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Dio vs. Court of Appeals (1992)

FACTS

In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy
Tiam, applied for and obtained credit accommodations from Metrobank in the sum of
Php700,000. This was secured by Continuing Suretyships separately executed by
petitioners Norberto Uy (who agreed to pay Php300, 000) and Jacinto Dio (who bound
himself liable up to Php800, 000). Uy Tiam paid the obligation under this letter of credit
in 1977. UTEFS obtained another credit accommodation in 1978, which was likewise
settled before he applied and obtained another in 1979 in the sum of Php815, 600. This
sum covered UTEFS purchase of fertilizers from Planters Products. Uy and Dio did
not sign the application for this credit and were not asked to execute suretyship or
guarantee. UTEFS executed a trust receipt whereby it agreed to deliver to Metrobank
the goods in the event of non-sale, and if sold, the proceeds will be delivered to
Metrobank. However, UTEFS did not comply with its obligation. As a result, Metrobank
demanded payment from UTEFS and the sureties, Uy and Dio. The sureties refused to
pay on the ground that the obligation for which they executed the continuing suretyship
agreement has been paid. RTC ruled in favor of the petitioners, CA affirmed.

Issue

WON petitioners are liable for payment of the 1979 transaction under the continuing
suretyship agreement they executed in 1977. Assuming that they are, what is the extent
of their liability?

HELD
The Supreme Court held that Uy and Dio are liable. The agreement they executed in
1977 is a continuing suretyship, one which is not limited to a single transaction but
which contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable. The agreement that petitioners signed expressly provided that it is a
continuing guaranty and shall be in full force and effect until written notice to the bank
that it has been revoked by the surety. As to the 2nd issue, petitioners are only liable up
to the maximum limit fixed in the continuing suretyship agreements (Php800, 000 for
Dio and Php300, 000 for Uy). The law is clear that a guarantor may bind himself for
less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions (Art. 2054). CA decision ordering petitioners to pay P2,
397, 883.68 which represents the amount due inclusive of interest and charges, is
modified.

G.R. No. 127405 TOCAO vs. CA

FACTS

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William T. Belo introduced Nenita A. Anay to petitioner Marjorie Tocao, who conveyed
her desire to enter into a joint venture with her for the importation and local distribution
of kitchen cookwares. Belo volunteered to finance the joint venture and assigned to
Anay the job of marketing the product. Under the joint venture, Belo acted as capitalist,
Tocao as president and general manager, and Anay as head of the marketing
department and later, vice-president for sales. The parties agreed further that Anay
would be entitled to shares of the annual net profits of the business, commissions,
sales, and demonstration services. They operated under the name of Geminesse
Enterprise.

The cookware business took off successfully. Anay was invited for a distributor/dealer
meeting in the USA and subsequently was awarded 37% commission for her personal
sales for her excellent job performance. October 9, 1987, Anay learned that Marjorie
Tocao had signed a letter addressed to the Cubao sales office to the effect that she was
no longer the vice-president of Geminesse Enterprise.

Anay attempted to contact Belo demanding for her overriding commission for the period
of January 8, 1988 to February 5, 1988 and the audit of the company to determine her
share in the net profits. When her letters were not answered, Anay then filed a
complaint for sum of money with damages against Marjorie and Belo before the RTC of
Makati. The said trial court ruled in her favor. Petitioners appeal to the CA was
dismissed and MR was denied for lack of merit.

Belo, one of the petitioners, in his defense, denied contributing capital to the business or
receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business and never participated in decision making. He claimed
that he wrote the memo granting the plaintiff 37% commission upon her dismissal from
the business venture at the request of Tocao, because Anay had no other income.

Hence, this petition.

ISSUE

WON Belo was only a guarantor of Tacao

HELD

NO. Belos claim that he was merely a "guarantor" has no basis since there
was no written evidence thereof as required by Article 2055 of the Civil Code.
Moreover, his acts of attending and/or presiding over meetings of Geminesse Enterprise
plus his issuance of a memo giving Anay 37% commission on personal sales belied
this. On the contrary, it demonstrated his involvement as a partner in the business.

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His claim is belied by that personal act of proprietorship in the business.

Moreover, if he was indeed a guarantor of future debts of petitioner Tocao under Article
2053 of the Civil Code, he should have presented documentary evidence therefor. While
Article 2055 of the Civil Code simply provides that guaranty must be "express," Article
1403, the Statute of Frauds, requires that "a special promise to answer for the debt,
default or miscarriage of another" be in writing.

G.R. No. 154183 August 7, 2003

SPS TOH VS SOLID BANK

FACTS

Respondent Solid Bank Corporation agreed to extend an omnibus line credit facility
worth P10 million in favor of respondent First Business Paper Corporation (FBPC). The
terms and conditions of the agreement as well as the checklist of the documents
necessary to open the credit line were stipulated in a letter-advise of the Bank. One of
the documents essential for the credit facility and submitted for this purpose was the (c)
) Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh
and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li. Spouses
Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
were President and General Manager, respectively, of the same corporation.

