Credit

Pacionaria Baylon vs Court of Appeals and Leonila Tomacruz August 17, 1999 Facts: Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is the co-manager of her husband in PLDT. Baylon invited Leonila to lend Rosita money for her business as contractor and in return pay the amount and a monthly interest rate of 5%. Persuaded by Baylon’s assurances that the business was stable and the high interest rate Leonila lent Rosita P 150,000. Rosita on the other hand issued and signed a promissory note acknowledging the receipt of P 150,000 payable on August 22, 1987. Baylon signed the promissory note as “guarantor”. Later on, Rosita failed to pay the said amount forcing Leonila to file a case for collection of sum of money against Rosita and Baylon. However summons were never served to Rosita. Baylon denied having guaranteed the payment of the promissory note and claims that the money given to Rosita was not a loan but an investment and that assuming that the loan was guaranteed Leonila has not exhausted the property of Rosita nor resorted to all legal remedies against Rosita as required by law. Trial court ruled in favor of Leonila making Baylon liable for the said amount. This decision was affirmed by the C.A. Issue: WON Baylon should be held liable for the amount of the promissory note. Ruling: No. Rationale: Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that — The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of the principal's property' — the benefit of which the guarantor claims — cannot even begin to take place before judgment has been obtained." This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor. Under the circumstances availing in the present case, the court held that it is premature to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting — that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. The court held that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor.

Allen McConn vs Paul Haragan et. al. and Associate Insurance and Surety Co., Inc. January 31, 1962 Facts: In a case pending at the CFI of Manila entitled Morris McConn vs Paul Haragan the Bureau of Immigration advised the court that Paul Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave the Philippines for 15 days only and requested information whether the court had any objection thereto. The court required Haragan to file a bond of P4,000 "to answer for his return to the Philippines and the prosecution of his case against him, with the understanding, that upon his failure to return, said bond will answer pro tanto for any judgment that may be rendered against him". Thereupon, Haragan submitted a bond, subcribed by him and the Associated Insurance & Surety Co., as principal and surety, respectively. A portion of which states: WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, the guarantee that he will return to the Philippines on or before September 16, 1955; NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL and the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic of the Philippines, or its authorized representatives, in the sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will return to the Philippines on or before September 16, 1955 and that should he fail to do so, said bond will answer pro tanto for any judgment that may be rendered against him. Because of this the court consented to Haragan’s departure for a short stay abroad and a formal leave was given to him. On the date of the supposed return of Haragan, his counsel informed the court that Haragan has been unable to return to the Philippines because the Philippine Consulate in Hongkong had advised Haragan of a communication from our Department of Foreign Affairs banning him from returning to the Philippines. The court then postponed the hearing to January 6, 1956. The court ruled against Haragan and ordered him to pay P 5,500 with 6% interest from Dec. 1954 until full payment and attorney’s fees. McConn moved for the execution of the said bond to satisfy the judgment against Haragan. Associate Insurance and Surety objected thereto upon several grounds and, after due hearing, the lower court issued an order releasing said company from liability under the bond aforementioned and denying plaintiff's motion. Issue: WON the Surety Company is liable to McConn under the bond in view of Haragan’s failure to return to the Philippines. Ruling: No. Rationale: A careful reading of the surety bond, indicates that the surety's principal commitment and on the other hand if defendant Haragan should return to the Philippines on or before September 16, 1955, said bond will not answer for the judgment. It is now the contention of the Associated Insurance that since it was the Republic of the Philippines (obligee under the bond) who rendered the return of defendant Haragan to the Philippines impossible, said surety company is thereby released from its obligation, and cites in support thereof Articles 1266 and 2076 of the New Civil Code. The Court finds it tenable and well grounded, for as the surety company has so well stated 'where the principal obligation (of returning to the Philippines) has been extinguished by the action of the obligee, Philippine Government in preventing such return, the accessory obligation of the surety is likewise extinguished and the bond released of its liability.' Paraphrasing the last paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to do so, said bond will (not) answer pro tanto for any judgment that may be rendered against him.It is in accord with the principle that “The debtor in obligation to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.” (Article 1266, Civil Code of the Philippines.).

