Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 1

COLINARES VS CA SHOULD BE TURNED OVER TO HIM BY THE IMPORTER OR BY HIS

REPRESENTATIVE OR SUCCESSOR IN INTEREST.
RULING:
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust To secure that the bank shall be paid, it takes full title to the goods at
receipt transaction as any transaction by and between a person the very beginning and continues to hold that title as his indispensable
referred to as the entruster, and another person referred to as the security until the goods are sold and the vendee is called upon to pay
entrustee, whereby the entruster who owns or holds absolute title for them; hence, the importer has never owned the goods and is not
or security interest over certain specified goods, documents or able to deliver possession. In a certain manner, trust receipts partake of
instruments, releases the same to the possession of the entrustee the nature of a conditional sale where the importer becomes absolute
upon the latter’s execution and delivery to the entruster of a owner of the imported merchandise as soon as he has paid its price.
signed document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or Trust receipt transactions are intended to aid in financing importers
instruments with the obligation to turn over to the entruster the and retail dealers who do not have sufficient funds or resources to
proceeds thereof to the extent of the amount owing to the finance the importation or purchase of merchandise, and who may not
entruster or as appears in the trust receipt or the goods, be able to acquire credit except through utilization, as collateral, of the
documents or instruments themselves if they are unsold or not merchandise imported or purchased.39
otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt. THE ANTECEDENT ACTS IN A TRUST RECEIPT TRANSACTION
CONSIST OF:
THERE ARE TWO POSSIBLE SITUATIONS IN A TRUST RECEIPT 1. the application and approval of the letter of credit,
TRANSACTION. 2. the making of the marginal deposit and
1. ENTREGARLA - The first is covered by the provision which 3. the effective importation of goods through the efforts of the
refers to money received under the obligation involving the importer.
duty to deliver it (entregarla) to the owner of the merchandise
sold. THE TRUST RECEIPTS LAW DOES NOT SEEK TO ENFORCE
2. DEVOLVERA - The second is covered by the provision which PAYMENT OF THE LOAN, RATHER IT PUNISHES THE DISHONESTY
refers to merchandise received under the obligation to "return" it AND ABUSE OF CONFIDENCE IN THE HANDLING OF MONEY or
(devolvera) to the owner.33 goods to the prejudice of another regardless of whether the latter is
the owner.
FAILURE OF THE ENTRUSTEE TO TURN OVER THE PROCEEDS
OF THE SALE OF THE GOODS, COVERED BY THE TRUST THE PRACTICE OF BANKS OF MAKING BORROWERS SIGN TRUST
RECEIPT TO THE ENTRUSTER OR TO RETURN SAID GOODS IF RECEIPTS TO FACILITATE COLLECTION OF LOANS AND PLACE
THEY WERE NOT DISPOSED OF IN ACCORDANCE WITH THE THEM UNDER THE THREATS OF CRIMINAL PROSECUTION
TERMS OF THE TRUST RECEIPT SHALL BE PUNISHABLE AS SHOULD THEY BE UNABLE TO PAY IT MAY BE UNJUST AND
ESTAFA under Article 315 (1) of the Revised Penal Code, without INEQUITABLE, IF NOT REPREHENSIBLE.
need of proving intent to defraud.
Such agreements are contracts of adhesion which borrowers have no
A thorough examination of the facts obtaining in the case at bar option but to sign lest their loan be disapproved. The resort to this
reveals that the transaction intended by the parties was a simple scheme leaves poor and hapless borrowers at the mercy of banks, and
loan, not a trust receipt agreement. is prone to misinterpretation, as had happened in this case.

Petitioners received the merchandise from CM Builders Centre on ROSARIO TEXTILE VS HOMEBANKERS
30 October 1979. On that day, ownership over the merchandise
was already transferred to Petitioners who were to use the ISSUE:
materials for their construction project. It was only a day later, 31 (1) whether the petitioners are relieved of their obligation to pay their
October 1979, that they went to the bank to apply for a loan to loan after they tried to tender the goods to the bank which refused to
pay for the merchandise. accept the same, and which goods were subsequently lost in a fire;
NO
This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only (2) whether Yujuico is bound by the suretyship agreement - YES
released to the importer in trust subsequent to the grant of the
loan. The bank acquires a "security interest" in the goods as (3) whether the Court of Appeals violated the Trust Receipts Law.
holder of a security title for the advances it had made to the
entrustee. Trust receipts were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were mere securities.
THE OWNERSHIP OF THE MERCHANDISE CONTINUES TO BE
VESTED IN THE PERSON WHO HAD ADVANCED PAYMENT a TRUST RECEIPT as "a security transaction intended to aid in
UNTIL HE HAS BEEN PAID IN FULL, OR IF THE MERCHANDISE financing importers and retail dealers who do not have sufficient funds
HAS ALREADY BEEN SOLD, THE PROCEEDS OF THE SALE or resources to finance the importation or purchase of merchandise,
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 2

and who may not be able to acquire credit except through There are TWO OBLIGATIONS IN A TRUST RECEIPT TRANSACTION.
utilization, as collateral, of the merchandise imported or 1. ENTREGARLA The first is covered by the provision that refers to
purchased." money under the obligation to deliver it (entregarla) to the owner of
the merchandise sold.
A trust receipt, therefore, is a security agreement, pursuant to 2. DEVOLVERA - The second is covered by the provision referring to
which a bank acquires a ‘security interest’ in the goods. It secures merchandise received under the obligation to return it (devolvera) to
an indebtedness and there can be no such thing as security the owner.
interest that secures no obligation.
"8 Section 3 (h) of the Trust Receipts Law (P.D. No. 115) Thus, under the Trust Receipts Law, INTENT TO DEFRAUD IS
defines a "security interest" as follows: PRESUMED WHEN
(1) the entrustee fails to turn over the proceeds of the sale of goods
"(h) SECURITY INTEREST means a property interest in goods, covered by the trust receipt to the entruster; or
documents, or instruments to secure performance of some (2) when the entrustee fails to return the goods under trust, if they are
obligation of the entrustee or of some third persons to the not disposed of in accordance with the terms of the trust receipts.
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for IN ALL TRUST RECEIPT TRANSACTIONS, BOTH OBLIGATIONS ON
security only." THE PART OF THE TRUSTEE EXIST IN THE ALTERNATIVE – the
return of the proceeds of the sale or the return or recovery of the
JURISPRUDENCE PROVIDES THAT, goods, whether raw or processed.
"If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal fiction than When both parties enter into an agreement knowing that the return of
fact, for if it were really so, it could dispose of the goods in any the goods subject of the trust receipt is not possible even without any
manner it wants, which it cannot do, just to give consistency with fault on the part of the trustee, it is not a trust receipt transaction
purpose of the trust receipt of giving a stronger security for the penalized under Section 13 of P.D. 115; the only obligation actually
loan obtained by the importer. To consider the bank as the true agreed upon by the parties would be the return of the proceeds of the
owner from the inception of the transaction would be to sale transaction.
disregard the loan feature thereof..."
This transaction becomes a mere loan, where the borrower is obligated
to pay the bank the amount spent for the purchase of the goods.
AS TO THE THIRD AND FINAL ISSUE – At the risk of being
repetitious, we stress that the contract between the parties is a What was the intention in this case?
loan. What respondent bank sought to collect as creditor was the ACDC was in the constructing business and it sought to buy under the
loan it granted to petitioners. Petitioners’ recourse is to sue their letters of credit materials which were to be used for transit and
supplier, if indeed the materials were defective. exposition projects.

Note: res perit domino does not apply As a government financial institution, LBP should have been aware that
the materials were to be used for the construction of an immovable
Discussion property, as well as a property of the public domain. As an immovable
If under the trust receipt, the bank is made to appear as the property, the ownership of whatever was constructed with those
owner, it was but an artificial expedient, more of legal fiction than materials would presumably belong to the owner of the land, under
fact, for if it were really so, it could dispose of the goods in any Article 445 of the Civil Code
manner it wants, which it cannot do, just to give consistency with
purpose of the trust receipt of giving a stronger security for the IT IS FUNDAMENTAL IN A TRUST RECEIPT TRANSACTION THAT
loan obtained by the importer. To consider the bank as the true THE PERSON WHO ADVANCED PAYMENT FOR THE
owner from the inception of the transaction would be to MERCHANDISE BECOMES THE ABSOLUTE OWNER OF SAID
disregard the loan feature thereof… MERCHANDISE AND CONTINUES AS OWNER UNTIL HE OR SHE IS
PAID IN FULL, OR IF THE GOODS HAD ALREADY BEEN SOLD, THE
The contract between the parties is a loan. What respondent bank PROCEEDS SHOULD BE TURNED OVER TO HIM OR TO HER.
sought to collect as creditor was the loan it granted to petitioners,
not the proceeds from the sale of the goods under a trust receipt. Thus, in concluding that the transaction was a loan and not a trust
receipt, we noted in Colinares that the industry or line of work that the
LANDBANK VS PEREZ borrowers were engaged in was construction. We pointed out that the
borrowers were not importers acquiring goods for resale
ISSUE: What was teh nature of the transactions? NOT A TRUST
RECEIPT IN THISCASE,
Purpose: to determine if an action for estafa was proper BASED ON THESE PREMISES, WE CANNOT CONSIDER THE
AGREEMENTS BETWEEN THE PARTIES IN THIS CASE TO BE TRUST
RULING: RECEIPT TRANSACTIONS BECAUSE
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(1) from the start, the parties were aware that ACDC could not A different conclusion would violate the principle upon which
possibly be obligated to reconvey to LBP the materials or the end commercial letter of credit are founded because in such a case, both
product for which they were used; and the beneficiary and the issuer.
(2) from the moment the materials were used for the government
projects, they became public, not LBP’s, property. "COMMERCIAL LETTERS OF CREDIT have come into general use in
international sales transactions where much time necessarily elapses
SINCE THESE TRANSACTIONS ARE NOT TRUST RECEIPTS, AN between the sale and the receipt by a purchaser of the merchandise,
ACTION FOR ESTAFA SHOULD NOT BE BROUGHT AGAINST during which interval great price changes may occur. Buyers and
THE RESPONDENTS, WHO ARE LIABLE ONLY FOR A LOAN. sellers struggle for the advantage of position. The seller is desirous of
being paid as surely and as soon as possible, realizing that the vendee
THEREFORE, ABSENT ANY ABUSE OF CONFIDENCE OR at a distant point has it in his power to reject on trivial grounds
MISAPPROPRIATION ON THE PART OF THE RESPONDENTS, merchandise on arrival, and cause considerable hardship to the
THE CRIMINAL PROCEEDINGS AGAINST THEM FOR ESTAFA shipper. Letters of credit meet this condition by affording celerity and
SHOULD NOT PROSPER. certainty of payment. Their purpose is to insure to a seller payment of
a definite amount upon presentation of documents.

PRUDENTIAL BANK VS IAC The bank deals only with documents. It has nothing to do with the
quality of the merchandise. Disputes as to the merchandise shipped
ISSUE: may arise and be litigated later between vendor and vendee, but they
Whether Philippine Rayon is liable on the basis of the trust receipt; may not impede acceptance of drafts and payment by the issuing bank
YES when the proper documents are presented.