On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-
spouses Luis Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li signed the required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank. The terms of the instrument defined the
contract arising therefrom as a surety agreement and provided for the solidary liability of
the signatories thereto for and in consideration of "loans or advances" and "credit in any
other manner to, or at the request or for the account" of FBPC.

In 1994, respondent Bank received information that respondent-spouses Kenneth Ng Li

and Ma. Victoria Ng Li had fraudulently departed from their conjugal home. Respondent
Bank then filed a complaint for sum of money against FBPC, sps. Kenneth and Victoria
Ng Li, and sps. Luis and Vicky Toh before the RTC, Pasig City. The said court ruled in
favor of the respondent Bank but absolving petitioner-spouses Luis and Vicky Toh of
any liability to respondent Bank. Solid Bank Corp. appealed the decision to the CA
whereby the latter modified the decision of the trial court holding the petitioner-spouses
solidarily liable with FBPC to pay respondent bank. A Motion for Reconsideration was
denied.

Hence, this Petition for Review.

ISSUE

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WON the petitioner spouses are solidarily liable due to the execution of the
Continuing Guaranty

HELD

No. Although this Court holds that the Continuing Guaranty is a valid and binding
contract of petitioner-spouses as it is a public document that enjoys the presumption of
authenticity and due execution, we find that there were illicit/irregular extensions as far
as the letters of credit are concerned therefore affecting the liability of herein petitioner
spouses.

The foregoing extensions of the letters of credit made by respondent Bank without
observing the rigid restrictions for exercising the privilege are not covered by the waiver
stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions
prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty." This act of the
Bank is not mere failure or delay on its part to demand payment after the debt has
become due, as was the case in unpaid five (5) letters of credit which the Bank did not
extend, defer or put off, but comprises conscious, separate and binding agreements to
extend the due date, as was admitted by the Bank itself.

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan
Toh are relieved of their obligations as sureties of respondent FBPC under Art.
2079 of the Civil Code.

Further, there were several suspicious circumstances (i.e. execution of the Continuing
Guaranty after 30 days from original acceptance period) that militate against the
enforcement of the Continuing Guaranty against the accommodation sureties, the
consequence of which is to discharge the surety, petitioners herein, under Article 2080
of the Civil Code or the very least, mitigate the liability of the surety up to the value of
the property or lien released.

Wherefore, the decision of the CA was REVERSED and SET ASIDE, and hereby
REINSTATED and AFFIRMED the decision of the RTC.

G.R. No. 160324 November 15, 2005

INTERNATIONAL FINANCE CORP vs. IMPERIAL TEXTILE MILLS, INC

FACTS

International Finance Corp. (IFC) and Philippine Polyamide Industrial Corp. (PPIC)
entered into a loan agreement wherein IFC extended to PPIC a loan of US $7, 000,
000.00 payable in 16 semi-annual installments plus interest of 10% per annum on the
principal amount. A Guarantee Agreement was executed wherein Imperial Textile Mills,

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Inc. (ITM) and Grand Textile Manufacturing Corp (Grandtex), being parties thereto,
agreed to guarantee PPICs obligations under the loan agreement.

PPIC religiously paid the first 3 installment schedules, however, defaulted thereafter.
IFC served notice of default demanding PPIC to pay the outstanding principal loan and
all its accrued interests. Despite such notice, PPIC failed to comply which resulted to
the extrajudicial foreclosure of mortgages owned by PPIC. The winning bid amount still
left a balance, from the outstanding loan, with US$2,833,967.00, which PPIC still failed
to pay. Consequently, IFC demanded IFC and Grandtex to pay the outstanding balance,
but to no avail.

IFC then filed a complaint with the RTC of Manila against PPIC and ITM for the
payment of the outstanding balance plus interests and attorneys fees. The trial court
held PPIC liable for the payment but relieved ITM of its obligation as guarantor, thereby
dismissing the complaint against ITM. IFC appealed the decision to the CA. The
appellate court reversed the decision of the trial court therefore holding that ITM is not
discharged from its obligation as guarantor of PPIC under the Guarantee Agreement.
The CA, however, held that ITMs liability as a guarantor would arise only if and when
PPIC could not pay. Since PPICs inability to comply with its obligation was not
sufficiently established, ITM could not immediately be made to assume the liability.

Hence, this Petition.

ISSUE

WON the respondent under the Guarantee Agreement is merely a guarantor and not a
surety

HELD

NO. ITM (respondent) is a surety. Article 2047 states that:

By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the
obligation of the principal 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 shall be
called suretyship."

The Agreement specifically stated that the corporation was "jointly and severally" liable.
To put emphasis on the nature of that liability, the Contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety. Indubitably therefore, ITM
bound itself to be solidarily liable with PPIC for the latters obligations under the Loan
Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable.

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As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily
with the principal obligor. Likewise, the phrase in the Agreement -- "as primary obligor
and not merely as surety" -- stresses that ITM is being placed on the same level as
PPIC. Those words emphasize the nature of their liability, which the law characterizes
as a suretyship. And although a surety contract is secondary to the principal obligation,
the liability of the surety is direct, primary and absolute; or equivalent to that of a regular
party to the undertaking.

