ANTONIO GARCIA, JR. vs.

COURT OF APPEALS, LASAL DEVELOPMENT CORPORATION

Facts:

The Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems
Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which it issued the
corresponding promissory notes payable on May 30, 1977. On the same date, Antonio Garcia and Ernest
Kahn executed a surety agreement binding themselves solidarily for the payment of the loan of
P2,500,000.00 on due date.

Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to
the surety agreement. Garcia also failed to pay. Hence, Lasal Development Corporation (to which the
credit had been assigned earlier by PISO) sued Garcia for recovery of the debt.

Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of action; (b)
the suit would result in unjust enrichment of the plaintiff because he had not received any consideration
from PISO; (c) the surety agreement violated the doctrine of the limited liability of corporations; and (d)
the principal obligation had been novated.

The petitioner's first ground is that, as found by the trial court, the surety agreement was invalid
because no consideration had been paid to him by PISO for executing the contract and that the amount
of the entire loan had been received and enjoyed by WMC.

The petitioner cites other developments or transactions between the parties to the original
loans that he contends had the effect of novating the said contracts and consequently extinguished the
surety agreement. Among these are the extension of the original period of payment and the
compounding of the interest on the principal obligations, both of which operated to the prejudice of the
petitioner.

Issue:

1. Whether or not the surety agreement is void for lack of consideration.

2. Whether or not the doctrine of limited liability of corporations is applicable in the case.

3. Whether or not there is novation as to extinguish the surety agreement.

Held:

1. NO.
The surety's obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract
of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or
promisee of the principal is said to be direct, primary and absolute; 1 in other words, he is directly and
equally bound with the principal. The surety therefore becomes liable for the debt or duty of another
although he possesses no direct or personal interest over the obligations nor does he receive any
benefit therefrom.

The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct
consideration received by the surety either from the principal obligor or from the creditor. A contract of
surety, like any other contract, must generally be supported by a sufficient consideration. However, the
consideration necessary to support a surety obligation need not pass directly to the surety; a
consideration moving to the principal alone will suffice.

It has been held that if the delivery of the original contract is contemporaneous with the delivery of the
surety's obligation, each contract becomes completed at the same time, and the consideration which
supports the principal contract likewise supports the subsidiary one.

2. NO.

The surety agreement shows that he signed the same not in representation of WMC or as its president
but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate
officer from binding himself personally to answer for a corporate debt. While the limited liability
doctrine is intended to protect the stockholder by immunizing him from personal liability for the
corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to
the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he
has by his own acts effectively waived.

3. NO.

Significantly the agreement entered into by the parties releasing the petitioner from its obligations was
signed only by Don M. Ferry as chairman of the board of directors of WMC and does not carry the
signature of any of the creditors. Hence, it has no binding force whatsoever on such creditors.

Since in the surety contract, paragraph 5, it is stated that the time of payment may be extended without
notice to the sureties, the petitioner not only consented to an extension in the payment of the
obligation but even waived his right to be notified of such extension, he cannot now claim that he has
been released from his undertaking because of the extension granted to the principal.

As for the compounded interest, the respective sureties claimed that since the creditor changed the rate
of interest in the principal obligation without their knowledge or consent, they were relieved from
liability under their contract. It was held, however, that the change in the rate of interest was merely a
collateral agreement between the creditor bank and the principal debtor that did not affect the surety.
When the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he
assumed was his alone and was separate and apart from the original contract. His agreement to pay the
additional rate of interest was an additional burden upon him and him only. That obligation in no way
affected the original contract of the surety, whose liability remained unchanged.

The most important argument against the alleged novation is the failure of the petitioner to establish
the validity of the new contract, an essential requisite for the novation of a previous valid obligation.

In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of
all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new
one. Novation requires the creation of new contractual relations as well as the extinguishment of the
old.

VISAYAN SURETY & INSURANCE CORPORATION vs. THE HONORABLE COURT OF APPEALS, SPOUSES JUN
BARTOLOME + and SUSAN BARTOLOME and DOMINADOR V. IBAJAN

Facts:

On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed a complaint against
spouses Jun and Susan Bartolome, for replevin to recover from them the possession of an Isuzu jeepney,
Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and unlawfully
taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at their residence.

