5.2 - filipinas to towers.docx

Credit – V. Guaranty & Suretyship_Filipinas to Towers of 41

[G.R. No. 119800. November 12, 2003]

FILIPINAS TEXTILE MILLS, INC. and BERNARDINO VILLANUEVA, petitioners, vs. COURT OF APPEALS and STATE INVESTMENT HOUSE, INC. respondents.

D E C I S I O N

TINGA, J.:

Before this Court is a Petition for Review on Certiorari assailing the Decision[1] and Resolution[2] of the Court of Appeals dated June 16, 1994 and April 19, 1995, respectively, affirming the Decision[3] of the Regional Trial Court dated July 23, 1990 which found the petitioners Filipinas Textile Mills, Inc. (“Filtex”) and Bernardino Villanueva (“Villanueva”) jointly and severally liable to respondent State Investment House, Inc. (“SIHI”) for the amount of P7,868,881.11.

The antecedent facts are as follows:

On December 6, 1985, SIHI instituted a Complaint[4] for the collection of the sum of P3,118,949.75, with interest, penalties, exemplary damages, attorneys fees and costs of suit against herein petitioners Filtex and Villanueva.

In its Complaint, SIHI alleged that sometime in 1983, Filtex applied for domestic letters of credit to finance the purchase of various raw materials for its textile business. Finding the application to be in order, SIHI issued on various dates domestic letters of credit[5] authorizing Indo-Philippine Textile Mills, Inc. (“Indo-Phil”), Texfiber Corporation (“Texfiber”), and Philippine Polyamide Industrial Corporation (“Polyamide”) “to value” on SIHI such drafts as may be drawn by said corporations against Filtex for an aggregate amount not exceedingP3,737,988.05.

Filtex used these domestic letters of credit to cover its purchase of various textile materials from Indo-Phil, Texfiber and Polyamide. Upon the sale and delivery of the merchandise, Indo-Phil, Texfiber and Polyamide issued several sight drafts [6] on various dates with an aggregate value of P3,736,276.71 payable to the order of SIHI, which were duly accepted by Filtex. Subsequently, the sight drafts were negotiated to and acquired in due course by SIHI which paid the value thereof to Indo-Phil, Texfiber and Polyamide for the account of Filtex.

Allegedly by way of inducement upon SIHI to issue the aforesaid domestic letters of credit and “to value” the sight drafts issued by Indo-Phil, Texfiber and Polyamide, Villanueva executed a comprehensive surety agreement[7] on November 9, 1982, whereby he guaranteed, jointly and severally with Filtex, the full and punctual payment at maturity to SIHI of all the indebtedness of Filtex. The essence of the comprehensive surety agreement was that it shall be a continuing surety until such time that the total outstanding obligation of Filtex to SIHI had been fully settled.

In order to ensure the payment of the sight drafts aforementioned, Filtex executed and issued to SIHI several trust receipts[8] of various dates, which were later extended with

the issuance of replacement trust receipts all dated June 22, 1984, covering the merchandise sold. Under the trust receipts, Filtex agreed to hold the merchandise in trust for SIHI, with liberty to sell the same for SIHI’s account but without authority to make any other disposition of the said goods. Filtex likewise agreed to hand the proceeds, as soon as received, to SIHI “to apply” against any indebtedness of the former to the latter. Filtex also agreed to pay SIHI interest at the rate of 25% per annum from the time of release of the amount to Indo-Phil, Texfiber and Polyamide until the same is fully paid, subject to SIHI’s option to reduce the interest rate. Furthermore, in case of delay in the payment at maturity of the aggregate amount of the sight drafts negotiated to SIHI, said amount shall be subject to two percent (2%) per month penalty charge payable from the date of default until the amount is fully paid.

Because of Filtex’s failure to pay its outstanding obligation despite demand, SIHI filed a Complaint on December 6, 1985 praying that the petitioners be ordered to pay, jointly and severally, the principal amount of P3,118,949.75, plus interest and penalties, attorney’s fees, exemplary damages, costs of suit and other litigation expenses.

In its Answer with Counterclaim,[9] Filtex interposed special and affirmative defenses, i.e., the provisions of the trust receipts, as well as the comprehensive surety agreement, do not reflect the true will and intention of the parties, full payment of the obligation, and lack of cause of action. For his part, Villanueva interposed the same special and affirmative defenses and added that the comprehensive surety agreement is null and void and damages and attorney’s fees are not legally demandable. [10] The petitioners, however, failed to specifically deny under oath the genuineness and due execution of the actionable documents upon which the Complaint was based.

On July 23, 1990, the Regional Trial Court of Manila rendered judgment [11] holding Filtex and Villanueva jointly and severally liable to SIHI. Dissatisfied, Filtex and Villanueva filed an Appeal,[12] primarily contending that they have fully paid their indebtedness to SIHI and asserting that the letters of credit, sight drafts, trust receipts and comprehensive surety agreement upon which the Complaint is based are inadmissible in evidence supposedly because of non-payment of documentary stamp taxes as required by the Internal Revenue Code.[13]

In its assailed Decision, the Court of Appeals debunked the petitioners’ contention that the letters of credit, sight drafts, trust receipts and comprehensive surety agreement are inadmissible in evidence ruling that the petitioners had “in effect, admitted the genuineness and due execution of said documents because of their failure to have their answers placed under oath, the complaint being based on actionable documents in line with Section 7, Rule 8 of the Rules of Court.” [14] The appellate court also ruled that there remained an unpaid balance as of January 31, 1989 of P868,881.11 for which Filtex and Villanueva are solidarily liable.[15]

The appellate court denied the petitioners’ Motion for Reconsideration[16] in its Resolution,[17] ruling that the petitioners failed to raise new and substantial matters that would warrant the reversal of its Decision. However, due to certain typographical oversights, the Court of Appeals modified its Decision and stated that the correct unpaid balance as ofJanuary 31, 1989 was actually P7,868,881.11, excluding litigation and other miscellaneous expenses and filing fees.[18]


In asking this Court to reverse and set aside the aforementioned Decision and Resolution of the Court of Appeals, the petitioners argued that the appellate court should not have admitted in evidence the letters of credit, sight drafts, trust receipts and comprehensive surety agreement for lack of the requisite documentary stamps thereon. They hypothesized that their implied admission of the genuineness and due execution of these documents for failure to specifically deny the same under oath should not be equated with an admission in evidence of the documents and an admission of their obligation. They also maintained that they have fully paid the obligation and, in fact, have made an excess payment in the amount of P415,722.53. In addition, Villanueva asserted that the comprehensive surety agreement which he executed is null and void, inadmissible in evidence and contains material alterations. Thus, he claimed that he should not be held solidarily liable with Filtex.

Traversing the allegations in the instant petition, SIHI stated in its Comment[19] that in their respective answers to the complaint, the petitioners expressly admitted the due execution of the letters of credit, sight drafts and trust receipts and their obligation arising from these documents. Having done so, they could no longer question the admissibility of these documents. Moreover, their allegation of inadmissibility of these documents is inconsistent with their defense of full payment. SIHI also reasoned that the documentary stamps, assuming they are required, are for the sole account of Filtex not only because the letters of credit were issued at its instance and application but also because it was the issuer and acceptor of the trust receipts and sight drafts, respectively. As regards the petitioners’ allegation of full payment, SIHI stressed that the appellate court had already resolved this issue in its favor by ruling that there remained an unpaid balance of P7,868,881.11 as of January 31, 1989 for which the petitioners were held solidarily liable. Besides, by quoting substantial portions of their appellants’ Brief in the instant petition, the petitioners merely repeated the issues that have already been passed upon by the appellate court. Finally, SIHI asserted the validity and admissibility of the comprehensive surety agreement.

The threshold issue in this case is whether or not the letters of credit, sight drafts, trust receipts and comprehensive surety agreement are admissible in evidence despite the absence of documentary stamps thereon as required by the Internal Revenue Code.[20]

We rule in the affirmative. As correctly noted by the respondent, the Answer with Counterclaim[21] and Answer,[22] of Filtex and Villanueva, respectively, did not contain any specific denial under oath of the letters of credit, sight drafts, trust receipts and comprehensive surety agreement upon which SIHI’s Complaint[23] was based, thus giving rise to the implied admission of the genuineness and due execution of these documents. Under Sec. 8, Rule 8 of the Rules of Court, when an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts.

In Benguet Exploration, Inc. vs. Court of Appeals,[24] this Court ruled that the admission of the genuineness and due execution of a document means that the party whose signature it bears admits that he voluntarily signed the document or it was signed by another for him and with his authority; that at the time it was signed it was in words and

figures exactly as set out in the pleading of the party relying upon it; that the document was delivered; and that any formalities required by law, such as a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by him.

Moreover, under Section 173 of the Internal Revenue Code the liability for payment of the stamp taxes is imposed on “the person making, signing, issuing, accepting, or transferring” the document. As correctly pointed out by SIHI, Filtex was the issuer and acceptor of the trust receipts and sight drafts, respectively, while the letters of credit were issued upon its application. On the other hand, Villanueva signed the comprehensive surety agreement. Thus, being among the parties obliged to pay the documentary stamp taxes, the petitioners are estopped from claiming that the documents are inadmissible in evidence for non-payment thereof.

Interestingly, the petitioners questioned the admissibility of these documents rather belatedly, at the appeal stage even. Their respective answers[25] to SIHI’s Complaint were silent on this point. The rule is well-settled that points of law, theories, issues and arguments not adequately brought to the attention of the trial court need not, and ordinarily will not, be considered by a reviewing court as they cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play, justice and due process.[26]

Hence, the petitioners can no longer dispute the admissibility of the letters of credit, sight drafts, trust receipts and comprehensive surety agreement. However, this does not preclude the petitioners from impugning these documents by evidence of fraud, mistake, compromise, payment, statute of limitations, estoppel and want of consideration.[27]

This brings us to the petitioners’ contention that they have already fully paid their obligation to SIHI and have, in fact, overpaid by P415,722.53. This matter is purely a factual issue. In Fortune Motors (Phils.) Corporation vs. Court of Appeals,[28] it was held that “the jurisdiction of this Court in cases brought before it from the Court of Appeals under Rule 45 of the Rules of Court is limited to reviewing or revising errors of law. It is not the function of this Court to analyze or weigh evidence all over again unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute serious abuse of discretion. Factual findings of the Court of Appeals are conclusive on the parties and carry even more weight when said court affirms the factual findings of the trial court.”[29]

It should be noted that the issue of overpayment as well as the proof presented by the petitioners on this point merely rehash those submitted before the Court of Appeals. The appellate court affirmed the trial court and passed upon this issue by exhaustively detailing the amounts paid as guaranty deposit, the payments made and the balance due for every trust receipt. This Court shall not depart from the findings of the trial court and the appellate court, supported by the preponderance of evidence and unsatisfactorily refuted by the petitioners, as they are.

As a final issue, Villanueva contended that the comprehensive surety agreement is null and void for lack of consent of Filtex and SIHI. He also alleged that SIHI materially altered the terms and conditions of the comprehensive surety agreement by granting Filtex


an extension of the period for payment thereby releasing him from his obligation as surety. We find these contentions specious.

In the first place, the consent of Filtex to the surety may be assumed from the fact that Villanueva was the signatory to the sight drafts and trust receipts on behalf of Filtex.[30]Moreover, in its Answer with Counterclaim,[31] Filtex admitted the execution of the comprehensive surety agreement with the only qualification that it was not a means to induce SIHI to issue the domestic letters of credit. Clearly, had Filtex not consented to the comprehensive surety agreement, it could have easily objected to its validity and specifically denied the same. SIHI’s consent to the surety is also understood from the fact that it demanded payment from both Filtex and Villanueva.

As regards the purported material alteration of the terms and conditions of the comprehensive surety agreement, we rule that the extension of time granted to Filtex to pay its obligation did not release Villanueva from his liability. As this Court held in Palmares vs. Court of Appeals:[32]

“The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent…

The raison d’etre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and precludes the surety from paying the debt.”[33]

Lastly, with regard to Villanueva’s assertion that the 25% annual interest to be paid by Filtex in case it failed to pay the amount released to suppliers was inserted by SIHI without his consent, suffice it to say that the trust receipts bearing the alleged insertion of the 25% annual fee are countersigned by him. His pretension of lack of knowledge and consent thereto is obviously contrived.

In view of the foregoing, we find the instant petition bereft of merit.

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision and Resolution of the Court of Appeals concurring with the decision of the trial court are hereby AFFIRMED. Costs against the petitioners.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Austria-Martinez and Callejo, Sr., JJ., concur.

G.R. No. 34642 September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees, vs.GUILLERMO SEVERINO, ET AL., defendants. ENRIQUE ECHAUS, appellant.

R. Nepomuceno for appellant.Jacinto E. Evidente for appellees.

STREET, J.:

This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from November 15, 1929, the date of the filing of the complaint, with costs. But it was declared that execution of this judgment should issue first against the property of Guillermo Severino, and if no property should be found belonging to said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be issued against the property of Enrique Echaus as guarantor. From this judgment the defendant Echaus appealed, but his principal, Guillermo Severino, did not.