SPOUSES ALFREDO and SUSANA ONG

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
G.R. No. 160466
January 17, 2005

FACTS:
Baliwag Mahogany Corp. (BMC) needed additional capital for its business and
applied for various loans, amounting to a total of P 5M with the respondent bank, PCIB.
Alfredo (President) and Susana Ong (Treasurer) acted as sureties for these loans and
issued 3 promissory notes for the purpose. It was stipulated in the notes that the bank
may consider BMC in default and demand payment of the remaining balance of the loan
upon the levy, attachment or garnishment of any of its properties, or upon BMCs
insolvency, or if it is declared to be in a state of suspension of payments. Thereafter,
BMC filed a petition for rehabilitation and suspension of payments with SEC after the
creditors attached its properties. The bank then sought the collection of the payment of
the debt from the petitioners as sureties.
PCIB filed a case for collection of a sum of money against petitioners-spouses. A
MOA was executed by BMC, the petitioners, and the consortium of creditor banks of
BMC (including PCIB). Petitioners then moved to dismiss the complaint arguing that the
MOA suspended any pending civil action against BMC. Hence, the benefits of the MOA
should also be extended to the petitioners as sureties. The trial court denied the motion
to dismiss. The CA affirmed the trial courts ruling that a creditor can proceed against
petitioners as surety independently of its right to proceed against BMC.

ISSUE: Whether or not Art 2063 and 2081 of the NCC apply to suretyship contracts.
HELD:
NO, Articles 2063 and 2081 of the NCC refer to contracts of guaranty. They do not
apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of
BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a
surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the
debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the
guarantor. It is only after the creditor has proceeded against the properties of the
principal debtor and the debt remains unsatisfied that a guarantor can be held liable to
answer for any unpaid amount. This is the principle of excussion. In a suretyship
contract, however, the benefit of excussion is not available to the surety as he is
principally liable for the payment of the debt. As the surety insures the debt itself, he
obligates himself to pay the debt if the principal debtor will not pay, regardless of

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whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can
go directly against the surety although the principal debtor is solvent and is able to pay
or no prior demand is made on the principal debtor. A surety is directly, equally and
absolutely bound with the principal debtor for the payment of the debt and is deemed as
an original promisor and debtor from the beginning.

PRUDENTIAL BANK
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI
G.R. No. 74886
December 8, 1992

FACTS:

Philippine Rayon Mills, Inc. (PRMI) applied for a commercial letter of credit with
Prudential Bank for the importation of textile machinery with Nissho Co., Ltd. of Japan.
Prudential Bank executed a trust receipt signed by the President of PRMI, Anacleto Chi.
PMRI received the machinery and installed the same at its factory. PMRI ceased
business sometime in 1967 without paying his obligation arising from the letters of credit
and trust receipt. Repeated demands for the payment of the said trust receipt were
made and to no avail. Hence, action for collection of money was filed to the trial court.

The trial court ruled against Phil. Rayon Mills sentencing it to pay the plaintiff. Public
respondent, IAC sustained the trial court in all respects and held that Chi cannot be held
liable therefor because the records fail to show that petitioner had either exhausted the
properties of Philippine Rayon or had resorted to all legal remedies as required in Article
2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code,
the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's
liability would therefore arise only when the principal debtor fails to comply with his
obligation.

ISSUE: Whether or not respondent Chi is merely a simple guarantor.

HELD:

YES, the Court held that the questioned solidary guaranty clause shows that the
obligation of Chi is only that of a guarantor.

Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as
solidary between the guarantors; this would have been correct if two (2) guarantors had
signed it. The clause "we jointly and severally agree and undertake" refers to the

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undertaking of the two (2) parties who are to sign it or to the liability existing between
them. It does not refer to the undertaking between either one or both of them on the one
hand and the petitioner on the other with respect to the liability described under the trust
receipt. Elsewise stated their liability is not divisible as between them; it can be enforced
to its full extent against any one of them.

Chi is not liable on the trust receipt in any capacity either as surety or as guarantor
because his signature at the dorsal portion thereof was useless; and even if he could be
bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of
the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal
debtor, Philippine Rayon. The records fail to show that petitioner had done so.

THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC

vs.
EUGENIO B. RAMOS, and PILAR MIRANDA
G.R. No. L-20978
February 28, 1966

FACTS:
Associated Reclamation & Development Corporation executed a promissory note for
P11,765.00 in favor of General Acceptance & Finance Corporation. Philippine American
General Insurance Co., Inc. executed a surety bond to secure payment of the
aforementioned promissory note. Subsequently, the spouses Ramos and Miranda
signed a counter-guaranty agreement with real estate mortgage, in favor of Philippine
American General Insurance Co., Inc., against its liability under the surety bond. The
next day, the Ramos spouses and Associated Reclamation & Development Corporation
executed an indemnity agreement in favor of Philippine American General Insurance
Co., Inc., thereunder binding themselves "jointly and severally" to indemnify the
Philippine American General Insurance Co., Inc., for whatever it may suffer under its
aforesaid surety bond.
Philippine American General Insurance Co., Inc. filed a complaint in the CFI against the
Ramos spouses. Plaintiff alleged that Associated Reclamation & Development
Corporation failed to pay its obligation under the promissory note, as a result of which
plaintiff paid its liability under its surety bond in the sum of P11,765.
The Court of First Instance dismissed the case hence, this direct appeal to the Court.
ISSUE: Whether or not the plaintiff have a cause of action so as to proceed against
defendants without first proceeding against Associated Reclamation & Development
Corporation.
HELD:

YES, for the creditor may proceed against any one of the solidary debtors or some or all
of them simultaneously under Art. 1216 of the NCC. It should not be overlooked, also,
that the indemnity agreement could not have been modified by the counter-guaranty
agreement, since the former was executed one day after the latter.

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Finally, even under the counter-guaranty agreement, the defendants as counter-

guarantors are not entitled to demand exhaustion of the properties of the principal
debtor. For it is a counter-guaranty with real estate mortgage. It is accepted that
guarantors have no right to demand exhaustion of the properties of the principal debtor,
under Article 2058 of the New Civil Code, where a pledge or mortgage has been given
as a special security (Saavedra vs. Price, 68 Phil. 688; Southern Motors vs. Barbosa,
53 O.G. 137).

WILLEX PLASTIC INDUSTRIES vs. CA and INTERNATIONAL CORPORATE BANK

G.R. No. 103066
April 25, 1996

FACTS:
Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking
Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and
the Investment and Underwriting Corporation of the Philippines (IUCP) executed two
documents; both entitled "Continuing Surety Agreement", whereby they bound
themselves solidarily to pay Manilabank.
Thereafter, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed
a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum
or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation" from
IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guarantee "the
prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S to
the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00)
Philippine Currency and such interests, charges and penalties as hereafter may be
specified."
Following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61
representing Inter-Resin Industrial's outstanding obligation. Atrium Capital Corp., which
in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and
Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of
the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial
and Willex Plastic.
Inter-Resin Industrial paid some of the amounts due. Willex Plastic denied the material
allegations of the complaint. It argues that under the "Continuing Guaranty," its liability
is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the
latter to Manilabank for the account of Inter-Resin Industrial.
As already stated, the amount had been paid by Interbank's predecessor-in-interest,
Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on
December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues
that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin
Industrial from Interbank, not for sums paid by the latter to Manilabank for the account
of Inter-Resin Industrial.
ISSUE: Whether under the "Continuing Guaranty", Willex Plastic may be held jointly
and severally liable with Inter-Resin Industrial for the amount by Interbank to
Manilabank.
HELD:

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YES, Willex Plastic has overlooked is the fact that evidence aliunde was introduced in
the trial court to explain that it was actually to secure payment to Interbank (formerly
IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was
executed.
Interbank adduced evidence to show that the "Continuing Guaranty" had been made to
guarantee payment of amounts made by it to Manilabank and not of any sums given by
it as loan to Inter-Resin Industrial.
Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of
the credit accommodation granted to defendant IRIC by Manilabank, that the plaintiff
required defendant IRIC to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic Industries Corporation."
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee, Interbank of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-
appellants to sign a Continuing Guaranty.
Willex Plastic admitted that it was "to secure the aforesaid guarantee, that INTERBANK
required principal debtor IRIC to execute a chattel mortgage in its favor, and so a
'Continuing Guaranty' was executed on April 2, 1979 by WILLEX in favor of
INTERBANK for and in consideration of the loan obtained by IRIC."
Put in another way the consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to the principal alone
being sufficient. For a "guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties thereto. . . . It is never
necessary that a guarantor or surety should receive any part or benefit, if such there be,
accruing to his principal."

G.R. No. 109941. August 17, 1999

Baylon vs CA
FACTS:
The petitioner Pacionaria C. Baylon introduced private respondent Leonila
Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon. Petitioner
told private respondent that Luanzon has been engaged in business as a contractor for
twenty years and she invited private respondent to lend Luanzon money at a monthly
interest rate of five percent (5%), to be used as capital for the latter's business and she
assured that Luanzons business is stable. Respondent, as a result lent Luanzon
150,000 and signed a promissory note with the petitioner affixing her signature as
guarantor. Luanzon issued several postdated checks for the loan. However, upon
demand, Luanzon failed to pay. Thus, the respondent filed a case for the collection of a
sum of money against petitioner and Luanzon. In her answer, petitioner denied having
guaranteed the payment of the promissory note issued by Luanzon. She claimed that
private respondent gave Luanzon the money, not as a loan, but rather as an
investment. Furthermore, she asserts that private respondent has not exhausted the
property of the principal debtor nor has she resorted to all the legal remedies against
the principal debtor as required by law. Finally, petitioner claims that there was an
extension of the maturity date of the loan without her consent, thus releasing her from