A LETTER OF CREDIT is defined as an engagement by a bank or Nature of a trust receipt

other person made at the request of a customer that the issuer "By this arrangement a banker advances money to an intending
will honor drafts or other demands for payment upon compliance importer, and thereby lends the aid of capital, of credit, or of business
with the conditions specified in the credit. facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means, and
Through a letter of credit, the bank merely substitutes its own therefore it is of the first importance that the fundamental factor in the
promise to pay for the promise to pay of one of its customers transaction, the banker’s advance of money and credit, should receive
who in return promises to pay the bank the amount of funds the amplest protection.
mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon. Accordingly, in order to secure that the banker shall be repaid at the
critical point — that is, when the imported goods finally reach the
PARAGRAPH 8 OF THE TRUST RECEIPT WHICH READS: hands of the intended vendee — the banker takes the full title to the
"My/our liability for payment at maturity of any accepted draft, goods at the very beginning; he takes it as soon as the goods are
bill of exchange or indebtedness shall not be extinguished or bought and settled for by his payments or acceptances in the foreign
modified" country, and he continues to hold that title as his indispensable
security until the goods are sold in the United States and the vendee is
does not, contrary to the holding of the public respondent, called upon to pay for them.
contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in the This security is not an ordinary pledge by the importer to the banker,
first place because the drafts which were eventually issued were for the importer has never owned the goods, and moreover he is not
sight drafts. And even if these were not sight drafts, thereby able to deliver the possession; but the security is the complete title
necessitating acceptance, it would be the petitioner — and not vested originally in the bankers, and this characteristic of the
Philippine Rayon — which had to accept the same for the latter transaction has again and again been recognized and protected by the
was not the drawee. Presentment for acceptance is defined as the Courts. Of course, the title is at bottom a security title, as it has
production of a bill of exchange to a drawee for acceptance. sometimes been called, and the banker is always under the obligation
to reconvey; but only after his advances have been fully repaid and
after the importer has fulfilled the other terms of the contract."

PRESENTMENT OR ACCEPTANCE WAS NOT AN Note: P.D. NO. 115, - TOOK EFFECT ON 29 JANUARY 1973
INDISPENSABLE REQUISITE FOR LIABILITY TO ATTACH
Contrary to both courts’ pronouncements, Philippine Rayon Under Section 13 of the Trust Receipts Law, the failure of an entrustee
immediately became liable thereon upon petitioner’s payment to turn over the proceeds of the sale of goods, documents or
thereof. Such is the essence of the letter of credit issued by the instruments covered by a trust receipt to the extent of the amount
petitioner. owing to the entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 4

Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under draft and the required shipping documents are presented to it. In turn,
Article 33 of the Civil Code, this arrangement assures the seller of prompt payment, independent
A CIVIL ACTION FOR DAMAGES, ENTIRELY SEPARATE AND of any breach of the main sales contract.
DISTINCT FROM THE CRIMINAL ACTION, may be brought by the By this so-called "independence principle," the bank determines
injured party in cases of defamation, fraud and physical injuries. compliance with the letter of credit only by examining the shipping
Estafa falls under fraud documents presented; it is precluded from determining whether the
main contract is actually accomplished or not

BANK OF AMERICA VS CA THERE WOULD AT LEAST BE THREE (3) PARTIES:

ISSUES (a) the buyer, who procures the letter of credit and obliges himself to
1. Whether or not bank of america is liable under the letter of reimburse the issuing bank upon receipt of the documents of title;
credit - NO
2. Can it recover against inter resin under the draft executed (b) the bank issuing the letter of credit, which undertakes to pay the
under the diswoned letter of credit - YES seller upon receipt of the draft and proper documents of titles and to
surrender the documents to the buyer upon reimbursement; and,
A LETTER OF CREDIT is a financial device developed by
merchants as a convenient and relatively safe mode of dealing (c) the seller, who in compliance with the contract of sale ships the
with sales of goods to satisfy the seemingly irreconcilable goods to the buyer and delivers the documents of title and draft to the
interests of a seller, who refuses to part with his goods before he issuing bank to recover payment.
is paid, and a buyer, who wants to have control of the goods The FIRST ISSUE raised by the petitioner, i.e., that it has in this instance
before paying. merely been an advising bank, is outrightly rejected by Inter-Resin and
is thus sought to be discarded for having been raised only on appeal.
To break the impasse, the buyer may be required to contract a We cannot agree. The crucial point of dispute in this case is whether
bank to issue a letter of credit in favor of the seller so that, by under the "letter of credit," Bank of America has incurred any liability
virtue of the letter of credit, the issuing bank can authorize the to the "beneficiary" thereof, an issue that largely is dependent on the
seller to draw drafts and engage to pay them upon their bank's participation in that transaction; as a mere advising or notifying
presentment simultaneously with the tender of documents bank, it would not be liable, but as a confirming bank, had this been
required by the letter of credit. the case, it could be considered as having incurred that liability.

The buyer and the seller agree on what documents are to be SC

presented for payment, but ordinarily they are documents of title Bank of America has, in fact, only been an advising, not confirming,
evidencing or attesting to the shipment of the goods to the bank, and this much is clearly evident, among other things, by the
buyer. provisions of the letter of credit itself, the petitioner bank's letter of
advice, its request for payment of advising fee, and the admission of
Once the credit is established, the seller ships the goods to the Inter-Resin that it has paid the same. That Bank of America has asked
buyer and in the process secures the required shipping Inter-Resin to submit documents required by the letter of credit and
documents or documents of title. To get paid, the seller executes eventually has paid the proceeds thereof, did not obviously make it a
a draft and presents it together with the required documents to confirming bank. The fact, too, that the draft required by the letter of
the issuing bank. credit is to be drawn under the account of General Chemicals (buyer)
only means that the same had to be presented to Bank of Ayudhya
The issuing bank redeems the draft and pays cash to the seller if it (issuing bank) for payment. It may be significant to recall that the letter
finds that the documents submitted by the seller conform with of credit is an engagement of the issuing bank, not the advising bank,
what the letter of credit requires. to pay the draft..

The bank then obtains possession of the documents upon paying AS AN ADVISING OR NOTIFYING BANK, BANK OF AMERICA DID
the seller. NOT INCUR ANY OBLIGATION MORE THAN JUST NOTIFYING
INTER-RESIN OF THE LETTER OF CREDIT ISSUED IN ITS FAVOR, let
The transaction is completed when the buyer reimburses the alone to confirm the letter of credit. The bare statement of the bank
issuing bank and acquires the documents entitling him to the employee, aforementioned, in responding to the inquiry made by Atty.
goods. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit
Under this arrangement, the seller gets paid only if he delivers the and Bank of America's letter of advise, nor can it justify the conclusion
documents of title over the goods, while the buyer acquires the that the bank must now assume total liability on the letter of credit.
said documents and control over the goods only after Indeed, Inter-Resin itself cannot claim to have been all that free from
reimbursing the bank. fault. As the seller, the issuance of the letter of credit should have
obviously been a great concern to it.
WHAT CHARACTERIZES LETTERS OF CREDIT, AS
DISTINGUISHED FROM OTHER ACCESSORY CONTRACTS, is BRINGING THE LETTER OF CREDIT TO THE ATTENTION OF THE
the engagement of the issuing bank to pay the seller once the SELLER IS THE PRIMORDIAL OBLIGATION OF AN ADVISING BANK.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 5

jurisdiction and is sanctioned under Article 567[63] of the Code of

Article 18 of the U.C.P. states that: "Banks assume no liability or Commerce and in numerous jurisprudence defining a letter of credit,
responsibility for the consequences arising out of the delay the principles relating to it, and the obligations of parties arising from
and/or loss in transit of any messages, letters or documents, or it.
for delay, mutilation or other errors arising in the transmission of
any telecommunication x x x" As advising bank, Bank of America A letter of credit generally arises out of a separate contract requiring
is bound only to check the "apparent authenticity" of the letter of the assurance of payment of a third party. In a transaction involving a
credit, which it did." letter of credit, there are usually three transactions and three parties.
1. THE FIRST TRANSACTION, which constitutes the underlying
MAY BANK OF AMERICA THEN RECOVER WHAT IT HAS PAID transaction in a letter of credit, is a contract of sale between the buyer
UNDER THE LETTER OF CREDIT WHEN THE CORRESPONDING and the seller. The contract may require that the buyer obtain a letter
DRAFT FOR PARTIAL AVAILMENT THEREUNDER AND THE of credit from a third party acceptable to the seller. The obligations of
REQUIRED DOCUMENTS THEREFOR WERE LATER the parties under this contract are governed by our law on sales.
NEGOTIATED WITH IT BY INTER-RESIN? The answer is YES.
2. The SECOND TRANSACTION is the issuance of a letter of
This kind of transaction is what is commonly referred to as a credit between the buyer and the issuing bank. The buyer requests the
DISCOUNTING ARRANGEMENT. This time, Bank of America, has issuing bank to issue a letter of credit naming the seller as the
acted independently as a negotiating bank, thus saving beneficiary. In this transaction, the issuing bank undertakes to pay the
Inter-Resin from the hardship of presenting the documents seller upon presentation of the documents identified in the letter of
directly to Bank of Ayudhya to recover payment. (Inter-Resin, of credit.
course, could have chosen other banks with which to negotiate a) The buyer, on the other hand, obliges himself or herself to
the draft and the documents.) As a negotiating bank, Bank of reimburse the issuing bank for the payment made. In
America has a right of recourse against the issuer bank and until addition, this transaction may also include a fee for the
reimbursement is obtained, Inter-Resin, as the drawer of the draft, issuing bank's services.[68] This transaction constitutes an
continues to assume a contingent liability thereon.[31] obligation on the part of the issuing bank to perform a
service in consideration of the buyer's payment. The
While Bank of America has indeed failed to allege material facts in obligations of the parties and their remedies in cases of
its complaint that might have likewise warranted the application breach are governed by the letter of credit itself and by our
of the Negotiable Instruments Law and possibly then allowed it to general law on obligations, as our civil law finds suppletory
even go after the indorsers of the draft, this failure,[32] application in commercial documents
nonetheless, does not preclude petitioner bank's right (as a
negotiating bank) of recovery from Inter-Resin itself. Inter-Resin 3. The THIRD TRANSACTION takes place between the seller
admits having received P10,219,093.20 from Bank of America on and the issuing bank. The issuing bank issues the letter of credit for the
the letter of credit transaction and in having executed the benefit of the seller. The seller may agree to ship the goods to the
corresponding draft. That payment to Inter-Resin has given, as buyer even before actual payment provided that the issuing bank
aforesaid, Bank of America the right of reimbursement from the informs him or her that a letter of credit has been issued for his or her
issuing bank, Bank of Ayudhya which, in turn, could then seek benefit. This means that the seller can draw drafts from the issuing
indemnification from the buyer (the General Chemicals of bank upon presentation of certain documents identified in the letter of
Thailand). Since Bank of Ayudhya disowned the letter of credit, credit.
however, Bank of America may now turn to Inter-Resin for a) The relationship between the issuing bank and the seller
restitution. is not strictly contractual since there is no privity of
contract nor meeting of the minds between them.
"Between the seller and the negotiating bank there is the usual b) It also does not constitute a stipulation pour autrui in favor
relationship existing between a drawer and purchaser of drafts. of the seller since the issuing bank must honor the drafts
Unless drafts drawn in pursuance of the credit are indicated to be drawn against the letter of credit regardless of any defect in
without recourse therefore, the negotiating bank has the ordinary the underlying contract.
right of recourse against the seller in the event of dishonor by the c) Neither can it be considered as an assignment by the buyer
issuing bank x x x The fact that the correspondent and the to the seller-beneficiary as the buyer himself cannot draw
negotiating bank may be one and the same does not affect its on the letter.
rights and obligations in either capacity, although a special d) From its inception, only the seller can demand payment
agreement is always a possibility x x x"[33] under the letter of credit. It is also not a contract of
suretyship or guaranty since it involves primary liability in
HSBC VS NATIONAL STEEL the event of default.[73]

