Reviewer in Credit Transactions_cases on Guaranty

REVIEWER IN CREDIT TRANSACTIONS CASES ON GUARANTY Philippine National Bank vs. Macapanga Producers, Inc. G.R. No. L-8349, May 23, 1956

Luzon Sugar Company leased a sugar mill to Macapanga Producers at a minimum Facts: annual royalty of P 50,000, which constituted a lien on the sugar produced by the lessee and shall be paid before sale or removal of sugar from warehouse. Macapanga Producers and Plaridel Surety & Insurance executed and delivered to PNB a performance bond of 50,000 for the full and faithful compliance by Macapanga Producers of all terms and conditions of the lease. Thereafter, Luzon Sugar assigned to PNB the payment due from Macapanga Producers in the sum of P50,000, representing royalty for the lease of the sugar. PNB notified Macapanga M acapanga Producers and Plaridel Surety & Insurance of said assignment. However, when PNB demanded payment from Macapanga producers, the latter refused to make payment. PNB sought payment of the same from Plaridel Surety & Insurance but the latter also refused to pay and alleged that it is a guarantor and as such is responsible only if Macapanga Producers has no property or assets to pay its obligation as lessee. Plaridel Surety and Insurance also contended that as it was not a party to the assignment, and was made without its consent, it is, therefore, discharged from its obligation.   On the other hand, PNB contended that Macapanga Producers, as principal, and Plaridel Surety & Insurance Company, as surety, agreed to be held and firmly bound unto Luzon Sugar as stated in their performance bond, and argued that since Plaridel Surety & Insurance bound itself solidarily with Macapanga Producers, it became a surety in accordance with Article 2047, paragraph 2 of the Civil Code which provides that if a person binds himself solidarily with the principal debtor, the provisions on joint and solidary obligations shall be observed. In such case the contract is called a suretyship.

Issues:

(1) Whether Plaridel Surety and Insurance Company is a guarantor or a surety? (2) Whether Plaridel Surety and Inusrance Company is released from the obligation by the assignment or not?

Ruling:

(1) Plaridel Surety and Insurance Company is a surety. surety. The second second paragraph of Article 2047 states the law applicable to the contract contract of suretyship. If a person binds himself solidarily with the the principal debtor, the contract contract is called suretyship suretyship and the guarantor is called surety. As such, Plaridel Surety and Insurance Complany is also a principal debtor. The creditor may sue any of the solidary debtors or all of them simultaneously.

(2) No. An assignment by the creditor without the knowledge or consent of the surety is not a material alteration of the contract sufficient to discharge the surety. Besides, there is no allegation in the complaint, or provision in the deed of assignment, or any change therein that makes the obligation of Plaridel Surety & Insurance more onerous than that stated in the performance bond. Such assignment did not, therefore, release the Plaridel Surety & Insurance from its obligation under the surety bond.

Manila Surety vs. Batu Construction G.R. No L-9353, May 21, 1957

Batu Construction & Company, as principal, and Manila Surety & Fidelity Co. Inc., as Facts: surety, executed a surety bond in favor of the Government of the Philippines to insure faithful performance of Batu Construction's obligation as contractor for the construction of Bacarra Bridge. Manila Surety received a notice from the Director of Public Works annulling its contract because of Batu Construction’s failure to make satisfactory progress in the execution of the works, with the warning that any amount spent by the Government in the continuation of the work, in excess of the contract price, will be charged against the surety bond furnished by Manila Surety. It also appears that a complaint by the laborers in said project was filed against Batu Construction and the Manila Surety, for unpaid wages. Manila Surety filed a complaint against Batu Construction, et al. praying, among others, that defendants deliver sufficient security to protect it from any proceedings by the creditors on the Surety Bond and from the danger of insolvency of the defendants. Amboy moved for the dismissal of the complaint, on the ground that the remedy provided for in the last paragraph of Article 2071 of the new Civil Code may be availed of by the guarantor only and not by a surety. Issue: Whether the last paragraph of Article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety. Ruling: No.

 Article 2071 of the NCC may be availed of by a guarantor and by a surety.  A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the principal does not pay. In suretyship, the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for the surety maybe sued independently. A surety has assumed a responsibility more onerous than that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. Manila Surety’s cause of action comes under paragraph 1 o f article 2071 of the NCC, because the action brought by the laborers for the collection of unpaid wages in connection with the construction of the Bacarra Bridge is a suit for the payment of an amount for which the surety bond was posted. Paragraph 1 of article 2071 of NCC provides that the guarantor, even before having paid, may proceed against the principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor

be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor.