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her obligation. The trial court ruled in favor of private respondent. The CA affirmed the
RTCs decision.
ISSUE: WON the respondent court erred in holding the petitioner liable even if the
private respondent have not exhausted the properties of the debtor and legal remedies
available to him.
HELD:
Yes.Article 2058 of the Civil Code provides that the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the debtor. is axiomatic that
the liability of the guarantor is only subsidiary.[20] All the properties of the principal debtor
must first be exhausted before his own is levied upon.Thus, the creditor may hold the
guarantor liable only after judgment has been obtained against the principal debtor and
the latter is unable to pay, for obviously the exhaustion of the principals property - the
benefit of which the guarantor claims - cannot even begin to take place before judgment
has been obtained.[21] This rule is embodied in article 2062 of the Civil Code which
provides that the action brought by the creditor must be filed against the principal debtor
alone, except in some instances when the action may be brought against both the
debtor and the principal debtor.In the case at bar, there is no judgment obtained first
against the principal debtor. . It is useless to speak of a guarantor when no debtor has
been held liable for the obligation which is allegedly secured by such guarantee.

G.R. No. L-43862 January 13, 1989

Mercantile Insurance Co. vs. Ysmael

FACTS:

Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application
for an overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine
National Bank.PNB is willing to grant the credit accommodation provided that the
applicant shall have filed a bond in the sum of P140,000.00 to guarantee the payment of
the said amount. Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed the
surety bonds. As security and consideration of the execution of the surety bonds, Felipe
Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by Felipe Ysmael, Jr.
executed with the plaintiff Mercantile Insurance Co., Inc. an indemnity agreement
wherein the defendants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound
themselves jointly and severally to indemnify the plaintiff, hold save it harmless from
and against any and all payments, damages, costs, losses, penalties, charges and
expenses which said company as surety. In view of the failure of the defendants to pay
the overdraft and credit line, PNB demanded from Mercantile Insurance Co. the
settlement of its obligations under the surety which was reduced to 100,000. Mercantile
Insurance Co. informed the herein defendants-appellants about the demand of PNB but
still failed to pay. For non-settlement, Mercantile Insurance Co. brought the present
action. The trial court ordered the defendants to pay jointly and severally the sum of
100,000 plus other costs. The defendants-appellants appealed to the CA asserting that
the case is premature, the complaint states no cause of action and most importantly

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they argue that no indemnification should be given to the surety company as it did not
pay the creditor. This case was certified to the Supreme Court.

ISSUE: WON the surety can be allowed indemnification from the defendants-appellants,
upon the latter's default even before the former has paid to the creditor

HELD:

Yes. The stipulation in the indemnity agreement allowing the surety to recover
even before it paid the creditor is enforceable. In accordance therewith, the surety may
demand from the indemnitors even before paying the creditors. Appellants argue that
the case is premature and the complaint failed to state a cause of action. This
contention is belied not only by the allegations in the complaint but also by the
agreement entered into between the appellants and the appellee in favor of the bank.
The records show that the cause of action is distinctly set forth in the complaint and the
terms of the Indemnity Agreement provide that defendants-appellants have undertaken
to hold plaintiff-appellee free and harmless from any suit, damage or liability which may
be incurred by reason of non-performance by the defendants-appellants of their
obligation with the Philippine National Bank. The trial court is correct in holding the
defendants-appellants jointly and severaly liable for the surety bond. It must be stressed
that in the case at bar, the principal debtors, defendants-appellants herein, are
simultaneously the same persons who executed the Indemnity Agreement. Thus, the
position occupied by them is that of a principal debtor and indemnitor at the same time,
and their liability being joint and several with the plaintiff-appellee's, the Philippine
National Bank may proceed against either for fulfillment of the obligation as covered by
the surety bonds. There is, therefore, no principle of guaranty involved and, therefore,
the provision of Article 2071 of the Civil Code does not apply. Otherwise stated, there is
no more need for the plaintiff-appellee to exhaust all the properties of the principal
debtor before it may proceed against defendants-appellants.

G.R. No. L-31442 June 24, 1983

Gidwani vs Domestic Insurance Co.

FACTS:

The Manufacturers' Bank & Trust Company granted Plastic Era a discounting line
of P20,000.00. To secure the payment of any loan which said bank may extend to
Plastic Era, the latter posted a surety bond for P 20,000.00 issued by the Domestic
Insurance Company of the Philippines. Plastic Era, Bhagwandas B. Gidwani and Kishu
Gidwani executed an indemnity agreement whereby they bound themselves, jointly and
severally, to indemnify Domestic Insurance against all damages, losses and expenses
which the latter may incur as a consequence of having issued said surety bond. Plastic
Era executed a promissory note in favor of the Manufacturers Bank & Trust Company.
As an additional security, Plastic Era pledged to Domestic Insurance her shares of stock
in three corporations, among which are shares of Marinduque Mining & Industrial
Corporation. Plastic Era failed to pay the promissory note on time, as a result,

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Manufacturers Bank & Trust Company filed a claim against the bond issued by
Domestic Insurance, which on October 27,1960, paid the sum of P20,000.00 to said
bank. Domestic Insurance filed an action in the Court of First Instance of Manila, against
Plastic Era, Kishu Gidwani and Bhagwandas Gidwani, for the recovery of the sum of P
20,000.00. The Court of First Instance ruled in favor of Domestic Insurance. Domestic
Insurance requested the Notary Public for the foreclosure of the pledged shares,
wherein all the shares were sold to him as being the highest bidder.The Gidwani
Spouses joined by the assignee of their shares of stocks, Samuel Sharuff sued
Domestic Insurance and Marinduque Mining & Industrial Corporation, they allege that
the filing by the Domestic Insurance of an action based on the counter-guaranty and
obtaining a favourable judgment with a partial satisfaction thereof extinguished the
pledge of shares by Sati Gidwani. Not satisfied with the decision of respondent Judge,
petitioners filed an appeal by certiorari.

