. Accordingly, Tomas Ang's right of subrogation against Ang
Eng Liong, expressed in his cross-claim, is now SEVERAL TIMES foreclosed because of the fault or
negligence of appellant bank since 1979 up to its insistence of an ex-parte trial, and now when it
failed to serve notice of appeal and appellant's brief upon him. Accordingly, appellee Tomas Ang
should be released from his suretyship obligation pursuant to Art. 2080 of the Civil Code. The above
is related to the issues above-stated.

4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the benefit of
appellant bank which defrauded the judiciary by the payment of deficient docket fees.41

Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals denied the
motion in its Resolution dated December 26, 2000.42

Petitioner now submits the following issues for resolution:

1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas Ang as
accommodation maker or surety because of the failure of [private] respondent bank to serve its
notice of appeal upon the principal debtor, respondent Eng Liong? cra lawlibrary

2. Did the trial court have jurisdiction over the case at all? cra lawlibrary

3. Did the Court of Appeals [commit] error in assigning its own error and raising its own issue? cra lawlibrary

4. Are petitioner's other real and personal defenses such as successive extensions coupled with
fraudulent collusion to hide Eng Liong's default, the payee's grant of additional burdens, coupled
with the insolvency of the principal debtor, and the defense of incomplete but delivered instrument,
meritorious?43

Petitioner allegedly learned after the promulgation of the Court of Appeals' decision that, pursuant
to the parties' agreement on the compounding of interest with the principal amount (per month in
case of default), the interest on the promissory notes as of July 31, 1990 should have been
only P81,647.22 for PN No. DVO-78-382 (instead of P203,538.98) and P49,618.33 for PN No. DVO-
78-390 (instead of P125,334.41) while the principal debt as of said date should increase
to P647,566.75 (instead of P539,638.96). He submits that the bank carefully and shrewdly hid the
fact by describing the amounts as interest instead of being part of either the principal or penalty in
order to pay a lesser amount of docket fees. According to him, the total fees that should have been
paid at the time of the filing of the complaint on August 28, 1990 was P2,216.30 and not P614.00 or
a shortage of 71%. Petitioner contends that the bank may not now pay the deficiency because the
last demand letter sent to him was dated September 9, 1986, or more than twenty years have
elapsed such that prescription had already set in. Consequently, the bank's claim must be dismissed
as the trial court loses jurisdiction over the case.

Petitioner also argues that the Court of Appeals should not have assigned its own error and raised it
as an issue of the case, contending that no question should be entertained on appeal unless it has
been advanced in the court below or is within the issues made by the parties in the pleadings. At
any rate, he opines that the appellate court's decision that the bank is the real party in interest
because it is the payee named in the note or the holder thereof is too simplistic since: (1) the power
and control of Asset Privatization Trust over the bank are clear from the explicit terms of the duly
certified trust documents and deeds of transfer and are confirmed by the newspaper clippings; (2)
even under P.D. No. 902-A or the General Banking Act, where a corporation or a bank is under
receivership, conservation or rehabilitation, it is only the representative (liquidator, receiver, trustee
or conservator) who may properly act for said entity, and, in this case, the bank was held by Asset
Privatization Trust as trustee; and (3) it is not entirely accurate to say that the payee who has not
indorsed the notes in all cases is the real party in interest because the rights of the payee may be
subject of an assignment of incorporeal rights under Articles 1624 and 1625 of the Civil Code.

Lastly, petitioner maintains that when respondent Bank served its notice of appeal and appellant's
brief only on him, it rendered the judgment of the trial court final and executory with respect to
Antonio Ang Eng Liong, which, in effect, released him (Antonio Ang Eng Liong) from any and all
liability under the promissory notes and, thereby, foreclosed petitioner's cross-claims. By such act,
the bank, even if it be the "holder" of the promissory notes, allegedly discharged a simple contract
for the payment of money (Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a surety like
petitioner from being subrogated in the shoes of his principal (Article 2080, Civil Code), and
impaired the notes, producing the effect of payment (Article 1249, Civil Code).

The petition is unmeritorious.

Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems proper under
the circumstances obtaining, error/s not assigned on an appealed case. In Mendoza v.
Bautista,44 this Court recognized the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned, thus:

As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for
its consideration. Higher courts are precluded from entertaining matters neither alleged in the
pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion
for reconsideration or on appeal.

However, as with most procedural rules, this maxim is subject to exceptions. Indeed, our rules
recognize the broad discretionary power of an appellate court to waive the lack of proper
assignment of errors and to consider errors not assigned. Section 8 of Rule 51 of the Rules of Court
provides:

SEC. 8. Questions that may be decided. - No error which does not affect the jurisdiction over the
subject matter or the validity of the judgment appealed from or the proceedings therein will be
considered, unless stated in the assignment of errors, or closely related to or dependent on an
assigned error and properly argued in the brief, save as the court may pass upon plain errors and
clerical errors.

Thus, an appellate court is clothed with ample authority to review rulings even if they are not
assigned as errors in the appeal in these instances: (a) grounds not assigned as errors but affecting
jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but are evidently
plain or clerical errors within contemplation of law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision and complete resolution of the case
or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not
specifically assigned as errors on appeal but raised in the trial court and are matters of record
having some bearing on the issue submitted which the parties failed to raise or which the lower
court ignored; (e) matters not assigned as errors on appeal but closely related to an error assigned;
and (f) matters not assigned as errors on appeal but upon which the determination of a question
properly assigned is dependent. (Citations omitted)45

To the Court's mind, even if the Court of Appeals regarded petitioner's two assigned errors as
"irrelevant" and "not meritorious," the issue of whether the trial court erred in dismissing the
complaint for collection of sum of money for lack of cause of action (on the ground that the bank
was not the "holder" of the notes at the time of the filing of the action) is in reality closely related
to and determinant of the resolution of whether the lower court correctly ruled in not holding
Antonio Ang Eng Liong and petitioner Tomas Ang liable to the bank on their unpaid loans despite
documentary exhibits allegedly proving their obligations and in dismissing the complaint based on
newspaper clippings. Hence, no error could be ascribed to the Court of Appeals on this point.

Now, the more relevant question is: who is the real party in interest at the time of the institution of
the complaint, is it the bank or the Asset Privatization Trust? cra lawlibrary

To answer the query, a brief history on the creation of the Asset Privatization Trust is proper.

Taking into account the imperative need of formally launching a program for the rationalization of
the government corporate sector, then President Corazon C. Aquino issued Proclamation No. 5046 on
December 8, 1986. As one of the twin cornerstones of the program was to establish the
privatization of a good number of government corporations, the proclamation created the Asset
Privatization Trust, which would, for the benefit of the National Government, take title to and
possession of, conserve, provisionally manage and dispose of transferred assets that were identified
for privatization or disposition.47

In accordance with the provisions of Section 2348 of the proclamation, then President Aquino
subsequently issued Administrative Order No. 14 on February 3, 1987, which approved the
identification of and transfer to the National Government of certain assets (consisting of loans,
equity investments, accrued interest receivables, acquired assets and other assets) and liabilities
(consisting of deposits, borrowings, other liabilities and contingent guarantees) of the Development
Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The transfer of assets was
implemented through a Deed of Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn, the National Government
designated the Asset Privatization Trust to act as its trustee through a Trust Agreement, whereby
the non-performing accounts of DBP and PNB, including, among others, the DBP's equity with
respondent Bank, were entrusted to the Asset Privatization Trust.49 As provided for in the
Agreement, among the powers and duties of the Asset Privatization Trust with respect to the trust
properties consisting of receivables was to handle their administration and collection by bringing suit
to enforce payment of the obligations or any installment thereof or settling or compromising any of
such obligations or any other claim or demand which the Government may have against any person
or persons, and to do all acts, institute all proceedings, and to exercise all other rights, powers, and
privileges of ownership that an absolute owner of the properties would otherwise have the right to
do.50

Incidentally, the existence of the Asset Privatization Trust would have expired five (5) years from
the date of issuance of Proclamation No. 50.51 However, its original term was extended from
December 8, 1991 up to August 31, 1992,52 and again from December 31, 1993 until June 30,
1995,53 and then from July 1, 1995 up to December 31, 1999,54 and further from January 1, 2000
until December 31, 2000.55 Thenceforth, the Privatization and Management Office was established
and took over, among others, the powers, duties and functions of the Asset Privatization Trust
under the proclamation.56