The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of the deceased on the other part. In order to make an end of this litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in cash upon the execution of the document of compromise, and the balance in three several payments of P20,000 at the end of one year; two years, and three years respectively. To this contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of P20,000.


It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should retained on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of moment.

The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the contract was lacking in consideration as to him.

The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the principal or his guarantor.

The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the appellant. So ordered.

Avanceña, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez,

G.R. No. L-18058FABIOLA SEVERINO, plaintiff-appellee,vs.GUILLERMO SEVERINO, defendant-appellant.FELICITAS VILLANUEVA, intervenor-appellee.

Serafin P. Hilado and A. P. Seva for appellant.Jose Ma. Arroyo, Jose Lopez Vito, and Fisher and DeWitt for appellees.OSTRAND, J.:This is an action brought by the plaintiff as the alleged natural daughter and sole heir of one Melecio Severino, deceased, to compel the defendant Guillermo Severino to convey to her four parcels of land described in the complaint, or in default thereof to pay her the sum of

P800,000 in damages for wrongfully causing said land to be registered in his own name. Felicitas Villanueva, in her capacity as administratrix of the estate of Melecio Severino, has filed a complaint in intervention claiming in the same relief as the original plaintiff, except in so far as she prays that the conveyance be made, or damages paid, to the estate instead of to the plaintiff Fabiola Severino. The defendant answered both complaints with a general denial.

The lower court rendered a judgment recognizing the plaintiff Fabiola Severino as the acknowledged natural child of the said Melecio Severino and ordering the defendant to convey 428 hectares of the land in question to the intervenor as administratrix of the estate of the said Melecio Severino, to deliver to her the proceeds in his possession of a certain mortgage placed thereon by him and to pay the costs. From this judgment only the defendant appeals.

The land described in the complaint forms one continuous tract and consists of lots Nos. 827, 828, 834, and 874 of the cadaster of Silay, Province of Occidental Negros, which measure, respectively, 61 hectares, 74 ares, and 79 centiares; 76 hectares, 34 ares, and 79 centiares; 52 hectares, 86 ares, and 60 centiares and 608 hectares, 77 ares and 28 centiares, or a total of 799 hectares, 75 ares, and 46 centiares.

The evidence shows that Melecio Severino died on the 25th day of May, 1915; that some 428 hectares of the land were recorded in the Mortgage Law Register in his name in the year 1901 by virtue of possessory information proceedings instituted on the 9th day of May of that year by his brother Agapito Severino in his behalf; that during the lifetime of Melecio Severino the land was worked by the defendant, Guillermo Severino, his brother, as administrator for and on behalf of the said Melecio Severino; that after Melecio’s death, the defendant Guillermo Severino continued to occupy the land; that in 1916 a parcel survey was made of the lands in the municipality of Silay, including the land here in question, and cadastral proceedings were instituted for the registration of the lands titles within the surveyed area; that in the cadastral proceedings the land here in question was described as four separate lots numbered as above stated; that Roque Hofileña, as lawyer for Guillermo Severino, filed answers in behalf of the latter in said proceedings claiming the lots mentioned as the property of his client; that no opposition was presented in the proceedings to the claims of Guillermo Severino and the court therefore decreed the title in his favor, in pursuance of which decree certificates of title were issued to him in the month of March, 1917.

It may be further observed that at the time of the cadastral proceedings the plaintiff Fabiola Severino was a minor; that Guillermo Severino did not appear personally in the proceedings and did not there testify; that the only testimony in support of his claims was that of his attorney Hofileña, who swore that he knew the land and that he also knew that Guillermo Severino inherited the land from his father and that he, by himself, and through his predecessors in interest, had possessed the land for thirty years.

The appellant presents the following nine assignments of error:


1. The trial court erred in admitting the evidence that was offered by plaintiff in order to establish the fact that said plaintiff was the legally acknowledged natural child of the deceased Melecio Severino.

2. The trial court erred in finding that, under the evidence presented, plaintiff was the legally acknowledged natural child of Melecio Severino.

3. The trial court erred in rejecting the evidence offered by defendant to establish the absence of fraud on his part in securing title to the lands in Nacayao.

4. The trial court erred in concluding that the evidence adduced by plaintiff and intervenor established that defendant was guilty of fraud in procuring title to the lands in question in his name.

5. The trial court erred in declaring that the land that was formerly placed in the name of Melecio Severino had an extent of either 434 or 428 hectares at the time of his death.

6. The trial court erred in declaring that the value of the land in litigation is P500 per hectare.

7. The trial court erred in granting the petition of the plaintiff for an attachment without first giving the defendant an opportunity to be heard.

8. The trial court erred in ordering the conveyance of 428 hectares of land by defendant to the administratrix.

9. The trial court erred in failing or refusing to make any finding as to the defendant’s contention that the petition for attachment was utterly devoid of any reasonable ground.

In regard to the first two assignments of error, we agree with the appellant that the trial court erred in making a declaration in the present case as to the recognition of Fabiola Severino as the natural child of Melecio Severino. We have held in the case of Briz vs. Briz and Remigio (43 Phil., 763), that “The legitimate heirs or kin of a deceased person who would be prejudiced by a declaration that another person is entitled to recognition as the natural child of such decedent, are necessary and indispensable parties to any action in which a judgment declaring the right to recognition is sought.” In the present action only the widow, the alleged natural child, and one of the brothers of the deceased are parties; the other potential heirs have not been included. But, inasmuch as the judgment appealed from is in favor of the intervenor and not of the plaintiff, except to the extent of holding that the latter is a recognized natural child of the deceased, this question is, from the view we take of the case, of no importance in its final disposition. We may say, however, in this connection, that the point urged in appellant’s brief that it does not appear affirmatively from the evidence that, at the time of the conception of Fabiola, her mother was a single woman, may be sufficiently disposed of by a reference to article 130 of the Civil Code and subsection 1 of section 334 of the Code of Civil Procedure which create the presumption that a child born out of wedlock is natural rather than illegitimate. The question of the status of the plaintiff Fabiola Severino and her right to share in the inheritance may, upon notice to

all the interested parties, be determined in the probate proceedings for the settlement of the estate of the deceased.

The fifth assignment of error relates to the finding of the trial court that the land belonging to Melecio Severino had an area of 428 hectares. The appellant contends that the court should have found that there were only 324 hectares inasmuch as one hundred hectares of the original area were given to Melecio’s brother Donato during the lifetime of the father Ramon Severino. As it appears that Ramon Severino died in 1896 and that the possessory information proceedings, upon which the finding of the trial court as to the area of the land is principally based, were not instituted until the year 1901, we are not disposed to disturb the conclusions of the trial court on this point. Moreover, in the year 1913, the defendant Guillermo Severino testified under oath, in the case of Montelibano vs. Severino, that the area of the land owned by Melecio Severino and of which he (Guillermo) was the administrator, embraced an area of 424 hectares. The fact that Melecio Severino, in declaring the land for taxation in 1906, stated that the area was only 324 hectares and 60 ares while entitled to some weight is not conclusive and is not sufficient to overcome the positive statement of the defendant and the recitals in the record of the possessory information proceedings.

The sixth assignment of error is also of minor importance in view of the fact that in the dispositive part of the decision of the trial court, the only relief given is an order requiring the appellant to convey to the administratrix the land in question, together with such parts of the proceeds of the mortgage thereon as remain in his hands. We may say further that the court’s estimate of the value of the land does not appear unreasonable and that, upon the evidence before us, it will not be disturbed.

The seventh and within assignments of error relate to the ex parte granting by the trial court of a preliminary attachment in the case and the refusal of the court to dissolve the same. We find no merit whatever in these assignments and a detailed discussion of them is unnecessary.

The third, fourth, and eight assignments of error involve the vital points in the case, are inter-related and may be conveniently considered together.

The defendant argues that the gist of the instant action is the alleged fraud on his part in causing the land in question to be registered in his name; that the trial court therefore erred in rejecting his offer of evidence to the effect that the land was owned in common by all the heirs of Ramon Severino and did not belong to Melecio Severino exclusively; that such evidence, if admitted, would have shown that he did not act with fraudulent intent in taking title to the land; that the trial court erred in holding him estopped from denying Melecio’s title; that more than a year having elapsed since the entry of the final decree adjudicating the land to the defendant, said decree cannot now be reopened; that the ordering of the defendant to convey the decreed land to the administratrix is, for all practical purposes, equivalent to the reopening of the decree of registration; that under section 38 of the Land Registration Act the defendant has an indefeasible title to the land; and that the question of ownership of the land being thus judicially settled, the question as to the previous relations between the parties cannot now be inquired into.


Upon no point can the defendant’s contentions be sustained. It may first be observed that this is not an action under section 38 of the Land Registration Act to reopen or set aside a decree; it is an action in personam against an agent to compel him to return, or retransfer, to the heirs or the estate of its principal, the property committed to his custody as such agent, to execute the necessary documents of conveyance to effect such retransfer or, in default thereof, to pay damages.

That the defendant came into the possession of the property here in question as the agent of the deceased Melecio Severino in the administration of the property, cannot be successfully disputed. His testimony in the case of Montelibano vs. Severino (civil case No. 902 of the Court of First Instance of Occidental Negros and which forms a part of the evidence in the present case) is, in fact, conclusive in this respect. He there stated under oath that from the year 1902 up to the time the testimony was given, in the year 1913, he had been continuously in charge and occupation of the land as the encargado or administrator of Melecio Severino; that he had always known the land as the property of Melecio Severino; and that the possession of the latter had been peaceful, continuous, and exclusive. In his answer filed in the same case, the same defendant, through his attorney, disclaimed all personal interest in the land and averred that it was wholly the property of his brother Melecio.

Neither is it disputed that the possession enjoyed by the defendant at the time of obtaining his decree was of the same character as that held during the lifetime of his brother, except in so far as shortly before the trial of the cadastral case the defendant had secured from his brothers and sisters a relinguishment in his favor of such rights as they might have in the land.

The relations of an agent to his principal are fiduciary and it is an elementary and very old rule that in regard to property forming the subject-matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. His position is analogous to that of a trustee and he cannot consistently, with the principles of good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui que trust. Upon this ground, and substantially in harmony with the principles of the Civil Law (see sentence of the supreme court of Spain of May 1, 1900), the English Chancellors held that in general whatever a trustee does for the advantage of the trust estate inures to the benefit of the cestui que trust. (Greenlaw vs. King, 5 Jur., 18; Ex parte Burnell, 7 Jur., 116; Ex parte Hughes, 6 Ves., 617; Ex parte James, 8 Ves., 337; Oliver vs. Court, 8 Price, 127.) The same principle has been consistently adhered to in so many American cases and is so well established that exhaustive citations of authorities are superfluous and we shall therefore limit ourselves to quoting a few of the numerous judicial expressions upon the subject. The principle is well stated in the case of Gilbert vs. Hewetson (79 Minn., 326):

A receiver, trustee, attorney, agent, or any other person occupying fiduciary relations respecting property or persons, is utterly disabled from acquiring for his own benefit the property committed to his custody for management. This rule is entirely independent of the fact whether any fraud has intervened. No fraud in fact need be shown, and no excuse will be heard from the trustee. It is to avoid the necessity of any such inquiry that the rule takes so general a form. The rule stands on the moral obligation to refrain from placing one’s self in positions which ordinarily excite conflicts between self-interest and integrity. It seeks to

remove the temptation that might arise out of such a relation to serve one’s self-interest at the expense of one’s integrity and duty to another, by making it impossible to profit by yielding to temptation. It applies universally to all who come within its principle.

In the case of Massie vs. Watts (6 Cranch, 148), the United States Supreme Court, speaking through Chief Justice Marshall, said:

But Massie, the agent of Oneale, has entered and surveyed a portion of that land for himself and obtained a patent for it in his own name. According to the clearest and best established principles of equity, the agent who so acts becomes a trustee for his principal. He cannot hold the land under an entry for himself otherwise than as trustee for his principal.

In the case of Felix vs. Patrick (145 U. S., 317), the United States Supreme Court, after examining the authorities, said:

The substance of these authorities is that, wherever a person obtains the legal title to land by any artifice or concealment, or by making use of facilities intended for the benefit of another, a court of equity will impress upon the land so held by him a trust in favor of the party who is justly entitled to them, and will order the trust executed by decreeing their conveyance to the party in whose favor the trust was created. (Citing Bank of Metropolis vs. Guttschlick, 14 Pet., 19, 31; Moses vs. Murgatroyd, 1 Johns. Ch., 119; Cumberland vs. Codrington, 3 Johns. Ch., 229, 261; Neilson vs. Blight, 1 Johns. Cas., 205; Weston vs. Barker, 12 Johns., 276.)