Cristina Marcelo Vda. De Bautista vs Brigida Marcos et. al. October 31, 1961 Facts: Brigida Marcos in 1954 obtained a loan amounting to P 2,000 from Cristina Marcel Vda. De Dautista secured by a mortgage of a two-hectare portion of an unregistered parcel of land situated in Sta. Ignacia Tarlac. The deed of mortgage provided that it was to last for three years, that possession of the land mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that said mortgage would be released only upon payment of the principal loan of P2,000 without any interest; and that the mortgagor promised to defend and warrant the mortgagee's rights over the land mortgaged. Subsequently, or in July, 1956, Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance of a free patent over the land in question, on the strength of the cultivation and occupation of said land by them and their predecessor since July, 1915. As a result, Free Patent was issued to the applicants and was registered in their names. Later on, Brigida failed to pay her debt of P 2,000 forcing Cristina to file an action against her for the foreclosure of the mortgage on the land which was given as security. Brigida moved to dismiss the action, pointing out that the land in question is covered by a free patent and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the patentees contracted prior to the expiration of said five-year period. The lower court denied the motion to dismiss on the ground that the law cited does not apply because the mortgage sought to be foreclosed was executed before the patent was issued. Brigida aver that the real contract between the parties is an antichresis and not a mortgage. Lower court rendered judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on the theory that the Public Land Law does not apply in this case because the mortgage in question was executed before a patent was issued over the land in question. And it was a mortgage with usufruct and not antichresis. Brigida is ordered to pay P 2,000 and upon failure to do so Brigida’s undivided share over the mortgaged property should be foreclosed. Issue: Won the mortgage over the land was valid. Ruling: No. Rationale: As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the plaintiffappellee. Nor could the subsequent acquisition by the mortgagor of title over said land through the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel. The invalidity of the mortgage does not, however, imply the concomitant invalidity of the collate agreement in the same deed of mortgage whereby possession of the land mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by herself and through her deceased mother before her since 1915, had possessory rights over the same even before title vested in her as co-owner by the issuance of the free patent to her and her sisters, and these possessory right she could validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from defendants, without any obligation to account for the fruits or benefits obtained by her from the land in question.

Case: MIRA HERMANOS, INC. v. MANILA TOBACCONISTS, INC., ET.AL., PROVIDENT INSURANCE CO. Date: September 29, 1943 Ponente: J. Ozaeta Facts: A written contract was entered into between Mira Hermanos and Manila Tobbacconists wherein the former agreed to deliver to the latter merchandise for sale on consignment upon payment on or before the 20 th day of each month. To secure the fulfillment of the obligation, Mira required Tobbacconists to give a bond of P3000 which was later executed by the Provident Insurance. Later on, the volume of business of the Tobbacconists have inceased so that the merchandise received by it on consignment from Mira exceeded P3000 in value so the latter required the former to an additional bond of P2000. In compliance thereto, Manila Compañia de Seguros executed a bond of P2000 with the same terms and condition as the first bond. Subsequently, a final and complete liquidation was made of the transactions between Mira and Tobbacconists, as a result, a balance of P2272.79 was found. The Tobbacconists recognized the debt but was unable to pay so Mira demanded payment from the 2 surety companies. Provident Insurance paid 60% alleging that the remaining 40% is to be paid by Manila Compañia pursuant to Article 8137 of the Civil Code. But the latter refused to pay the balance contending that so long as the liability of the Tobbacconists did not exceed P3000, it was not bound to pay anything because the bond referred only to the obligation of the Tobbacconists in excess of P3000 and up to P5000. As a result, Mira sued the surety companies. Issue: WON Provident Insurance is entitled to the benefit of dividing the liabilities between it and the Tobbacconists Held: No. Ratio: Art. 1837 provides that should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor can claim from each surety only his proportional part unless liability in solidum has been expressly stipulated. The right to the benefit of division against the cosureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of property against the principal debtor.