Based on the above backdrop, respondent Bank does not appear to be the real party in interest
when it instituted the collection suit on August 28, 1990 against Antonio Ang Eng Liong and
petitioner Tomas Ang. At the time the complaint was filed in the trial court, it was the Asset
Privatization Trust which had the authority to enforce its claims against both debtors. In fact, during
the pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted that it was
under the trusteeship of the Asset Privatization Trust.57 The Asset Privatization Trust, which should
have been represented by the Office of the Government Corporate Counsel, had the authority to file
and prosecute the case.

The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioner's
insistence that the case must be dismissed. Significantly, it stands without refute, both in the
pleadings as well as in the evidence presented during the trial and up to the time this case reached
the Court, that the issue had been rendered moot with the occurrence of a supervening event - the
"buy-back" of the bank by its former owner, Leonardo Ty, sometime in October 1993. By such re-
acquisition from the Asset Privatization Trust when the case was still pending in the lower court, the
bank reclaimed its real and actual interest over the unpaid promissory notes; hence, it could
rightfully qualify as a "holder"58 thereof under the NIL.

Notably, Section 29 of the NIL defines an accommodation party as a person "who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person." As gleaned from the text, an accommodation
party is one who meets all the three requisites, viz: (1) he must be a party to the instrument,
signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he
must sign for the purpose of lending his name or credit to some other person.59 An accommodation
party lends his name to enable the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes liability to the other party/ies
thereto.60 The accommodation party is liable on the instrument to a holder for value even though
the holder, at the time of taking the instrument, knew him or her to be merely an accommodation
party, as if the contract was not for accommodation.61

As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety - the accommodation party being the
surety.62 As such, he is deemed an original promisor and debtor from the beginning;63 he is
considered in law as the same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter since their liabilities are interwoven as to be inseparable.64 Although a
contract of suretyship is in essence accessory or collateral to a valid principal obligation, the surety's
liability to the creditor is immediate, primary  and absolute; he is directly and equally bound with
the principal.65 As an equivalent of a regular party to the undertaking, a surety becomes liable to
the debt and duty of the principal obligor even without possessing a direct or personal interest in
the obligations nor does he receive any benefit therefrom.66

Contrary to petitioner's adamant stand, however, Article 208067 of the Civil Code does not apply in a
contract of suretyship.68 Art. 2047 of the Civil Code states that if a person binds himself solidarily
with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of the Civil Code
must be observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and solidary
obligations) shall govern the relationship of petitioner with the bank.

The case of Inciong, Jr. v. CA69 is illuminating:

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release of his obligation, especially because the
dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites
as basis for his argument, Article 2080 of the Civil Code which provides that:

"The guarantors, even though they be solidary, are released from their obligation whenever by
come act of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of
the latter."

It is to be noted, however, that 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
as follows:

"Ninety one (91) days after date, for value received, I/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 (P50,000.00) Pesos, Philippine Currency, together
with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid."

A solidary or joint and several obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation. On the other hand, Article
2047 of the Civil Code states:

"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 a case the contract is called a suretyship." (Italics
supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:

"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 later, 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 rights 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."

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same
obligation, the presumption is that obligation is joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarily liability only when the obligation expressly so
states, when the law so provides or when the nature of the obligation so requires.

Because the promissory note involved in this case 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. (Citations omitted)70

In the instant case, petitioner agreed to be "jointly and severally" liable under the two promissory
notes that he co-signed with Antonio Ang Eng Liong as the principal debtor. This being so, it is
completely immaterial if the bank would opt to proceed only against petitioner or Antonio Ang Eng
Liong or both of them since the law confers upon the creditor the prerogative to choose whether to
enforce the entire obligation against any one, some or all of the debtors. Nonetheless, petitioner, as
an accommodation party, may seek reimbursement from Antonio Ang Eng Liong, being the party
accommodated.71