ESTRELLA PALMARES, petitioner, vs COURT OF APPEALS and M.B. LENDING CORPORATION, respondents. G.R. No. 126490 March 31, 1998

Facts: Pursuant to a promissory note dated March 13, 1990, M.B. Lending Corporation extended a l oan to the spouses Osmeña and Merlyn Azarraga, together with Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16, 300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. Consequently, on the basis of petitioner's solidary liability under the promissory note, M.B. Lending Corporation filed a complaint against Palmares as the lone party- defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter. Issue: Whether or not a party who signed a promissory note as a co-maker and bound herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? Ruling: He is a surety because a surety is an insurer of the debt. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guar antor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. Here, Palmares expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that her liability is that of a surety. Having entered into the contract with full knowledge of its terms and conditions, Palmares is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. JEANETTE D. MOLINO vs. SECURITY DINERS INTERNATIONAL CORPORATION G.R. NO. 136780 August 16, 2001 FACTS: On 24 July 1987, Jeanette Molino acted as a surety for her brother-in-law, Danilo Alto, in his application for a local credit card (P10,000.00 credit limit) with the Security Diners International Corporation (SDIC).

 A Surety Undertaking was signed by Jeanette which states that she bound herself jointly and severally with Danilo to pay SDIC all obligations and charges in the use of the credit card; and she declared that "any change or novation in the Agreement shall not release her from the Surety Undertaking," it being understood that said Undertaking is a continuing one and shall subsist and bind her until all such obligations, charges, and fees have been fully paid and satisfied. The application of Danilo was approved by SDIC. On 8 February 1988, he requested SDIC to upgrade his Regular Card to Diamond Card (no credit limit). As a requirement, Danilo secured the approval of Jeanette who then signed a note indicating her approval to the said request. On 01 October 1988, Danilo defaulted in the payment of P166,408.31. SDIC filed an action for collection against Danilo and Jeanette before the RTC of Makati. Jeanette claimed that the Surety Undertaking only applies to the original agreement covering the Regular Card first issued to Danilo and incurred no liability under the Diamond Card because she did not expressly give her consent to be a surety thereto; and the upgrading of the card extinguishes her obligation under the original agreement and Surety Undertaking. ISSUE: Whether the upgrading of the card constituted a novation that will extinguish Jeanette’s obligation under the original agreement and Surety Undertaking. HELD: The upgrading was a novation because it was committed with the intent of cancelling and replacing the first card. However, the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. The Surety U ndertaking expressly provides that petitioner’s liability is solidary.   A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.

The petition filed by Jeanette was dismissed for lack of merit. Paramount Insurance vs. Court of Appeals G.R. No. 110086 July 19, 1999

Facts:  McAdore Finance and Investment, Inc. (McADORE) and Dagupan Electric Corporation (DECORP) entered into a contract whereby DECORP shall provide electric power to McADORE's Hotel. During the term of their contract for power service, DECORP noticed discrepancies between the actual monthly billing of McADORE and this was subsequently affirmed upon investigation. DECORP sent a corrected electric bill to McADORE's Hotel but the latter refused to pay, prompting DECORP to cut off its electric services to the hotel. Aggrieved, McADORE commenced a suit against DECORP for

damages with prayer for a writ of preliminary injunction. McADORE posted injunction bonds from several sureties, one of which was Paramount Insurance Corporation, which issued an injunction bond with a face amount of P500,000.00. The RTC of Quezon City ruled in favor of DECORP; the court rescinded the contract between McADORE and held that all the bonding companies are jointly and severally liable with McAdore, to the extent of the value of their bonds, to pay actual, moral, and exemplary damages adjudged to DECORP. Paramount appealed the decision to the Court of Appeals asserting that it is only liable to pay actual damages, aside from its contention that it was denied due process because it was not notified by DECORP of its intention to present evidence of damages against its injunction bond.

Issue: Whether or not Paramount is correct in maintaining that it is only liable to pay actual damages?

Ruling: No. Paramount is not correct in maintaining that it is only liable to pay actual damages.

 A scrutiny of petitioner's Indemnity Agreement with McADORE shows that the former agreed "to become surety" for the stated amount "in favor of DECORP. By the contract of suretyship, it is not for the obligee to see to it that the principal pays the debt or fulfills the contract, but for the surety to see to it that the principal pay or perform. The purpose of the injunction bond is to protect the defendant against loss or damage by reason of the injunction in case the court finally decides that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly. Thus, the bondsmen are obligated to account to the defendant in the injunction suit for all damages, or costs and reasonable counsel's fees, incurred or sustained by the latter in case it is determined that the injunction was wrongfully issued. Trade & Investment (Philguarantee) vs. Roblett et al., and Paramount Insurance Corp. G.R. No 139290, November 11, 2005