As the trial court observed, there would have been no need for the additional bond of P2,000 if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000. In the instant case, although the two bonds on their face appear to guarantee the same debt co-extensively up to P2,000 — that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compañia de Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.

Case: NATIONAL SHIPYARDS & STEEL CORPORATION v. CARIDAD TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION Date: June 26, 1967 Ponente: J. Makalintal Facts: Torrento applied for a purchase on credit of 60 tins of steel bars, 3/8” deformed or plain, at P430 per ton, for a 120-day period with the NASSCO. A contract of purchase and sale was then executed. Pursuant to the stipulation in the contract the value of the steel bars sold to Torrento should be secured by a surety bond, in compliance therewith, Mutual Security Insurance Corporation (MSIC) and Torrento executed in favor of NASSCO a P25,000 bond, whereas the contract called for the payment of P25,800 so a supplemental bond was executed to increase the same to P25,800. In the bond, it was stated in clear terms that both principal and surety are held firmly bound in the said sum, jointly and severally. Later on, NASSCO could no longer supply the steel bars called for in the contract since the 3/8” deformed steel bars had been exhausted. To address the problem, Torrento and NASSCO executed a supplemental agreement wherein NASSCO shall sell to Torrento and the latter shall buy from the former 38.50 tons of steel bars of other sizes for P440 or P430 per ton. NASSCO then delivered to Torrento the said steel bars in the total value of P25,749.09. The 120-day period for payment lapsed and demand letters were sent but MSIC made no reply. As a consequence, an action was brought to recover the unpaid contract price from Torrento and MSIC. The lower court ruled against the latter. On appeal, Torrento maintains that NASSCO has no cause of action against her for the reason that inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of her default is exclusively against her surety. She argues that the cause of action does not arise until after payment by MSIC. On one hand, MSIC averred that the execution of the supplemental agreement without its knowledge and consent released it from any liability under the surety bond as there was a material alteration of the principal contract. CA ruled against Torrento and MSIC, hence, the present appeal. Issue: WON the supplemental agreement constitutes a material alteration that may release MSIC from any liability under the surety bond Held: No. Ratio: The supplemental agreement did not result in Torrento’s assuming more onerous conditions than those stipulated in the original contract, and for which the surety furnished the bond. There was consequently, no material or essential alteration of the original contract which could result in the release of the surety from the obligation under the said bond. For purposes of releasing a surety's obligation, there must be a material alteration of the contract in connection with which the bond is given, a change which imposes some new obligation on the party promising or takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof . . . To allow compensated surety companies to collect and retain premiums for their services and then repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties. While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability and that such liability cannot be extended by implication, it should be noted in the present case that although the technical specifications of the items to be purchased have been changed, it clearly appears that such changes are not substantial and have not added any other liability to that originally assumed. A surety is not released by a change in the contract which does not have the effect of making its obligation more onerous. On the argument of Torrento, the Court found that since the surety bond expressly provides that Torrento and MSIC solidarily bind themselves under the surety bond, it is a suretyship in which case the provisions of the Civil Code with respect to joint and solidary obligations will apply and Article 1216 of the Civil Code which provides that the creditor may proceed against any of the solidary debtors or all of them simultaneously. Although as a rule, sureties are only subsidiarily liable for an obligation, nevertheless, if they biond themselves jointly and severally, or in solidum, with the principal debtor, the creditor can bring action against anyone of them, either alone or together with the principal debtor.

Case: ESTATE OF K. H. HEMADY vs. LUZON SURETY CO., INC. Date: NOVEMBER 28,1956 Ponente: REYES Place: Facts: The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different creditors. The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration of the counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon. the lower court, by order dismissed the claims of Luzon Surety Co., on two grounds: (1) that the premiums due and cost of documentary stamps were not contemplated under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after the execution of the counter bonds; (2) that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be guarantor.” Issue: WON the death of Hemady extinguished liability as guarantor Held: No Ratio: Under the law, the general rule is that a party’s contractual rights and obligations are transmissible to the successors. The rule is a consequence of the progressive “depersonalization” of patrimonial rights and duties. Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract. The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that they are non-transferable. under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; hence, his failure to do so is no sign that he intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more than the company’s faith and confidence in the financial stability of the surety, but not that his obligation was strictly personal. The third exception to the transmissibility of obligations under Article 1311 exists when they are “not transmissible by operation of law”. The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety. From Art. 2056, it is immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor: it is his right, not his duty; may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death. The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs.