The same doctrine has also been adopted in the Philippines. In the case of Uy Aloc vs. Cho Jan Ling (19 Phil., 202), the facts are stated by the court as follows:

From the facts proven at the trial it appears that a number of Chinese merchants raised a fund by voluntary subscription with which they purchased a valuable tract of land and erected a large building to be used as a sort of club house for the mutual benefit of the subscribers to the fund. The subscribers organized themselves into an irregular association, which had no regular articles of association, and was not incorporated or registered in the commercial registry or elsewhere. The association not having any existence as a legal entity, it was agreed to have the title to the property placed in the name of one of the members, the defendant, Cho Jan Ling, who on his part accepted the trust, and agreed to hold the property as the agent of the members of the association. After the club building was completed with the funds of the members of the association, Cho Jan Ling collected some P25,000 in rents for which he failed and refused to account, and upon proceedings being instituted to compel him to do so, he set up title in himself to the club property as well as to the rents accruing therefrom, falsely alleging that he had bought the real estate and constructed the building with his own funds, and denying the claims of the members of the association that it was their funds which had been used for that purpose.

The decree of the court provided, among other things, for the conveyance of the club house and the land on which it stood from the defendant, Cho Jan Ling, in whose name it was registered, to the members of the association. In affirming the decree, this court said:


In the case at bar the legal title of the holder of the registered title is not questioned; it is admitted that the members of the association voluntarily obtained the inscription in the name of Cho Jan Ling, and that they had no right to have that inscription cancelled; they do not seek such cancellation, and on the contrary they allege and prove that the duly registered legal title to the property is in Cho Jan Ling, but they maintain, and we think that they rightly maintain, that he holds it under an obligation, both express and implied, to deal with it exclusively for the benefit of the members of the association, and subject to their will.

In the case of Camacho vs. Municipality of Baliuag (28 Phil., 466), the plaintiff, Camacho, took title to the land in his own name, while acting as agent for the municipality. The court said:

There have been a number of cases before this court in which a title to real property was acquired by a person in his own name, while acting under a fiduciary capacity, and who afterwards sought to take advantage of the confidence reposed in him by claiming the ownership of the property for himself. This court has invariably held such evidence competent as between the fiduciary and the cestui que trust.

x x x x x x x x x

What judgment ought to be entered in this case? The court below simply absolved the defendant from the complaint. The defendant municipality does not ask for a cancellation of the deed. On the contrary, the deed is relied upon the supplement the oral evidence showing that the title to the land is in the defendant. As we have indicated in Consunji vs. Tison, 15 Phil., 81, and Uy Aloc vs. Cho Jan Ling, 19 Phil., 202, the proper procedure in such a case, so long as the rights of innocent third persons have not intervened, is to compel a conveyance to the rightful owner. This ought and can be done under the issues raised and the proof presented in the case at bar.

The case of Sy-Juco and Viardo vs. Sy-Juco (40 Phil., 634) is also in point.

As will be seen from the authorities quoted, and agent is not only estopped from denying his principal’s title to the property, but he is also disable from acquiring interests therein adverse to those of his principal during the term of the agency. But the defendant argues that his title has become res adjudicata through the decree of registration and cannot now be disturbed.

This contention may, at first sight, appear to possess some force, but on closer examination it proves untenable. The decree of registration determined the legal title to the land as the date of the decree; as to that there is no question. That, under section 38 of the Land Registration Act, this decree became conclusive after one year from the date of the entry is not disputed and no one attempts to disturb the decree or the proceedings upon which it is based; the plaintiff in intervention merely contends that in equity the legal title so acquired inured to the benefit of the estate of Melecio Severino, the defendant’s principal and cestui que trust and asks that this superior equitable right be made effective by compelling the defendant, as the holder of the legal title, to transfer it to the estate.

We have already shown that before the issuance of the decree of registration it was the undoubted duty of the defendant to restore the property committed to his custody to his principal, or to the latter’s estate, and that the principal had a right of action in personam to enforce the performance of this duty and to compel the defendant to execute the necessary conveyance to that effect. The only question remaining for consideration is, therefore, whether the decree of registration extinguishing this personal right of action.

In Australia and New Zealand, under statutes in this respect similar to ours, courts of equity exercise general jurisdiction in matters of fraud and error with reference to Torrens registered lands, and giving attention to the special provisions of the Torrens acts, will issue such orders and direction to all the parties to the proceedings as may seem just and proper under the circumstances. They may order parties to make deeds of conveyance and if the order is disobeyed, they may cause proper conveyances to be made by a Master in Chancery or Commissioner in accordance with the practice in equity (Hogg, Australian Torrens System, p. 847).

In the Untied States courts have even gone so far in the exercise of their equity jurisdiction as to set aside final decrees after the expiration of the statutory period of limitation for the reopening of such decrees (Baart vs. Martin, 99 Minn., 197). But, considering that equity follows the law and that our statutes expressly prohibit the reopening of a decree after one year from the date of its entry, this practice would probably be out of question here, especially so as the ends of justice may be attained by other equally effective, and less objectionable means.

Turning to our own Land Registration Act, we find no indication there of an intention to cut off, through the issuance of a decree of registration, equitable rights or remedies such as those here in question. On the contrary, section 70 of the Act provides:

Registered lands and ownership therein, shall in all respects be subject to the same burdens and incidents attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to relieve registered land or the owners thereof from any rights incident to the relation of husband and wife, or from liability to attachment on mesne process or levy on execution, or from liability to any lien of any description established by law on land and the buildings thereon, or the interest of the owner in such land or buildings, or to change the laws of descent, or the rights of partition between coparceners, joint tenants and other cotenants, or the right to take the same by eminent domain, or to relieve such land from liability to be appropriated in any lawful manner for the payment of debts, or to change or affect in any other way any other rights or liabilities created by law and applicable to unregistered land, except as otherwise expressly provided in this Act or in the amendments hereof.

Section 102 of the Act, after providing for actions for damages in which the Insular Treasurer, as the Custodian of the Assurance Fund is a party, contains the following proviso:

Provided, however, That nothing in this Act shall be construed to deprive the plaintiff of any action which he may have against any person for such loss or damage or deprivation of


land or of any estate or interest therein without joining the Treasurer of the Philippine Archipelago as a defendant therein.

That an action such as the present one is covered by this proviso can hardly admit of doubt. Such was also the view taken by this court in the case of Medina Ong-Quingco vs. Imaz and Warner, Barnes & Co. (27 Phil., 314), in which the plaintiff was seeking to take advantage of his possession of a certificate of title to deprive the defendant of land included in that certificate and sold to him by the former owner before the land was registered. The court decided adversely to plaintiff and in so doing said:

As between them no question as to the indefeasibility of a Torrens title could arise. Such an action could have been maintained at any time while the property remained in the hands of the purchaser. The peculiar force of a Torrens title would have been brought into play only when the purchaser had sold to an innocent third person for value the lands described in his conveyance. . . . Generally speaking, as between the vendor and the purchaser the same rights and remedies exist with reference to land registered under Act No. 496, as exist in relation to land not so registered.

In Cabanos vs. Register of Deeds of Laguna and Obiñana (40 Phil., 620), it was held that, while a purchaser of land under a pacto de retro cannot institute a real action for the recovery thereof where the vendor under said sale has caused such lands to be registered in his name without said vendee’s consent, yet he may have his personal action based on the contract of sale to compel the execution of an unconditional deed for the said lands when the period for repurchase has passed.

Torrens titles being on judicial decrees there is, of course, a strong presumption in favor of their regularity or validity, and in order to maintain an action such as the present the proof as to the fiduciary relation of the parties and of the breach of trust must be clear and convincing. Such proof is, as we have seen, not lacking in this case.

But once the relation and the breach of trust on the part of the fiduciary in thus established, there is no reason, neither practical nor legal, why he should not be compelled to make such reparation as may lie within his power for the injury caused by his wrong, and as long as the land stands registered in the name of the party who is guilty of the breach of trust and no rights of innocent third parties are adversely affected, there can be no reason why such reparation should not, in the proper case, take the form of a conveyance or transfer of the title to the cestui que trust. No reasons of public policy demand that a person guilty of fraud or breach of trust be permitted to use his certificate of title as a shield against the consequences of his own wrong.

The judgment of the trial court is in accordance with the facts and the law. In order to prevent unnecessary delay and further litigation it may, however, be well to attach some additional directions to its dipositive clauses. It will be observed that lots Nos. 827, 828, and 834 of a total area of approximately 191 hectares, lie wholly within the area to be conveyed to the plaintiff in intervention and these lots may, therefore, be so conveyed without subdivision. The remaining 237 hectares to be conveyed lie within the western part of lot No. 874 and before a conveyance of this portion can be effected a subdivision of that lot must be made and a technical description of the portion to be conveyed, as well as of the

remaining portion of the lot, must be prepared. The subdivision shall be made by an authorized surveyor and in accordance with the provisions of Circular No. 31 of the General Land Registration Office, and the subdivision and technical descriptions shall be submitted to the Chief of that office for his approval. Within thirty days after being notified of the approval of said subdivision and technical descriptions, the defendant Guillermo Severino shall execute good and sufficient deed or deeds of conveyance in favor of the administratrix of the estate of the deceased Melecio Severino for said lots Nos. 827, 828, 834, and the 237 hectares segregated from the western part of lot No. 874 and shall deliver to the register of deeds his duplicate certificates of title for all of the four lots in order that said certificates may be cancelled and new certificates issued. The cost of the subdivision and the fees of the register of deeds will be paid by the plaintiff in intervention. It is so ordered

With these additional directions the judgment appealed from is affirmed, with the costs against the appellant. The right of the plaintiff Fabiola Severino to establish in the probate proceedings of the estate of Melecio Severino her status as his recognized natural child is reserved.

Araullo, C. J., Johnson, Street, Malcolm, Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

[G.R. No. 103066. April 25, 1996]

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,respondents.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO OBJECT TO THE PRESENTATION OF PAROL EVIDENCE CONSTITUTES A WAIVER THEREOF. - It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. At all events, Willex Plastic cannot now claim that its liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule.

2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE; APPLICABLE IN CASE AT BAR. – The trial court found that it was “to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation.” Similarly, the Court of Appeals found it to be an undisputed fact that “to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellant to sign a Continuing Guaranty.” These factual findings of the trial court and of the Court of Appeals are


binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts.

3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION NECESSARY TO SUPPORT A SURETY OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY, A CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic argues that the “Continuing Guaranty,” being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. Its contention is based on the fact that it is not a party either to the “Continuing Surety Agreement” or to the loan agreement between Manilabank and Inter-Resin Industrial. Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.”

4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE CONSTRUED AS RETROSPECTIVE, IN THE END THE INTENTION OF THE PARTIES AS REVEALED BY THE EVIDENCE IS CONTROLLING. - Willex Plastic contends that the “Continuing Guaranty” cannot be retroactively applied so as to secure the payments made by Interbank under the two “Continuing Surety Agreements.” Willex Plastic invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923]) and Diño v. Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a contract of suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a contract of suretyship “is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated.” There we found nothing in the contract to show that the parties intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the “Continuing Guaranty” clearly provided that the guaranty would cover “sums obtainedand/or to be obtained” by Inter-Resin Industrial from Interbank. On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement. It was held that 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.” By no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application. Indeed, as we also held in Bank of the Philippine Islands v. Foerster, (49 Phil. 843 [1926]) although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation

which apply in regard to other contracts. In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond.

APPEARANCES OF COUNSEL

Tangle-Chua, Cruz & Aquino for petitioner.Fe B. Macalino & Associates for respondent Interbank.

D E C I S I O N

MENDOZA, J.:

This is a petition for review on certiorari of the decision [1] of the Court of Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent International Corporate Bank certain sums of money, and the appellate court’s resolution of October 17, 1989 denying petitioner’s motion for reconsideration.

The facts are as follows:

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled “Continuing Surety Agreement” and dated December 1, 1978, 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].” The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the surety, the first surety agreement being limited to US$333,830.00, while the second one is limited to US$334,087.00.

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a “Continuing Guaranty” in favor of IUCP whereby “For and in consideration of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation” from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed “the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified.”

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial’s outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic.

http://sc.judiciary.gov.ph/jurisprudence/1996/apr1996/103066.htm#_edn1


On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of P687,500.00 representing the proceeds of its fire insurance policy for the destruction of its properties.

In its answer, Inter-Resin Industrial admitted that the “Continuing Guaranty” was intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital.

On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following Special Affirmative Defenses:

(a) Assuming arguendo that main defendant is indebted to plaintiff, the former’s liability is extinguished due to the accidental fire that destroyed its premises, which liability is covered by sufficient insurance assigned to plaintiff;

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now very much lesser than those stated in the complaint because of some payments made by the former;

(c) The complaint states no cause of action against WILLEX;

(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obligor;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial.

On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda.

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to pay to Interbank the following amounts:

(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of the said amount;

(b) Liquidated damages equivalent to 17% of the amount due; and

(c) Attorney’s fees and expenses of litigation equivalent to 20% of the total amount due.

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial presented a “Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellant’s Brief.” After its motion was denied, Inter-Resin Industrial did not file its brief anymore.

On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court.

Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6, 1991:

The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial’s motion for reception of evidence because the situation or situations in which we could exercise the power under B.P. 129 did not exist. Movant here has not presented any argument which would show otherwise.

Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of December 6,1991 of the Court of Appeals.

Petitioner raises a number of issues.

[1] The main issue raised is whether under the “Continuing Guaranty” signed on April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to Manilabank.

As already stated, the amount had been paid by Interbank’s predecessor-in-interest, Atrium Capital, to Manilabank pursuant to the “Continuing Surety Agreements” made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the “Continuing Guaranty,” its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In support of this contention Willex Plastic cites the following portion of the “Continuing Guaranty”:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter be specified.

The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure


payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the “Continuing Guaranty” was executed. In its complaint below, Interbank’s predecessor-in-interest. Atrium Capital, alleged:

5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other defendant WPIC [Willex Plastic].

In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did so “for lack of knowledge or information of the same.” But, at the hearing of the case on September 16, 1986, when asked by the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic’s counsel replied in the negative and manifested that “the plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor to the guarantee.”[2]

For its part Interbank adduced evidence to show that the “Continuing Guaranty” had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Interbank’s witness testified under cross- examination by counsel for Willex Plastic that Willex “guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila Banking Corporation.”[3]

It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. [4] At all events, Willex Plastic cannot now claim that its liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule.[5]

Accordingly, the trial court found that it was “to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation.”[6]

Similarly, the Court of Appeals found it to be an undisputed fact that “to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty.” These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts.[7]

Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. It can reasonably be assumed that

Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.

Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was “to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a ‘Continuing Guaranty’ was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial].”

[2] Willex Plastic argues that the “Continuing Guaranty,” being an accessory contract, cannot legally exist because of the absence of a valid principal obligation.[8] Its contention is based on the fact that it is not a party either to the “Continuing Surety Agreement” or to the loan agreement between Manilabank and Inter-Resin Industrial.

Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.”[9] In an analogous case,[10] this Court held:

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promissory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower “is or may become liable as maker, endorser, acceptor or otherwise.” There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the “Continuing Guaranty” cannot be retroactively applied so as to secure the payments made by Interbank under the two “Continuing Surety Agreements.” Willex Plastic invokes the ruling m El Vencedor v. Canlas[11] and Diño v. Court of Appeals[12] in support of its contention that a contract of suretyship or guaranty should be applied prospectively.

The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a contract of suretyship “is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated.” There we found nothing in the contract to show that the parties intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, 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.













On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement.

It was held that 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.” By no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application.

Indeed, as we also held in Bank of the Philippine Islands v. Foerster,[13] although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there[14] applies mutatis mutandis to the case at bar:

In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts.

In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond.

[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however:

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

x x x x x x x x x

The pertinent portion of the “Continuing Guaranty” executed by Willex Plastic and Inter-Resin Industrial in favor of IUCP (now Interbank) reads:

If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted My/Our direct and primary obligations. (italics supplied)

This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under the same agreement:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/ or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter he specified.

[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make use of the same. On the other hand, Willex Plastic rested its case without presenting evidence.

The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987.

On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and “reset for the last time” on April 2 and 30, 1987.

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order:

Considering that, as shown by the records, the Court had exerted every earnest effort to cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the assistance of the defendant Willex. . . the defendant Inter-Resin Industrial is hereby deemed to have waived the right to present its evidence.

On the other hand, Willex Plastic announced it was resting its case without presenting any evidence.

Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing to August 11, 1987. The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on October 13,1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987. However, Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly, the hearing was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable.

Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was declared to have waived its evidence.




To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial’s counsel did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting evidence and requested instead for time to file a memorandum.

There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing that Inter-Resin Industrial has already paid its obligation to Interbank.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner.

SO ORDERED.

Regalado (Chairman), Romero, Puno, and Torres, Jr., JJ., concur

G.R. No. 89775 November 26, 1992

JACINTO UY DIÑO and NORBERTO UY, petitioners, vs.HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.

Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled"Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust

Company (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy and Jacinto Uy Diño executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).

The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).

Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Diño, demanding payment of the amount due. Informed of the amount due,


UTEFS made partial payments to the Bank which were accepted by the latter.

Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents showing the source of his liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977.

As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid.

Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Diño and Uy as parties-defendants.

The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial enterprise was already non-operational (Original Records, p. 37).

On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation (Records, pp. 42-46).

On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the comprehensive suretyships separately executed by sureties-defendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations

and future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ." It was further asserted that the agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54).

Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).

Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in their motion to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp. 88-93).

On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground that it has no information as to the heirs or legal representatives of the latter who died sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).

After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:

The evidence and the pleadings, thus, pose the querry (sic):

Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships they executed on February 25, 1977?

Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 — and this was the obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation –– and such payment


extinguished the obligation they assumed as guarantors/sureties.

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the obligation created in the other — as evidenced by the fact that Uy Tiam had to apply anew for the 1979 transaction (Exh. A). And Diño and Uy, being strangers thereto, cannot be answerable thereunder.

c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended to Credit — at least to inform them that the continuing suretyships they executed on February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam.

d) There is no sufficient and credible showing that Diño and Uy were fully informed of the import of the Continuing Suretyships when they affixed their signatures thereon –– that they are thereby securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Diño and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They denied having gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3

xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;

b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and

c) denying all other claims of the parties for want of legal and/or factual basis.

SO ORDERED. (Records, p. 336) 4

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:

I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:

1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987 inclusive of principal, interest and charges;

2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until the whole monetary obligation is paid; and


3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees.

With costs against appellees.

SO ORDERED. 6

In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK would have been notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.

Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over and above their respective face values.

In its Resolution of 21 August 1989, public respondent denied the motion:

. . . considering that the issues raised were substantially the same grounds utilized by the lower court in rendering judgment for defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversal of Our decision herein, . . . . 7

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977.

Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid obligation. Petitioners further argue that even

granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement.

On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda.

The issues presented for determination are quite simple:

1. Whether 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; and

2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty isexecuted. 8 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. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. 10 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. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. 11

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. 12

In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus:


I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances evidence or secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to the BANK by the Borrower, together with any and all expenses which may be incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK may make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into by the Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and non-waivable in character, nor or hereafter in effect, which might in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK as referred to above. 13

Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño contains identical provisions except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14

Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it

has been revoked by the SURETY, but any such notice shall not release the SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more new partners. 15

The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent:

Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank is notified of its revocation.

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, are liable thereunder. 16

Petitioners maintain, however, that their 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; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads:


Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Diño and (b) P300,000.00 for petitioner Uy.

The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. 17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest and expenses, to wit:

. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK referred to above. 19

They further provide that:

In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and as attorney's fees and costs of collection, which shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and payable irrespective of whether the case is settled judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due.

Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides: 21

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:

Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship.

xxx xxx xxx

The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date of the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . .

Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).

In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the obligation became due, but from the filing of the complaint.


As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).

However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning attorney's fees.

The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank charges." 23This is the same amount stated by METROBANK in its Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states:

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) — P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by petitioner Diño which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.

Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent the instant petition is impressed with partial merit.

WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIÑO and NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the

remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs.

All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner, vs.COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did:


(1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor. The word"indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them, here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. 1(Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreement follow:

(2) This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor.

(3) The obligations hereunder are joint and several and independent of the obligations of the Principal. A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically

waived or released by an instrument in writing executed by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship.

xxx xxx xxx 2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto;

(c). Each assigned Contract arises out of the sale of merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become,


contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim;

(d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract;

(e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived;

(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contracts and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and

(h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue.

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED. 4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents.6


However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case."

In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987:

(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of consideration without any evidence whatsoever [being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court. 8 (Emphasis in the original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in paragraph 2 of the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although


it may be given as security for future debt (Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement. 10 (Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

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. (Emphasis supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity of the additional bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said

bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship.This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint.Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts the amount of which is not yet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guarantee 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. 13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is


born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.14

Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:

Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus:

(1) if there is a period (or length of time) agreed upon, then for such period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment — if debt was due at the time of the assignment

(b) one year from maturity — if debt was not yet due at the time of the assignment..

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984. Both dates were beyond the warranty period.

In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause ofaction. 15 (Emphasis supplied)

Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and . . .


The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

(Emphasis supplied)

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of such receivables.

WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

FIRST DIVISION

[G. R. No. 136603. January 18, 2002]

EMILIO Y. TAÑEDO, petitioner, vs. ALLIED BANKING CORPORATION, respondent.

D E C I S I O N

PARDO, J.:

Appeal via certiorari from the decision of the Court of Appeals[1] reversing the ruling of the trial court and holding petitioner liable solidarily with defendant Cheng Ban Yek Co., Inc. for all items of the money judgment and costs of suit.

The Facts

The facts, as found by the Court of Appeals, are as follows:

“Appeal by both the plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc. from the Order, as summary judgment, of the Regional Trial Court (Branch XLIV, Manila), the decretal part whereof reads:

“WHEREFORE, and in view of the foregoing considerations, summary judgment is hereby rendered in favor of the plaintiff, Allied Banking Corporation, and against defendant Cheng Ban Yek and Co., Inc. as follows:

“1. On the first cause of action:

http://sc.judiciary.gov.ph/jurisprudence/2002/jan2002/136603.htm#_edn1


“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,000,000.00, plus interest thereon at 14% per annum, 2% per annum as service charge, and penalty charge of 1% per month from February 11, 1981 until fully paid;

“2. On the second cause of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,500,000.00, plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 3, 1981 until fully paid;

“3. On the third cause of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 12, 1981 until fully paid;

“4. On the fourth cause of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 12, 1981 until fully paid;

“5. On the fifth cause of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully paid;

“6. On the sixth cause of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully paid;

“7. On the seventh cause of action:

“ Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,500,000.00 plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully paid;

“8. On all the causes of action:

“Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum equivalent to 25% of the amount due and demandable as and for attorney’s fees;

“9. Declaring the “Continuing Guaranty” as having been extinguished after plaintiff branded it as a “worthless security” and preferred to avail, as it did avail, of the provisional remedy of attachment; and declaring defendants Alfredo Ching and Emilio Tañedo relieved of their obligation under the said continuing Guaranty; and

“10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.

“SO ORDERED.”[2]

“The foregoing summary judgment has its roots in a complaint with preliminary attachment filed by plaintiff bank to recover sums of money from defendant corporation on its seven past due promissory notes with principal amounts totaling P10,000,000.00, from defendants Alfredo Ching and Emilio Tañedo under a Continuing Guaranty providing for joint and several liability relative to the said promissory notes. The preliminary attachment sought was granted upon the required bond and was thereafter maintained despite defendant corporation’s efforts to have it discharged.

“The appeal of plaintiff bank is limited to paragraph 9 of the summary judgment (supra, p. 3) which declared defendants Aldredo Ching and Emilio Tañedo as free from any liability under the Continuing Guaranty since their respective liabilities thereunder became extinguished when plaintiff bank in its pleading branded the Continuing Guaranty as “worthless security”.

“On the other hand, defendant corporation’s appeal is an attack on the summary nature of the proceeding adopted by the lower court since, according to defendant corporation, there was a petition for suspension of payment filed by it with the Securities and Exchange Commission which, although dismissed, was duly appealed to the Court of Appeals.

“ x x x

“Defendant corporation’s petition for suspension of payment was dismissed by the Securities and Exchange Commission for lack of quorum. At the creditors’ meeting called and accordingly held to approve the corporation’s petition for suspension of payment, out of outstanding liabilities of P237,718,426.00, only the creditors representing P110,355,607.37 thereof attended. This was far short of the three-fifths quorum unqualifiedly required by law which should have been P142,631,055.60 (Act No. 1956, Sec. 8) x x x .” [3]

On October 16, 1984, the trial court rendered a summary judgment, as quoted above.[4]

Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc. appealed from the summary judgment to the Court of Appeals.[5]






On March 27, 1990, the Court of Appeals promulgated a decision, the dispositive portion of which reads:

“WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED by deleting paragraph 9 from the dispositive portion thereof, and declaring the defendants Alfredo Ching and Emilio Tañedo solidarily liable with defendant Cheng Ban Yek Co., Inc. for all items of the money judgment set forth in paragraphs one 91) to eight (8) inclusive, and paragraph ten (10), of said dispositive portion. The Order is AFFIRMED in its other aspects. No costs in this instance.

“SO ORDERED.”[6]

On April 11, 1990, petitioner Emilio Y. Tañedo filed a motion for reconsideration of the decision, contending that while the case was pending before the Court of Appeals the Allied Bank and Cheng Ban Yek & Co., Inc. agreed to extend the time of payment of the indebtedness, without the consent of petitioner, thereby relieving him of his obligation as guarantor or surety of such obligation.[7]

On November 27, 1998, the Court of Appeals denied the motion for lack of merit.[8]

Hence, this appeal.[9]

The Issues

The basic issues raised are (a) whether the execution by the respondent Bank of the Fourth Amendatory Agreement extinguished petitioner’s obligations as surety, and (b) whether the “continuing guarantee” executed by the petitioner is a contract of (surety) adhesion.[10]

The Court’s Ruling

We find the petition without merit.