The general contractor of a foreign oil company (KNPC) opened for bidding in 1984 a Facts: subcontract for the supply of workers for a project in Kuwait. Roblett, to qualify as a bidder, was required to post a bid bond. Consequently, Roblett applied withthe Bank of Kuwait (BKME) for a letter of guarantee to cover the amount. The bank consented on the condition that Roblett would obtain a counterguarantee to secure bond. Roblett then obtained from Philguarantee a counterguarantee in favor of BKME, however, its issuance was conditioned upon the execution by Roblett of a Deed of Undertaking. Under the terms of the Deed, Roblett bound itself to keep petitioner free and harmless from any damage or liability which may arise out of the issuance of its bid bond guaranteeand to give their irrevocable consent and approval to any and all extensions of the period of the guarantee. The Deed required that the counterguarantee be secured by a surety bond equivalent to 100% of the guarantee accommodation. The instrument had to be in the form of a surety bond; the same must be issued by an insurance company acceptable to Philguarantee and must be coterminous with the guarantee to be issued. Roblett was awarded the subcontract by KNPC. The required performance bond was pending with the Central Bank, however, its application was disapproved. As a result, Roblett was not able to post the bond and was deemed by KNPC to have breached the

subcontract. KNPC confiscated BKME’s bid bond, which in turn called on petitioner Philguarantee’s counterguarantee. Thus, Philguarantee notified Paramount of the payment it had made to BKME. Paramount again contended that the bond it issued was in the nature of a bidders bond and not a performance bond. It argued that when the subcontract was awarded to and was entered into by Roblett, its liability on the Surety Bond, which was actually a bidders bond, already ceased, hence, this petition. Issue:

Whether or not Paramount was liable as surety to the petitioner.

Ruling: Yes.

 A perusal of the Surety Bond reveals that Paramount bound itself jointly and severally with Roblett to pay petitioner to the extent of P11, 775,611.35 whatever damages and liabilities the latter may incur by virtue of its guarantee. This liability on the part of Paramount obtains upon the occurrence of one condition: that petitioners counterguarantee be called upon by BKME. What is actually secured by Paramounts bond is not Robletts bid with KNPC, but rather the guarantee put up by petitioner to secure BKMEs bidders bond. Paramounts Surety Bond guarantees indemnification to petitioner for whatever it may pay by virtue of its counterguarantee. Time and again, we have ruled that the liability of a surety is determined strictly on the basis of the terms and conditions set out in the surety agreement. Hence, we need not look beyond the contract to determine the nature and scope of Paramounts undertaking.

G.R. No. 121879 August 14, 1998 EMPIRE INSURANCE COMPANY, petitioners, vs NATIONAL LABOR RELATIONS COMMISSION and MONERA ANDAL, respondents.

Facts: Monera Andal applied with G & M Phils., Inc. for an overseas employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a monthly basic salary of US $200.00. After serving 7 years and half, she sought help from the Philippine Embassy contending that she was illegally dismissed, non-payment and underpaid of salaries, by her employer. She also claims that she was abused by her employer and was given $450 representing her three (3) months. Impleaded as a co-respondent in the complaint was the herein petitioner, Empire Insurance Company, in its capacity as the surety of G & M Phils. Empire Insurance Company, now the petitioner, theorized that Monera Andal was without any cause of action against it for the alleged reason that the liability of its principal and co-respondent had not been established. It further argued that its liability, if any, for the money claims sued upon was merely subsidiary. In its answer to the complaint, respondent G & M (Phils.), Inc., stated that it had no knowledge of complainant’s unpaid and underpaid salaries, her working conditions and of the proceedings at the Philippine Embassy. NLRC held that the Empire Insurance is liable as it is settled that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Issue: Whether or not the petitioning surety company is jointly liable with its principal, G & M Phils., Inc., a recruitment agency, for the payment of respondent employee’s monetary claims in litigation. Ruling: The surety company is solidarily liable with its principal. Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default

or miscarriage of another, known as the principal. The surety’s liability is solidary but the nature of its undertaking is such that unless and until the principal debtor is held liable it does not incur liability. When the herein petitioner, Empire Insurance Company, entered into a suretyship agreement with G & M Phils., Inc., it bound itself to answer for the debt or default of the latter. And, since the POEA and NLRC found the said recruitment agency liable to private respondent, petitioner’s liability likewise proceeds from such a finding. As a surety, Empire Insurance Company is primarily liable to Monera  Andal, as judgment creditor, for her monetary claims against its principal, G & M Phils., Inc., and is immediately bound to pay and satisfy the same.

PEOPLE OF THE PHILIPPINES vs. JULIA MANIEGO G.R. NO. L-30910 February 27, 1987 FACTS: In 1957, Lt. Rizalino M. Ubay, Disbursing Officer in the Office of the Chief of Finance, was convicted of the crime of malversation in conspiracy with Julia T. Maniego, the indorser of personal checks drawn against the PNB and BPI. Maniego was acquitted on reasonable doubt but both she and Ubay are ordered to pay jointly and severally the amount of P57,434.50 (the amount malversed) to the Government.

Maniego argued that her acquittal absolved her from civil liability to indemnify the Government; and as a mere indorser, she cannot be made liable on account of the dishonor of the checks indorsed by her. ISSUE: Whether or not Maniego’s acquittal absolved her from any civil liability; and Whether or not Maniego is liable as indorser to indemnify the Government. HELD: The Supreme Court ruled that the Trial Court was correct in adjudging Maniego to be civilly liable in the same criminal action in which she had been acquitted of the felony of Malversation. Extinction of the penal action does not carry with it extinction of the civil unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist.