ISSUE: WON the pledge of the shares of stock by Sati Gidwani is extinguished when
Domestic Insurance filed a suit based on the counter-guaranty and obtained a
favorable judgment therein.

HELD:

No. There were two securities given to Domestic Insurance namely the counter-
guaranty agreement and the pledge of the shares of stock. By paying the promissory
note to the Manufacturers Bank & Trust Company, Domestic Insurance thereby was
subrogated to the rights of the former to demand for and collect payment of the amount
due thereon from Plastic Era, the maker of the promissory note. Domestic Insurance did
did not avail of the remedy to obtain a personal judgment against the Plastic Era, it is
not barred to enforce its claim against both securities. From the nature of the situation,
Domestic Insurance cannot prosecute its claim against the two securities in one and the
same action. The foreclosure of the pledged shares would not require an action in court,
whereas it would be necessary if the claim would be enforced under the indemnity
agreement.Therefore, the filing of action and securing a judgment therein against the
counter-guarantors, did not release, much less extinguish, the lien of Domestic
Insurance on the shares of stock of Sati B. Gidwani which were pledged in its favor.
Further, the pledge of the shares of stock of Sati Gidwani did not release the obligation
of the indemnitors.

G.R. No. L-29587 November 28, 1975

PNB vs. Luzon Surety Co. Inc.

FACTS:

Augusto Villarosa obtained a crop loan with the Philippine National Bank and
executed a chattel mortgage on the standing crops to secure the loan. The credit line for
the promissory notes was periodically increased and because of the interest accrued it
had reached a higher sum. For failure to pay,PNB sought relief from the three (3)

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bondsmen, Luzon Surety, Central Surety and Associated Surety. The Court of First
Instance ruled in favor of the petitioner granting it the right to collect from the defendant
bonding companies. Among the three, only Luzon Surety appealed alleging that the
evidence of the plaintiff did not establish a cause of action to make Luzon Surety liable
and secondly, in any case that there had been material alteration in the principal
obligation, if any, guaranteed by it. The Court of Appeals absolved from liability the
Luzon Surety Co. Inc. Hence, this petition.

ISSUE: WON the Court of Appeals erred when it released from Liability the Luzon
Surety Co. Inc.

HELD:

The excerpts from the Chattel Mortgage and the Surety Bond will clearly
establish the liability of Luzon Surety to petitioner Philippine National Bank not merely
as a guarantor but as surety-liable as a regular party to the undertaking. The Court of
Appeals ratiocinates that the Surety Bond executed by Luzon Surety made reference
only to the crop loan contract and not the Chattel Mortage. It did not give credence to a
significant and unrebutted testimony of petitioner's witness, Romanito Brillantes, that the
chattel mortgage was the only one executed by Augusto Villarosa evidencing the crop
loan contract and upon which Luzon Surety agreed to assume liability up to the amount
of P10,000 by posting the said surety bond .As to the defense of material alteration,
said bonding company is charged as an original promissory and is an insurer of the
debt. While it is an accepted rule in our jurisdiction that an alteration of the contract is a
ground for release, this alteration, must be material. A cursory examination of the record
shows that the alterations in the form of increases were made with the full consent of
Luzon Surety Co., Inc.

G.R. No. L-47369 June 30,1987

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,

vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FACTS:
Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an
increase in its line of credit from P400,000 to P800,000 (the "Principal Obligation"), with
the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a
good and sufficient bond in the amount of P400,000, representing the increment in its
line of credit, to secure its faithful compliance with the terms and conditions under which
its line of credit was increased. In compliance with this requirement, PAGRICO
submitted Surety Bond No. 4765, issued by the respondent R & B Surety in the
specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO
and R & B Surety bound themselves jointly and severally to comply with the "terms and