Resolving the first issue, we note that the amendatory agreement between the respondent Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent of the petitioner as surety of the obligations. However, the “continuing guarantee” executed by the petitioner provided that he consents and agrees that the bank may, at any time or from time to time extend or change the time of payments and/or the manner, place or terms of payment of all such instruments, loans, advances, credits or other obligations guaranteed by the surety. Hence, the extensions of the loans did not release the surety.[11]

As to the second issue, even if the “continuing guarantee” were considered as one of adhesion, we find the contract of “surety” valid because petitioner was “free to reject it entirely”.[12] Petitioner was a stockholder and officer of Cheng Ban Yek and Co., Inc. and it was common business and banking practice to require “sureties” to guarantee corporate obligations.

The Fallo

IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of Appeals.[13]

No costs in this instance.

SO ORDERED.

[G.R. No. L-9306. May 25, 1956.]

SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA, Defendant-Appellant.

D E C I S I O N

CONCEPCION, J.:

This is an appeal from a decision of the Court of First Instance of Iloilo:chanroblesvirtuallawlibrary

“(a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the benefit of the Plaintiffwithin a period of ninety (90) days from receipt by the Defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per annum computed on the basis of the amounts of the installments mentioned in the mortgage and of the dates they respectively fell due, until fully paid; chan roblesvirtualawlibrarythe sum of P200 by way of attorney’s fees, plus costs; chan roblesvirtualawlibraryand (b) Upon failure of the Defendant to pay as aforesaid, ordering the land described in the complaint and subject of the mortgage to be sold at public auction in accordance with law in order to realize the amount of the judgment debt and costs.”

Although originally forwarded to the Court of Appeals, the same has certified the record to this Court in view of the fact that the issues raised in the appeal involve merely questions of law.

Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate mortgage, constituted by the latter in favor of the former, as security for the payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in accordance with the terms and conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa filed an answer admitting the allegations of the complaint and alleging, by way of “special and affirmative” defense:chanroblesvirtuallawlibrary

“That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of guaranteeing — as surety and/or guarantor — the payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.










“That the Plaintiff until now has no right action against the herein Defendant on the ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within the Province of Iloilo.”

Thereupon, Plaintiff moved for summary judgment which a branch of the Court of First Instance of Iloilo, presided over by Hon. Roman Ibañez, Judge, denied upon the ground that it “is premature”. Plaintiff moved for a reconsideration of the order to this effect. Soon later, he filed, also, another motion praying that the case be transferred to another branch of said court, because that of Judge Ibañez would be busy trying cadastral cases, and had adopted the “policy of refraining from entertaining any other civil cases and all incidents related thereto, until after said cadastral cases shall have been finally disposed of.” With the express authority of Judge Ibañez, the case was referred to the branch of said court, presided over by Hon. Querube C. Makalintal, Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal rendered the aforementioned decision, from which theDefendant has appealed. He maintains, in his brief, that:chanroblesvirtuallawlibrary

“1. The trial court erred in hearing Plaintiff-Appellee’s ‘motion for reconsideration’ dated June 9, 1951, notwithstanding the fact that Defendant-Appellant was not served with a copy thereof nor served with notice of the hearing thereof.

2. “The trial court erred in rendering a ‘judgment on the pleadings’ in Appellee’s favor when no issue was at all submitted to it for resolution, to the prejudice of the substantial rights ofAppellant.

3. “The court a quo erred in depriving Defendant-Appellant of his property rights without due process of law.”

The first assignment of error is based upon an erroneous predicate, for, contrary toDefendant’s assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through an employee of his office, by the name of Agripino Aguilar, was actually served on June 9, 1951, with copy of Plaintiff’s motion for reconsideration, with notice to the effect that said motion would be submitted for the consideration and approval of the lower court, on Saturday, June 16, 1951, at 8:chanroblesvirtuallawlibrary00 a.m., or soon thereafter as counsel may be heard.

The second assignment of error is, likewise, untenable. It is not true that there was no issue submitted for determination by the lower court when it rendered the decision appealed from.

It will be recalled that each one of the allegations made in Plaintiff’s complaint were expressly admitted in Defendant’s answer, in which he merely alleged, as “special and affirmative” defense, that Plaintiff is not entitled to foreclose the mortgage constituted in its favor by the Defendant, because the property of Alfredo Brillantes, the principal debtors, had not been exhausted as yet, and were not sought to be exhausted, for the satisfaction ofPlaintiff’s credit. Thus, there was no question of fact left for determination. The only issue set up by the pleadings was the sufficiency of said affirmative defense. And such was the

only point discussed by the Defendant in his opposition to Plaintiff’s motion for a summary judgment, referring, evidently, to a judgment on the pleadings.

Plaintiff’s motion for reconsideration of the order of Judge Roman Ibañez refusing to render said judgment, upon the ground that it was premature, revived said issue of sufficiency of the aforementioned affirmative defense, apart from calling for a reexamination of the question posed by said order of Judge Ibañez, namely, whether it was proper, under the circumstances, to render a judgment on the pleadings. In other words, said motion for reconsideration had the effect of placing before then Judge Makalintal, for resolution, the following issues, to wit:chanroblesvirtuallawlibrary (1) whether a summary judgment or a judgment on the pleadings was in order, considering the allegations of Plaintiff’s complaint and those of Defendant’s answer; chan roblesvirtualawlibraryand (2) whether the mortgage in question could be foreclosed although Plaintiffhad not exhausted, and did not intend to exhaust, the properties of his principal debtor, Alfredo Brillantes.

The third assignment of error is predicated upon the alleged lack of notice of the hearing ofPlaintiff’s motion for reconsideration. As stated in our discussion of the first assignment of error, this pretense is refuted by the record. Moreover, it is obvious that Defendant’s affirmative defense is devoid of merit for:chanroblesvirtuallawlibrary

1. The deed of mortgage executed by him specifically provides:chanroblesvirtuallawlibrary

“That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and assigns shall well and truly perform the full obligations above-stated according to the terms thereof, then this mortgage shall be null and void, otherwise it shall remain in full force and effect, in which event herein mortgagor authorizes and empowers herein mortgagee-company to take any of the following actions to enforce said payment;.

“(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this mortgage, applying the proceeds of the purchase price at public sale of the real property herein mortgaged to any deficiency or difference between the purchase price of said chattel at public auction and the amount of P2,889.53, together with its interest hereby secured; chan roblesvirtualawlibraryor

“(b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule 70, Rules of Court, or extrajudicially under the provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of P2,889.53, together with its interest of 12 per cent per annum.”

2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code, in which the following provisions, among others, are found:chanroblesvirtuallawlibrary

ART. 2087. “It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.”


ART. 2126. “The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.”

3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the principal debtor.

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

Wherefore, the decision appealed from is hereby affirmed, with costs against theDefendant-Appellant. It is SO ORDERED.

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

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA TOMACRUZ,respondents.

D E C I S I O N

GONZAGA-REYES, J.:

This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of Appeals [1] dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the decision[2] of the Regional Trial Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly narrated as follows:

Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.[3] Petitioner told private respondent that Luanzon has been engaged in business as a contractor for twenty years and she invited private respondent to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000. On June 22, 1987, Luanzon issued and signed a promissory note acknowledging receipt of the P150,000 from private respondent and obliging herself to pay the former the said amount on or before August 22, 1987. [4] Petitioner signed the promissory note, affixing her signature under the word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.[5] Subsequently, Luanzon replaced this check with another postdated Solidbank check no. 432945 dated December 22, 1987, in favor of the

same payee and covering the same amount.[6] Several checks in the amount of P7,500 each were also issued by Luanzon and made payable to private respondent.[7]

Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an additional defendant. However, summons was never served upon Luanzon.

In her answer, petitioner denied having guaranteed the payment of the promissory note issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as a loan, but rather as an investment in Art Enterprises and Construction, Inc. - the construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo that there was a loan and petitioner guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has she resorted to all the legal remedies against the principal debtor as required by law. Finally, petitioner claims that there was an extension of the maturity date of the loan without her consent, thus releasing her from her obligation.[8]

After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated June 14, 1990, it stated that -

The evidence and the testimonies on record clearly established a (sic) fact that the transaction between the plaintiff and defendants was a loan with five percent (5%) monthly interest and not an investment. In fact they all admitted in their testimonies that they are not given any stock certificate but only promissory notes similar to Exhibit “B” wherein it was clearly stated that defendant Luanzon would pay the amount of indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes to enable the plaintiff and others to withdraw their money on a certain fixed time. This shows that they were never participants in the business transaction of defendant Luanzon but were creditors.

The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon because of the assurance of the monthly income of five percent (5%) of their money and that they could withdraw it anytime after the due date add to it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment of the amount loaned.

xxx xx xxx

WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00, with interest at the legal rate from the filing of this complaint until full payment thereof, to pay the total sum of P21,000.00 as attorney’s fees and costs of suit.[9]

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present case wherein petitioner makes the following assignment of errors -


I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.

III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND DEFENDANT LUANZON.

At the outset, we note that petitioner’s claim that the factual findings of the lower court, which were affirmed by the Court of Appeals, were based on a misapprehension of facts and contradicted by the evidence on records [10] is a bare allegation and devoid of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive and cannot be reviewed on appeal by the Supreme Court.[11] Although this rule admits of several exceptions, [12] none of the exceptions are in point in the present case. The factual findings of the respondent court are borne out by the record and are based on substantial evidence.

Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the amount of P150,000, not as a loan, but rather as an investment in the construction project of the latter.[13] In support of her claim, petitioner cites the use by private respondent of the words “investment,” “dividends,” and “commission” in her testimony before the lower court; the fact that private respondent received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on her investment; and the fact that other employees of the Development Bank of the Philippines made similar investments in Luanzon’s construction business.[14]

However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay private respondent the amount of P150,000 on or before August 22, 1987. The promissory note states as follows:

June 22, 1987

To Whom It May Concern:

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22, 1987.

The above amount is covered by _____ Check No. _____ dated August 22, 1987.

(signed)

ROSITA B. LUANZON

G U R A R A N T O R :

(signed)

PACIONARIA O. BAYLON

Tel. No. 801-28-00

18 P. Mapa St., DBP Village

Almanza, Las Pinas, M.M.[15]

If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. [16] Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the parties' intent when there is no ambiguity in the terms of the agreement. [17] Both petitioner and private respondent do not deny the due execution and authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering the real intention of the parties in executing the promissory note, but no amount of argumentation will change the plain import of the terms thereof, and accordingly, no attempt to read into it any alleged intention of the parties thereto may be justified.[18] The clear terms of the promissory note establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at bench is therefore a loan, not an investment.

It is petitioner's contention that, even though she is held to be a guarantor under the terms of the promissory note, she is not liable because private respondent did not exhaust the property of the principal debtor and has not resorted to all the legal remedies provided by the law against the debtor.[19] 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. [20] All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, “for obviously the ‘exhaustion of the principal’s property’ - the benefit of which the guarantor claims - cannot even begin to take place before judgment has been obtained.”[21] This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor.[22]

Under the circumstances availing in the present case, we hold that it is premature for this Court 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. We hold that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

G.R. No. L-42518 August 29, 1936

WISE & CO., INC., plaintiff-appellee, vs.DIONISIO P. TANGLAO, defendant-appellant.

The appellant in his own behalf.Franco and Reinoso for appellee.

AVANCEÑA, C. J.:

In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against Cornelio C. David for the recovery of a certain sum of money David was an agent of Wise & Co. and the amount claimed from him was the result of a liquidation of accounts showing that he was indebted in said amount. In said case Wise & Co. asked and obtained a

preliminary attachment of David's property. To avoid the execution of said attachment, David succeeded in having his Attorney Tanglao execute on January 16, 1932, a power of attorney (Exhibit A) in his favor, with the following clause:

To sign for me as guarantor for himself in his indebtedness to Wise & Company of Manila, which indebtedness appears in civil case No. 41129, of the Court of First Instance of Manila, and to mortgage my lot (No. 517-F of the subdivision plan Psd-20, being a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said obligations to the Wise & Company, Inc., of Manila.

On the 18th of said month David subscribed and on the 23d thereof, filed in court, the following document (Exhibit B):

COMPROMISE

Come now the parties, plaintiff by the undersigned attorneys and defendants in his own behalf and respectfully state:

I. That the defendant confesses judgment for the sum of six hundred forty pesos (P640), payable at the rate of eighty pesos (P80) per month, the first payment to be made on February 15, 1932 and successively thereafter until the full amount is paid; the plaintiff accepts this stipulation.

II. That as security for the payment of said sum of P640, defendant binds in favor of, and pledges to the plaintiff, the following real properties:

1. House of light materials described under tax declaration No. 9650 of the municipality of Angeles, Province of Pampanga, assessed at P320.