The Court also ruled that Maniego is liable as indorser. Under the law, the holder or last indorsee of a negotiable instrument has the right to "enforce payment of the instrument for the full amount thereof against all parties (including the indorser) liable thereon." Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it." Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." As such, she is under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew ** (her) to be only an accommodation party, although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, "since the relation between them is in effect that of principal and surety, the accommodation party being the surety."

The judgment of the Trial Court was affirmed in toto. Philippine Export and Foreign Loan Guarantee Corporation vs. VP E usebio Construction G.R. No. 140047 July 23, 2004 Facts: 3-Plex International, Inc., a local contractor, entered into a joint venture agreement with Ajyal Trading and Contracting Company, a duly licensed firm in Kuwait, for the construction of the Institute of Physical Therapy-Medical Center in Baghdad, Iraq. 3-Plex then entered into a joint management agreement with V.P. Eusebio Construction, Inc. (VPECI) for the execution of the project. Since the State Organization of Buildings (SOB) of the Iraqi Government required contractors to submit a performance and advance payment bonds, 3-Plex and VPECI applied for the issuance of a guarantee with Philguarantee. Letters of guarantee were then issued by Philguarantee to the Rafidain Bank of Baghdad, the government bank of Iraq, covering 100% of the performance and advance payment bonds, but these were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al  Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from Philguarantee. Due to the slow progress of the construction, Al Ahli Bank sent a telex call to the Philguarantee demanding full payment of its performance bond counter-guarantee. Philguarantee then paid Al Ahli Bank and accordingly, sent to  VPECI and 3-Plex separate letters demanding full payment. Due to failure of the latter to pay, Philguarantee commenced a collection suit against them. The trial court dismissed the complaint after finding that the joint venture contractor incurred no delay in the execution of the Project. It was held that it is the project owner's violations of the contract which rendered impossible the contractor's performance of its undertaking, thus, no valid call on the guarantee could be made. It also held that no valid notice was first made by the project owner (SOB) to the joint venture contractor before the call on the guarantee.

Issue: Whether or not Philguarantee is entitled to reimbursement of what it paid to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond?

Ruling: No. First, the petitioner is not a surety rather he is a guarantor whereby he binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is called suretyship. The guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself. In his obligation first before resort to the guarantor could be had. However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor. If the obligation was subject to defenses on the part of the debtor, the same defenses which

could have been set up against the creditor can be set up against the paying guarantor. But as to the findings of the trial court, it is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site. International Finance Corporation vs. Imperial Textile Mills, Inc. G.R. No 160324, November 15, 2005 Facts: Petitioner Finance Corporation (IFC) and respondent Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement where IFC extended to PPIC a loan of 7 Million US Dollars payable in 16 semi-annual installments beginning June 1, 1977 to December 1. 1984 with 10% interest per annum. Interest shall be paid in US Dollars semi-annually on June 1 and December 1 in each year and interest for any period less than a year shall accrue and be pro-rated on the bases of 360-day year of 12 30-day month basis. A “Guarantee Agreement” was executed with Imperial Textile Mills (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties. ITM and Grandtex agreed to guarantee PPIC’s obligation under the loan. But thereafter,  despite notice, PPIC failed to the loan and its interests. Hence, IFC, with DBP, applied for extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment, plant and all improvements owned by PPIC at Calamba, Laguna. The deputy sheriff issued a notice of extrajudicial sale. IFC and DBP were the only bidders. IFC’s bid is not enough to cover the whole amount, leaving a balance of 283, 967 US Dollars. Again, PPIC failed to pay the balance. So IFC demanded ITM and Grandtex, as guarantors. But despite demand, the balance remained unpaid. The trial court held PPIC liable for the balance plus interest but relieved ITM of its obligation as guarantor. On the other hand, CA held otherwise, but ITM’s liability as guarantor would arise onl y if and when PPIC could not pay. Since PPIC’s inability to pay was not sufficiently established, ITM could not immediately be made to assume the liability. Issue: with PPIC.

Whether or not ITM and Grandtex are sureties and therefore jointly and severally liable

Ruling: Yes.

 According to the language of the contract of guaranty between the parties, the guarantors  “jointly and severally, irrevocably, absolutely and unconditionally, guaranty, as primary obligors and not as sureties merely. While referring to ITM as guarantor, the agreement specifically stated that the corporation was “jointly and severally” liable. The contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant that it was a surety.The use of the word guarantee does not ipso facto make the contract one of guaranty. The very terms of the contract govern the obligation of the parties. G.R. No. 148864 August 21, 2003 SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, Petitioners, vs. MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMEC'S** REALTY AND DEVELOPMENT CORP. and the REGISTER OF DEEDS OF BULACAN, Respondents.