It is plainly mistaken for petitioner to say that just because the bank failed to serve the notice of
appeal and appellant's brief to Antonio Ang Eng Liong, the trial court's judgment, in effect, became
final and executory as against the latter and, thereby, bars his (petitioner's) cross-claims against
him: First, although no notice of appeal and appellant's brief were served to Antonio Ang Eng Liong,
he was nonetheless impleaded in the case since his name appeared in the caption of both the notice
and the brief as one of the defendants-appellees;72 Second, despite including in the caption of the
appellee's brief his co-debtor as one of the defendants-appellees, petitioner did not also serve him a
copy thereof;73 Third, in the caption of the Court of Appeals' decision, Antonio Ang Eng Liong was
expressly named as one of the defendants-appellees;74 and Fourth, it was only in his motion for
reconsideration from the adverse judgment of the Court of Appeals that petitioner belatedly chose
to serve notice to the counsel of his co-defendant-appellee.75

Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his "special appearance"
through counsel, that the Court of Appeals, much less this Court, already lacked jurisdiction over his
person or over the subject matter relating to him because he was not a party in CA-G.R. CV No.
53413. Stress must be laid of the fact that he had twice put himself in default - one, in not filing a
pre-trial brief and another, in not filing his answer to petitioner's cross-claims. As a matter of
course, Antonio Ang Eng Liong, being a party declared in default, already waived his right to take
part in the trial proceedings and had to contend with the judgment rendered by the court based on
the evidence presented by the bank and petitioner. Moreover, even without considering these
default judgments, Antonio Ang Eng Liong even categorically admitted having secured a loan
totaling P80,000. In his Answer to the complaint, he did not deny such liability but merely pleaded
that the bank "be ordered to submit a more reasonable computation" instead of collecting excessive
interest, penalty charges, and attorney's fees. For failing to tender an issue and in not denying the
material allegations stated in the complaint, a judgment on the pleadings76 would have also been
proper since not a single issue was generated by the Answer he filed.

As the promissory notes were not discharged or impaired through any act or omission of the bank,
Sections 119 (d)77and 12278 of the NIL as well as Art. 124979 of the Civil Code would necessarily find
no application. Again, neither was petitioner's right of reimbursement barred nor was the bank's
right to proceed against Antonio Ang Eng Liong expressly renounced by the omission to serve notice
of appeal and appellant's brief to a party already declared in default.

Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to
the holder in due course that he would pay the same according to its tenor.80 It is no defense to
state on his part that he did not receive any value therefor81 because the phrase "without receiving
value therefor" used in Sec. 29 of the NIL means "without receiving value by virtue of the
instrument" and not as it is apparently supposed to mean, "without receiving payment for lending
his name."82 Stated differently, when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as regards its maker
is the money advanced to the accommodated party. It is enough that value was given for the note
at the time of its creation.83 As in the instant case, a sum of money was received by virtue of the
notes, hence, it is immaterial so far as the bank is concerned whether one of the signers,
particularly petitioner, has or has not received anything in payment of the use of his name.84

Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral
security, if there be any, and dispose of it to his benefit, or, if applicable, subrogate himself in the
place of the creditor with the right to enforce the guaranty against the other signers of the note for
the reimbursement of what he is entitled to recover from them.85 Regrettably, none of these were
prudently done by petitioner. When he was first notified by the bank sometime in 1982 regarding
his accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong,
who represented that he would take care of the matter, instead of directly communicating with the
bank for its settlement.86 Thus, petitioner cannot now claim that he was prejudiced by the supposed
"extension of time" given by the bank to his co-debtor.

Furthermore, since the liability of an accommodation party remains not only primary but

also unconditional to a holder for value, even if the accommodated party receives an extension of
the period for payment without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as far as a holder for value is
concerned, he is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:

x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired his
action against the defendant. It should not be lost sight of that the defendant's signature on the
note is an assurance to the creditor that the collateral guaranty will remain good, and that
otherwise, he, the defendant, will be personally responsible for the payment.