On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan Surety &
Insurance Corporation. The said contract of surety stated that Spouses Ibajan and petitioner company
are solidarily liable to the defendants in case they are to recover any sum from the plaintiff spouses
Ibajan.

On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to
take the Isuzu jeepney into his custody. Consequently, the Sheriff seized the subject vehicle and turned
over the same to plaintiff spouses Ibajan.
 On February 15, 1993, the spouses Bartolome filed a motion to quash the writ of replevin and to
order the return of the jeepney to them.

On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a
motion for leave of court to intervene, stating that he has a right superior to the plaintiffs over the
ownership and possession of the subject vehicle.

On June 1, 1993, the trial court granted the motion to intervene and thereafter granted the
motion to squash the writ of replevin ordering the plaintiffs to return the subject vehicle to the
intervenor.

On August 31, 1993, the trial court ordered the issuance of a writ of replevin directing the sheriff
to take into his custody the subject motor vehicle and to deliver the same to the intervenor who was the
registered owner. However, the replevin order was not satisfied.

On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a motion/application
for judgment against plaintiffs' bond which was granted. Consequently, petitioner and plaintiff spouses
were ordered to pay the intervenor Dominador Ibajan.

Issue: Whether the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of
respondents.

Held: NO.

An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the
matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated
as to be adversely affected by a distribution or other disposition of property in the custody of the court
or of an officer thereof.

It is a basic principle in law that contracts can bind only the parties who had entered into it; it
cannot favor or prejudice a third person. Contracts take effect between the parties, their assigns, and
heirs, except in cases where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.

The obligation of a surety cannot be extended by implication beyond its specified limits. "When
a surety executes a bond, it does not guarantee that the plaintiff's cause of action is meritorious, and
that it will be responsible for all the costs that may be adjudicated against its principal in case the action
fails. The extent of a surety's liability is determined only by the clause of the contract of suretyship." A
contract of surety is not presumed; it cannot extend to more than what is stipulated.
 Since the obligation of the surety cannot be extended by implication, it follows that the surety
cannot be held liable to the intervenor when the relationship and obligation of the surety is limited to
the defendants specified in the contract of surety.

PHILIPPINE NATIONAL BANK vs. THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON
SURETY CO., INC., and ESTANISLAO E. DEPUSOY, trading under the style of E.E. DEPUSOY
CONSTRUCTION

Facts:

On August 6, 1955, Estanislao Depusoy, doing business under the name of E. E. Depusoy
Construction, and the Republic of the Philippines, represented by the Director of Public Works, entered
into a building contract, for the construction of the GSIS building at Arroceros Street, Manila, Depusoy to
furnish all materials, labor, plans, and supplies needed in the construction. Depusoy applied for credit
accommodation with the plaintiff. This was approved by the Board of Directors in various resolutions
subject to the conditions that he would assign all payments to be received from the Bureau of Public
Works of the GSIS to the bank, furnish a surety bond, and the surety to deposit P10,000.00 to the
plaintiff. The total accommodation granted to Depusoy was P100,000.00. This was later extended by
another P10,000.00 and P25,000.00, but in no case should the loan exceed P100,000.00. In compliance
with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from
the GSIS.

Luzon thereafter executed two surety bonds, one for the sum of P40,000.00 and the other for
P60,000.00.

With the consent of Luzon, the bond was extended for another 6 months from January 31, 1957. Under
the credit accommodation granted by the plaintiff bank, Depusoy obtained several amounts from the
bank. On January 14, 1957, Depusoy received P50,000.00 from the bank which he promised to pay in
installments on the dates therein indicated.

On January 17, 1957, he received another P50,000.00. Under this arrangement all payments made by
the GSIS were payable to the Philippine National Bank. The treasury warrants or checks, however, were
not sent directly to the plaintiff. They were received by Depusoy, who in turn delivered them to the
plaintiff bank.
The plaintiff then applied the money thus received, first, to the payment of the amount due on the
promissory notes at the time of the receipt of the treasury warrants or checks, and the balance was
credited to the current account of Depusoy with the plaintiff bank.