Facts: Spouses Evangelista executed a Mortgage in favor of Mercator for and in consideration of certain loans and other forms of credit accommodations given by Mercator, amounting to P844,625. Spouses Evangelista and Embassy Farms signed the promissory note as co-makers, aside from the Continuing

Suretyship and the succeeding promissory notes restructuring the loan. Due to their failure to pay the obligation, the mortgaged properties were foreclosed and sold. Spouses Evangelista are assailing the validity of the foreclosure proceedings by Mercator, the sale in the public auction, new TCT’s, and subsequent sale to Salazar, and the subseque nt sale and transfer to herein respondent Lamecs. They claimed being the registered owners of five (5) parcels of land contained in the Real Estate Mortgage executed by them and Embassy Farms, Inc. They did not receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms so the mortgage was without any consideration as to them since they did not personally obtain any loan or credit accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is void. Issue: Whether or not Spouses Evangelista are jointly and severally liable to pay Mercator for affixing their signatures in the promissory note as officers of Embassy Farms, Inc.. Ruling:  Yes, Spouses Evangelista are jointly and severally liable. Even if the spouses intended to sign the note merely as officers of Embassy Farms, still this does not erase the fact that they subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal. The spouses cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the rule that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. A surety is bound by the same consideration that makes the contract effective between the principal parties thereto. Having executed the suretyship agreement, there can be no dispute on the personal liability of petitioners. PHILIPPINE PRYCE v. CA G.R. NO. 107062 February 21, 1994 FACTS: Gegroco, Inc filed before the Makati Regional Trial Court, Branch 138 complaint for collection of sum of money. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively. The trial court favored Gegroco, Inc. Upon appeal to the CA, it affirmed RTC decision. Interworld Assurance Corporation checks issued by its principal which were supposed to pay for the premiums, which bounced and it was not yet authorized by the Insurance Commission to issue surety bonds. ISSUE: Whether or not Interworld Assurance Corporation should be liable for the surety bond that it issued as payment for the premium. HELD: The Court ruled in the affirmative. Interworld Assurance Corporation is liable for the surety bond it issued as payment for the premium.

Under Sec. 177 of the Insurance Code: The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.

Interworld's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against Gegroco. No person can claim benefit from the wrong he himself committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. Jacinto Uy Dino vs. Court of Appeals G.R. No. 89775 November 26, 1992 Facts: In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), through its representative Uy Tiam, applied for and obtained credit accommodations from Metropolitan Bank and Trust Company (Metrobank). To secure the same, Norberto Uy and Jacinto Uy Dino executed a separate Continuing Suretyships, in favor of the latter. UTEFS was able to pay the 1977 obligation. It obtained another credit accommodation from Metrobank in 1979, which covered the purchase of goods from Planters Products. UTEFS executed and delivered to Metrobank a trust receipt, whereby the former acknowledged in receipt in trust from the latter of the aforementioned goods from Planters Products. Being the entrusted, UTEFS agreed to deliver to Metrobank the entrusted goods in the event of nonsale or, if sold, the proceeds of the sale thereof. UTEFS failed to deliver to Metrobank, which prompted the latter to send demand letters to the former and the sureties, Uy and Dino, for the payment of the sum. UTEFS made partial payments to the bank which was accepted by the latter. Having sent the last demand letter to UTEFS, Dino and Uy, and finding resort to extrajudicial remedies to be futile, Metrobank filed a complaint for collection of a sum of money against the three. Dino and Uy filed a Motion to Dismiss the complaint on the ground of lack of cause of action, contending that the 1977 credit accommodation secured by their 1977 Continuing Suretyship has already been paid, thus dissolving the suretyship. Moreover, the contend that the continuing suretyship agreement cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; thus they cannot exist without a valid obligation.

Issue: Whether or not the petitioners are liable as sureties for the 1979 obligations of Uy Tiam to Metrobank by virtue of the Continuing Suretyship Agreements they separately signed in 1977?

Ruling:  Yes. Dino and Uy are liable as sureties for the 1979 obligations by virtue of the 1977 Continuing Suretyship Agreements. Article 2053 of the Civil Code provides that a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. Furthermore, it also stated that a guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be

used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. In this case, the provisions of the contracts unequivocally reveal that the suretyship agreement are continuing in nature. And since no notice was given by the petitioners to Metrobank, the suretyships are deemed outstanding. On the contention that Continuing Suretyship  Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977, the law speaks of a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. Therefore, the agreements cover even the 1979 obligation, making Dino and Uy liable to pay Metrobank the remaining unpaid balance of the obligation together with the interest due, attorney’s fees and costs. RCBC vs. Cerro G.R. No L-49401, July 30, 1982 Facts: Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensive surety agreement to guaranty, above all, any existing or future indebtedness of Davao Agricultural Industries Corporation (Daicor), and/or induce the bank at any time or from time to time to make loans or advances or to extend credit to said Daicor, provided that the liability shall not exceed at any time Php100,000.00. A promissory note for Php100,000.00 (for additional capital to the charcoal buy and sell and the activated carbon importation business) was issued in favor of petitioner RCBC payable a month after execution. This was signed by Go in his personal capacity and in behalf of Daicor. Respondent Chua did not sign in said promissory note. As the note was not paid despite demands, RCBC filed a complaint for a sum of money against Daicor, Go and Chua. The complaint against Chua was dismissed upon his motion, alleging that the complaint states no cause of action against him as he was not a signatory to the note and hence he cannot be held liable. This was so despite RCBC’s opposition, invoking the comprehensive surety agreement which it holds to cover not  just the note in question but also every other indebtedness that Daicor may incur from petitioner bank. RCBC moved for reconsideration of the dismissal but to no avail, hence, this petition. Issue: Whether or not respondent Chua may be held liable with Go and Daicor under the promissory note, even if he was not a signatory to it. Ruling: Yes.