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conditions of the advance line [of credit] established by the [PNB]." PNB had the right
under the Surety Bond to proceed directly against R & B Surety "without the necessity
of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also
provided that R & B Surety's liability was not to be limited to the principal sum of
P400,000, but would also include "accrued interest" on the said amount "plus all
expenses, charges or other legal costs incident to collection of the obligation [of R & B
Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical
indemnity agreements were entered into with R & B Surety: (a) one agreement was
executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr,
and (b) another agreement was executed by PAGRICO, Pacific Copra Export Inc.
(PACOCO), Jose K. Villanueva and Liu Tua Ben. Under both indemnity agreements, the
indemnitors bound themselves jointly and severally to R & B Surety to pay an annual
premium of P5,103.05 and for the faithful compliance of the terms and conditions set
forth in said SURETY BOND for a period beginning until the same is CANCELLED
and/or DISCHARGED.
When PAGRICO failed to comply with its Principal Obligation to the PNB, the
PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount
of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B
Surety in turn sent formal demand letters to petitioners Cochingyan, Jr. and Villanueva
for reimbursement of the payments made by it to the PNB and for a discharge of its
liability to the PNB under the Surety Bond. When petitioners failed to heed its demands,
R & B Surety brought suit against Cochingyan, Jr., Villanueva and Liu Tua Ben in the
CFI of Manila.
Petitioner Cochingyan, Jr. in his answer maintained that the Indemnity
Agreement he executed in favor of R & B Surety. Petitioner Cochingyan, however, did
not present any evidence at all to support his asserted defenses. Petitioner Villanueva
did not submit any evidence either on his "accommodation" defense. The trial court was
therefore constrained to decide the case on the basis alone of the terms of the Trust
Agreement and other documents submitted in evidence. The CFI decided in favor of R
& B Surety and the CA affirmed the CFIs decision.

ISSUES: 1. WON Article 2079 is applicable in the case at bar.

2. WON the extension of time given to the principal debtor by the creditor
without the suretys consent would deprive the latter of his right to pay the creditor and
to be immediately subrogated to the creditors remedies against principal debtor upon
original maturity.

HELD:
1. No. The SC ruled that Article 2079 of the Civil Code which provides in part that,
an extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty could not apply in the case at bar.

The Indemnity Agreement speaks of the several indemnitors "applying jointly and
severally (in solidum) to the R & B Surety to become SURETY upon a

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SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00]

for the faithful compliance of the terms and conditions set forth in said SURETY
BOND ." This part of the Agreement suggests that the indemnitors (including
the petitioners) would become co-sureties on the Security Bond in favor of PNB.
The record, however, is bereft of any indication that the petitioners-indemnitors
ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The
petitioners, so far as the record goes, remained simply indemnitors bound to R &
B Surety but not to PNB, such that PNB could not have directly demanded
payment of the Principal Obligation from the petitioners.

2. The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against the principal debtor
upon the original maturity date. The surety is said to be entitled to protect himself
against the principal debtor upon the orginal maturity date. The surety is said to
be entitled to protect himself against the contingency of the principal debtor or
the indemnitors becoming insolvent during the extended period. The underlying
rationale is not present in the instant case.

G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

FACTS:

Inciongs liability resulted from the promissory notes in the amount of P50,000
which he signed with Rene Naybe and Gregorio Pantanosas, holding themselves jointly
and severally liable to private respondent Philippine Bank of Communications. The
promissory note expired without the promisors having their obligation. Consequently,
despite repeated demands sent by the private respondent, the obligors still failed to
respond and pay. Private respondent filed a complaint for collection of sum of P50,000
against the three obligors. The complaint was dismissed for failure to prosecute the
case. However, the lower court reconsidered the dismissal order and required the
sheriff to serve the summons but only the summons addressed to petitioner was served
as the sheriff learned that defendant Naybe had gone to Saudi Arabia.

In petitioners answer. he alleged that he was approached Rudy Campos, who told him
that he was a partner of Pio Tio, the branch manager of private respondent bank, in the
falcata logs operation business. Campos also intimated to him that Rene Naybe was
interested in the business and would contribute a chainsaw to the venture. He added
that, although Naybe had no money to buy the equipment, Pio Tio had assured Naybe
of the approval of a loan he would make with private respondent. Campos then
persuaded petitioner to act as a "co-maker" in the said loan. Petitioner allegedly

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acceded but with the understanding that he would only be a co-maker for the loan of
P50,000. Furthermore, he alleged that five (5) copies of a blank promissory note were
brought to him by Campos at his office. He affixed his signature thereto but in one copy,
he indicated that he bound himself only for the amount of P5,000. Thus, it was by
trickery, fraud and misrepresentation that he was made liable for the amount of
P50,000.

The lower court held that, even granting that said limited amount had actually
been agreed upon, the same would have been merely collateral between him and
Naybe and, therefore, not binding upon the private respondent as creditor-bank. The CA
affirmed the lower courts decision. Petitioners motion for reconsideration having been
denied, he filed a petition for review on certiorari, however, it was also denied.

ISSUE: WON Inciong should be held liable.

HELD:

Yes. Inciong 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 some act of the
creditor, they cannot be subrogated to the rights, mortgages, and preferences of the
latter. However, petitioner signed the promissory note as a solidary co-maker and not
as a guarantor.

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. 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, A guarantor who binds
himself in solidum with the principal debtor does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he assumes to pay the debt before
the property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him.

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. Consequently, the dismissal of the
case against Judge Pontanosas may not be deemed as having discharged petitioner
from liability as well. As regards Naybe, suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may only have recourse against his co-
makers, as provided by law.

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G.R. No. 113931 May 6, 1998

E. ZOBEL, INC., petitioner,

vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION,
and SPOUSES RAUL and ELEA R. CLAVERIA, respondents.