Case: MANILA SURETY & FIDELITY CO., INC., vs. NOEMI ALMEDA, doing business under the name and style of ALMEDA TRADING, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION, Date: July 31, 1970 Ponente: REYES Place: MANILA Facts: Noemi Almeda, doing business under the name and style of Almeda Trading, entered into a contract with the National Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates of deliveries As required by' the NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc. was posted by the purchaser to secure the latter's faithful compliance with the terms of the contract. The agreement was later supplemented and a new bond for the same amount of P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. was given in favor of the NAMARCO The bonds uniformly contained the following provisions: 2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon demand, pay said account immediately to the NAMARCO; 3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent of said amount shall also be deemed secured by this Bond; 4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that the liability of the Surety shall be direct and immediate and not contingent upon the exhaustion by the NAMARCO of whatever remedies it may have against the Principal and same shall be valid and continuous until the obligation so guaranteed is paid in full; and 5. The Surety also waives its right to be notified of any extension of the terms of payment which the NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the account, that such extension shall not extinguish the guaranty unless the same is made against the express wish of the Surety.

The marketing firm demanded from the purchaser Almeda Trading the settlement of its back accounts which, allegedly amounted to P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO however, previous to this, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First Instance of Laguna and by order of said court he was declared insolvent. Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case against the spouses Noemi Almeda and Generoso Esquillo, and the NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The action was based on the allegation that the defendant spouses had become insolvent and that defendant NAMARCO had rescinded its agreement with them and had already demanded payment of the outstanding accounts of the couple. The court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-principal did not discharge the surety's liability under the bond. Issue: WON the insolvency of a debtor-principal does not release the surety from its obligation to the creditor under the bond. Held: YES Ratio: There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety company assumed to make immediate payment to said firm of any due and unsettled accounts of the debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. Appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself. The guarantor's action for release can only be exercised against the principal debtor and not against the creditor Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts to be released from the undertaking thus assumed would have been appropriate. 7 Nevertheless, , as is apparent from the precise terms of the legal provision. "The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid, may proceed against the principal debtor ------------------ to obtain a release from the guaranty ---------------." The juridical rule grants no cause of action against the creditor for a release of the guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which is a property right) against his will. For, the release of the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor's assent for its validity (See Article 1270 and Article 1301). Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency. In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the insolvency proceeding. But appellant can not utilize this fact in support of its petition for release from the assumed undertaking. For one thing, it is almost a certainty that creditor NAMARCO can not secure full satisfaction of its credit out of the debtor's properties brought into the insolvency proceeding. Considering that under the contract of suretyship, which remains valid and subsisting, the entire obligation may even be demanded directly against the surety itself, the creditor's act in resorting first to the properties of the insolvent debtor is to the surety's advantage.