A total of P1,309,461.89 were paid by the GSIS to the plaintiff bank for the account of Estanislao
Depusoy. Of this amount, P246,408.91 were paid for the importation of construction materials, and
P1,063,408.91 were received by the Loans and Discounts Department of the plaintiff bank.

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime therafter, the
Bureau of Public Works rescinded its contract with Depusoy. No further amounts were tpaid by the GSIS
to the plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest, is
over P100,000.00. Demands for payment were made upon Depusoy and Luzon, and as no payment was
made.

Herein petitioner filed with the trial court a complaint against Estanislao Depusoy and private
respondent Luzon Surety Co. Inc.

After trial on the merits, the trial court rendered a decision dismissing the case against Luzon Surety
stating that the surety bonds it issued guaranteed only the faithful performance of the deed of
assignment and the extension of said bonds did not change their conditions.

The court of appeals affirmed the decision of the trial court and thus stated:

Under the surety bonds, the principal, Depusoy, and Luzon bound themselves jointly and
severally to the PNB under the following conditions: that 'in consideration of a certain loan, Depusoy
executed a Deed of Assignment in favor of the PNB on all payments to be received by him from the
Bureau of Public Works in connection with a contract of August 6, 1956'; that the PNB required the
principal to give a good and sufficient bond to secure the full and faithful performance on his part of said
agreement; and that, 'if the principal shall well and truly perform and fulfill all the undertakings,
covenants, terms and conditions, and agreements stipulated in said agreement, this obligation shall be
null and void'. Now, what are the undertakings, covenants, terms, conditions, and agreements
stipulated in the said agreement or Deed of Assignment? The undertakings of the principal Depusoy,
under the Deed of Assignment, were to assign, transfer, and convey to the plaintiff bank all payments to
be received by Depusoy from the Bureau of Public Works; that Depusoy acknowledged that such sums
assigned and received by the plaintiff would belong to the PNB, and if any conversion should be made
by the assignor or his representative, he would be criminally liable; that the PNB could collect and
receive all sums and monies, and payments, and the bank was authorized to endorse for deposit or for
encashment all checks or money orders, or negotiable instruments that it might receive in connection
with the assignment. Nowhere in the Deed of Assignment nor in the bonds did Luzon guarantee that
Depusoy would pay his indebtedness to the plaintiff and that upon Depusoy's default, Luzon would be
liable. When the terms of the agreement are clear, there can be no room for construction. If the
intention of the parties, and particularly of Luzon, was to guarantee the payment of the debt of Depusoy
to the plaintiff, the bonds would have recited in its preamble that the principal was indebted to the PNB
and that the PNB required the principal to give a good and sufficient bond to secure the faithful
performance on his part of the terms of the promissory notes. Instead of doing so, it recited that in
consideration of a certain loan, the principal had executed a Deed of Assignment.

Issue: Whether or not Luzon Surety is liable for the indebtedness of Depusoy to petitioner PNB

Held: NO.

We are in full accord with the conclusion of the trial court and the Court of Appeals that the
bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy of
his obligation under the Deed of Assignment and not to guarantee the payment of the loans or the debt
of Depusoy to petitioner to the extent of P100,000.00. The language of the bonds is clear, explicit and
unequivocal. It leaves no room for interpretation.

Article 1370 of the Civil Code provides:

"If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."

Besides, even if there had been any doubt on the terms and conditions of the surety agreement,
the doubt should be resolved in favor of the surety. As concretely put in Article 2055 of the Civil Code,
"A guaranty is not presumed, it must be expressed and cannot extend to more than what is stipulated
therein.”