True, that if the creditor had done any act whereby the guaranty was impaired in its value, or
discharged, such an act would have wholly or partially released the surety; but it must be born in
mind that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the
creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor.
His mere inaction indulgence, passiveness, or delay in proceeding against the principal debtor, or
the fact that he did not enforce the guaranty or apply on the payment of such funds as were
available, constitute no defense at all for the surety, unless the contract expressly requires diligence
and promptness on the part of the creditor, which is not the case in the present action. There is in
some decisions a tendency toward holding that the creditor's laches may discharge the surety,
meaning by laches a negligent forbearance. This theory, however, is not generally accepted and the
courts almost universally consider it essentially inconsistent with the relation of the parties to the
note. (21 R.C.L., 1032-1034)89

Neither can petitioner benefit from the alleged "insolvency" of Antonio Ang Eng Liong for want of
clear and convincing evidence proving the same. Assuming it to be true, he also did not exercise
diligence in demanding security to protect himself from the danger thereof in the event that he
(petitioner) would eventually be sued by the bank. Further, whether petitioner may or may not
obtain security from Antonio Ang Eng Liong cannot in any manner affect his liability to the bank; the
said remedy is a matter of concern exclusively between themselves as accommodation party and
accommodated party. The fact that petitioner stands only as a surety in relation to Antonio Ang Eng
Liong is immaterial to the claim of the bank and does not a whit diminish nor defeat the rights of
the latter as a holder for value. To sanction his theory is to give unwarranted legal recognition to
the patent absurdity of a situation where a co-maker, when sued on an instrument by a holder in
due course and for value, can escape liability by the convenient expedient of interposing the
defense that he is a merely an accommodation party.90

In sum, as regards the other issues and errors alleged in this petition, the Court notes that these
were the very same questions of fact raised on appeal before the Court of Appeals, although at
times couched in different terms and explained more lengthily in the petition. Suffice it to say that
the same, being factual, have been satisfactorily passed upon and considered both by the trial and
appellate courts. It is doctrinal that only errors of law and not of fact are reviewable by this Court in
Petitions for Review on Certiorari under Rule 45 of the Rules of Court. Save for the most cogent and
compelling reason, it is not our function under the rule to examine, evaluate or weigh the probative
value of the evidence presented by the parties all over again.91

WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court of
Appeals in CA-G.R. CV No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.

No costs.

SO ORDERED.

Puno, C.J., Chairperson, Sandoval-Gutierrez, Corona, Garcia, JJ., concur.

Endnotes:

1
 Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices Romeo J. Callejo, Sr.
(now retired Supreme Court Associate Justice) and Juan Q. Enriquez, Jr. concurring.

2
 CA Rollo, p. 137.

3
 Penned by Judge Romeo D. Marasigan.

4
 Records, pp. 1-5.

5
 Id. at 500, 563.

6
 Id. at 501, 564.
7
 Id. at 14-16.

8
 Id. at 20-26.

9
 Id. at 32-46.

10
 Id. at 27-28.

11
 Id. at 59-60.

12
 Id. at 62.

13
 Id. at 64-66.

14
 Id. at 72-73.

15
 Id. at 84-86.

16
 Id. at 86.

17
 Id. at 88-90, 144.

18
 Id. at 91.

19
 Id. at 92-94.

20
 Id. at 95-96.

21
 Id. at 119-120, 123-127, 140.

22
 Id. at 152.

23
 Id. at 164-170.

24
 TSN, January 18, 1993, p. 2

25
 Records, pp. 223-226.

26
 Id. at 223-224.

27
 Id. at 234-235.

28
 Id. at 236-240, 247, 250-275.

29
 Id. at 350.

30
 Id. at 358, 395, 401-402.

31
 Id. at 450, 529-542, 560-561; Exhibit "9" and its sub-markings.

32
 Id. at 487.

33
 Rollo, p. 182.

34
 Records, pp. 490-493.

35
 Id. at 492-493.

36
 CA Rollo, p. 23.

37
 Id. at 27-30.

38
 Id. at 79-84.

39
 Id. at 83.
40
 Id. at 89-133.

41
 Id. at 90-91.

42
 Id. at 137.

43
 Rollo, pp. 33-34.

44
 G.R. No. 143666, March 18, 2005, 453 SCRA 691.

45
 Id.  at 702-703.

46
 PROCLAIMING AND LAUNCHING A PROGRAM FOR THE EXPEDITIOUS DISPOSITION AND
PRIVATIZATION OF CERTAIN GOVERNMENT CORPORATIONS AND/OR THEASSETS THEREOF AND
CREATING THE COMMITTEE ON PRIVATIZATION AND THE ASSET PRIVATIZATION TRUST.