Case: BANK OF THE PHILIPPINE ISLANDS, vs. ALBALADEJO Y CIA., S. EN C., ET AL., Date: March 27, 1929 Ponente: OSTRAND, Place: Facts: defendant, Albaladejo and Co., a limited copartnership, obtained a current account credit to the amount of no more than P100, 000 from the Bank of the Philippine Islands at the interest rate of 8 per cent per annum. To secure that credit, Florencio Gordillo and Isidro Martinez, executed a bond. The bank increased the rate of interest to 9 per cent per annum. Failing to meet their obligations to the bank, an action was brought against Albaladejo and Co. and the members of the partnership, Pedro Albaladejo the sureties, Florencio Gordillo and Isidro Martinez, for the recovery of the sum of P136,586.26, the amount then due the bank for the capital and the accrued interest at 9 per cent. During the pendency of the action, Albaladejo and Co., as well as the partners of the company, were declared insolvent and subsequently discharged from their debts, and as a consequence, the present case was dismissed as against Albaladejo and Co., Upon trial the court rendered judgment in favor of the Bank of the Philippine Islands and against Florencio Gordillo and Isidoro Martinez, jointly and severally for the sum of P136,533.26, with interest at 9 per cent per annum Issue: WON The lower court erred In not holding that the facts of the case constitute a valid novation of the contract between the debtors and the bank which releases the sureties from the obligation under the former agreement and In not holding that the extension granted by the bank to the principal debtors for the payment of the loan, without the consent of the sureties extinguishes the latter's liability. Held: No Ratio: This contention cannot be successfully maintained. There is no sufficient in the record to show that the bank actually extended the time for the payment of the debt, but the appellant maintains that the long delay on the part of the bank in enforcing its rights against the debtors is equivalent to an extension of the time. It is a general principle that a creditor is under no obligation to be actively diligent in pursuit of his principal debtor. He may forbear the prosecution of his claim, and remain inactive, without impairing his right to resort to the surety, particularly when his forebearance amounts to no more than a mere inaction or passivity. Therefore the mere neglect of a creditor to sue or to attempt to collect a debt at the time it falls due does not discharge the sureties, although the principal had ample means at the time, and subsequently became insolvent. Similarly, mere passiveness or mere delay in the prosecution of an execution against the principal debtor after judgment, will not discharge the surety. The principal under consideration, however, comprehends something more than mere passivity or inaction resulting from negligence. Thus, a gratuitous indulgence of the principal, whether extended at his request or without it, and whether it is yielded by the creditor from sympathy and from an inclination to favor him, or is the result or mere passiveness, will not operate to discharge the surety, unless he omits to do, when required by the surety, what the law or his duty enjoins him to do, or unless he neglects, to the injury of the surety, to discharge his duty in any matter in which he occupies the position of a trustees for the surety. Mere delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and principal debtor a valid and binding agreement therefore, one which tends to prejudice him, or to deprive him of the power of obtaining indemnity by presenting a legal obstacle, for the time, to the prosecution of an action on the original security. Positive and willful interference by a creditor, embarrassing the recovery of the claim against the principal, will, however, release the surety. In some jurisdictions, moreover, the duty of active diligence in the prosecution of suits, or of execution against the principal can be devolved on the creditor by the surety, if he desires, by requesting it. Also, of course, if a delay in calling on the principal for the money is the result of fraud, that surety will be exonerated. In extension of the principle that the mere delay of the creditor to proceed against the principal will not discharge the surety, it has been held that the surety is not discharged, even if the delay of the creditor is such that his remedy against the principal becomes barred by imitation. It has also uniformly been held that increases of interest rates on the debt do not affect the original obligation of the sureties, though they may not be bound by the increase.

Case: SINGSON VS BABIDA Date: SEPTEMBER 27, 1977 Ponente: AQUINO Place:

Facts: Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located at Barrio Malinta (Finugo), Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936 by Pedro Babida as payment of his attomey's fees in a murder case wherein Babida was the accused. The justice of the peace court in its decision ordered the defendants to vacate the land and allowed Singson to withdraw from Domingo Gerardo, the depositary, "the canons of the land" or the owner's share of the harvests To stay the execution of the inferior court's decision, while the appeal in the Court of First Instance was pending, Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who are not defendants) executed a "counterload for the amount of P3,000 to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which they pray to be disposed (of) and deposited". That counterbond is known as the "first supersedeas bond". The lower court in its decision ordered the defendants to restore the possession of the land to Singson The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal, Doroteo Ballesteros and Pedro Agatep (not parties to the case) separately executed supersedeas bonds in the sum of P2,000 wherein they undertook "to pay to the plaintiff whatever damages he might sustain as a result of" the case. Those under are known as the "second supersedeas bond". Court of Appeals dismissed defendants' appeal Execution sale on June 27, 1961 involving the first supersedeas bond.— To implement the writ of execution of against the first supersedeas bond, the sheriff served a written demand upon the four sureties to pay the sum of P730 plus the expenses and commission in the sum of P19.80. As the four sureties did not heed his demand, the sheriff levied upon the lands of three of the sureties described in the first supersedeas bond and in the writ of execution. The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The sheriff scheduled the sale of the lands of the three sureties. The day of the auction sale, Singson was the only bidder. the three parcels of land of the sureties, were sold to Singson. The execution sale on June 30, 1961 involving the second supersedeas bond. — The judicial was based on the first or original writ of execution. To satisfy that writ of execution Singson was placed in ion of the 24-hectare homestead and the defendants delivered to his overseer 158 cavans of palay, thus leaving an unsatisfied balance of 134 cavans of palay valued at P1,340. the sheriff, apparently to satisfy the balance levy ten hectares of land belonging to defendants Antonio, Bibis, Calpito and Alfredo Peralta, with a total assessed value of P3,590. The sureties on the "second supersedeas bond", the sheriff executed the respective certificates of sale in favor of Singson for the nine parcels of land. He specified that the period of redemption would expire "within one (1) year, counted from this date of sale". The two certificates of sale were registered In a final certificate of sale dated the sheriff conveyed to Singson the parcels of land of the sureties Babida, Garcia and Pacursa. the defendants and the bondsmen filed a supplementary pleading" wherein they prayed that the execution sales be declared void because the obligations of the sureties may be regarded as extinguished with the delivery of the 158 cavans of palay to Singson's overseer and because the sureties were not given the benefit of exhaustion of the principal debtors' properties.

The trial court in its order denied the motion of the bondsmen Issue: WON the bonds are void and sales are void because their liabilities on their supersedeas bonds had already been extinguished before the sales were made; Held: Yes Ratio: The appeal can be disposed of by holding that the two so-called supersedeas bonds, which gave rise to the execution sales under attack, are void because they were not signed by the twelve defendants or judgment debtors as principal obligors They were signed only by the six sureties. Not having been signed by the principal debtors, the supersedeas bonds do not evidence any Principal obligation and are devoid of consideration as to the sureties who have no privity with the judgment creditor nor any liability to him. Other reasons for holding the two supersedeas bonds void are that the first supersedeas bond was not warranted under the judgment of the justice of the peace court and the second supersedeas bond was required in the trial court's order which was issued when it had no more jurisdiction over the case. A supersedeas bond in an ejectment case is usually filed in the inferior court and approved by it and "executed to the plaintiff to enter the action in the Court of First Instance". It covers "the rents, damages and costs down to the time of the final judgment" The supersedeas bond answers only for the rentals or the reasonable compensation for the use and occupation of the premises as fixed in the judgment of the inferior court. In the instant case, the justice of the peace court did not adjudge any rentals or reasonable compensation for the use and occupation of the homestead. That court allowed "the plaintiff to withdraw the canons of the land" from the depositary. Hence, there was no occasion or justification for requiring a supersedeas bond. For that reason, the "first supersedeas bond" was not necessary and is, therefore, a nullity. Any execution against it would likewise be a nullity. With respect to the "second supersedeas bond". it should be underscored that the lower court approved defendants' record on appeal in its order wherein it directed the clerk of court to elevate the same to the Court of Appeals. The appeal was deemed perfected on that date. There is some basis for appellant's contention that the execution sales in question were invalid because the judgment debtors' obligation was extinguished by the lower court's orders of September 10, 1960 and January 28, 1961, reducing their liability for the owner's share of the harvests to 146 cavans of palay or P1,460. In those two orders, the trial court had novated its judgment without any protest on the part of the judgment creditor. It is an undisputed fact that, as heretofore repeatedly emphasized, the judgment debtors had delivered to Singson's overseer 158 cavans of palay valued at P1,580, an amount which is more than the reduced liability of P1,460. That explains why the defendants and the sureties contended in the lower court that its judgment had already been satisfied and that, therefore, further execution was not in order. But even if the supersedeas bonds could be proper bases for selling at public auction the properties of the five sureties, to satisfy the defendants' liability to deliver 146 cavans of palay to Singson or to pay him P1,460, it would not follow that the execution sales are valid.