The comprehensive surety agreement executed by Chua and Go, as president and general manager, respectively, of Daicor, was to cover existing as well as future obligations which Daicor may incur with RCBC. This was only subject to the proviso that their liability shall not exceed at any one time the aggregate principal amount of Php100,000.00. (Par.1of said agreement). The agreement was executed to induce petitioner Bank to grant any application for a loan Daicor would request for.  According to said agreement, the guaranty is continuing and shall remain in full force or effect until the bank is notified of its termination. During the time the loan under the promissory note was incurred, the agreement was still in full force and effect and is thus covered by the latter agreement. Thus, even if Chua did not sign the promissory note, he is still liable by virtue of the surety agreement. The only condition necessary for him to be liable under the agreement was that Daicor  “is or may become liable as maker, endorser, and accept or otherwise.” The comprehensive surety agreement signed by Go and Chua was as an accessory obligation dependent upon the principal obligation, i.e., the loan obtained by Daicor as evidenced by the promissory note. The surety agreement unequivocally shows that it was executed to guarantee future debts that may be incurred by Daicor with petitioner, as allowed under NCC Art.2053.

 “A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.”  Case No. 37

G.R. No. L-3751 October 25, 1952  VISAYAN DISTRIBUTORS, INC., plaintiff-appellee, vs MARIANO R. FLORES, ET AL, defendants-appellants. Facts:  Visayan Distribution Incorporation and Mariano Flores and Teofilo Abeto entered into a Contract whereby Abeto and Flores bound themselves to deliver to Visayan at the port of Romblon the 2,000 long tons of copra. The parties agreed that upon satisfactory inspection of the copra, Visayan would advance to Aberto and Flores the sum of Php10,000.00 for initial weighing and checking expenses, plus another Php10,000.00 on the first day of loading, and that Visayan would provide vessel, among others. Also surety bond was executed by Abeto and Flores as principals and by Rizal Surety and Insurance Co. (Rizal Surety, for brevity), the sum of Php30,000 to secure the performance of the subject contract. With due notice to Abeto and Flores, Visayan sent SS PANAMAN to the port of Romblon however, Flores and Abeto failed to deliver any amount of copra. SS PANAMAN left the port without cargo. Consequently, Visayan field a complaint at the Court of Instance of Manila against  Aberto, Flores and Rizal Surety for breach of contract. The Court of First Instance rendered an Order ordering Abeto and Flores and Rizal Surety liable to pay jointly and severally liable to pay Visayan. The liability however of Rizal Surety was limited to the Php30,000.00 only subject to reimbursement from Abeto and Flores. All parties filed their Appeals. The Surety claims that it was released from liability under its bond because Abeto and Flores and the appellee novated their contract of November 9, 1946, without the consent of the Surety. In the main, the Surety alleges that the appellee advanced P10,000 to Abeto and Flores before the inspection of copra, and thereafter made another advance payment of P3,000, in addition to the fact that the manner of payment was changed from a letter of credit to cash, and that 26,875 empty sacks were delivered to Abeto and Flores instead of only 15,000 as stipulated in the contract. Issue: Whether nor not Surety was released from its liabilities given the circumstances. Ruling: No. The claim of Rizal Surety that it was released from liability under its bond because Abeto and Flores and Visayan novated their contract without its consent is not proper. With reference to the payment of P10,000, it appears that the same was made with the knowledge of the Surety as shown on the duplicate copy. As to the advance payment of P3,000, suffi ce it to state that said payment could not adversely affect the position of the Surety or render the obligation more onerous, and therefore could not have the effect of releasing the bond. In respect of the 26,875 empty sacks, it may be pointed out that although the contract bound the appellee to furnish Abeto and Flores with only 15,000 sacks, the excess could likewise have no adverse effect insofar as the Surety was concerned, it appearing that the Surety is not being charged with the value of such excess intended to be used by the appellee for any proper purpose. Indeed, the liability of the Surety under the bond is limited to P30,000, easily covered by the first advance payment of P10,000 and the value of 15,000 empty copra sacks, at the proven price of P1.50 per sack. BA FINANCE CORP v. CA GR 94566, July 3, 1992