MARIANO LIM vs. SECURITY BANK CORPORATION

Facts:

Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types
of credit accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul
Arroyo for the amount of P2,000,000.00 which is covered by a Credit Agreement/Promissory Note. Said
promissory note stated that the interest on the loan shall be 19% per annum, compounded monthly, for
the first 30 days from the date thereof, and if the note is not fully paid when due, an additional penalty
of 2% per month of the total outstanding principal and interest due and unpaid, shall be imposed.
The Continuing Suretyship executed by petitioner stipulated that:

If any of the Guaranteed Obligations is not paid or performed on due date (at stated maturity or
by acceleration), the Surety shall, without need for any notice, demand or any other act or deed,
immediately become liable therefor and the Surety shall pay and perform the same.

Guaranteed Obligations are defined in the same document as follows:

(i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which
the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as
defined hereinbelow.

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of
Final Demand, informing him that he was liable to pay the loan obtained by Raul and Edwina Arroyo,
amounting to P7,703,185.54. For failure of petitioner to comply with said demand, respondent filed a
complaint for collection of sum of money against him and the Arroyo spouses. Since the Arroyo spouses
can no longer be located, summons was not served on them, hence, only petitioner actively participated
in the case.

After trial, the (RTC) rendered judgment against petitioner.

Petitioner appealed to the CA, but the appellate court affirmed the RTC judgment.

Issue: whether petitioner may validly be held liable for the principal debtor's loan obtained six months
after the execution of the Continuing Suretyship.

Held: YES.

Suretyship arises upon the solidary binding of a person deemed the surety with the principal
debtor for the purpose of fulfilling an obligation. A surety is considered in law as being the same party as
the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities
are interwoven as to be inseparable.

A bank or financing company which anticipates entering into a series of credit transactions with
a particular company, normally 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 suretyship
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.
 The terms of the Continuing Suretyship executed by petitioner, are very clear. It states that
petitioner, as surety, shall, without need for any notice, demand or any other act or deed, immediately
become liable and shall pay "all credit accommodations extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as
(i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the accounts,
books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank
may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as defined
hereinbelow." Such stipulations are valid and legal and constitute the law between the parties, as Article
2053 of the Civil Code provides that "[a] guaranty may also be given as security for future debts, the
amount of which is not yet known;" Thus, petitioner is unequivocally bound by the terms of the
Continuing Suretyship.

Note: With regard to the award of attorney's fees, it should be noted that Article 2208 of the Civil Code
does not prohibit recovery of attorney's fees if there is a stipulation in the contract for payment of the
same.

However, even if such attorney's fees are allowed by law, the courts still have the power to reduce the
same if it is unreasonable.

The award of attorney's fees amounting to ten percent (10%) of the principal debt, plus interest and
penalty charges, would definitely exceed the principal amount; thus, making the attorney's fees
manifestly exorbitant. Hence, we reduce the amount of attorney's fees to ten percent (10%) of the
principal debt only.

TOWERS ASSURANCE CORPORATION vs. ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG
and JUDGE BENJAMIN K. GOROSPE

Facts:

See Hong, the proprietor of Ororama Supermart sued the spouses Ernesto Ong and Conching
Ong for the collection of the sum of P58,400 plus litigation expenses and attorney's fees.

See Hong asked for a writ of preliminary attachment. As a result, the lower court issued an order
of attachment. The deputy sheriff attached the properties of the Ong spouses.

To lift the attachment, the Ong spouses filed a counterbond in the amount of P58,400 with
Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance
Corporation bound themselves to pay solidarily to See Hong the sum of P58,400.
 Thereater, the Ong spouses filed an answer with a counterclaim. For non-appearance at the pre-
trial, the Ong spouses were declared in default.

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 P58,400.

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

Issue: Whether or not the judgment creditor, See Hong, proprietor of Ororama Supermart can recover
from the surety on the counterbond.

Held: NO.

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 the Rules of
Court.

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.

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.

FINMAN GENERAL ASSURANCE CORPORATION vs. ABDULGANI SALIK, BALABAGAN AMPILAN, ALI KUBA,
GANDHI PUA, DAUD MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR AND EMPLOYMENT
Facts:

Private respondents, allegedly applied with Pan Pacific on and were assured employment
abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totalling
P30,000.00. But despite numerous assurances of employment abroad, they were not employed.