2. Accesoria apartments with a ground floor of 180 sq. m. with the first story of cement and galvanized of iron roofing located on the lot belonging to Mariano Tablante Geronimo, said accesoria is described under tax declaration No. 11164 of the municipality of Angeles, Province of Pampanga, assessed at P800.

3. Parcel of land described under Transfer Certificate of Title No. 2307 of the Province of Pampanga recorded in the name of Dionisio Tanglao of which defendant herein holds a special power of attorney to pledge the same in favor of


Wise & Co., Inc., as a guarantee for the payment of the claim against him in the above entitled cause. The said parcel of land is bounded as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW. lot No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente Dayrit; containing 431 sq. m. and described in tax declaration No. 11977 of the municipality of Angeles, Pampanga, assessed at P423.

That this guaranty is attached to the properties above mentioned as first lien and for this reason the parties agree to register this compromise with the Register of Deeds of Pampanga, said lien to be cancelled only on the payment of the full amount of the judgment in this case.

Wherefore, the parties pray that the above compromise be admitted and that an order issue requiring the register of Deeds of Pampanga to register this compromise previous to the filing of the legal fees.

David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself to pay under Exhibit B, leaving an unpaid balance of P296.53.

Wise & Co. now institutes this case against Tanglao for the recovery of said balance of P296.53.

There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter into a contract of suretyship and a contract of mortgage of the property described in the document, with Wise & Co. However, David used said power of attorney only to mortgage the property and did not enter into contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao became David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this inference might be made, it would be insufficient to create an obligation of suretyship which, under the law, must be express and cannot be presumed.

It appears from the foregoing that defendant, Tanglao could not have contracted any personal responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in connection with Exhibit A, has created on the part of Tanglao, is that resulting from the mortgage of a property belonging to him to secure the payment of said P640. However, a foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for the recovery of the amount still owed by David.

At any rate, even granting that defendant Tanglao may be considered as a surety under Exhibit B, the action does not yet lie against him on the ground that all the legal remedies against the debtor have not previously been exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court of Spain of March 2, 1891). The plaintiff has in its favor a judgment against debtor David for the payment of debt. It does not appear that the

execution of this judgment has been asked for and Exhibit B, on the other hand, shows that David has two pieces of property the value of which is in excess of the balance of the debt the payment of which is sought of Tanglao in his alleged capacity as surety.

For the foregoing considerations, the appealed judgment is reversed and the defendant is absolved from the complaint, with the costs to the plaintiff. So ordered.

Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concur.

EN BANC

G.R. No. L-41320 November 9, 1934

CONCEPCION J. VIUDA DE SYQUIA, in her capacity as administratrix of the state of the deceased Gregorio Syquia, plaintiff-appellee, vs.PERFECTO JACINTO, ET AL., defendants. RAFAEL PALMA, appellants.

Francisco Dominguez for appellant.Cardenas and Casal for appellee.

BUTTE, J.:

On December 15, 1924, the Bank of the Philippine Islands obtained a judgment against Perfecto and Felipe Jacinto and Rafael Palma on a promissory note in its favor executed by the defendants on May 27, 1922, for the sum of P22,000 with interest at the rate of 9 per cent per annum plus 10 per cent of the principal as costs and attorney's fees. The dispositive part of this judgment is as follows:

Se condena a los Sres. P. y F. Jacinto y Rafael Palma a que paguen a la parte demandante, los primeros como obligados principales y el ultimo como fiador, la suma de veinticuatro mil pesos (P24,000) al interes de 9 por ciento al año desde el 27 de mayo de 1923, mas el uno por ciento sobre el principal en concepto de honorarios de abogado y costas.

No debe expedirse ejecucion contra el demandado Sr. Rafael Palma, sino despues de haberse hecho excusion de los bienes de los senores P. y F. Jacinto.


On August 16, 1928, the Bank of the Philippine Islands "in consideration of the sum of P1 and other valuable considerations" assigned and transferred said judgment to Gregorio Syquia.

On July 12, 1932, the widow of Gregorio Syquia, as administratrix of his estate, filed suit in the Court of First Instance of Manila against Perfecto and Felipe Jacinto and Rafael Palma reciting the aforementioned judgment and assignment and alleging that since the date of said judgment none of the defendants had paid anything thereon and there remains still due the sum of P24,000 with interest at 9 per cent since May 27, 1923. The plaintiff prayed that the judgment be revived and that defendants Perfecto and Felipe Jacinto as principal and Rafael Palma as guarantor be adjudged to pay the sum of P24,000 with interest since May 27, 1923, and costs. To this petition were attached a copy of the judgment of December 15, 1924, Exhibit A, and a copy of the assignment thereof to the plaintiff, Exhibit B.

The defendants filed a joint amended answer in which they admitted the judgment, Exhibit A, and that said judgment had lapsed and it was necessary to revive the same; but they denied the assignment to Syquia and the allegation that nothing had been paid on said judgment and that the full amount thereof was still due. They set up as a special defense that the judgment which the plaintiff was attempting to revive has been fully paid; that at the time of making the assignment to Gregorio Syquia, the bank had no right or interest under said judgment, the same having been fully paid, and that the partition does not state facts sufficient to constitute a cause of action.

In the same answer they set up a counter-demand to the following effect: that in the month of April, 925, the Bank of the Philippine Islands caused an execution to be issued under said judgment and the sheriff on the request of the bank sold at public sale three properties belonging to the defendants Jacinto which had been previously attached; that at said public sale three properties belonging to the defendants Jacinto which had been previously attached; that at said public sale the bank was the highest bidder crediting the amount of its bid on the said judgment; that said parcels of land with their improvements consisting of four houses yielded a monthly revenue of P880 or P10,560 a year; that during the year allowed the judgment debtors for redemption the said bank took control and possession of the said parcels of land and collected and retained the revenues thereof as aforesaid and that Gregorio Syquia has been receiving the same since that time, though without any right whatever; that the said revenues during the year of redemption in the sum of P10,560 were never applied by the bank as a credit on said judgment. The defendants prayed that they be absolved from the demand of the petitioner and that the estate of Gregorio Syquia be condemned to pay the sum of P10,560 with costs. The answer concludes with a prayer for general relief.

On the trial of this cause it was shown that at the execution sale held on April 18, 1925, the bank bought two of the properties of the defendants Jacinto for the sum of P15,045. The third property was sold to Rufino Reyes for P1,000 which was not credited on the judgment debt pending the determination of Reyes' claim of priority. The trial court stated the judgment debt as of April 18, 1925, as follows:

Loan .............................................................................................. P24,000.00

Interest from May 27, 1923 to April 1, 1925 at 9 per cent ... 4,083.29

Cost including sheriff's sale ..................................................... 657.95

Total obligation ......................................... P28,741.24

from which is to be deducted P15,045 the value of the two parcels sold to the bank on April 18, 1925, leaving a balance due of P13,696.24. On September 2, 1925, the defendant Palma paid the bank P100 leaving thus a net balance due of P13,596.24. The trial court entered the following judgment:

Dictese sentencia condenando a los demandados, Perfecto Jacinto y Felipe Jacinto, como obligados principales, y Rafael Palma como fiador, a pagar a la demandante la cantidad de trece mil quinientos noventa y seis pesos con veinte y cuatro centimos (P13,596.24), mas las costas del juicio.

Se sobresee la reconvencion de los demandados.

Asi se ordena.

Manila, I.F., 25 de septiembre de 1933.

From this judgment only defendant Palma appeals. He submits the following assignments of error:

1. El Juzgado erro al no apreciar que la cuenta de los deudores P. y F. Jacinto quedo liquidada con el banco al efectuarse la venta de las fincas embargadas por este a favor de Gregorio Syquia por la suma de P45,000 y que, por consiguiente, la sentencia firme de diciembre 14, 1924, quedo ipso facto saldada y con creces, en virtud de aquella venta.

2. El Juzgado erro al no apreciar que el banco no transmitio ningun derecho, interes o participacion en la sentencia referida al tiempo de hacerse el traspaso de los mismos a Gregorio Syquia.

3. Aun suponiendo que la sentencia firme era subsistente contra los deudores y su fiador al tiempo de hacerse el traspaso por el banco de cualquier titulo, derecho, interes o participacion en dicha sentencia, el Juzgado erro al no apreciar que se ha constituido una novacion de la obligacion del fiador sin su conocimiento ni consentimiento, y, por tanto, sin eficacia juridica contra el.


4. El Juzgado erro al no apreciar que el demandado Rafael Palma, como fiador, ha quedado eximido de su obligacion no solo por efecto de la novacion hecha sin su conocimiento ni consentimiento, sino tambien por efecto de la aceptacion por el banco de los bienes inmuebles de los deudores P. y F. Jacinto, en pago de deuda.

It is to be noted that Palma filed no separate answer nor special defenses available to him as guarantor but merely joined in the answer of his codefendants pleading that the bank had been fully paid. It should be noted too that the execution which was issued under the judgment of December 15, 1924, and under which said parcels of land were sold on April 18, 1925, was directed solely against the principal debtors, Perfecto and Felipe Jacinto, Palma not being mentioned therein.

Under his first and second assignments of error, the appellant argues that when the bank acquired said properties at the sheriff's sale on April 18, 1925, for the sum of P15,045, it paid much less than they were worth, in view of the fact that they yielded an annual revenue of P10,560; and this is further established by the fact that the bank on August 16, 1928, sold and conveyed said parcels to Gregorio Syquia for the sum of P45,000. Exhibits 2-A and 2-Bare copies of pages of the "libro de diversas cuentas" of the bank, upon which appears the account of Perfecto and Felipe Jacinto and Rafael Palma. From these it appears that after the sale by the bank to Syquia, said account was marked as balanced and closed. From these facts the appellant contends that the principal debtors, and therefore the guarantor, were discharged from further liability on the judgment; and that being true, Syquia acquired nothing by the assignment of the judgment to him by the bank. In strict law, it is obvious that the plea that the defendants has paid their debt cannot be sustained. Indeed the appellant himself in arguing his first and second assignments of error invokes the equitable principle that no person should enrich himself unjustly at the expense of another. Clearly this equitable principle has no application to a legally conducted sheriff's sale. The appellant does not question the regularity of the sale. A purchaser at a sheriff's sale, when his title has once become vested, may dispose of the property for such consideration as he sees fit or as he can obtain. The rule which the appellant asks us to introduce into our jurisprudence with regard to sheriff's sales would cast such a doubt upon such sales that bidders would abstain therefrom and even judgment creditors would offer less, all to the prejudice of judgment debtors. The Code of Civil Procedure goes far in protecting the judgment debtor. He may prevent the sale of the property on execution (sec. 456); or he may redeem it from the purchaser at any time within twelve months after the sale(sec. 465). In the instant case, although it was alleged the property was sold for greatly below its value, the defendants did not exercise any right of redemption. We hold, therefore, that the judgment debt in its entirety was not discharged before the action for the revival of the judgment was brought.

However, the majority of the court are of the opinion that there should be credited upon the judgment for the benefit of the guarantor alone the sum of P10,560, being the revenues collected and retained during the year of redemption by Gregorio Syquia from said properties, according to the testimony of Perfecto Jacinto (t.s.n., 19, 20,22). This conclusion is based on the interpretation given to the provisions of the Code of Civil

Procedure by this court in the cases of Pabico vs. Ong Pauco (43 Phil., 572); Flores vs. Lim (50 Phil. 738); Powell vs. National Bank (54 Phil., 54). It is view of the writer that this defense so far as the guarantor is concerned is premature.

In his brief and upon the oral argument the appellant has pressed upon our attention several defenses available to guarantors under our law which, he claims, entitle him to a reversal of the judgment. With reference to all these defences, it suffices to say that it is conceded that Palma as guarantor is still entitled to the benefits of articles 1830,1832 and 1852 of the Civil Code. Up to the present, the judgment creditor has made no demand on Palma. Joining him in the suit against the principal debtor is not the demand intended articles 1832 of the Civil Code. That demand can be made only after judgment on the debt, 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. Only then can the creditor "levy upon the property of the principal" — only then can the liability of the creditor begin under article 1833 of the Civil Code. It would be absurd and futile to point out "saleable property of the debtor" at the inception of the suit, when it cannot be seized or sold, and require the creditor to make a "levy" upon it.

There is no competent evidence that the principal debtors, Perfecto and Felipe Jacinto, are insolvent — even if they were now, there can be no certainty that they may not be in funds when an exemption on the revived judgment is issued. So far as this record shows, the judgment creditor has not exhausted his remedies against the principal debtors and he is still looking to them for payment. It is not for the guarantor to anticipate that there will be a return of nulla bona on the execution, when and if issued. Nor is it for him to anticipate a demand on him under article 1832 and to offer defences thereto which have not matured. The occasion for these defences may never arise. The present revived judgment could not therefore be res judicata as to such future defences. The revived judgment does not foreclose any defence which the guarantor may raise when "demand for payment" is made on him. Indeed, he cannot claim the benefits of articles 1830, 1832, 1834 and 1852 of the Civil Code before demand is made on him; they are all available to him only after "demand for payment" (art. 1832).