The nature of a letter of credit Nevertheless, while the relationship between the seller-beneficiary and
the issuing bank is not strictly contractual, strict payment under the
A LETTER OF CREDIT IS A COMMERCIAL INSTRUMENT terms of a letter of credit is an enforceable right.
DEVELOPED TO ADDRESS THE UNIQUE NEEDS OF CERTAIN
COMMERCIAL TRANSACTIONS. It is recognized in our This enforceable right finds two legal underpinnings.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 6

1. First, letters of credit, as will be further explained, are governed another bank or confirms that the letter of
by recognized international norms which dictate strict compliance credit will be honored by the issuing bank.
with its terms
2. Second, the issuing bank has an existing agreement with the essentially insures that the credit will be paid
buyer to pay the seller upon proper presentation of documents. in accordance with the terms of the letter of
credit
In simpler terms, the various TRANSACTIONS THAT GIVE RISE
TO A LETTER OF CREDIT proceed as follows: Assumes a direct obligation to the
1. Once the seller ships the goods, he or she obtains the seller-beneficiary
documents required under the letter of credit.
2. He or she shall then present these documents to the issuing RULES APPLICABLE TO LETTERS OF CREDIT
bank which must then pay the amount identified under the letter
of credit after it ascertains that the documents are complete. This set of rules is known as the Uniform Customs and Practice for
3. The issuing bank then holds on to these documents which the Documentary Credits (UCP).
buyer needs in order to claim the goods shipped.
4. The buyer reimburses the issuing bank for its payment at When the particular issues are not covered by the provisions of
which point the issuing bank releases the documents to the the letter of credit, by laws specifically applicable to them and by
buyer. UCP 400, our general civil law finds suppletory application.
5. The buyer is then able to present these documents in order to
claim the goods. An irrevocable letter of credit cannot, during its lifetime, be cancelled
6. At this point, all the transactions are completed. or modified without the express permission of the beneficiary.
7. The seller received payment for his or her performance of his A) Not even partial payment of the obligation by the
obligation to deliver the goods. applicant-buyer would amend or modify the obligation of the issuing
8. The issuing bank is reimbursed for the payment it made to the bank.
seller.
9. The buyer received the goods purchased. ESCANO VS ORTIGAS

Owing to the complexity of these contracts, there may be a HELD: The obligation to repay is only jointly as declared by the Court.
correspondent bank which facilitates the ease of completing the
transactions. In case there is a concurrence of two or more creditors or of two or
more debtors in one and the same obligation, Article 1207 of the Civil
Corresponding may be a notifying bank, a negotiating bank Code states that among them, “there is a solidary liability only when
bank or a confirming bank depending on the the obligation expressly so states, or when the law or the nature of the
nature of the obligations assumed. obligation requires solidarity.”

Notifying bank undertakes to inform the seller-beneficiary Article 1210 supplies further caution against the broad interpretation
that a letter of credit exists. It may also have of solidarity by providing: “The indivisibility of an obligation does not
the duty of transmitting the letter of credit. necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility.” These Civil Code provisions establish that in case of
As its obligation is limited to this duty, it concurrence of two or more creditors or of two or more debtors in one
assumes no liability to pay under the letter of and the same obligation, and in the absence of express and
credit. indubitable terms characterizing the obligation as solidary, the
Negotiating bank purchases drafts at a discount from the presumption is that the obligation is only joint. It thus becomes
seller-beneficiary and presents them to the incumbent upon the party alleging that the obligation is indeed
issuing bank for payment. solidary in character to prove such fact with a preponderance of
evidence.
Prior to negotiation, a negotiating bank has
no obligation. A contractual relationship Note that Article 2047 itself specifically calls for the application of the
between the negotiating bank provisions on joint and solidary obligations to surety ship contracts.
Article 1217 of the Civil Code thus comes into play, recognizing the
A contractual relationship between the right of reimbursement from a co-debtor (the principal debtor, in case
negotiating bank and the seller-beneficiary of suretyship) in favor of the one who paid (i.e. the surety).
arises only after the negotiating bank
purchases or discounts the drafts However, a significant distinction still lies between a joint and several
Confirming bank may honor the letter of credit issued by debtor, on one hand, and a surety on the other.
another bank or confirms that the letter of
credit will be honored by the issuing bank. SOLIDARITY SIGNIFIES THAT THE CREDITOR CAN COMPEL ANY
ONE OF THE JOINT AND SEVERAL DEBTORS OR THE SURETY
may honor the letter of credit issued by ALONE TO ANSWER FOR THE ENTIRETY OF THE PRINCIPAL DEBT.
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The difference lies in the respective faculties of the joint and Suretyship, in essence, contains TWO TYPES OF RELATIONSHIP –
several debtor and the surety to seek reimbursement for the sums 1. the PRINCIPAL RELATIONSHIP between the obligee (petitioner)
they paid out to the creditor. In the case of joint and several and the obligor (Lucky Star), and
debtors, 2. the ACCESSORY SURETY RELATIONSHIP between the principal
(Lucky Star) and the surety (respondent).
Article1217 makes plain that the solidary debtor who effected the
payment to the creditor “may claim from his co-debtors only the In this arrangement, the obligee accepts the surety’s solidary
share which corresponds to each, with the interest for the undertaking to pay if the obligor does not pay.
payment already made.” Such solidary debtor will not be able to
recover from the co-debtors the full amount already paid to the Such acceptance, however, does not change in any material way the
creditor, because the right to recovery extends only to the obligee’s relationship with the principal obligor. Neither does it make
proportional share of the other co-debtors, and not as to the the surety an active party to the principal obligee-obligor relationship.
particular proportional share of the solidary debtor who already Thus, the acceptance does not give the surety the right to intervene in
paid. In contrast, even as the surety is solidarily bound with the the principal contract.
principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just THE SURETY’S ROLE ARISES ONLY UPON THE OBLIGOR’S
any proportional share, from the principal debtor or debtors. Such DEFAULT, AT WHICH TIME, IT CAN BE DIRECTLY HELD LIABLE BY
right to full reimbursement falls within the other rights, actions THE OBLIGEE FOR PAYMENT AS A SOLIDARY OBLIGOR.
and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety. In the case at bench, when Lucky Star failed to finish the drilling work
within the agreed time frame despite petitioner’s demand for
SURETY SOLIDARY CO-DEBTOR completion, it was already in delay. Due to this default, Lucky Star’s
Outside of the liability he Solidarity signifies that the liability attached and, as a necessary consequence, respondent’s
assumes to pay the debt creditor can compel any one liability under the surety agreement arose.
before the property of the of the joint and several
principal debtor has been debtors or the surety alone to Undeniably, when Lucky Star reneged on its undertaking with the
exhausted answer for the entirety of the petitioner and further failed to return the P575,000.00 downpayment
principal debt. that was already advanced to it, respondent, as surety, became
Has the right to recover the “May claim from his solidarily bound with Lucky Star for the repayment of the said amount
full amount paid, and not co-debtors only the share to petitioner.
just any proportional share, which corresponds to
from the principal debtor or each, with the interest for the Contrary to the trial court’s ruling, respondent insurance company was
debtors. payment already made.” not automatically released from any liability when petitioner resorted
to the rescission of the principal contract for failure of the other party
Subsidiary Solidary
to perform its undertaking. PRECISELY, THE LIABILITY OF THE
SURETY ARISING FROM THE SURETY CONTRACTS COMES TO LIFE
ASSET BUILDERS VS STRONGHOLD UPON THE SOLIDARY OBLIGOR’S DEFAULT. It should be
emphasized that petitioner had to choose rescission in order to
Asset Builders Corp (ABC) – obligee, petitioner prevent further loss that may arise from the delay of the progress of
Lucky Star Drilling & Construction Corporation (Lucky Star) - the project. Without a doubt, Lucky Star’s unsatisfactory progress in
obligor the drilling work and its failure to complete it in due time amount to
Stronghold Insurance Company (Stronghold) – surety, respondent non-performance of its obligation.

As provided in Article 2047, the surety undertakes to be bound In fine, respondent should be answerable to petitioner on account of
solidarily with the principal obligor. Lucky Star’s non-performance of its obligation as guaranteed by the
performance bond.
That undertaking makes a surety agreement an ancillary contract
as it presupposes the existence of a principal contract. GILAT SATELLITE VS UCPB

Although the contract of a surety is in essence secondary only to The existence of a suretyship agreement does not give the surety the
a valid principal obligation, the surety becomes liable for the debt right to intervene in the principal contract, nor can an arbitration
or duty of another although it possesses no direct or personal clause between the buyer and the seller be invoked by a non-party
interest over the obligations nor does it receive any benefit such as the surety.
therefrom.
IN SURETYSHIP, THE OFT-REPEATED RULE IS THAT A SURETY’S
Notwithstanding the fact that the surety contract is secondary to LIABILITY IS JOINT AND SOLIDARY WITH THAT OF THE
the principal obligation, the surety assumes liability as a regular PRINCIPAL DEBTOR. This undertaking makes a surety agreement an
party to the undertaking.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 8

ancillary contract, as it presupposes the existence of a principal The undertaking is perhaps not exactly that of a fianza under the Civil
contract. Code, but is a perfectly valid contract and must be given the legal
effect if ordinarily carries.
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, ITS LIABILITY TO The Fidelity and Surety Company having bound itself to pay only the
THE CREDITOR OR "PROMISE" OF THE PRINCIPAL IS SAID TO event its principal, Machetti, cannot pay it follows that it cannot be
BE DIRECT, PRIMARY AND ABSOLUTE; IN OTHER WORDS, A compelled to pay until it is shown that Machetti is unable to pay. Such
SURETY IS DIRECTLY AND EQUALLY BOUND WITH THE ability may be proven by the return of a writ of execution unsatisfied or
PRINCIPAL by other means, but is not sufficiently established by the mere fact that
he has been declared insolvent in insolvency proceedings under our
He becomes liable for the debt and duty of the principal obligor, statutes, in which the extent of the insolvent's inability to pay is not
even without possessing a direct or personal interest in the determined until the final liquidation of his estate.
obligations constituted by the latter. Thus, A SURETY IS NOT
ENTITLED TO A SEPARATE NOTICE OF DEFAULT OR TO THE Surety Guaranty
BENEFIT OF EXCUSSION. It may in fact be sued separately or undertakes to pay when if he only binds himself when to pay
together with the principal debtor. principal does not pay, if the principal cannot pay.
insurer of the debt an insurer of the solvency of
"[the] acceptance [of a surety agreement], however, does not the debtor
change in any material way the creditor’s relationship with the
principal debtor nor does it make the surety an active party to the
principal creditor-debtor relationship. In other words, the PALMARES VS CA
acceptance does not give the surety the right to intervene in the
principal contract. Note: “co maker” was considered as a surety
Reason: it was stated in the loan that “in case there is default”
THE SURETY’S ROLE ARISES ONLY UPON THE DEBTOR’S
DEFAULT, AT WHICH TIME, IT CAN BE DIRECTLY HELD LIABLE The Civil Code pertinently provides:
BY THE CREDITOR FOR PAYMENT AS A SOLIDARY OBLIGOR."
Art. 2047. By guaranty, a person called the guarantor binds himself to
Hence, the surety remains a stranger to the Purchase Agreement. the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
Sureties do not insure the solvency of the debtor, but rather the
debt itself.43 They are contracted precisely to mitigate risks of If a person binds himself solidarily with the principal debtor, the
non-performance on the part of the obligor. This responsibility provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
necessarily places a surety on the same level as that of the In such case the contract is called a suretyship.
principal debtor.
Petitioner would like to make capital of the fact that although she
The effect is that the creditor is given the right to directly proceed obligated herself to be jointly and severally liable with the
against either principal debtor or surety. This is the reason why principal maker, her liability is deemed restricted by the
excussion cannot be invoked. provisions of the third paragraph of her contract wherein she
agreed "that M.B. Lending Corporation may demand payment of
To require the creditor to proceed to arbitration would render the the above loan from me in case the principal maker, Mrs. Merlyn
very essence of suretyship nugatory and diminish its value in Azarraga defaults in the payment of the note," which makes her
commerce. At any rate, as we have held in Palmares v. Court of contract one of guaranty and not suretyship. The purported
Appeals,46 "IF THE SURETY IS DISSATISFIED WITH THE discordance is more apparent than real.
DEGREE OF ACTIVITY DISPLAYED BY THE CREDITOR IN THE
PURSUIT OF HIS PRINCIPAL, HE MAY PAY THE DEBT HIMSELF A SURETY IS AN INSURER OF THE DEBT, WHEREAS A
AND BECOME SUBROGATED TO ALL THE RIGHTS AND GUARANTOR IS AN INSURER OF THE SOLVENCY OF THE DEBTOR.
REMEDIES OF THE CREDITOR."
A suretyship is an undertaking that the debt shall be paid; a guaranty,
MACHETTI VS HOSPICIO DE SAN JOSE an undertaking that the debtor shall pay.
Surety Guaranty
While a surety undertakes to pay if the principal does not pay, the undertakes to pay when if he agrees that the creditor, after
guarantor only binds himself to pay if the principal cannot pay. principal does not pay, proceeding against the
The one is the insurer of the debt, the other an insurer of the principal, may proceed against
solvency of the debtor. This latter liability is what the Fidelity the guarantor if the principal is
and Surety Company assumed in the present case. unable to pay.