G.R. No. L-29588

December 29, 1928

STANDARD OIL CO. OF NEW YORK, plaintiff-appellant, vs. CHO SIONG, ET AL., defendants-appellees. -----------------------------------G.R. No. L-29753

December 29, 1928

ONG GUAN CAN, plaintiff-appellant, vs. STANDARD OIL CO. OF NEW YORK, defendant-appellee. Facts: On January 27, 1926, the plaintiff and defendant Cho Siong entered into a contract whereby Cho Siong obligated himself to sell as agent, plaintiff's petroleum products. He guaranteed the fullfillment of his obligation by giving a personal bond in the sum of P3,000, subscribed by Ong Guan Can, and with the sum of P1,000 in cash which he delivered to the plaintiff, with the right to apply it to the payment of any amount in which he might become indebted. Cho Siong also bound himself to pay such attorney's fees, costs, and other expenses, as might be occasioned the plaintiff should it be under the necessity of filing suit for the recovery of any amount to which it might be entitled pursuant to this contract in a sum equal to 10 per cent of the amount owed. By virtue of this contract, Cho Siong received from the plaintiff petroleum to the value of P14,136.79, and made good to said plaintiff the total amount of P14,027.33, thus leaving a balance of P64.46 in favor of the plaintiff and against the defendant Cho Siong. But it appears that on the same day (January 27, 1926), when the plaintiff and defendant Cho Siong entered into the contract to agency and when the other defendant, Ong Guan Can subscribed the P3,000 bond, the defendant Cho Siong signed an instrument in favor of the plaintiff in which he assumed responsibility for all the accounts that might be owing to the plaintiff by the former agent, Tong Kuan, and for all goods the latter might have in his possession at the time when the agency was transferred to Cho Siong. According to the plaintiff's evidence, the amount then owed by Tong Kuan was P3,132.96. Adding P64.46 to this amount, we have the total debt of P3,197.42. Deducting from this the P1,000 in cash which Cho Siong deposited with the plaintiff to be applied upon his liabilities, it leaves a debit balance of P2,197.42 which is the amount claimed in the complaint. According to the above, excluding the debt of the former agent Tong Kuan, the only balance against the defendant Cho Siong on his own contract of agency with the plaintiff is the sum of P64.46. Since the plaintiff has the P1,000 belonging to the defendant Cho Siong, which may be applied to the payment of the sums owed by the latter, it follows that, as to Cho Siong's agency, he has incurred no liabiliy, for out of the P1,000 deposited with the plaintiff he still has P935.54 in his favor. Consequently, Ong Guan Can, as a surety for those debts which Cho Siong might incur upon the contract of agency, does not answer for anything, the principal not having incurred any liability. It is plain under the terms of the bond signed by Ong Guan Can that he did not answer for Cho Siong, save for the latter's act by virtue of the contract of agency. He cannot be held liable for the debt of agent Tong Kuan which Cho Siong assumed by virtue of another contract of which said Ong Guan Can was not even aware. A contract of suretyship is to be strictly interpreted and is not to be extended beyond its terms. The amount of P750 for attorney's fees and court costs, which Cho Siong bound himself to pay to the plaintiff, was agreed upon in the contract of agency, and as Cho Siong did not incur any liability with respect to this contract he cannot be ordered to pay this sum. In the instrument by which Cho Siong assumed the debt of the former agent, Tong Kuan, no stipulation was made as to attorney's fees and as it is on this contract that Cho Siong failed to perform his obligaion it is also clear that he is not liable for any amount as attorney's fees. In view of the foregoing, the appealed judgment is modified as to case No. 29588 and the defendant Cho Siong is ordered to pay the plaintiff the amount of P2,197.42 only, the other defendant Ong Guan Can being relieved from all liability. In case No. 29753 Ong Guan Can claims the sum of P15,000 from the Standard Oil Co., of New York. In the former case No. 29588, the Standard Oil Co., of New York secured a preliminary attachment against Ong Guan Can, which was levied on some of his lands. This attachment consisted simply in the annotation thereof in the transfer certificate of tile entered on November 17, 1927, which attachment was dissolved and the annotation cancelled on the 19th of the same month. The attachment, therefore, only lasted two days. The amount of P15,000 which Ong Guan Can claims of the Standard Oil Co., of New York is the amount of damages he alleges were, caused him by this attachment. Held: The trial court ordered the defendants Cho Siong and Ong Guan Can to pay the plaintiff the amount of P64.46, with legal interest from the date when the complaint was filed until full payment, plus P200 by way of attorney's fees; and defendant Cho Siong to pay the plaintiff the sum of P2,132.96, with legal interest thereon from the date when the complaint was filed until fully paid, plus P500 as