Accordingly, they filed a joint complaint with the POEA against Pan Pacific for Violation of
Articles 32 and 34(a) of the Labor Code.

The POEA motu proprio impleaded and summoned herein petitioner surety Finman in the
latter's capacity as Pan Pacific's bonding company.

Summons were served upon both Pan Pacific and Finman, but they failed to answer.

A hearing was called, but only the private respondents appeared. Despite being in default for
failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they
failed to appear. Thus, ex-parte proceedings ensued.

During the hearing, herein private respondents reiterated the allegations in their complaint that
they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer
Arandia and countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific;
that they paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total
payment of P30,000.00 allegedly represents payments for herein private respondents in the amount of
P5,000.00 each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific.

Finman, in an answer, alleged that herein private respondents do not have a valid cause of
action against it; that Finman is not privy to any transaction undertaken by Pan Pacific with herein
private respondents; that herein private respondents claims are barred by the statute of frauds and by
the fact that they executed a waiver; that the receipts presented by herein private respondents are
mere scraps of paper; that it is not liable for the acts of Mrs. Egil; that Finman has a cash bond of
P75,000.00 only which is less than the required amount of P100,000.00; and that herein private
respondents should proceed directly against the cash bond of Pan Pacific or against Mrs. Egil.

The Secretary of Labor and Employment, upon the recommendation of the POEA hearing officer,
issued an Order in favor of respondents and cancelling the license of Pan Pacific.

Issue: Whether or not petitioner Finman is liable as a surety.

Held: YES.

In the case at bar, petitioner and Pan Pacific entered into a suretyship agreement, with the
former agreeing that the bond is conditioned upon the true and faithful performance and observance of
the bonded principal (Pan Pacific) of its duties and obligations. It was also understood that under the
suretyship agreement, herein petitioner undertook itself to be jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific in keeping with the Labor Code, which provides that a
surety bond is to be issued by the applicant from an accredited bonding company to answer for valid
and legal claims arising from violations of the conditions of the license or the contracts of employment
and guarantee compliance with the provisions of the Code, its implementing rules and regulations and
appropriate issuances of the Ministry.

Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to
the proceedings against (Pan Pacific). As such Finman is bound, in the absence of collusion, by a
judgment against its principal even though it was not a party to the proceedings. This Court ruled that
where the surety bound itself solidarily with the principal obligor, the former is so dependent on the
principal debtor "that the surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter." Even if herein Finman was not impleaded in
the case, still it can be held jointly and severally liable for all claims arising from recruitment violation of
Pan Pacific. Moreover, as correctly stated by the Solicitor General, private respondents have a legal
claim against Pan Pacific and its insurer for the placement and processing fees they paid, so much so
that in order to provide a complete relief to private respondents, petitioner had to be impleaded in the
case.

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING
CORPORATION, vs. BA FINANCE CORPORATION

Facts:

Defendant-appellant Fortune Motors Corporation has been availing of the credit facilities of plaintiff-
appellant BA Finance Corporation.

On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement, in which he "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA Finance Corporation.

On February 3, 1983, Palawan Lumber Manufacturing Corporation and its duly authorized
representatives executed in favor of plaintiff-appellant a Continuing Suretyship Agreement in which,
said corporation "jointly and severally unconditionally" guaranteed the "full, faithful and prompt
payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance
Corporation.
On the same date, South City Homes, Inc. and its duly authorized representatives likewise executed a
Continuing Suretyship Agreement in which said corporation "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness" of
Fortune Motors Corporation to BA Finance Corporation.

Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles delivered to
it by CARCO under which it agreed to remit to the Entruster (CARCO) the proceeds of any sale and
immediately surrender the remaining unsold vehicles. The drafts and trust receipts were assigned to
plaintiff-appellant, under Deeds of Assignment executed by CARCO.

Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due under the
drafts and to remit the proceeds of motor vehicles sold or to return those remaining unsold in
accordance with the terms of the trust receipt agreements, BA Finance Corporation sent demand letter
to the petitioners and their authorized representatives.