insurer of the debt an insurer of the solvency of

Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 9

the debtor severally and unconditionally guarantee unto you and/or your
binds himself to perform if the does not contract that the principal/s, successor/s and assigns the prompt and punctual payment
principal does not, without principal will pay, but simply at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
regard to his ability to do so that he is able to do so principal/s, successor/s and assigns favor to the extent of the
undertakes directly for the contracts to pay if, by the use aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00),
payment and is so responsible of due diligence, the debt Philippine Currency, and such interests, charges and penalties as may
at once if the principal debtor cannot be made out of the hereinafter be specified.
makes default principal debtor.
Jurisprudential rulings:
Quintessentially, the UNDERTAKING TO PAY UPON DEFAULT
OF THE PRINCIPAL DEBTOR DOES NOT AUTOMATICALLY 1. a contract of suretyship "is not retrospective and no liability
REMOVE IT FROM THE AMBIT OF A CONTRACT OF attaches for defaults occurring before it is entered into unless an intent
SURETYSHIP. The second and third paragraphs of the to be so liable is indicated."
aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's 2. On the other hand, in Diño v. Court of Appeals the issue was
right against petitioner. It has not been shown, either in the whether the sureties could be held liable for an obligation contracted
contract or the pleadings, that respondent corporation agreed to after the execution of the continuing surety agreement. It was held
proceed against herein petitioner only if and when the defaulting that by its very nature a continuing suretyship contemplates a future
principal has become insolvent. A contract of suretyship, to course of dealing. "It is prospective in its operation and is generally
repeat, is that wherein one lends his credit by joining in the intended to provide security with respect to future transactions." By no
principal debtor's obligation, so as to render himself directly and means, however, was it meant in that case that in all instances a
primarily responsible with him, and without reference to the contrast of guaranty or suretyship should be prospective in
solvency of the principal.22 application.

A SURETY IS BOUND EQUALLY AND ABSOLUTELY WITH THE 3. Although a contract of suretyship is ordinarily not to be construed
PRINCIPAL,26 AND AS SUCH IS DEEMED AN ORIGINAL as retrospective, in the end the intention of the parties as revealed by
PROMISOR AND DEBTOR FROM THE BEGINNING.27 This is the evidence is controlling.
because in suretyship there is but one contract, and the surety is
bound by the same agreement which binds the principal.28 In 4. It is very true that bonds or other contracts of suretyship are
essence, the contract of a surety starts with the agreement,29 ordinarily not to be construed as retrospective, but THAT RULE MUST
which is precisely the situation obtaining in this case before the YIELD TO THE INTENTION OF THE CONTRACTING PARTIES AS
Court. REVEALED BY THE EVIDENCE, and does not interfere with the use of
the ordinary tests and canons of interpretation which apply in regard
It will further be observed that petitioner's undertaking as to other contracts.
co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and the In the present case the circumstances so clearly indicate that the bond
principal obligors. A surety is usually bound with his principal by given by Echevarria was intended to cover all of the indebtedness of
the same instrument, executed at the same time and upon the the Arrocera upon its current account with the plaintiff Bank that we
same consideration; he is an original debtor, and his liability is cannot possibly adopt the view of the court below in regard to the
immediate and direct. Thus, it has been held that where a written effect of the bond.
agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is [4] Willex Plastic says that in any event it cannot be proceeded against
executed simultaneously therewith, providing that the signers of without first exhausting all property of Inter-Resin Industrial. Willex
the agreement agreed to the terms of the principal contract, the Plastic thus claims the benefit of excussion. The Civil Code provides,
signers were "sureties" jointly liable with the buyer. however:

A surety usually enters into the same obligation as that of his Art. 2059. This excussion shall not take place:
principal, and the signatures of both usually appear upon the
same instrument, and the same consideration usually supports (1) If the guarantor has expressly renounced it;
the obligation for both the principal and the surety.
(2) If he has bound himself solidarily with the debtor;
WILLEX VS CA
THE PERTINENT PORTION OF THE "CONTINUING GUARANTY"
For and in consideration of the sums obtained and/or to be EXECUTED BY WILLEX PLASTIC AND INTER-RESIN INDUSTRIAL IN
obtained by INTER-RESIN INDUSTRIAL CORPORATION, FAVOR OF IUCP (NOW INTERBANK) READS:
hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, If default be made in the payment of the NOTE/s herein guaranteed
bills receivable/s and/or other evidence/s of indebtedness you and/or your principal/s may directly proceed against Me/Us
(hereinafter referred to as the NOTE/S), I/We hereby jointly and without first proceeding against and exhausting DEBTOR/s properties
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 10

in the same manner as if all such liabilities constituted My/Our may be held by the BANK, or in which the BANK may have any interest
direct and primary obligations. 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
This stipulation embodies an EXPRESS RENUNCIATION OF THE impair this guaranty, nor shall same (sic) be affected by any change
RIGHT OF EXCUSSION. 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
Note: such partnership of any one or more new partners.
the consideration necessary to support a surety obligation need
not pass to directly to the surety, a consideration moving to the THE FOREGOING STIPULATIONS UNEQUIVOCALLY REVEAL THAT
principal alone being sufficient. THE SURETYSHIP AGREEMENT IN THE CASE AT BAR ARE
CONTINUING IN NATURE. Petitioners do not deny this; in fact, they
DINO VS CA candidly admitted it. Neither have they denied the fact that they had
not revoked the suretyship agreements. Accordingly, as correctly held
UNDER THE CIVIL CODE, A GUARANTY MAY BE GIVEN TO by the public respondent:
SECURE EVEN FUTURE DEBTS, THE AMOUNT OF WHICH MAY
NOT KNOWN AT THE TIME THE GUARANTY IS EXECUTED. First of all, the succeeding article provides that "[a] guaranty may also
This is the basis for contracts denominated as continuing be given as security for future debts, the amount of which is not yet
guaranty or suretyship. known." Secondly, Article 2052 speaks about a valid obligation, as
distinguished from a void obligation, and not an existing or current
A continuing guaranty is one which is not limited to a single obligation. This distinction is made clearer in the second paragraph of
transaction, but which contemplates a future course of dealing, Article 2052 which reads:
covering a series of transactions, generally for an indefinite time
or until revoked. Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
It is prospective in its operation and is generally intended to guarantee a natural obligation.
provide security with respect to future transactions within certain
limits, and contemplates a succession of liabilities, for which, as The limit of the petitioners respective liabilities must be determined
they accrue, the guarantor becomes liable. from the suretyship agreement each had signed. It is undoubtedly true
that the law looks upon the contract of suretyship with a jealous eye,
Otherwise stated, a continuing guaranty is one which covers all and the rule is settled that the obligation of the surety cannot be
transactions, including those arising in the future, which are extended by implication beyond its specified limits.
within the description or contemplation of the contract, of
guaranty, until the expiration or termination thereof. They further provide that:

A guaranty shall be construed as continuing when by the terms In the event of judicial proceedings being instituted by the BANK
thereof it is evident that the object is to give a standing credit to against the SURETY to enforce any of the terms and conditions of this
the principal debtor to be used from time to time either undertaking, the SURETY further agrees to pay the BANK a reasonable
indefinitely or until a certain period, especially if the right to recall compensation for and as attorney's fees and costs of collection, which
the guaranty is expressly reserved. 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
Hence, where the contract of guaranty states that the same is to is settled judicially or extrajudicially). 20
secure advances to be made "from time to time" the guaranty will
be construed to be a continuing one. Thus, by express mandate of the Continuing Suretyship Agreements
which they had signed, petitioners separately bound themselves to pay
In other jurisdictions, it has been held that the use of particular interest, expenses, attorney's fees and costs. The last two items are
words and expressions such as payment of "any debt," "any pegged at not less than ten percent (10%) of the amount due.
indebtedness," "any deficiency," or "any sum," or the guaranty of
"any transaction" or money to be furnished the principal debtor EVEN WITHOUT SUCH STIPULATIONS, THE PETITIONERS WOULD,
"at any time," or "on such time" that the principal debtor may NEVERTHELESS, BE LIABLE FOR THE INTEREST AND JUDICIAL
require, have been construed to indicate a continuing guaranty. COSTS. ARTICLE 2055 OF THE CIVIL CODE PROVIDES:
12
Art. 2055. A guaranty is not presumed; it must be express and cannot
Paragraph IV of both agreements stipulate that: extend to more than what is stipulated therein.

VI. This is a continuing guaranty and shall remain in full force and If it be simple or indefinite, it shall comprise not only the principal
effect until written notice shall have been received by the BANK obligation, but also all its accessories, including the judicial costs,
that it has been revoked by the SURETY, but any such notice shall provided with respect to the latter, that the guarantor shall only be
not release the SURETY, from any liability as to any instruments, liable for those costs incurred after he has been judicially required to
loans, advances or other obligations hereby guaranteed, which pay.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 11

The agreement was executed obviously to induce petitioner to grant

Interest and damages are included in the term accessories. any application for a loan Daicor may desire to obtain from petitioner
However, such interest should run ONLY FROM THE DATE bank. The guaranty is a continuing one which shall remain in full force
WHEN THE COMPLAINT WAS FILED IN COURT. Even attorney's and effect until the bank is notified of its termination.
fees may be imposed whenever appropriate, pursuant to Article
2208 of the Civil Code. This is a continuing guaranty and shall remain in fun force and effect
until written notice shall have been received by you that it has been
THE SURETY IS MADE TO PAY INTEREST, NOT BY REASON OF revoked by the undersigned, .
THE CONTRACT, BUT BY REASON OF ITS FAILURE TO PAY
WHEN DEMANDED AND FOR HAVING COMPELLED THE At the time the loan of P100,000.00 was obtained from petitioner by
PLAINTIFF TO RESORT TO THE COURTS TO OBTAIN Daicor, for the purpose of having an additional capital for buying and
PAYMENT. It should be observed that interest does not run from selling coco-shell charcoal and importation of activated carbon, 10 the
the time the obligation became due, but from the filing of the comprehensive surety agreement was admittedly in full force and
complaint. effect. The loan was, therefore, covered by the said agreement, and
private respondent, even if he did not sign the promisory note, is liable
NOTE: What phrase makes this a continuing guaranty: 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
In this case, the phrase says “at any time”, “from time to time maker, endorser, acceptor or otherwise". There is no doubt that Daicor
hereafter”, and guaranty the punctual payment at maturity to the is liable on the promissory note evidencing the indebtedness.
bank of any and all such instruments, loans, advances and credit.
We have also therein: “this is a continuing guaranty and shall The surety agreement which was earlier signed by Enrique Go, Sr. and
remain in full force and effect until either notice shall have been private respondent, is an accessory obligation, it being dependent
received by the bank that it has been revoked by the surety”. upon a principal one which, in this case is the loan obtained by Daicor
as evidenced by a promissory note. What obviously induced petitioner
So with this, it is a continuing guaranty even if it was executed in bank to grant the loan was the surety agreement whereby Go and
1977, it covers all debts, even future debts in favor of the bank as Chua bound themselves solidarily to guaranty the punctual payment of
the creditor. So here the defense that the 1977 obligation was the loan at maturity. By terms that are unequivocal, it can be clearly
already paid was not upheld by the court because of the nature of seen that the surety agreement was executed to guarantee future
this continuing suretyship agreement. Suretyship for all debts which Daicor may incur with petitioner, as is legally allowable
obligations incurred by the principal debtor in favor of the bank. under the Civil Code. Thus —