47
 Sec. 3, Art. II and Sec. 9, Art. III of Proclamation No. 50. In addition, the term "assets" is defined
under Sec. 2 (1) of the Proclamation as:

1) Assets shall include (i) receivables and other obligations due to government institutions under
credit, lease, indemnity and other agreements together with all collateral security and other rights
(including but not limited to rights in relation to shares of stock in corporations such as voting rights
as well as rights to appoint directors of corporations or otherwise engage in the management
thereof) granted to such institutions by contract or operation of law to secure or enforce the right of
payment of such obligations; (ii) real and personal property of any kind owned or held by the
government institutions, including shares of stock in corporations, obtained by such government
institutions, whether directly or indirectly, through foreclosure or other means, in settlement of such
obligations; (iii) shares of stock and other investments held by government institutions; and (iv) the
government institutions themselves, whether as parent or subsidiary corporations.

48
 Sec. 23 of the Proclamation reads:

SEC. 23. Mechanics of Transfer of Assets. - As soon as practicable, but not later than six months
from the date of the issuance of this Proclamation, the President, acting through the Committee on
Privatization, shall identify such assets of government institutions as appropriate for privatization
and divestment in an appropriate instrument describing such assets or identifying the loan or other
transactions giving rise to the receivables, obligations and other property constituting assets to be
transferred.

The Committee shall, from the list of assets deemed appropriate for divestment, identify assets to
be transferred to the Trust or to be referred to the government institutions in an appropriate
instrument, which upon execution by the Committee shall constitute as the operative act of transfer
or referral of the assets described therein, and the Trust or the government institution may
thereupon proceed with the divestment in accordance with the provisions of this Proclamation and
guidelines issued by the Committee.

Nothing in this Proclamation shall:

(1) Affect the rights of the National Government to pursue the enforcement of any claim of a
government institution in respect of or in relation to any asset transferred hereunder;

(2) In relation to any debt hereby assigned and transferred to the National Government of which a
government institution is the original creditor, give rise to any novation or requirement to obtain the
consent of the debtor; and

(3) In relation to any share of stock or any interest therein, give rise to any claim by any other
stockholder for enforcement of rights of pre-emption or of first refusal or other similar rights, the
provision of any law to the contrary notwithstanding.

Where the contractual rights of creditors of any of the government institutions involved may be
affected by the exercise of the Committee or the Trust of the powers granted herein, the Committee
or the Trust shall see to it that such rights are not impaired.

49
 Records, pp. 529-533, 543.

50
 Id. at 530.

51
 Sec. 9, Art. III of Proclamation No. 50.
52
 Sec. 1 of Republic Act (R.A.) No. 7181.

53
 Sec. 1 of R.A. No. 7661.

54
 Sec. 1 of R.A. No. 7886.

55
 Sec. 1 of R.A. No. 8758.

56
 Sec. 2, Art. III of Executive Order No. 323, Series of 2000.

57
 TSN, January 18, 1993, p. 7.

58
 A "Holder" is defined under Sec. 191 of the NIL, as:

"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof.

59
 Lim v. Saban, G.R. No. 163720, December 16, 2004, 447 SCRA 232, 244 and Crisologo-Jose v.
Court of Appeals, G.R. No. 80599, September 15, 1989, 177 SCRA 594, 598.

60
 Spouses Gardose v. Tarroza, 352 Phil. 797, 807 (1998) citing Philippine Bank of Commerce v.
Aruego, G.R. NOS. L-25836-37, January 31, 1981, 102 SCRA 530, 539-540.

61
 Lim v. Saban, supra at 244; Garcia v. Llamas, G.R. No. 154127, December 8, 2003, 417 SCRA
292, 304-305; Spouses Gardose v. Tarroza, supra at 807; Travel-On, Inc. v. Court of Appeals, G.R.
No. 56169, June 26, 1992, 210 SCRA 351, 357; and Ang Tiong v. Ting, 130 Phil. 741, 744 (1968).