FACTS:

Spouses Claveria, doing business under the name "Agro Brokers," applied for a
loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in
the amount P2,875,000.00 to finance the purchase of two (2) maritime barges and one
tugboat which would be used in their molasses business. The loan was granted subject
to the condition that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by petitioner E.
Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were
executed.

Respondent spouses defaulted in the payment of the entire obligation upon

maturity. Hence, SOLIDBANK filed a complaint for sum of money with a prayer for a writ
of preliminary attachment, against the spouses and petitioner. Petitioner moved to
dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that
it has lost its right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency. SOLIDBANK opposed the motion contending that Article 2080 is not applicable
because petitioner is not a guarantor but a surety.

The RTC denied the motion to dismiss and decided in favor of the respondents.
The CA affirmed the RTCs decision.

ISSUE: 1. WON Article 2080 is applicable to petitioner.

2. WON petitioners obligations to SOLIDBANK under the continuing guaranty is

that of a surety.

HELD:

1. No. A contract of surety is an accessory promise by which a person binds himself

for another already bound, and agrees with the creditor to satisfy the obligation if
the debtor does not. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does not pay the debt.

Strictly speaking, guaranty and surety are nearly related, and many of the
principles are common to both. However, under our civil law, they may be

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distinguished thus: A surety is usually bound with his principal by the same
instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know
every default of his principal. Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal, or by want of notice of the default
of the principal, no matter how much he may be injured thereby. On the other
hand, the contract of guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into before or after that of
the principal, and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract of his principal is not
his contract, and he is not bound to take notice of its non-performance. He is
often discharged by the mere indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of the principal.

Simply put, a surety is distinguished from a guaranty in that a guarantor is the

insurer of the solvency of the debtor and thus binds himself to pay if the principal
is unable to pay while a surety is the insurer of the debt, and he obligates himself
to pay if the principal does not pay.

2. Yes. It appears that the contract executed by petitioner in favor of SOLIDBANK,

albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms
of the contract categorically obligates petitioner as "surety" to induce
SOLIDBANK to extend credit to respondent spouses.

The contract to determine the nature of the undertaking and the intention of the
parties. The contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated itself as an
original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner
liable for the obligation.

G.R. No. 136603 January 18, 2002

EMILIO Y. TAEDO, petitioner,

vs.
ALLIED BANKING CORPORATION, respondent.

This is an appeal via certiorari from the decision of the Court of Appeals reversing the
ruling of the trial court and holding petitioner liable solidarily with defendant Cheng Ban
Yek Co., Inc. for all items of the money judgment and costs of suit.

FACTS:

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Summary of judgment was rendered in favor of the plaintiff, Allied Bank

Corporation and against defendant Cheng Ban Yek and Co. on 9 causes of action. The
court also declared that the "Continuing Guaranty" as having been extinguished after
plaintiff branded it as a "worthless security" and preferred to avail, as it did avail, of the
provisional remedy of attachment; and declaring defendants Alfredo Ching and Emilio
Taedo relieved of their obligation under the said continuing Guaranty.
The summary judgment has its roots in a complaint with preliminary attachment
filed by plaintiff bank to recover sums of money from defendant corporation on its seven
past due promissory notes with principal amounts totaling P10,000,000, from
defendants Alfredo Ching and Emilio Taedo under a Continuing Guaranty providing for
joint and several liability relative to the said promissory notes. The preliminary
attachment sought was granted upon the required bond and was thereafter maintained
despite defendant corporations efforts to have it discharged.
Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek &
Co., Inc. appealed from the summary judgment to the CA. The CA reversed and
modified the trial courts decision, declaring that the defendants Alfredo Ching and
Emilio Taedo solidarily liable with defendant Cheng Ban Yek Co., Inc. for all items of
the money judgment.
Petitioner Taedo filed a motion for reconsideration of the decision, contending
that while the case was pending before the CA, the Allied Bank and Cheng Ban Yek &
Co., Inc. agreed to extend the time of payment of the indebtedness, without the consent
of petitioner, thereby relieving him of his obligation as guarantor or surety of such
obligation. However, the CA denied the motion for lack of merit.
ISSUE: 1. WON the execution by the respondent Bank of the Agreement extinguished
petitioners obligations as surety
2. WON the Continuing guarantee executed by the petitioner is a contract of
(surety) adhesion.

HELD: 1. The agreement between the respondent Allied Banking Corporation and
Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice
or consent of the petitioner as surety of the obligations. However, the "continuing
guarantee" executed by the petitioner provided that he consents and agrees that the
bank may, at any time or from time to time extend or change the time of payments
and/or the manner, place or terms of payment of all such instruments, loans, advances,
credits or other obligations guaranteed by the surety. Hence, the extensions of the loans
did not release the surety.

2. Yes. Even if the "continuing guarantee" were considered as one of adhesion, we find
the contract of "surety" valid because petitioner was "free to reject it entirely". Petitioner
was a stockholder and officer of Cheng Ban Yek and Co., Inc. and it was common
business and banking practice to require "sureties" to guarantee corporate obligations.

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