ATOK VS CA Article 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
a surety is not bound under any particular principal obligation against the guarantor until the debt is liquidated. A conditional
until that principal obligation is born. But there is no theoretical obligation may also be secured.
or doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the principal FORTUNE MOTORS VS CA
obligation intended to be secured thereby is born, any more that
there would be in saying that obligations which are subject to a A surety is not bound under any particular principal obligation until
condition precedent are valid and binding before the occurrence that principal obligation is born.
of the condition precedent.
BUT THERE IS NO THEORETICAL OR DOCTRINAL DIFFICULTY
Comprehensive or continuing surety agreements are in fact quite INHERENT IN SAYING THAT THE SURETYSHIP AGREEMENT ITSELF
commonm place in present day financial and commercial practice. IS VALID AND BINDING EVEN BEFORE THE PRINCIPAL
A bank or a financing company which anticipates entering into a OBLIGATION INTENDED TO BE SECURED THEREBY IS BORN, ANY
series of credit transactions with a particular company, commonly MORE THAN THERE WOULD BE IN SAYING THAT OBLIGATIONS
requires the projected principal debtor to execute a continuing WHICH ARE SUBJECT TO A CONDITION PRECEDENT ARE VALID
surety agreement along with its sureties. AND BINDING BEFORE THE OCCURRENCE OF THE CONDITION
PRECEDENT.
By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its Comprehensive or continuing surety agreements are in fact quite
creditor; with such surety agreement, there would be no need to commonplace in present day financial and commercial practice. A bank
execute a separate surety contract or bond for each financing or or financing company which anticipates entering into a series of credit
credit accommodation extended to the principal debtor. As we transactions with a particular company, commonly requires the
understand it, this is precisely what happened in the case at bar. projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
RCBC VS JUDGE ARRO 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
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 12

each financing or credit accommodation extended to the

principal debtor. "Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank
The facts of the instant case bring us to no other conclusion than or financing company which anticipates entering into a series of credit
that the surety undertakings executed by Chua and Rodrigueza transactions with a particular company, commonly requires the
were continuing guaranties or suretyships covering all future projected principal debtor to execute a continuing surety agreement
obligations of Fortune Motors (Phils.) Corporation with Filinvest along with its sureties. By executing such an agreement, the principal
Credit Corporation. This is evident from the written contract itself places itself in a position to enter into the projected series of
which contained the words "absolutely, unconditionally and transactions with its creditor; with such suretyship agreement, there
solidarily guarantee(d)" to Respondent Filinvest and its affiliated would be no need to execute a separate surety contract or bond for
and subsidiary companies the "full, faithful and prompt each financing or credit accommodation extended to the principal
performance, payment and discharge of any and all obligations debtor."
and agreements" of Petitioner Fortune "under or with respect to ON ASSIGNMENT
any and all such contracts and any and all other agreements An assignment of credit is an agreement by virtue of which the owner
(whether by way of guaranty or otherwise)" of the latter with of a credit, known as the assignor, by a legal cause, such as sale, dacion
Filinvest and its affiliated and subsidiary companies "now in force en pago, exchange or donation, and without the consent of the debtor,
or hereafter made." transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly the assignor could enforce it against the debtor. As a consequence, the
where they stood at the time they executed their respective third party steps into the shoes of the original creditor as subrogee of
surety undertakings in favor of Fortune. the latter. PETITIONERS' OBLIGATIONS WERE NOT EXTINGUISHED.
Thus:
Under the surety undertakings however, the obligation of the
sureties referred to absolutely, unconditionally and solidarily "x x x Moreover, in assignment, the debtor's consent is not essential for
guaranteeing the full, faithful and prompt performance, payment the validity of the assignment his knowledge thereof affecting only the
and discharge of all obligations of Petitioner Fortune with respect validity of the payment he might make (Article 1626, Civil Code).
to any and all contracts and other agreements with Respondent
Filinvest in force at that time or thereafter made. There were to "Article 1626 also shows that payment of an obligation which is already
qualifications, conditions or reservations stated therein as to the existing does not depend on the consent of the debtor. It, in effect,
extent of the suretyship. mandates that such payment of the existing obligation shall already be
made to the new creditor from the time the debtor acquires
The Financing Agreement, on the other hand, merely detailed the knowledge of the assignment of the obligation.
obligations of Fortune to CARCO (succeeded by Filinvest as
assignee). The allegation of novation by petitioners is, therefore, NOTE:
misplaced. There is no incompatibility of obligations to speak of Does the assignment of credit affects the validity of suretyship
in the two contracts. They can stand together without conflict. agreement?

SOUTH CITY HOMES VS BA FINANCE No, it does not affect the validity.

On the first issue, petitioners assert that the suretyship agreement Again, it’s very clear Article 2053 of Civil Code allows surety agreement
they signed is void because there was no principal obligation at to secure future debts even if the amount is not yet known.
the time of signing as the principal obligation was signed six (6)
months later. The Civil Code, however, allows a suretyship A surety is not bound under any particular principal obligation until
agreement to secure future loans even if the amount is not yet that principal obligation is born but there is no theoretical or doctrinal
known. difficulty inherent in saying that the suretyship agreement itself is valid
and binding even before the principal obligation intended to secure
Article 2053 of the Civil Code provides that: thereby is born. Any more that there would be in saying that
obligations which are subject to a condition precedent are valid and
"Art. 2053. A guaranty may also be given as security for future binding before the occurrence of the condition precedent.
debts, the amount of which is not yet known. x x x"
YULIM VS INTERNATIONAL EXCHANGE BANK
"x x x Of course, a surety is not bound under any particular
principal obligation until that principal obligation is born. But RULING:
there is no theoretical or doctrinal difficulty inherent in saying Firstly, the individual petitioners do not deny that they executed the
that the suretyship agreement itself is valid and binding even Continuing Surety Agreement, wherein they “jointly and severally with
before the principal obligation intended to be secured thereby is the PRINCIPAL [Yulim], hereby unconditionally and irrevocably
born, any more than there would be in saying that obligations guarantee full and complete payment when due, whether at stated
which are subject to a condition precedent are valid and binding maturity, by acceleration, or otherwise, of any and all credit
before the occurrence of the condition precedent.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 13

accommodations that have been granted” to Yulim by iBank, BANK of whatever remedies it may have against the PRINCIPAL of
including interest, fees, penalty and other charges. other securities.”

Under Article 2047 of the Civil Code, these words are said to There can thus be no doubt that the individual petitioners have bound
describe a contract of suretyship. It states: themselves to be solidarily liable with Yulim for the payment of its loan
with iBank.
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal Nowhere can it be remotely construed that the letter even intimates an
debtor in case the latter should fail to do so. understanding by iBank that the Deed of Assignment would serve to
extinguish the petitioners’ loan. Otherwise, there would have been no
If a person binds himself solidarily with the principal debtor, the need for iBank to mention therein the three “collaterals” or “supports”
provisions of Section 4, Chapter 3, Title I of this Book shall be provided by the petitioners, namely, the Deed of Assignment, the
observed. In such case the contract is called a suretyship. Chattel Mortgage and the Continuing Surety Agreement executed by
the individual petitioners.
In a contract of suretyship, one lends his credit by joining in the
principal debtor’s obligation so as to render himself directly and INTENTION WAS TO CONSTITUTE A REM
primarily responsible with him without reference to the solvency Even more unmistakably, Section 2.02 of the Deed of Assignment
of the principal.26 According to the above Article, if a person provides that as soon as title to the condominium unit is issued in its
binds himself solidarily with the principal debtor, the provisions of name, Yulim shall “immediately execute the necessary Deed of Real
Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV of Estate Mortgage in favor of the BANK to secure the loan obligations of
the Civil Code on joint and solidary obligations, shall be observed. the ASSIGNOR and/or the BORROWER.” This is a plain and direct
acknowledgement that the parties really intended to merely constitute
Thus, WHERE THERE IS A CONCURRENCE OF TWO OR MORE a real estate mortgage over the property.
CREDITORS OR OF TWO OR MORE DEBTORS IN ONE AND
THE SAME OBLIGATION, ARTICLE 1207 PROVIDES THAT In fact, the Deed of Assignment expressly states, by way of a resolutory
AMONG THEM, “[T]HERE IS A SOLIDARY LIABILITY ONLY condition concerning the purpose or use of the Deed of Assignment,
WHEN THE OBLIGATION EXPRESSLY SO STATES, OR WHEN that after the petitioners have delivered or caused the delivery of their
THE LAW OR THE NATURE OF THE OBLIGATION REQUIRES title to iBank, the Deed of Assignment shall then become null and void.
SOLIDARITY.” Shorn of its legal efficacy as an interim security, the Deed of
Assignment would then become functus officio once title to the
“A surety is considered in law as being the SAME PARTY AS THE condominium unit has been delivered to iBank. This is so because the
DEBTOR IN RELATION TO WHATEVER IS ADJUDGED petitioners would then execute a Deed of Real Estate Mortgage over
TOUCHING THE OBLIGATION OF THE LATTER, AND THEIR the property in favor of iBank as security for their loan obligations.
LIABILITIES ARE INTERWOVEN AS TO BE INSEPARABLE.”27
And it is well settled that when the obligor or obligors undertake To stress, the assignment being in its essence a mortgage, it was but a
to be “jointly and severally” liable, it means that the obligation is security and not a satisfaction of the petitioners’ indebtedness.
solidary,28 as in this case. There can be no mistaking the same
import of Article I of the Continuing Surety Agreement executed Article 1255 of the Civil Code invoked by the petitioners contemplates
by the individual petitioners: the existence of two or more creditors and involves the assignment of
the entire debtor’s property, not a dacion en pago.36 Under Article
ARTICLE I 1245 of the Civil Code, “[d]ation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money, shall be
LIABILITIES OF SURETIES governed by the law on sales.” Nowhere in the Deed of Assignment
can it be remotely said that a sale of the condominium unit was
SECTION 1.01. The SURETIES, jointly and severally with the contemplated by the parties, the consideration for which would consist
PRINCIPAL, hereby unconditionally and irrevocably guarantee full of the amount of outstanding loan due to iBank from the petitioners.
and complete payment when due, whether at stated maturity, by
acceleration, or otherwise, of any and all credit accommodations PACIFIC BANKING VS IAC
that have been granted or may be granted, renewed and/or
extended by the BANK to the PRINCIPAL. RULING:
The pertinent portion of the "Guarantor's Undertaking" which private
THEREUNDER, IN ADDITION TO BINDING THEMSELVES respondent Roberto Regala, Jr. signed in favor of Pacific Banking
“JOINTLY AND SEVERALLY” WITH YULIM TO Corporation provides:
“UNCONDITIONALLY AND IRREVOCABLY GUARANTEE FULL
AND COMPLETE PAYMENT” OF ANY AND ALL CREDIT I/We, the undersigned, hereby agree, jointly and severally with Celia
ACCOMMODATIONS THAT HAVE BEEN GRANTED TO YULIM, Syjuco Regala to pay the Pacific Banking Corporation upon demand
the petitioners further warrant that their liability as sureties “shall any and all indebtedness, obligations, charges or liabilities due and
be direct, immediate and not contingent upon the pursuit [by] the incurred by said Celia Syjuco Regala with the use of the Pacificard or
renewals thereof issued in his favor by the Pacific Banking Corporation.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 14