Since the defendants-appellants failed to settle their outstanding account with plaintiff-appellant, the
latter filed on December 22, 1983 a complaint for a sum of money with prayer for preliminary
attachment.

The defendants (petitioners herein) filed a Motion to Dismiss. Therein, they alleged that conventional
subrogation effected a novation without the consent of the debtor (Fortune Motors Corporation) and
thereby extinguished the latter's liability; that pursuant to the trust receipt transaction, it was
premature under P. D. No. 115 to immediately file a complaint for a sum of money as the remedy of the
entruster is an action for specific performance; that the suretyship agreements are null and void for
having been entered into without an existing principal obligation; and that being such sureties does not
make them solidary debtors.

The court rendered judgment ordering the petitioners herein to pay jointly and severally BA Finance.

Issue:

1. Whether or not the suretyship agreement is valid.

2. Whether or not there was a novation of the obligation because of the assignment of credit.

3. Whether respondent BA Finance has a cause of action since they, as entrusters, should first
demand the return of the unsold vehicles.

Held:

1. YES.
The Civil Code, however, allows a suretyship agreement to secure future loans even if the amount is not
yet known.

Article 2053 of the Civil Code provides that: A guaranty may also be given as security for future debts,
the amount of which is not yet known.

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
than 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.

2. NO.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against the debtor.

In assignment, the debtor's consent is not essential for the validity of the assignment (Art. 1624 in
relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he
might make (Article 1626, Civil Code).

Article 1626 also shows that payment of an obligation which is already existing does not depend on the
consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall already
be made to the new creditor from the time the debtor acquires knowledge of the assignment of the
obligation.

What the law requires in an assignment of credit is not the consent of the debtor but merely notice to
him. A creditor may, therefore, validly assign his credit and its accessories without the debtor's consent.
The purpose of the notice is only to inform that debtor from the date of the assignment, payment
should be made to the assignee and not to the original creditor.

3. YES BA Finance has a cause of action.

A trust receipt is a security transaction intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the merchandise imported
or purchased. 9 In the event of default by the entrustee on his obligations under the trust receipt
agreement, it is not absolutely necessary that the entruster cancel the trust and take possession of the
goods to be able to enforce his rights thereunder because the law uses the word “may” consequently,
petitioner has the discretion to avail of such right or seek any alternative action, such as a third party
claim or a separate civil action which it deems best to protect its right, at any time upon default or
failure of the entrustee to comply with any of the terms and conditions of the trust agreement.

ESTRELLA PALMARES vs. COURT OF APPEALS and M.B. LENDING CORPORATION

Facts:

Pursuant to a promissory note, private respondent M.B. Lending Corporation extended a loan to
the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum.
On four occasions after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were thereafter made.

Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint against petitioner Palmares as the lone party-defendant, to
the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.

The RTC rendered judgment dismissing the complaint without prejudice to the filing of a
separate action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are primarily
liable on the instrument. This was based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses,
amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a person's secondary liability on the
instrument; that petitioner, as co-maker, is only secondary liable on the instrument; and that the
promissory note is a contract of adhesion

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment
declaring herein petitioner Palmares liable to pay respondent corporation.

Respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be
jointly and severally or solidarity liable with the principal debtors, the Azarraga spouses, when she
signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the
creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her
liability in her Answer although she claims that the Azarraga spouses should have been impleaded.
Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion,
the same is not entirely prohibited because the one who adheres to the contract is free to reject it
entirely; if he adheres, he gives his consent.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents
of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above
principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject
to the same conditions above-contained.

Petitioner contends that the provisions of the second and third paragraph are conflicting in that
while the second paragraph seems to define her liability as that of a surety which is joint and solidary
with the principal maker, on the other hand, under the third paragraph her liability is actually that of a
mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor
should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the third paragraph defines the nature of her
liability as that of a guarantor.