The appellant's defences may be all be considered when they are property presented at the proper time. The case which he now presents, in anticipation of a demand which has not yet been made, is purely hypothetical. The courts do not undertake to decide hypothetical cases.

It results that the judgment appealed from must be modified in the sense that Rafael Palma as guarantor maybe held contingently liable only in the sum of P3,034.24 under said judgment, which is in all other respects affirmed, without special pronouncement as to costs in this instance.

Street, J., concurs.


Separate Opinions

AVANCEÑA, C.J., concurring:

I concur in this decision. Although I dissented in the decision in the case of Powell vs. National Bank (54 Phil., 54), I have agree with it as long as it is not revoked by the majority.

IMPERIAL, J., concurring:

On December 15, 1924, judgment was rendered in civil cause No. 26942 of the Court of First Instance of Manila in favor of the Bank of the Philippine Islands and againts Perfecto Jacinto, as principals, and Rafael Palma, as guarantor, for the amount of P24,000 together with interest at the rate of 9 per cent per annum from May 27, 1923, plus 1 per cent on the said amount, as attorney's fees, and cots of the proceedings. It was ordered in the said judgment that no execution shall be issued against the guarantor until after salable properties of the principal debtors shall have been exhausted. The judgment became final and the law between the parties. On February 20, 1925, execution of the judgment was issued against the Jacintos and the sheriff levied upon real properties belonging to them which were purchased at public auction by the Bank of the Philippine Islands for P15,045. During the year of redemption the properties so sold earned rental amounting to P10,560 which were collected and actually received by Gregorio Syquia, with the knowledge and consent of the judgment creditor. On August 16, 1928, the judgment creditor sold the same date but in separate instrument it also sold to Gregorio Syquia for the nominal value of P1 and for other valuable considerations all its rights, participation and interest on the aforesaid judgment. This purchaser died without taking any further step and his administratrix on July 12, 1932, after the lapse of about eight years from the date of the judgment, instituted another action against the same debtors and guarantor for the revival of the judgment.

The guarantor appealed from the judgment rendered by the lower court whereby he was condemned to pay, as guarantor, to the administratrix the sum of P13,596.24 plus costs of the suit. His counterclaim for the rental was dismissed.

The appellant, being a mere guarantor, no execution could be issued against him without first exhausting the salable properties of his principal, as provided by article 1830 of the Civil Code. Same provisions was made in the original judgment rendered against him. Pursuant to article 1832 the benefit of exhaustion is not vailable to the guarantor until demand for payment is made upon him by the creditor. In view of the change in our procedural system in civil litigations the proper and only time for a formal demand for payment could only be made at the time the execution of the judgment is issued; but it happened that the execution actually issued has never been directed against the guarantor.

This being the case and because both the Bank of the Philippine Islands and its assignee remained inactive for many years and due to this attitude the principal debtors

became insolvent the guarantor cannot now be subrogated to the rights and privileges of said creditors as againts the principal debtors and for this reason his obligation on the surety has been released in accordance with the provisions of article 1852 of the said Code.

It is argued that the insolvency of the principal debtors has not been proven, but such fact is virtually admitted by both parties and the circumstance that neither the Bank of the Philippine Islands nor its assignee has taken any step to secure an alias writ of execution against the principal debtors is a clear indication of the latter's insolvency.

It is also estimated that inasmuch as there is no positive evidence of the principal debtors' insolvency and that the guarantor failed to allege it in his answer as a special defense it is now premature to pass upon the obligation contracted by the guarantor. On this point it might be said that if guarantor has really been released by positive acts performed by the Bank of the Philippine Islands and its assignee, as shown above, the right of the guarantor to be exonerated has accrued and he is entitled right now to a complete discharge. Further proceedings are useless and will only promote multiplicity of actions.

The matter presents another feature which calls for solution under the principles of justice and equity. The judgment of the bank was only for P24,000, plus interest and costs. It bought the real properties of the principal debtors for P15,045 but afterwards it sold them to Gregorio Syquia for the sum of P45,000.00, thus realizing a profit which amounted to P29,955. As to the assignee, it is true that he paid P45,000, but the properties so bought are worth more than P68,000 and in addition to this bargain he collected the rentals during the year of redemption which amounted to the substantial sum of P10,560. Under these circumstances and applying the principles of justice and equity it should have been held that the judgment, which is sought to be revived, has fully been satisfied. Any other determination on this particular point will encourage enrichment of a person to the prejudice of an innocent one.

There can be no question that the late Gregorio Syquia has collected the rents of the properties assigned to him during the year allowed by the law for redemption. The testimony of Perfecto Jacinto on this point is positive, clear and convincing and it was not contradicted by nay evidence of the appellee. Said rentals amounted to P10,560 and it should have been credited to the judgment debtors. (Pabico vs. Ong Pauco, 43 Phil., 572; Flores vs. Lim, 50 Phil., 738; and Angeles and De Angeles vs. Lozada and Saguisag, 54 Phil., 184.)

Other members of this court further maintain the opinion that the defendant-appellant Rafael Palma has been relieved from further responsibility as surety through the failure of the Bank of the Philippine Islands, the predecessor in interest of the herein plaintiff-appellee, to secure a writ of execution after it was ascertained, through the levy of the writ of execution issued against the principals Perfecto Jacinto et al. that the latter had not sufficient property to satisfy the judgment, thus depriving the defendant-appellant of the opportunity to point out other properties of the judgment debtor upon which a levy could be made. To this I am also agreeable.


The foregoing reasons, as can readily be seen, call for a dissenting opinion, but in order to expedite the matter with a sufficient number of votes and inasmuch as defendant-appellant is given credit for the yearly rentals earned by the properties sold and his right of exhaustion is upheld and reserved, I concur in the result of the majority decision.

Malcolm, Villa-Real and Abad Santos, JJ., concur.

GODDARD, J., dissenting:

I dissent.

Upon a sale of real property, under a writ of execution, the purchaser is substituted to and acquires all the right, interest, title and claim of the judgment debtor thereto, subject only to the right of redemption. The officer making the sale must give the purchaser a certificate of sale containing a particular description of the property sold; the price paid for each distinct lot or parcel; the whole price paid and the date when the right of redemption expires. (Sec. 463, Code of Civil Procedure.)

The judgment debtor, or the redemptioners mentioned in section 464 of the Code of Civil Procedure, may redeem the property from the purchaser at any time within twelve months after the sale, on paying the purchaser the amount of his purchase, with one per cent per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last-named amount at the same rate. (Section 465, Code of Civil Procedure.)

The purchaser, from the time of the sale until a redemption, is entitled to receive from the tenant in possession the rents of the property sold or the value of the use and occupation thereof. But when any rents have been received by the judgment creditor or purchaser from property thus sold preceding such redemption, the amounts of such rents and profits shall be a credit upon the redemption money to be paid. (See. 469, Code of Civil Procedure.)

Is there any provision in our Code of Civil Procedure aside from that contained in section 469 of that Code, quoted above, that authorizes this court to allow a judgment debtor a credit for the amount of the rents and profits of land sold under execution? No. Was there any "redemption money" paid the purchaser by the judgment debtor in this case? No. Have the above quoted sections of the Code of Civil Procedure been repealed or modified? Not by the Legislature. "However, the majority of the court are of the opinion that there should be credited upon the judgment for the benefit of the guarantor alone the sum of P10,560, being the revenues collected and retained during the year of redemption by Gregorio Syquia from said properties, according to the testimony of Perfecto Jacinto (t.s.n., 19, 20, 22)." — Majority opinion.

In short the "majority are of the opinion" that the defendant-appellant, Rafael Palma, is entitled to the rents and profits on the property during the year of redemption, although the law clearly provides that the purchaser, from the time of the sale until a redemption, is entitled to receive such rents and profits and, pursuant to that opinion, Palma is allowed a credit of P10,560 upon the judgment against him, not upon "redemption money" which he might have profitably paid the purchaser. I say might have profitably paid, because this appellant, in his brief, puts the value of the property sold under execution at P88,000. The purchaser only paid P15,045. Let us suppose the appellant had redeemed the property on the last day of the year or redemption, he would have had to pay the purchaser the sum of P15,045 plus 12 per cent, a total of P16,850.40 less a credit of P10,560, the alleged value of the rents and profits for the year of redemption, or a total of only P6,290 for property worth P88,000, a clear profit of P81,710.

The sections of our Code of Civil Procedure, cited above, are taken from the California Code of Civil Procedure. The courts of that state, interpreting the phrase "upon a sale of real property, the purchaser shall be substituted and acquire all the right, title, interest and claim of the judgment debtor thereto", have held that it is by the sale that the title passes, or, in other words, that at the sale the purchaser acquires the legal title to the land subject to defeasance by the happening of the condition subsequent (redemption). (McNutt vs. Nuevo Land Co., 167 Cal., 459; 140 Pac., 6; Leet vs. Armbruster, 143 Cal., 663; 77 Pac., 653; Pollard vs. Harlow, 138 Cal., 390; 71 Pac., 454, 648; Reynolds vs. London & Lancashire F. Ins. Co., 128 Cal., 16; 79 Am. St. Rep., 17; 60 Pac., 467; Breedlove vs. Norwich etc. Ins. Society, 124 Cal., 164; 58 Pac., 770 ["It is by the sale that the title passes"]; Leaver vs. Smith, 47 Cal., App., 474; 190 Pac., 1050; Wangenheim vs. Garner, 42 Cal. App., 332; 183 Pac., 670; Youd vs. German Savings & Loan Society, 3 Cal. App., 706; 86 Pac., 991. In McQueeney vs. Toomey, 36 Mont., 282; 122 Am. St. Rep., 358; 13 Ann. Cas., 316; 92 Pac., 561, the courts holds that the title passes to the purchaser on the sale and notes that in Simpson vs. Castle, 52 Cal., 664, the statute so providing was overlooked.)

It is also held that the various qualifications to the purchaser's title are not inconsistent with the vesting of the legal title in him and that even the continued possession of the land by the judgment debtor is no more incompatible with the existence of a legal title in another than in the ordinary case of a tenant and his landlord. (Pollard vs. Harlow, 138 Cal., 390, 393; 71 Pac., 454, 648.)

It is undoubtedly true that independent of some express statutory provision to that effect a purchaser at an execution sale would not be entitled to rents and profits during the time allowed for redemption. In California, however, the courts have held that this right has been expressly conferred upon purchasers at sales on civil judgments obtained in the ordinary administration of justice, it being provided, in the Code of Civil Procedure of that State, as it is in our Code, that "The purchaser from the time of the sale until a redemption . . . is entitled to receive, from the tenant in possession, the rents of the property sold, or the value of the use and occupation thereof. . . ." (Mayo vs. Woods, 31 Cal., 269; California Code of Civil Procedure, section 707; Yndart vs. Den, 125 Cal., 85; Robinson vs. Thornton, 102 Cal., 675.)


The courts of California have also held that the "tenant in possession" is liable to the purchaser at sheriff's sale for the rents and profits of the land sold. The phrase "tenant in possession" has been held to be a generic term designed to apply to all cases of tenancy. In a broad sense, a "tenant" is held to be "one that holds or possesses lands or tenements, by any kind of title, either in fee, for life, years, or at will." Under this definition the owner in fee in possession is no less, in legal contemplation, a tenant, than the one who occupies under him. (Harris vs. Reynolds, 13 Cal., 514; 73 Am. Dec., 600.)1awphil.net

The phrase "tenant in possession" also includes a mortgagee of the judgment debtor (Knight vs. Truett, 18 Cal., 113), the trustee and his successor in interest under a trust deed from the judgment debtor (Shores vs. Scott River Co., 21 Cal., 135) and the administrator of the estate of the judgment debtor (Walls vs. Walker, 37 Cal., 424; 99 Am. Dec., 290), when they are in possession after a sheriff's sale.

In California, prior to 1869, the purchaser at an execution sale was given the rents and profits of the property without any liability to account for them in case of a redemption. (Page vs. Rogers, 31 Cal., 293; Kline vs. Chase, 17 Cal., 596, holding that a debtor who received rent from his tenants between the sale and a redemption is liable to the purchaser for the amount received.) In that year the rule was changed by the adoption of an amendment to section 707 of the Code of Civil Procedure of that state under which the amount of any rents or profits received by the judgment creditor or purchaser will be a credit upon the redemption money to be paid. This section thus liberalized in favor of the judgment debtor is section 496 of our Code of Civil Procedure.

It is, however, evident that the majority of this court is of the opinion that the Legislature of the State of California and the Philippine Legislature did not do enough for the judgment debtor, who, for some reason or other, fails to redeem his property within a year after it is sold under a writ of execution. Well, Mr. Judgment Debtor, cheer up! If you fail to redeem your land within the year provided by law, your cruel judgment creditor, if he be the purchaser of your property sold under execution, will now be obliged to allow you a credit on his judgment against you equal to the amount of the rents and profits that he may have received from your property during the year of redemption.