Any changes of or Novation in the terms and conditions in extension of time to pay such obligations, charges or liabilities shall
connection with the issuance or use of said Pacificard, or any not in any manner release me/us from the responsibility hereunder, it
extension of time to pay such obligations, charges or liabilities being understood that the undertaking is a continuing one and shall
shall not in any manner release me/us from the responsibility subsist and bind me/us until all the liabilities of the said Celia Syjuco
hereunder, it being understood that the undertaking is a Regala have been fully satisfied or paid. (p. 12, supra; emphasis
continuing one and shall subsist and bind me/us until all the supplied)
liabilities of the said Celia Syjuco Regala have been fully satisfied
or paid. (p. 12, Rollo) PRIVATE RESPONDENT ROBERTO REGALA, JR. HAD BEEN MADE
AWARE BY THE TERMS OF THE UNDERTAKING OF FUTURE
The undertaking signed by Roberto Regala, Jr. ALTHOUGH CHANGES IN THE TERMS AND CONDITIONS GOVERNING THE
DENOMINATED "GUARANTOR'S UNDERTAKING," WAS IN ISSUANCE OF THE CREDIT CARD TO HIS WIFE AND THAT,
SUBSTANCE A CONTRACT OF SURETY. As distinguished from a NOTWITHSTANDING, HE VOLUNTARILY AGREED TO BE BOUND
contract of guaranty where the guarantor binds himself to the AS A SURETY. As in guaranty, a surety may secure additional and
creditor to fulfill the obligation of the principal debtor only in case future debts of the principal debtor the amount of which is not yet
the latter should fail to do so, in a contract of suretyship, the known (see Article 2053, supra).
surety binds himself solidarily with the principal debtor (Art. 2047,
Civil Code of the Philippines). The application by respondent court of the ruling in Government v.
Tizon, supra is misplaced. It was held in that case that:
We need not look elsewhere to determine the nature and extent
of private respondent Roberto Regala, Jr.'s undertaking. As a . . . although the defendants bound themselves in solidum, the liability
surety he bound himself jointly and severally with the debtor Celia of the Surety under its bond would arise only if its co-defendants, the
Regala "to pay the Pacific Banking Corporation upon demand, principal obligor, should fail to comply with the contract. To
any and all indebtedness, obligations, charges or liabilities due paraphrase the ruling in the case of Municipality of Orion vs. Concha,
and incurred by said Celia Syjuco Regala with the use of Pacificard the liability of the Surety is "consequent upon the liability" of Tizon, or
or renewals thereof issued in (her) favor by Pacific Banking "so dependent on that of the principal debtor" that the Surety "is
Corporation." This undertaking was also provided as a condition considered in law as being the same party as the debtor in relation to
in the issuance of the Pacificard to Celia Regala, thus: whatever is adjudged, touching the obligation of the latter"; or the
liabilities of the two defendants herein "are so interwoven and
5. A Pacificard is issued to a Pacificard-holder against the joint dependent as to be inseparable." Changing the expression, if the
and several signature of a third party and as such, the Pacificard defendants are held liable, their liability to pay the plaintiff would be
holder and the guarantor assume joint and several liabilities for solidary, but the nature of the Surety's undertaking is such that it does
any and all amount arising out of the use of the Pacificard. (p. 14, not incur liability unless and until the principal debtor is held liable.
Rollo)
A guarantor or surety does not incur liability unless the principal
debtor is held liable. IT IS IN THIS SENSE THAT A SURETY,
IT IS TRUE THAT UNDER ARTICLE 2054 OF THE CIVIL CODE, ALTHOUGH SOLIDARILY LIABLE WITH THE PRINCIPAL DEBTOR, IS
"(A) GUARANTOR MAY BIND HIMSELF FOR LESS, BUT NOT DIFFERENT FROM THE DEBTOR. IT DOES NOT MEAN, HOWEVER,
FOR MORE THAN THE PRINCIPAL DEBTOR, BOTH AS THAT THE SURETY CANNOT BE HELD LIABLE TO THE SAME
REGARDS THE AMOUNT AND THE ONEROUS NATURE OF EXTENT AS THE PRINCIPAL DEBTOR. The nature and extent of the
THE CONDITIONS. liabilities of a guarantor or a surety is determined by the clauses in the
contract of suretyship
It is likewise not disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per month and that Celia ERMA INDUSTRIES VS SECURITY BANK
Regala succeeded in using the card beyond the original period of
its effectivity, October 29, 1979. We do not agree however, that The lower courts found that while respondent Ortiz signed the Credit
Roberto Jr.'s liability should be limited to that extent. PRIVATE Agreement as an officer of Erma, as shown by his signature under Erma
RESPONDENT ROBERTO REGALA, JR., AS SURETY OF HIS Industries Inc. (Borrower),71 this does not absolve him from liability
WIFE, EXPRESSLY BOUND HIMSELF UP TO THE EXTENT OF because he subsequently executed a Continuing Suretyship
THE DEBTOR'S (CELIA) INDEBTEDNESS LIKEWISE EXPRESSLY agreement72 wherein he guaranteed the "due and full payment and
WAIVING ANY "DISCHARGE IN CASE OF ANY CHANGE OR performance"73 of all credit accommodations granted to Erma and
NOVATION OF THE TERMS AND CONDITIONS IN bound himself solidarily liable with Ernesto Marcelo for the obligations
CONNECTION WITH THE ISSUANCE OF THE PACIFICARD of Erma. Sections 3 and 11 of the Continuing Suretyship clearly state as
CREDIT CARD." Roberto, in fact, made his commitment as a follows:
surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear
under the "Guarantor's Undertaking" Roberto signed, thus: 3. Liability of the Surety. - The liability of the Surety is solidary and not
contingent upon the pursuit by the Bank of whatever remedies it may
. . . Any changes of or novation in the terms and conditions in have against the Debtor or the collateralslliens it may possess. If any of
connection with the issuance or use of said Pacificard, or any the Guaranteed Obligations is- not paid or performed on due date (at
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 15

stated maturity or by acceleration), the Surety shall, without need compensated corporate surety which is a business association
for any notice, demand or any other act or deed, immediately organized for the purpose of assuming classified risks in large numbers,
become liable therefor and the Surety shall pay and perform the for profit and on an impersonal basis, through the medium of
same. standardized written contractual forms drawn by its own
representatives with the primary aim of protecting its own interests.
11. Joint and Several Suretyship. - If the Surety is more than one
person, all of their obligations under this Suretyship shall be joint THE NATURE AND EXTENT OF RESPONDENT ORTIZ'S LIABILITY
and several with the Debtor and with each other. The Bank may ARE SET OUT IN CLEAR AND UNMISTAKABLE TERMS IN THE
proceed under this Suretyship against any of the sureties for the CONTINUING SURETYSHIP AGREEMENT. Under its express terms,
entire Guaranteed Obligations, without first proceeding against respondent Ortiz, as surety, is "bound by all the terms and conditions
the Debtor or any other surety or sureties of the Guaranteed of the credit instruments." HIS LIABILITY IS SOLIDARY WITH THE
Obligations, and without exhausting the property of the Debtor, DEBTOR AND CO-SURETIES; and the surety contract remains in full
the Surety hereby expressly waiving all benefits under Article force and effect until full payment of Erma's obligations to the Bank.
2058 and Article 2065 and Articles 2077 to 2081, inclusive, of the
Civil Code. ALLIED BANKING VS YUJUICO

ISSUES:
1. What was the natrue of Jesus’ undertaking? SURETY
The undertaking of Jesus was that of a surety, not a guarantor

Written on Genbank letterhead, the continuing guaranty dated

February 8, 196616 and the continuing guaranty dated February 22,
196717 contained identical principal provisions to the effect that:
(a) he had guaranteed the "punctual payment at maturity" of the loans
secured by the continuing guaranty;
(b) Gen bank, as the creditor bank of YLTC, could "make or cause"
payments under the terms and conditions of their loan agreement;
(c) under paragraph II, Jesus had offered as security for the loans of
YLTC his own properties in the possession of Genbank or for which
Genbank had attached a lien, which, upon default by YLTC in paying
the loan, Genbank, "without demand or notice" upon respondent,
would have the full power and authority to sell;
(d) SHOULD YLTC INCUR IN DEFAULT IN THE PAYMENT OF THE
LOANS, GENBANK COULD "PROCEED DIRECTLY" AGAINST JESUS
"without exhausting the property" of YLTC; and
(e) paragraph XII expressly stated that the liability of the signatory or
signatories to the continuing guaranty would be "JOINT AND
SEVERAL."

It is apparent that the courts below, as well as the petitioner,

interchangeably used the terms guaranty and surety in characterizing
the undertakings of Jesus under the continuing guaranties. The terms
are distinct from each other, however, and the distinction is expressly
delineated in the Civil Code, to wit:

Article 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.
Consequently, the RULE OF STRICT CONSTRUCTION OF THE
If a person binds himself solidarily with the principal debtor, the
SURETY CONTRACT IS COMMONLY APPLIED TO AN
provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
ACCOMMODATION SURETY BUT IS NOT EXTENDED TO
In such case the contract is called a suretyship.
FAVOR A COMPENSATED CORPORATE SURETY.
Thus, IN GUARANTY, THE GUARANTOR "BINDS HIMSELF TO THE
THE RATIONALE OF THIS DOCTRINE IS REASONABLE; AN
CREDITOR TO FULFILL THE OBLIGATION OF THE PRINCIPAL
ACCOMMODATION SURETY ACTS WITHOUT MOTIVE OF
DEBTOR IN CASE THE LATTER SHOULD FAIL TO DO SO." The
PECUNIARY GAIN and, hence, should be protected against
liability of the guarantor is SECONDARY to that of the principal debtor
unjust pecuniary impoverishment by imposing on the principal
because he "cannot be compelled to pay the creditor unless the latter
duties akin to those of a fiduciary. This cannot be said of a
has exhausted all the property of the debtor, and has resorted to all
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 16