Petitioner avers that she could be held liable only as a guarantor for several reasons. First, the
words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal
terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old
housewife who is likely to enter into such transactions without fully realizing the nature and extent of
her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend.
Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement which holds the surety liable despite the
absence of any direct consideration received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation.
Thus, any apparent ambiguity in the contract should be strictly construed against private respondent.

Issue: Whether or not petitioner is liable as a surety or as a guarantor.

Held: Petitioner is liable as a surety.

The Civil Code provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship.

In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily
liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal
that petitioner's liability is that of a surety.

the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving
her of liability.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the
debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not
pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed
against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that
the principal will pay, but simply that he is able to do so.

The second and third paragraphs of the aforequoted portion of the promissory note do not
contain any other condition for the enforcement of respondent corporation's right against petitioner. It
has not been shown, that respondent corporation agreed to proceed against herein petitioner only if
and when the defaulting principal has become insolvent.

A surety is not entitled, as a matter of right, to be given notice of the principal's default.
Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his
mere failure to voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's default and to
perform the obligation. He cannot complain that the creditor has not notified him in the absence of a
special agreement to that effect in the contract of suretyship.

A creditor's right to proceed against the surety exists independently of his right to proceed
against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is
joint and several, the creditor has the right to proceed even against the surety alone.
Note: Strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has
once been judicially determined under the rule of reasonable construction applicable to all written
contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to
be extended beyond its strict meaning.

ESTATE OF K. H. HEMADY vs. LUZON SURETY CO., INC.

Facts:

The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady,
a surety solidary guarantor, in all of them, in consideration of the Luzon Surety Co.'s of having
guaranteed, the various principals in favor of different creditors.

Before answer was filed, and upon motion of the administratrix of Hemady's estate, the lower
court, dismissed the claims of Luzon Surety Co., on the ground, among others, that "whatever losses
may occur after Hemady's death, are not chargeable to his estate, because upon his death he ceased to
be guarantor.

The Court dismissed the case stating that there is merit in this contention and finds support in
Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a
person to qualify as a guarantor, that is: integrity. As correctly pointed out by the Administratrix,
integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity
was not transmitted to his estate or successors.

Another clear and strong indication that the surety company has exclusively relied on the
personality, character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the
printed form of the indemnity agreement there is a paragraph entitled 'Security by way of first mortgage,
which was expressly waived and renounced by the security company. The security company has not
demanded from K. H. Hemady to comply with this requirement of giving security by way of first
mortgage.

Issue: Whether or not the liability of Hemady ceased upon his death

Held: NO.
 Under the present Civil Code (Article 1311), as well as under the Civil Code of 1889 (Article 1257),
the rule is that —

"Contracts take effect only as between the parties, their assigns and heirs, except in the case where the
rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law."

While in our successional system the responsibility of the heirs for the debts of their decedent
cannot exceed the value of the inheritance they receive from him, the principle remains intact that
these heirs succeed not only to the rights of the deceased but also to his obligations.

Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or
guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a
principal inducement for the contract. Luzon Surety expected nothing but the reimbursement of the
moneys it paid. This reimbursement is a payment of a sum of money, resulting from an obligation to give;
and to the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady
himself or by some one else in his behalf, so long as the money was paid to it.

The second exception is intransmissibility by stipulation of the parties. This intransmissibility

should not be easily implied, but must be expressly established, and the text of the agreements sued
upon nowhere indicate that they are non-transferable.

The third exception to the transmissibility of obligations exists when they are "not transmissible
by operation of law". The provision makes reference to those cases where the law expresses that the
rights or obligations are extinguished by death, as is the case in legal support (Article 300), parental
authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership
(Article 1830 and agency (Article 1919). The articles of the Civil Code that regulate guaranty or
suretyship contain no provision that the guaranty is extinguished upon the death of the guarantor or the
surety.

The lower court sought to infer such a limitation from Art. 2056, to the effect that "one who is
obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind himself,
and sufficient property to answer for the obligation which he guarantees". The law requires these
qualities to be present only at the time of the perfection of the contract of guaranty. It is self-evident
that once the contract has become perfected and binding, the supervening incapacity of the guarantor
would not operate to exonerate him of the eventual liability he has contracted.