FACTS: On December 17, 1980, Renato Gaytano, doing business under the name Gebbs International, applied for and was granted a loan with respondent Traders Royal Bank in the amount of P60,000.00. As security for the payment of said loan, the Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly and severally to respondent bank the amount of the loan including interests, penalty and other bank charges. In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as credit administrator of BA Finance Corporation for and in behalf of the latter, undertook to guarantee the loan of the Gaytano spouses. Partial payments were made on the loan leaving an unpaid balance in the amount of P85, 807.25. Since the Gaytan spouses refused to pay their obligation, respondent bank filed with the trial court complaint for sum of money against the Gaytano spouses and petitioner as alternative defendant. The Gaytano spouses did not present evidence for their defense. Petitioner, on the other hand, raised the defense of lack of authority of its credit administrator to bind the corporation. On December 12, 1988, the trial court rendered a decision in favor of plaintiff and against defendants/Gaytano spouses, ordering the latter to jointly and severally pay the plaintiff. Not satisfied with the decision, respondent bank appealed with the Court of Appeals. On March 13, 1990, respondent appellate court rendered judgment modifying the decision of the trial court. Hence, this petition. ISSUE: Whether or not the letter of guaranty of Wong is ultra vires act. HELD: Wong acts beyond his authority.  Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security requirement, which is far above the amount subject of the guaranty in the amount of P60,000.00, nothing in the said memorandum expressly vests on the credit administrator power to issue guarantees. We cannot agree with respondent's contention that the phrase "contingent commitment" set forth in the memorandum means guarantees. It has been held that a power of attorney or authority of an agent should not be inferred from the use of vague or general words. Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits. In one case, where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that such fact did not authorize him to make her liable as a surety for the payment of the debt of a third person. The sole allegation of the credit administrator in the absence of any other proof that he is authorized to bind petitioner in a contract of guaranty with third persons should not be given weight. The representation of one who acts as agent cannot by itself serve as proof of his authority to act as agent or of the extent of his authority as agent. Wong's testimony that he had entered into similar transactions of guaranty in the past for and in behalf of the petitioner, lacks credence due to his failure to show documents or records of the alleged past transactions. The actuation of Wong in claiming and testifying that he has the authority is understandable. He would naturally take steps to save himself from personal liability for damages to respondent bank considering that he had exceeded his authority. The rule is clear that an agent who exceeds his authority is personally liable for damages

Willex Plastic Industries Corp. vs. Court of Appeals G.R. No. 103066 April 25, 1996 Facts: Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. As a security, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed separate Continuing Surety Agreements whereby they bound

themselves solidarily to pay Manilabank obligations of every kind, on which the Inter-Resin Industrial may now be indebted or hereafter become indebted to the Manilabank. Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a Continuing Guaranty in favor of IUCP for the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation from IUCP, InterResin Industrial and Willex Plastic jointly and severally guaranteed the prompt and punctual payment at maturity of the notes. When Manilabank demanded from IUCP, the latter paid the sum of P4,334,280.61 representing Inter-Resin Industrials 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 a collection case against Inter-Resin Industrial and Willex Plastic. One of Willex Plastic's contentions was that the Continuing Guaranty cannot be retroactively applied so as to secure the payments made by Interbank (successor of Atrium) under the two Continuing Surety Agreements. Issue: Whether or not the Continuing Guaranty Agreement can be applied retroactively? Ruling: Yes. By its very nature a continuing suretyship contemplates a future course of dealing. It is prospective in its operation and is generally intended to provide security with respect to future transactions. However, this rule must yield to the intention of the contracting parties as revealed by the evidence. In the end, the intention of the parties as revealed by the evidence is controlling. And in this case, the parties to the Continuing Guaranty clearly provided that the guaranty would cover sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank. Thus, the Continuing Guaranty Agreement should apply retroactively.

Tupaz vs. CA G.R. No 145578, November 18, 2005

Petitioners Jose Tupaz IV and Petronila Tupaz were the Vice-President for Operations Facts: and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation. The said corporation had a contract with the Philippine Army to supply the latter with survival bolos. To finance the purchase of the raw material for the said bolos, the petitioners, on behalf of the corporation, applied with respondent Bank of the Philippines (BPI) for two commercial letters of credit in favor of El Oro Corporations suppliers, Tanchaoco Manufacturing Incorporated (Tanchaoco Incorporated) and Maresco Rubber and Retreading Corporation (Maresco Corporation). Respondent BPI granted petitioners application and issued a letter of credit for P564,871.05 to Tanchaoco Incorporated and another letter of credit for P294,000 to Maresco Corporation. Thereafter, the petitioners signed trust receipts in favor of BPI. Petitioner Tupaz signed, in his personal capacity, a trust receipt corresponding to the letter of credit to Tanchaoco Inc. and bound himself to sell the goods covered by the said letter of credit and to remit the proceeds to BPI, if sold, or to return the goods, if not sold on or before 29 December 1981. On 9 October 1981, the petitioners signed, in their capacities as officers of the corporation, a trust receipt corresponding to the letter of credit to Maresco Corporation and bound themselves to sell the goods and to remit the proceeds to BPI if sold, or to return the goods if not sold, on or before 8 December 1981. After Tanchaoco Inc. and Maresco Inc. delivered the raw materials to the corporation, BPI paid for the letters of credit. The petitioners did not comply with their undertaking under the trust receipts so BPI made several demands for payment but the corporation made partial payments. BPI’s counsel and its representative sent fin al demand letters to the corporation but the latter said that it could not pay fully because the Armed Forces of the Philippines (AFP) delayed payment for the bolos. BPI charged the petitioners with estafa under the Trust Receipts Law (PD 115) to which the petitioners pleaded not guilty to the charges. The trial court acquitted the petitioners but rendered them solidarily liable with the corporation for the balance