62
 Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of Appeals, 401 Phil. 644, 654
- 655 (2000); Spouses Gardose v. Tarroza, supra at 807; Caneda, Jr. v. Court of Appeals, G.R. No.
81322, February 5, 1990, 181 SCRA 762, 772; Crisologo-Jose v. Court of Appeals, supra at 598;
Prudencio v. Court of Appeals, 227 Phil. 7, 12 (1986); and Philippine Bank of Commerce v. Aruego,
supra at 539.

63
 Garcia v. Llamas, supra at 305.

64
 Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., G.R. No.
139290, November 11, 2005, 474 SCRA 510, 531.

65
 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15,
2005, 475 SCRA 149, 160; Trade & Investment Development Corp. v. Roblett Industrial
Construction Corp., id.at 531; Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of
Appeals, supra at 655; and Philippine Bank of Commerce v. Aruego, supra at 540.

66
 International Finance Corporation v. Imperial Textile Mills, Inc., id. at 160-161 and Trade &
Investment Development Corp. v. Roblett Industrial Construction Corp., id. at 531.

67
 Art. 2080 of the Civil Code provides:

Art. 2080. 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.

68
 E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 618 (1998); Inciong, Jr. v. Court of Appeals, 327
Phil. 364, 372-373 (1996); and Bicol Savings & Loan Association v. Guinhawa, G.R. No. 62415,
August 20, 1990, 188 SCRA 642, 647.

69
 327 Phil. 364 (1996).

70
 Id. at 372-374.

71
 Lim v. Saban, supra at 244; Agro Conglomerates, Inc. v. Court of Appeals, supra at 654; and
Caneda, Jr. v. Court of Appeals, supra at 772.

72
 CA Rollo, p. 21.

73
 Id. at 40, 75.

74
 Id. at 79.
75
 Id. at 133.

76
 Sec. 1, Rule 34 of the 1997 Revised Rules on Civil Procedure states:

Section 1. Judgment on the pleadings. - Where an answer fails to tender an issue, or otherwise
admits the material allegations of the adverse party's pleading, the court may, on motion of that
party, direct judgment on such pleading. However, in actions for declaration of nullity or annulment
of marriage or for legal separation, the material facts alleged in the complaint shall always be
proved.

77
 Sec. 119 of the NIL provides:

SECTION 119. Instrument; how discharged. - A negotiable instrument is discharged:

(a.) By payment in due course by or on behalf of the principal debtor;

(b.) By payment in due course by the party accommodated, where the instrument is made or
accepted for his accommodation;

(c.) By the intentional cancellation thereof by the holder;

(d.) By any other act which will discharge a simple contract for the payment of money;

(e.) When the principal debtor becomes the holder of the instrument at or after maturity in his own
right. (Emphasis ours)

78
 Sec. 122 of the NIL states:

SECTION 122. Renunciation by holder. - The holder may expressly renounce his rights against any
party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation
of his rights against the principal debtor made at or after the maturity of the instrument discharges
the instrument. But a renunciation does not affect the rights of a holder in due course without
notice. A renunciation must be in writing unless the instrument is delivered up to the person
primarily liable thereon.

79
 Art. 1249 of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired. (Emphasis ours)

80
 Travel-On, Inc. v. Court of Appeals, supra at 357.

81
 Caneda, Jr. v. Court of Appeals, supra at 772; Crisologo-Jose v. Court of Appeals, supra at 598;
and Ang Tiong v. Ting, supra at 744.

82
 Clark v. Sellner, 42 Phil. 384, 386 (1921).

83
 Caneda, Jr. v. Court of Appeals, supra at 772.

84
 Clark v. Sellner, supra at 386.

85
 Id. at 386-387.

86
 TSN, February 21, 1995, p. 27 and TSN, April 4, 1995, p. 15.

87
 Prudencio v. Court of Appeals, supra at 12-13.

88
 42 Phil. 384 (1921).

89
 Id. at 387-388.

90
 Ang Tiong v. Ting, supra at 744.
91
 Batangas State University v. Bonifacio, G.R. No. 167762, December 15, 2005, 478 SCRA 142,
147-148 and Local Superior of the Servants of Charity (Guanellians), Inc. v. Jody King Construction
& Development Corporation, G.R. No. 141715, October 12, 2005, 472 SCRA 445, 451.