Art 2057 confirms this concept and states that the supervening dishonesty of the guarantor
(that is to say, the disappearance of his integrity after he has become bound) does not terminate the
contract but merely entitles the creditor to demand a replacement of the guarantor. But the step
remains optional in the creditor: it is his right, not his duty; he may waive it if he chooses, and hold the
guarantor to his bargain.
GENERAL INSURANCE and SURETY CORPORATION vs. REPUBLIC OF THE PHILIPPINES and CENTRAL
LUZON EDUCATIONAL FOUNDATION, INC.

Facts:

On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance and
Surety Corporation posted in favor of the Department of Education a bond in order to guarantee the
efficient administration of the school and compliance with all its obligations including the payment of
salaries of all the teachers.

In the terms of the bond it was stated that they were to give at least 60 days notice to the
Department of Education, of the intended withdrawal or cancellation of the bond and that the liability
of the surety is to expire on June 15, 1955, unless sooner revoked.

On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., executed an
indemnity agreement binding themselves jointly and severally to indemnify the surety of "any damages,
prejudices, loss, costs, payments, advances and expenses which the COMPANY may, at any time sustain
or incur, as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY
or its representatives shall or may pay or cause to be paid.

On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and
cancelling its bond.

It appears that on the date of execution of the bond, the Foundation was indebted to two of its
teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum
of P820.00, or a total of P1,505.64.

Demand for the above amount having been refused, the Solicitor General, in behalf of the
Republic of the Philippines, filed a complaint for the forfeiture of the bond.

The surety filed a motion to dismissed and also prayed that it be indemnified by the foundation
for any amount it might be required to pay to the government.

The Court of First Instance rendered judgment holding the principal and the surety jointly and
severally liable to the Government.
 The surety contends that it was no longer liable on its bond after August 24, 1954 (when the 60-
day notice of cancellation and withdrawal ended) or, at the latest, after June 15, 1955.

That the bond is void for being contrary to public policy insofar as it requires the surety to pay
P10,000.00 regardless of the amount of the salaries of the teachers. 3 It is claimed that to enforce
forfeiture of the bond for the full amount would be to allow the Government to enrich itself since the
unpaid salaries of the teachers amount to P1,318.84 only.

On the other hand, the Government contends that since the salaries of the teachers were due
and payable when the bond was still in force, the surety has become liable on its bond from the moment
of its execution on May 15, 1954.

Issue: Whether or not the Surety is liable

Held: YES.

By the terms of the bond, the surety guaranteed to the Government "compliance (by the
Foundation) with all obligations, including the payment of the salaries of its teachers and employees,
past, present and future, and the payment of all other obligations incurred by, or in behalf of said
school." Now, it is not disputed that even before the execution of the bond, the Foundation was already
indebted to two of its teachers for past salaries. From the moment the bond was executed, the right of
the Government to proceed against the bond accrued because since then, there has been violation of
the terms of the bond.

The fact that the action was filed only on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in ten years.

In the present case, there is no provision that the bond will be cancelled unless the surety is
notified of any claim and so no condition precedent has to be complied with by the Government before
it can bring an action. Indeed, the provision of the bond in the NARIC and Santos cases that it would be
cancelled ten days after its expiration unless notice of claim was given was inserted precisely because,
without such a provision, the surety's liability for obligations arising while the bond was in force would
subsist even after its expiration.

The 60-day notice is not a period of prescription of action. The provision merely means that the surety
can withdraw even before June 15, 1955 provided it gave notice of its intention to do so at least 60 days
in advance. If at all, the condition is a limitation on the right of the surety to withdraw rather than a
limitation of action on the bond.
There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in
nature.

Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation
to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated
without need of proving damages because one of the primary purposes of a penalty clause is to avoid
such necessity.

Also, the supposed extension of time granted as contended by the surety, was given by the teachers, not
the creditor. Hence, this does not work to extinguish the surety’s liability.