Suppose the judgment creditor is not the purchaser and a third party buys the property of the judgment debtor at the execution sale, the former will receive the purchase price to be credited against the amount of the judgment. In case the judgment debtor fails to redeem from the third party purchaser, who has received the rents and profits during the redemption period, would the majority of this court hold that the judgment debtor then had a right to a credit against the judgment equal to the value of the rents and profits received by the purchaser during the period of redemption? In other words would the judgment creditor have to repay his judgment debtor the value of such rents and profits? If it be legal and logical to allow such a credit in the case under consideration, the answer to these questions must be in the affirmative. However, it would also be just as legal and logical to compel the third party purchaser to return the rents and profits to the judgment debtor even though the latter failed to redeem his property within the period fixed by law.

In view of the provisions of our Code of Civil Procedure and the decisions of the courts of California, cited above, it is clear that in the case of a sale of real property, under a writ of execution, the purchaser, whether he be the judgment creditor or a third party, is regarded as the owner of such property during the period elapsing between the sale and the time for redemption; that he is entitled to the rents and profits, or the value of the use and occupation thereof during said period and that when such rents, etc. have been received by the purchaser and the judgment debtor redeems the property within the period provided by law, then and then only, is the latter entitled to a credit of the amount of such rents, etc., upon the redemption money to be paid by him to the purchaser.

The judgment of the trial court should be affirmed with costs in both instances against the defendant-appellant.

Hull, Vickers and Diaz, JJ., concur.

EN BANC

G.R. No. L-10168 July 22, 1916

JOSE M. A. ARROYO, guardian of Tito Jocsing, an imbecile, plaintiff-appellee, vs.FLORENTINO HILARIO JUNGSAY, ET AL., defendants-appellants.

Perfecto J. Salas Rodriguez for appellants.

TRENT, J.:

The plaintiff in this case is the guardian of one Tito Jocsing, an imbecile, appointed by the court to succeed Jungsay, the former guardian, who absconded with the funds of his ward. The defendants are the absconding guardian and his bondsmen. From a judgment in favor of the plaintiff and against the defendants for the sum of P6,000, together with interest and costs, the bondsmen appealed.

The principal question presented for our consideration is whether the appellants should be credited with P4,400, the alleged value of certain property attached as that of the absconding guardian, all of which is in the exclusive possession of third parties under claim of ownership.

The appellants in contending for the credit, rely upon article 1834 of the Civil Code, which gives to the surety the benefit of a levy (excusion), even when a judgment is rendered against both the surety and the principal. But, according t article 1832, before the surety is entitled to this benefit, he must point out to the creditor property of the principal debtor which can be sold and which is sufficient to cover the amount of the debt. Upon this point Manresa, in vol. 12, pp. 263-265, says:


As explicitly stated in the article under consideration, it is not sufficient that the surety claim the benefit of discussion in time, nor that is so doing he designate property of the debtor wherein to satisfy the debt. It is also necessary that another condition be fulfilled, to wit, that such property be realizable and that it be situated in Spanish territory. This is not only logical, but just, because the attachment of property situated a great distance away would be a lengthy and extremely difficult proceeding and one that, if actually not opposed to, yet does not very well accord with the purpose of the bond, that is, to insure the fulfillment of the obligation and at the same time furnish the creditor with the means of obtaining its fulfillment without hindrance or delays. The same may be said of property that is not readily realizable, and as the surety is the sole person who benefits by the discussion and the one most interested in avoiding difficulties in its execution, it is he, therefore, who should designate the property out of which the recovery is to be made, it being unquestionably convenient for him that the property he designates unite the conditions indicated in order to facilitate the payment of the debt, whereby he will be freed from the subsidiary obligation inherent in the bond.

In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where provisions similar to our Civil Code were under consideration, the court said:

The surety has the right, under certain circumstances, to demand the discussion of the property of the principal debtor. Where suit is brought against the surety alone, he may interpose the plea, and compel the creditor to discuss the principal debtor. The effect of this is to stay proceedings against the surety until judgment has been obtained against the principal debtor, and execution against his property has proved insufficient. When the suit is brought against the surety and the principal debtor the plea of discussion does not require or authorize any suspension of the proceedings; but the judgment will be so modified as to require the creditor to proceed by execution against the property of the principal, and to exhaust it before resorting to the property of the surety. (Bernard vs. Custis, 4 Martin, 215; Banks vs. Brander, 13 La., 276.)

In either case, the surety who desires to avail himself of this right must demand it in limine, `on the institution of proceedings against him.' He must, moreover, point out to the creditor property of the principal debtor, not incumbered, subject to seizure; and must furnish a sufficient sum to have the discussion carried into effect. (R. C. C., 3045, 3046, 3047.) A plea which does not meet these requirements must be disregarded. (Robechot vs. Folse, 11 La., 136; Banks vs. Brander, 13 La., 276.)

The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so incumbered that third parties have, as we have indicated, full possession under claim of ownership without leaving to the absconding guardian a fractional or reversionary interest without determining first whether the claim of one or more of the

occupants is well founded. In all these respects the sureties have failed to meet the requirements of article 1832 of the Civil Code.

Where a guardian absconds or is beyond the jurisdiction of the court, the proper method, under article 1834 of the Civil Code and section 577 of the Code of Civil Procedure, in order to ascertain whether such guardian is liable and to what extent, in order to bind the sureties on his official bond, is by a proceeding in the nature of a civil action wherein the sureties are made parties and given an opportunity to be heard. All this was done in the instant case.

The judgment appealed from, being in accordance with the law, the same is hereby affirmed, with costs against the appellants. So ordered.

Torres, Johnson, Moreland, and Araullo, JJ., concur.

G.R. No. L-26449 May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-appellant, vs.JOSE O. SIA, defendant, TIMES SURETY & INSURANCE CO. INC., surety-appellee.

German A. Sipin for plaintiff-appellant. Galicano S. Calapatia for surety-appellee.

REYES, J.B.L., J.:

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled Luzon Steel Corporation, plaintiff vs. Metal Manufacturing of the Philippines, Inc., and Jose O. Sia, defendants, whereby the court aforesaid quashed a writ of execution issued against the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said surety company.

The essential and uncontroverted facts of the case may be summarized as follows:

Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia, the former's manager, for breach of contract and damages. It obtained a writ of preliminary attachment of the properties of the defendants, but the attachment was lifted upon a P25,000.00 counterbond executed by the defendant Sia, as principal, and the Times Surety & Insurance Co., Inc. (hereinafter designated as the surety), as solidary guarantor, in the following terms:


WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY & INSURANCE CO., INC., as Surety, in consideration of the dissolution of attachment, hereby jointly and severally bind ourselves in the sum of Twenty Five Thousand Pesos (P25,000.00), Philippine Currency, to answer for the payment to the plaintiff of any judgment it may recover in the action in accordance with Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on Appeal.)

Issues having been joined, plaintiff and defendant (without intervention of the surety) entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim in the following manner:

1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00) PESOS, monthly for the first six (6) months to be paid at the end of every month and to commence in January, 1965, and within one month after paying the last installment of P500.00, the balance of P22,000.00 shall be paid in lump sum, without interest. It is understood that failure of the Defendant to pay one or any installment will make the whole obligation immediately due and demandable and that a writ of execution will be issued immediately against Defendants bond.lawphi1.ñet

The compromise was submitted to the court and the latter approved it, rendered judgment in conformity therewith, and directed the parties to comply with the same (Record on Appeal, page 22).

Defendant having failed to comply, plaintiff moved for and obtained a writ of execution against defendant and the joint and several counterbond. The surety, however, moved to quash the writ of execution against it, averring that it was not a party to the compromise, and that the writ was issued without giving the surety notice and hearing. The court, overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled the counterbond, and denied the motion for reconsideration. Hence this appeal.

Main issues posed are (1) whether the judgment upon the compromise discharged the surety from its obligation under its attachment counterbond and (2) whether the writ of execution could be issued against the surety without previous exhaustion of the debtor's properties.

Both questions can be solved by bearing in mind that we are dealing with a counterbond filed to discharge a levy on attachment. Rule 57, section 12, specifies that an attachment may be discharged upon the making of a cash deposit or filing a counterbond "in an amount equal to the value of the property attached as determined by the judge"; that upon the filing of the counterbond "the property attached ... shall be delivered to the party making the deposit or giving the counterbond, or the person appearing on his behalf, the deposit or counterbond aforesaid standing in place of the property so released".

The italicized expressions constitute the key to the entire problem. Whether the judgment be rendered after trial on the merits or upon compromise, such judgment undoubtedly may be made effective upon the property released; and since the counterbond merely stands in the place of such property, there is no reason why the judgment should not be made effective against the counterbond regardless of the manner how the judgment was obtained.

Squarely on the point, and rebutting the appellee's apprehension that the compromise could be the result of a collusion between the parties to injure the surety, is our decision in Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through former Chief Justice Paras, ruled as follows:

Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the discharge of an attachment is "to secure the payment to the plaintiff of any judgment he may recover in the action," and stands "in place of the property so released". It follows that the order of cancellation issued by the respondent judge is erroneous. Indeed, judgment had already been rendered by the Court of First Instance of Manila in civil case No. 11748, sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner; and it is not pretended that said judgment is a nullity. There is no point in the contention of the respondent Surety Company that the compromise was entered into without its knowledge and consent, thus becoming as to it essentially fraudulent. The Surety is not a party to civil case No. 11748 and, therefore, need not be served with notice of the petition for judgment. As against the conjecture of said respondent that the parties may easily connive by means of a compromise to prejudice it, there is also the likelihood that the same end may be attained by parties acting in bad faith through a simulated trial. At any rate, it is within the power of the Surety Company to protect itself against a risk of the kind.

Wherefore, the order of the respondent Judge cancelling the bond in question is set aside. So ordered with costs against the respondent Alto Surety & Insurance Co., Inc.

The lower court and the appellee herein appear to have relied on doctrines of this Court concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of attachment, without discriminating between such bonds and those filed by a defendant for the lifting of writs of attachment already issued and levied. This confusion is hardly excusable considering that this Court has already called attention to the difference between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L-15709, 19 October 1960, this Court pointed out that —

The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the lifting of a writ of attachment is due to these bonds being security for the payment of any judgment that the attaching party may obtain; they are thus mere replacements of the property formerly attached, and just as the latter may be levied upon after final judgment in the case in order to realize the amount


adjudged, so is the liability of the countersureties ascertainable after the judgment has become final. This situation does not obtain in the case of injunction counterbonds, since the sureties in the latter case merely undertake "to pay all damages that the plaintiff may suffer by reason of the continuance ... of the acts complained of" (Rule 60, section 6) and not to secure payment of the judgment recovered.1

It was, therefore, error on the part of the court below to have ordered the surety bond cancelled, on the theory that the parties' compromise discharged the obligation of the surety.

As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in passing upon the liability of counter sureties in replevin who bound themselves to answer solidarily for the obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure payment of the amount that said plaintiff be adjudged to recover from the defendants,2

the liability of the sureties was fixed and conditioned on the finality of the judgment rendered regardless of whether the decision was based on the consent of the parties or on the merits. A judgment entered on a stipulation is nonetheless a judgment of the court because consented to by the parties.

But the surety in the present case insists (and the court below so ruled) that the execution issued against it was invalid because the writ issued against its principal, Jose O. Sia, et al., defendants below, had not been returned unsatisfied; and the surety invoked in its favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59), couched in the following terms:

SEC. 17. When execution returned unsatisfied, recovery had upon bond. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counter-bond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.

The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be first returned unsatisfied even if the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further would

nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant.

A second reason against the stand of the surety and of the court below is that even if the surety's undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion of the property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine territory. There is no record that the appellee surety has done so. Says Article 2060 of the Civil Code of the Philippines:

ART. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt.

A third reason against the thesis of appellee is that, under the rule and its own terms, the counter-bond is only conditioned upon the rendition of the judgment. Payment under the bond is not made to depend upon the delivery or availability of the property previously attached, as it was under Section 440 of the old Code of Civil Procedure. Where under the rule and the bond the undertaking is to pay the judgment, the liability of the surety or sureties attaches upon the rendition of the judgment, and the issue of an execution and its return nulla bona is not, and should not be, a condition to the right to resort to the bond. 3

It is true that under Section 17 recovery from the surety or sureties should be "after notice and summary hearing in the same action". But this requirement has been substantially complied with from the time the surety was allowed to move for the quashal of the writ of execution and for the cancellation of their obligation.

WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc. Costs against said appellee.

SECOND DIVISION

G.R. No. L-45848 November 9,1977

TOWERS ASSURANCE CORPORATION, petitioner, vs.ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.


AQUINO, J.:

This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary attachment.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P 58,400.

On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-appearance at the pre- trial, the Ong spouses were declared in default.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees.

Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.

We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which provides:

SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbound given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbound, and bound to pay to the judgment creditor upon demand, the amount due under the judgment,

which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set aside. The lower court is directed to conduct a summary hearing on the surety's liability on its counterbound. No costs.

SO ORDERED.

5.2 - filipinas to towers.docx

Documents