the legal remedies against the debtor."18 In contrast, the SURETY

IS SOLIDARILY bound to the obligation of the principal MOLINO VS SECURITY
debtor.19
ISSUE: W/N Janette is liable as a surety for Danilo under the Diamond
Although the first part of the continuing guaranties showed that Edition Card?
Jesus as the signatory had agreed to be bound "either as
guarantor or otherwise," the usage of term guaranty or guarantee HELD:
in the caption of the documents, or of the word guarantor in the YES, the resolution of whether petitioner is liable as surety under the
contents of the documents did not conclusively characterize the Diamond card revolves around the effect of the upgrading by Danilo
nature of the obligations assumed therein. What properly Alto of his card. Was the upgrading a novation of the original
characterized and defined the undertakings were the contents of agreement governing the use of Danilo Alto's first credit card, as to
the documents and the intention of the parties.21 In holding that extinguish that obligation and the Surety Undertaking which was
the continuing guaranty executed in E. Zobel, Inc. v. Court of simply accessory to it?
Appeals was a surety instead of a guaranty, the Court accented
the distinctions between them, viz.: Novation, as a mode of extinguishing obligations, may be done in two
ways: by explicit declaration, or by material incompatibility (implied
SURETY GUARANTEE novation)
A contract of surety is an A contract of guaranty, on the
accessory promise by which a other hand, is a collateral THERE IS NO DOUBT THAT THE UPGRADING WAS A NOVATION
person binds himself for undertaking to pay the debt of OF THE ORIGINAL AGREEMENT COVERING THE FIRST CREDIT
another already bound, and another in case the latter does CARD issued to Danilo Alto, basically since it was committed with the
agrees with the creditor to not pay the debt. intent of canceling and replacing the said card. However, the novation
satisfy the obligation if the did not serve to release petitioner from her surety obligations because
debtor does not. in the Surety Undertaking she expressly waived discharge in case of
: A surety is usually bound with On the other hand, the contract change or novation in the agreement governing the use of the first
his principal by the same of guaranty is the guarantor's credit card.
instrument, executed at the own separate undertaking, in Excerpt:
same time, and on the same which the principal does not 1. She bound herself jointly and severally with Danilo Alto to pay
consideration. He is an original join. It is usually entered into SDIC all obligations and charges in the use of the Diners Club
promissor and debtor from the before or after that of the Card, including fees, interest, attorney's fees, and costs;
beginning, and is held, principal, and is often
ordinarily, to know every supported on a separate 2. She declared that "any change or novation in the Agreement or
default of his principal. consideration from that any extension of time granted by SECURITY DINERS to pay such
supporting the contract of the obligation, charges, and fees, shall not release (her) from this
Usually, he will not be principal. The original contract Surety Undertaking";
discharged, either by the mere of his principal is not his
indulgence of the creditor to contract, and he is not bound 3. "(S)aid undertaking is a continuous one and shall subsist and
the principal, or by want of to take notice of its bind (her) until all such obligations, charges and fees have been
notice of the default of the non-performance. He is often fully paid and satisfied"; and
principal, no matter how much discharged by the mere
he may be injured thereby. indulgence of the creditor to 4. "The indication of a credit limit to the cardholder shall not
the principal, and is usually not relieve (her) of liability for charges and all other amounts
liable unless notified of the voluntarily incurred by the cardholder in excess of said credit
default of the principal. limit."
a surety is the insurer of the guarantor is the insurer of the
debt, and he obligates himself solvency of the debtor and As a last-ditch measure, petitioner asseverates that, being merely a
to pay if the principal does not thus binds himself to pay if the surety, a pronouncement should first be made declaring the principal
pay. principal is unable to pay debtor liable before she herself can be proceeded against. The
argument, which is hinged upon the dropping of Danilo as defendant
in the complaint, is bereft of merit.
With the stipulations in the continuing guaranties indicating
that he was the surety of the credit line extended to YLTC, The Surety Undertaking expressly provides that petitioner's liability is
Jesus was solidarily liable to Genbank for the indebtedness of solidary. A SURETY IS CONSIDERED IN LAW AS BEING THE SAME
YLTC. In other words, he thereby rendered himself "directly PARTY AS THE DEBTOR IN RELATION TO WHATEVER IS
and primarily responsible" with YLTC, "without reference to ADJUDGED TOUCHING THE OBLIGATION OF THE LATTER, AND
the solvency of the principal. " THEIR LIABILITIES ARE INTERWOVEN AS TO BE INSEPARABLE.

JESUS WAS NO LONGER LIABLE AS A SURETY DUE TO THE Although the contract of a surety is in essence secondary only to a
NON-RENEWAL OF THE CONTINUING GUARANTIES valid principal obligation, his liability to the creditor is direct, primary
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 17

and absolute; he becomes liable for the debt and duty of another INDEPENDENTLY OF ITS RIGHT AGAINST GATEWAY AS
although he possesses no direct or personal interest over the PRINCIPAL DEBTOR;[13] it could thus proceed against one of them or
obligations nor does he receive any benefit therefrom. file separate actions against them to recover the principal debt
covered by the deed on suretyship, subject to the rule prohibiting
GATEWAY ELECTRONICS VS ASIANBANK double recovery from the same cause.[14] This legal postulate
ISSUES: WON Geronimo is discharged from performing his becomes all the more cogent in case of an insolvency situation where,
obligations as a surety because Gateway has been declared as here, the insolvency court is bereft of jurisdiction over the sureties of
insolvent. the principal debtor.

HELD: As Asianbank aptly points out, a suit against the surety, insofar as the
NO. Geronimo argues that his liability as a surety cannot be surety’s solidary liability is concerned, is not affected by an insolvency
separated from Gateway’s liability. As surety, he continues, he is proceeding instituted by or against the principal debtor.
entitled to avail himself of all the defenses pertaining to Gateway,
including its insolvency, suggesting that if Gateway is eventually As we held in Commercial Banking Corporation v. CA, a surety of the
released from what it owes Asianbank, he, too, should also be so distressed corporation can be sued separately to enforce his liability as
relieved. such, notwithstanding an SEC order declaring the former under a state
of suspension of payment.
Geronimo’s above contention is untenable. Suretyship is covered
by Article 2047 of the Civil Code, which states: SECURITY BANK VS CUENCA

By guaranty a person, called the guarantor, binds himself to the Indemnity agreement provides:
creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so. ‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally
with the client (SIMC) in favor of the bank for the payment, upon
If a person binds himself solidarily with the principal debtor, the demand and without the benefit of excussion of whatever amount x x x
provisions of Section 4, Chapter 3, Title I of this Book shall be the client may be indebted to the bank x x x by virtue of aforesaid
observed. In such case the contract is called a suretyship. credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the
The Court’s disquisition in Palmares v. Court of Appeals on aforesaid credit accommodation(s) x x x .’ (Emphasis supplied).
suretyship is instructive, thus:
RULING:
A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an ALLEGED EXTENSION
undertaking that the debt shall be paid x x x. Stated differently, a
surety promises to pay the principal’s debt if the principal will not Petitioner insists that the 1989 Loan Agreement was a mere renewal or
pay, while a guarantor agrees that the creditor, after proceeding extension of the ₱8 million original accommodation; it was not a
against the principal, may proceed against the guarantor if the novation.25
principal is unable to pay. A surety binds himself to perform if the
principal does not, without regard to his ability to do so. x x x In This argument must be rejected. To begin with, the 1989 Loan
other words, a surety undertakes directly for the payment and is Agreement expressly stipulated that its purpose was to "liquidate," not
so responsible at once if the principal debtor makes default x x x. to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreement,
CREDITOR’S RIGHT TO PROCEED AGAINST THE SURETY which had allegedly extended the original ₱8 million credit facility.
EXISTS INDEPENDENTLY OF HIS RIGHT TO PROCEED
AGAINST THE PRINCIPAL. Under Article 1216 of the Civil Code, Hence, his obligation as a surety should be deemed extinguished,
the creditor may proceed against any one of the solidary debtors pursuant to Article 2079 of the Civil Code, which specifically states that
or some or all of them simultaneously. The rule, therefore, is that "[a]n extension granted to the debtor by the creditor without the
if the obligation is joint and several, the creditor has the right to consent of the guarantor extinguishes the guaranty. x x x." In an earlier
proceed even against the surety alone. case,26 the Court explained the rationale of this provision in this wise:

Since, generally, it is not necessary for the creditor to proceed "THE THEORY BEHIND ARTICLE 2079 IS THAT AN EXTENSION OF
against a principal in order to hold the surety liable, where, by the TIME GIVEN TO THE PRINCIPAL DEBTOR BY THE CREDITOR
terms of the contract, the obligation of the surety is the same as WITHOUT THE SURETY’S CONSENT WOULD DEPRIVE THE SURETY
that of the principal, then soon as the principal is in default, the OF HIS RIGHT TO PAY THE CREDITOR AND TO BE IMMEDIATELY
surety is likewise in default, and may be sued immediately and SUBROGATED TO THE CREDITOR’S REMEDIES AGAINST THE
before any proceedings are had against the principal. PRINCIPAL DEBTOR UPON THE MATURITY DATE. The surety is said
to be entitled to protect himself against the contingency of the
CLEARLY, ASIANBANK’S RIGHT TO COLLECT PAYMENT FOR principal debtor or the indemnitors becoming insolvent during the
THE FULL AMOUNT FROM GERONIMO, AS SURETY, EXISTS extended period."
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 18

Hence, the burden is on respondent bank to satisfactorily prove that

CONTINUING SURETY the credit administrator with whom they transacted acted within the
authority given to him by his principal, petitioner corporation. The only
Contending that the Indemnity Agreement was in the nature of a evidence presented by respondent bank was the testimony of Philip
continuing surety, petitioner maintains that there was no need for Wong, credit administrator, who testified that he had authority to issue
respondent to execute another surety contract to secure the 1989 guarantees as can be deduced from the wording of the memorandum
Loan Agreement. given to him by petitioner corporation on his lending authority. The
said memorandum which allegedly authorized Wong not only to
This argument is incorrect. THAT THE INDEMNITY AGREEMENT approve and grant loans but also to enter into contracts of guaranty in
IS A CONTINUING SURETY DOES NOT AUTHORIZE THE BANK behalf of the corporation, partly reads:
TO EXTEND THE SCOPE OF THE PRINCIPAL OBLIGATION
INORDINATELY. To: Philip H. Wong, SAM
Credit Administrator
In Dino v. CA,38 the Court held that "a continuing guaranty is one
which covers all transactions, including those arising in the future, From: Hospicio B. Bayona, Jr., VP and
which are within the description or contemplation of the contract Head of Credit Administration
of guaranty, until the expiration or termination thereof."
Re: Lending Authority
To repeat, in the present case, the Indemnity Agreement was
subject to the two limitations of the credit accommodation: (1) I am pleased to delegate to you in your capacity as Credit
that the obligation should not exceed ₱8 million, and (2) that the Administrator the following lending limits:
accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained a) P650,000.00 — Secured Loans
on or before the aforementioned expiry date and not exceeding b) P550,000.00 — Supported Loans
the total of ₱8 million. c) P350,000.00 — Truck Loans/Contracts/Leases
d) P350,000.00 — Auto Loan Contracts/Leases
Accordingly, the surety of Cuenca secured only the first loan of e) P350,000.00 — Appliance Loan Contracts
₱6.1 million obtained on November 26, 1991. It did not secure the f) P350,000.00 — Unsecured Loans
subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could Total loans and/or credits [combination of (a) thru (f) extended to any
not have guaranteed the 1989 Loan Agreement, which was one borrower including parents, affiliates and/or subsidiaries, should
executed after November 30, 1981 and which exceeded the not exceed P750,000.00. In exercising the limits aforementioned, both
stipulated P8 million ceiling. direct and contingent commitments to the borrower(s) should be
considered.
Dino reliance:
We hold that in Dino, the surety Agreement specifically provided All loans must be within the Company's established lending guideline
that "each suretyship is a continuing one which shall remain in full and policies.
force and effect until this bank is notified of its revocation." Since
the bank had not been notified of such revocation, the surety was xxx xxx xxx
held liable even for the subsequent obligations of the principal
borrower. LEVELS OF APPROVAL