attorney's fees.The trial court finding that no damage proven to have been suffered by Ong Guan Can on account of said attachment, absolved the Standard Oil Co., of New York from this claim in case No. 29753.

G.R. No. L-20199

November 23, 1965

THE COSMOPOLITAN INSURANCE CO., INC., plaintiff-appellee, vs. ANGEL B. REYES, defendant-appellant. Facts: Cosmopolitan Insurance Co., Inc., filed a bond in favor of the Collector of Internal Revenue to secure the payment in stated installments of the total amount of P25,422.85, which appellant Reyes owed for income tax for the years, 1950, 1951, 1952 and 1953.In consideration of the bond, appellant Reyes in turn signed an Indemnity Agreement whereby he bound himself, among other things, — 2) INDEMNITY: — To indemnify the COMPANY upon its demand and keep it indemnified for and to hold and save it harmless from and against, any and all payments, damage, cost, losses, penalties, charges and expenses of whatever kind and nature which the COMPANY as such surety shall or may, at any time make, sustain, incur and/or suffer or for which it has or may become liable to the obligee, and to pay an additional amount as attorney's fees equal to 20% of the amount due to the COMPANY by virtue hereof which in no case shall be less than P50.00 and which shall be payable whether or not the case be extrajudicially settled, it being understood that demand made upon anyone of the undersigned herein is admitted as demand made on all of the signatories hereof. 3) ACCRUAL OF ACTION: — Notwithstanding the provision of the next preceding paragraph where the obligation involves a liquidated amount for the payment of which the COMPANY has become legally liable under the terms of the obligation and its suretyship undertaking, or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY a term or extension for payment of the latter's demand the full amount necessary to discharge the COMPANY'S aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either of them by court action or otherwise to enforce payment, even prior to making payment to the obligee which may hereafter be done by the COMPANY; It is not denied that because of appellant Reyes' failure, the amount of P10,645.38 became due and that, as a result, appellee Cosmopolitan Insurance Co., Inc., became liable on its bond.Appellant Reyes assails, however, the validity of paragraph 3 of the Indemnity Agreement, which he contends is contrary to public policy.the appellant raises the point that there is absolutely no authority in any existing law allowing any person in his capacity as guarantor, as in this case, to obtain, to recover, to receive by way of money judgment from the debtor the amount due to the creditor. The appellant further argues: What security does appellant have, once the amount has been received by appellee from appellant, that the same would be paid to the Collector of Internal Revenue? Issue: whether, under the Indemnity Agreement of the parties, the appellee, as surety, can demand indemnification from appellant Reyes as principal, upon the latter's default, even before the former has paid to the creditor. Held: yes. The Supreme Court held that: 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. Even after analyzing the provisions of the contract entered into between the parties, the court is of the opinion that they do not in any way militate against the public good or that they are contrary to the policy of the law.

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, vs. MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS Facts: The Philippine National Bank had opened a letter of credit and advanced $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor.ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its investigators found that more money were payable to ATACO from the Public Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same purchase order to a total of P311,230.41. Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs.The trial court rendered a decision Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National Bank; Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment; Dismissing the complaint insofar as the claim for 17% special tax is concerned; and Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc. From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the judgment of the court of origin as to the surety's liability. Its motions for reconsideration having proved unavailing, the Bank appealed to this Court. Issue: Held: The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's negligence resulted in exoneration of respondent Manila Surety & Fidelity Company. This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958. This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power of attorney, but because they could not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal debtor itself, and a fortiori reject any demands by the surety. Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security.