G.R. No. 126490 March 31, 1998

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.

In her Amended Answer with Counterclaim, 4 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 the co-maker's liability as that of a
guarantor.

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
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 penalty10 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

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 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 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.

Melo, Puno, Mendoza and Martinez, JJ., concur.

Footnotes

1 Annex C, Petition; Rollo, 49.

2 Rollo, 38.

3 Annex D, id., ibid., 51.

4 Annex H, id., ibid., 69.

5 Rollo, 76.
6 Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.

7 Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama,  ponente, with Associate Justices
Emeterio C. Cui and Eduardo G. Montenegro, concurring.

8 Rollo, 50.

9 Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.

10 Article 1229, Civil Code.

11 Citing Article 2031, id.

12 Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 119706, March 14, 1996, 255
SCRA 48.

13 Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996, 257 SCRA 482.

14 Inciong, Jr., vs. Court of Appeals, et al., G.R. No. 96405, June 26, 1996, 257 SCRA 578.

15 72 CJS, Principal and Surety, § 83, 565.

16 Churchill vs. Bradley, 5 A. 189.

17 Northern State Bank of Grand Forks vs. Bellamy, 125 N.W. 888.

18 Shearer vs. R.S. Peele & Co., 36 N.E. 455.

19 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.

20 Manry vs. Waxelbaum Co., 33 S.E. 701.

21 40A Words and Phrases 429.

22 Erbelding vs. Noland, Co., Inc., 64 S.E. 2d 218.

23 Covey, et al. vs. Schiesswohl, 114 P. 292.

24 Article 1371, Civil Code.

25 Rollo, 67-68.

26 18A Words and Phrases 657.

27 Hall, et al. vs. Weaver, 34 F. 104.

28 Howell vs. Commissioner of Internal Revenue, 69 F, 2d 447.

29 Shores-Mueller Co. vs. Palmer, et al., 216 S.W. 295.

30 Treweek vs. Howard, et al., 39 P. 20.

31 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.

32 Liquidating Midland Bank vs. Stecker, et al., 179 N.E. 504.

33 Article 1169, Civil Code.

34 Rowe, et al. vs. Bank of New Brockton, 92 So. 643.

35 74 Am Jur 2d, Principal and Surety, § 35, 36.

36 Smith vs. US, 8 L Ed 130.

37 Rouse, et al. vs. Wooten, 53 S.E. 430.

38 Hall vs. Weaver, 34 F. 104.

39 Christenson vs. Diversified Builders, Inc., et al., 331 F. 2d 992.

40 74 Am Jur 2d, Principal and Surety, § 144, 103.

41 Standard Accident Insurance Co. vs. Standard Oil Co., 133 So. 2d 539; School District No. 65
of Lincoln County vs. Universal Surety Co., 135 N.W. 2d 232; Depot Realty Syndicate vs.
Enterprise Brewing Co., 171 P. 223.

42 72 CJS, Principal and Surety, § 287, 744-745.

43 74 Am Jur 2d, Principal and Surety, § 68, 53-54.

44 First National Bank of Huntington vs. Williams, et al., 26 N.E. 75.

45 National Bank of Commerce vs. Gilvin, 152 S.W. 652.

46 Kerby, et al. vs. State ex rel. Frohmiller, 157 P. 2d 698.

47 72 CJS, Principal and Surety, § 208, 673.

48 Scott vs. Gaulding, et al., 122 ALR 200.

49 74 Am Jur 2d, Principal and Surety, § 68 53.

50 Ibid., id., §59, 48-49.

51 72 CJS, Principal and Surety, § 173, 651.

52 Op. cit., § 270, 723.

53 Annex E, Petition; Rollo, 54.

54 Article 1244, Civil Code.

55 Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.

56 Article 1233, Civil Code.

57 Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV,
1986 ed., 280.

58 Article 1235, Civil Code.

59 Magallanes, et al. vs. Court of Appeals, et al., G.R. No. 112614, May 16, 1994, Third
Division, Minute Resolution.

60 Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R. No. 117009, October 11,
1995, 249 SCRA 206.

61 Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals, et al., G.R. No. 84610,
November 24, 1988, 167 SCRA 838.

62 Supra, fn. 59.