of the principal debt under trust receipts. The petitioners appealed to the Court of Appeals but the latter affirmed the trial court’s ruling, hence, this petition. Issue: Whether or not the petitioners are liable as guarantor under the trust receipt. Ruling: Yes. Respondent bank’s suit against petitioner Jose Tupaz stands despite the Court’s finding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the execution of the judgment against him until after the assets of the principal debtor shall have been exhausted. Second, the benefit of excussion may be waived. Under the trust receipt, petitioner Tupaz waived excussion when he agreed that his “liability in the guaranty shall be direct and immediate, without any need whatsoever on the part of BPI to take any steps or exhaust any legal remedies.” The clear import of this stipulation is that petitioner Tupaz waived the benefit of excussion under his guarantee.

 As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust receipt. G.R. No. L-43862 January 13, 1989 MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs. FELIPE YSMAEL, JR., & CO., INC., defendants-appellants. Facts: Felipe Ysmael, Jr. & Co., Inc., filed an application for an overdraft li ne and credit line both of P1,000,000 with the PNB upon the condition that the former shall have filed a bond in the sum of P140,000 to guarantee the payment of the said amount. Accordingly, Ysmael Jr. & Co. as principal and Mercantile Insurance Co. executed two surety bonds with the condition that if Ysmael, Jr. & Co. shall perform and fulfill its undertakings with the PNB, then the surety bonds shall be null and void.  As security and in consideration of the execution of the surety bonds, Ysmael, Jr. & Co. and Felipe executed with the Mercantile indemnity agreements which provide, among others that payment of indemnity or compensation may be claimed irrespective of whether or not Mercantile has actually paid the same. When Ysmael, Jr. & Co. failed to settle their obligation with the PNB, Mercantile brought an action wherein Ysmael, Jr. & Co. and Felipe were ordered to pay jointly and severally Mercantile.  Ysmael, Jr. & Co. and Felipe maintain that the indemnity agreements are void for being contrary to law, public policy and good morals. They argued that to allow surety to receive indemnity or compensation for something it has not paid in its capacity as surety would constitute unjust enrichment at the expense of another. Issue: Whether or not the surety (Mercantile) can demand indemnification from the principal (Ysmael, Jr. & Co. and Felipe), upon the latter's default, even before the former has paid to the creditor (PNB). Ruling:  Yes. The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. An indemnity agreement was not executed for the benefit of the creditors but rather for the benefit of the surety; and if the principal debtor voluntarily agrees to the terms and conditions, the obligation arising from the contract have the force of law. Further, it was also discussed that the principal debtors, Ysmael, Jr. & Co. and Felipe, 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 surety, the creditor may proceed against either for fulfillment of the

obligation as covered by the surety bonds. The provision of Article 2071 of the Civil Code does not apply. There is no more need for the surety to exhaust all the properties of the principal debtors before it may proceed against them. SBTC v. Cuenca GR 138544 October 3, 2000 FACTS: Defendant-appellant Sta. Ines Melale ( ‘Sta. Ines’/SIMC) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the DENR. On 10 November 1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line in the amount of (P8,000,000.00) effective until November 30, 1981 to assist the latter in meeting the additional capitalization requirements of its logging operations. To secure payment, it executed a chattel mortgage over some of its machineries and equipments. And as an additional security, its President and Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity agreement in favor of Security Bank whereby he bound himself jointly and severally with Sta. Ines. Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a public auction to Adolfo Angala. Before and after this, Sta. Ines availed of its credit line. Sta. Ines encountered difficulty in making the amortization payments on its loans and requested SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC’s request and signified its approval in a letter dated February 18, 1988 wherein SBTC and Sta. Ines, without notice to or the prior consent of Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. To formalize their agreement to restructure the loan obligations of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement dated October 31, 1989 Sta. Ines made payments up to (P1,757,000.00). The defaulted in the payment of its restructured loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA, SBTC filed a complaint for collection of sum of resulting after trial on the merits in a decision by the court a quo, from which Cuenca appealed. Cuenca was released from liability because 1989 Loan  Agreement novated the 1980 credit accommodation which extinguished the Indemnity Agreement for which Cuenca was liable solidarily. ISSUE/S:  Whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s liability under the Indemnity Agreement. HELD:  YES. An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:

 ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Novation of a contract is never presumed. It has been held that in the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.