No similar provision is found in the present case. On the contrary, All transactions in excess of any branch's limit must be recommended
respondent’s liability was confined to the 1980 credit to you through the Official Credit Report for approval. If the
accommodation, the amount and the expiry date of which were transaction exceeds your limit, you must concur in application before
set down in the Credit Approval Memorandum. submitting it to the Vice President, Credit Administration for approval
or concurrence.
BA FINANCE VS CA
Although Wong was clearly authorized to approve loans even up to
IT IS A SETTLED RULE THAT PERSONS DEALING WITH AN P350,000.00 without any security requirement, which is far above the
ASSUMED AGENT, WHETHER THE ASSUMED AGENCY BE A amount subject of the guaranty in the amount of P60,000.00, nothing
GENERAL OR SPECIAL ONE ARE BOUND AT THEIR PERIL, IF in the said memorandum expressly vests on the credit administrator
THEY WOULD HOLD THE PRINCIPAL LIABLE, TO ASCERTAIN power to issue guarantees. We cannot agree with respondent's
NOT ONLY THE FACT OF AGENCY BUT ALSO THE NATURE contention that the phrase "contingent commitment" set forth in the
AND EXTENT OF AUTHORITY, AND IN CASE EITHER IS memorandum means guarantees. It has been held that a power of
CONTROVERTED, THE BURDEN OF PROOF IS UPON THEM TO attorney or authority of an agent should not be inferred from the use
ESTABLISH IT (Harry Keeler v. Rodriguez, 4 Phil. 19). of vague or general words. GUARANTY IS NOT PRESUMED, IT MUST
BE EXPRESSED AND CANNOT BE EXTENDED BEYOND ITS
SPECIFIED LIMITS
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 19

The Court must, however, reject Aglibot’s claim as a mere guarantor of

The sole allegation of the credit administrator in the absence of the indebtedness of PLCC to Santia for want of proof, in view of Article
any other proof that he is authorized to bind petitioner in a 1403(2) of the Civil Code, embodying the Statute of Frauds,
contract of guaranty with third persons should not be given
weight. The representation of one who acts as agent cannot by A GUARANTY AGREEMENT, WHICH IS A PROMISE TO ANSWER
itself serve as proof of his authority to act as agent or of the FOR THE DEBT OR DEFAULT OF ANOTHER, THE LAW CLEARLY
extent of his authority as agent (Velasco v. La Urbana, 58 Phil. REQUIRES THAT IT, OR SOME NOTE OR MEMORANDUM THEREOF,
681). Wong's testimony that he had entered into similar BE IN WRITING. Otherwise, it’s unenforceable.
transactions of guaranty in the past for and in behalf of the
petitioner, lacks credence due to his failure to show documents or
records of the alleged past transactions. The actuation of Wong in Contracts are generally obligatory in whatever form they may have
claiming and testifying that he has the authority is been entered into, provided all the essential requisites for their validity
understandable. He would naturally take steps to save himself are present, and the Statute of Frauds simply provides the method by
from personal liability for damages to respondent bank which the contracts enumerated in Article 1403(2) may be proved, but
considering that he had exceeded his authority. it does not declare them invalid just because they are not reduced to
writing. Thus, the form required under the Statute is for convenience or
The rule is clear that an agent who exceeds his authority is evidentiary purposes only.
personally liable for damages.
On the other hand, Article 2055 of the Civil Code also provides that A
ANENT THE CONCLUSION OF RESPONDENT APPELLATE GUARANTY IS NOT PRESUMED, BUT MUST BE EXPRESS, AND
COURT THAT PETITIONER IS ESTOPPED from alleging lack of CANNOT EXTEND TO MORE THAN WHAT IS STIPULATED
authority due to its failure to cancel or disallow the guaranty, We THEREIN.
find that the said conclusion has no basis in fact. Respondent
bank had not shown any evidence aside from the testimony of This is the obvious rationale why a contract of guarantee is
the credit administrator that the disputed transaction of guaranty unenforceable unless made in writing or evidenced by some writing.
was in fact entered into the official records or files of petitioner For as pointed out by Santia, Aglibot has not shown any proof, such as
corporation, which will show notice or knowledge on the latter's a contract, a secretary’s certificate or a board resolution, nor even a
part and its consequent ratification of the said transaction. In the note or memorandum thereof, whereby it was agreed that she would
absence of clear proof, it would be unfair to hold petitioner issue her personal checks in behalf of the company to guarantee the
corporation guilty of estoppel in allowing its credit administrator payment of its debt to Santia. Certainly, there is nothing shown in the
to act as though the latter had power to guarantee. Promissory Note signed by Aglibot herself remotely containing an
agreement between her and PLCC resembling her guaranteeing its
AGLIBOT VS SANTIA debt to Santia. And neither is there a showing that PLCC thereafter
ratified her act of "guaranteeing" its indebtedness by issuing her own
checks to Santia.
RULING OF THE COURT
AGLIBOT IS AN ACCOMMODATION PARTY AND THEREFORE
Aglibot cannot invoke the benefit of excussion LIABLE TO Santia

Art. 2058. The guarantor cannot be compelled to pay the creditor Section 185 of the Negotiable Instruments Law defines a check as "a
unless the latter has exhausted all the property of the debtor, and bill of exchange drawn on a bank payable on demand," while Section
has resorted to all the legal remedies against the debtor. 126 of the said law defines a bill of exchange as "an unconditional
order in writing addressed by one person to another, signed by the
It is settled that the LIABILITY OF THE GUARANTOR IS ONLY person giving it, requiring the person to whom it is addressed to pay
SUBSIDIARY, and all the properties of the principal debtor, the on demand or at a fixed or determinable future time a sum certain in
PLCC in this case, must first be exhausted before the guarantor money to order or to bearer."
may be held answerable for the debt.
The appellate court ruled that by issuing her own post-dated checks,
Thus, the creditor may hold the guarantor liable only after Aglibot thereby bound herself personally and solidarily to pay Santia,
judgment has been obtained against the principal debtor and the and dismissed her claim that she issued her said checks in her official
latter is unable to pay, "for obviously the ‘exhaustion of the capacity as PLCC’s manager merely to guarantee the investment of
principal’s property’ — the benefit of which the guarantor claims Santia. It noted that she could have issued PLCC’s checks, but instead
— cannot even begin to take place before judgment has been she chose to issue her own checks, drawn against her personal account
obtained."14 This rule is contained in Article 206215 of the Civil with Metrobank. It concluded that Aglibot intended to personally
Code, which provides that the action brought by the creditor assume the repayment of the loan, pointing out that in her
must be filed against the principal debtor alone, except in some Counter-Affidavit, she even admitted that she was personally indebted
instances mentioned in Article 205916 when the action may be to Santia, and only raised payment as her defense, a clear admission of
brought against both the guarantor and the principal debtor. her liability for the said loan.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 20

The appellate court refused to give credence to Aglibot’s claim

that she had an understanding with Santia that the checks would The mere fact, then, that Aglibot issued her own checks to Santia made
not be presented to the bank for payment, but were to be her personally liable to the latter on her checks without the need for
returned to her once she had made cash payments for their face Santia to first go after PLCC for the payment of its loan.28 It would
values on maturity. It noted that Aglibot failed to present any have been otherwise had it been shown that Aglibot was a mere
proof that she had indeed paid cash on the above checks as she guarantor, except that since checks were issued ostensibly in payment
claimed. This is precisely why Santia decided to deposit the for the loan, the provisions of the Negotiable Instruments Law must
checks in order to obtain payment of his loan. take primacy in application.

The facts below present a clear situation where Aglibot, as the

manager of PLCC, agreed to accommodate its loan to Santia by TEXAS COMPANY vs ALONZO
issuing her own post-dated checks in payment thereof. She is
what the Negotiable Instruments Law calls an accommodation Excerpt: clause of the agency contract:
party.23 Concerning the liability of an accommodation party,
Section 29 of the said law provides: Additional Security. — The Agent shall whenever requested by the
Company in addition to the guaranty herewith provided, furnish
Sec. 29. Liability of an accommodation party. — An further guaranty or bond, conditioned upon the Agent's faithful
accommodation party is one who has signed the instrument as performance of this contract, in such individuals of firms as joint and
maker, drawer, acceptor, or indorser, without receiving value several sureties as shall be satisfactory to the Company.
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value notwithstanding such holder at the time of taking the Note:
instrument knew him to be only an accommodation party. By virtue of that provision it is clear here that what you have is merely
an offer which requires acceptance for the guarantor to be liable as
As elaborated in The Phil. Bank of Commerce v. Aruego:24 well on the obligation. Otherwise, if this was an unconditional promise
of guaranty such notice of acceptance would not have been necessary.
AN ACCOMMODATION PARTY is one who has signed the
instrument as maker, drawer, indorser, without receiving value In view of the foregoing clause which should be the law between the
therefor and for the purpose of lending his name to some other parties, it is obvious that, before a bond is accepted by the petitioner, it
person. Such person is liable on the instrument to a holder for has to be in such form and amount and with such sureties as shall be
value, notwithstanding such holder, at the time of the taking of satisfactory hereto; in other words, the bond is subject to petitioner's
the instrument knew him to be only an accommodation party. In approval. The logical implication arising from this requirement is that,
lending his name to the accommodated party, the if the petitioner is satisfied with any such bond, notice of its acceptance
accommodation party is in effect a surety for the latter. He lends or approval should necessarily be given to the proper party in interest,
his name to enable the accommodated party to obtain credit or namely, the surety or guarantor. There is no evidence in this case
to raise money. He receives no part of the consideration for the tending to show that the respondent, Tomas Alonso, ever had
instrument but assumes liability to the other parties thereto knowledge of any act on the part of petitioner amounting to an
because he wants to accommodate another. x x x. implied acceptance, so as to justify the application of our decision in
National Bank vs. Escueta.
THE RELATION BETWEEN AN ACCOMMODATION PARTY
AND THE PARTY ACCOMMODATED IS, IN EFFECT, ONE OF POLICY: Where there is merely an offer of, or proposition for, a
PRINCIPAL AND SURETY — the accommodation party being the guaranty, or merely a conditional guaranty in the sense that it requires
surety. It is a settled rule that a surety is bound equally and action by the creditor before the obligation becomes fixed, it does not
absolutely with the principal and is deemed an original promisor become a binding obligation until it is accepted and, unless there is a
and debtor from the beginning. The liability is immediate and waiver of notice of such acceptance is given to, or acquired by, the
direct. It is not a valid defense that the accommodation party did guarantor, or until he has notice or knowledge that the creditor has
not receive any valuable consideration when he executed the performed the conditions and intends to act upon the guaranty. The
instrument; nor is it correct to say that the holder for value is not acceptance need not necessarily be express or in writing, but may be
a holder in due course merely because at the time he acquired indicated by acts amounting to acceptance.
the instrument, he knew that the indorser was only an
accommodation party.27 1âwphi1 Where, upon the other hand, the transaction is not merely an offer of
guaranty but amounts to direct or unconditional promise of guaranty,
In a contract of suretyship, the liability of the accommodation unless notice of acceptance is made a condition of the guaranty, all
party remains not only primary but also unconditional to a holder that is necessary to make the promise binding is that the promise
for value, such that even if the accommodated party receives an should act upon it, and notice of acceptance is not necessary, the
extension of the period for payment without the consent of the reason being that the contract of guaranty is unilateral.
accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as VISAYAN SURETY VS CA
far as a holder for value is concerned, he is a solidary co-debtor. THE COURT’S RULING
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 21

An INTERVENOR is a person, not originally impleaded in a Of the three exceptions fixed by Article 1311,
proceeding, who has legal interest in the matter in litigation, or in 1. the nature of the obligation of the surety or guarantor does not
the success of either of the parties, or an interest against both, or warrant the conclusion that his peculiar individual qualities are
is so situated as to be adversely affected by a distribution or other contemplated as a principal inducement for the contract. What did the
disposition of property in the custody of the court or of an officer creditor Luzon Surety Co. expect of K. H. Hemady when it accepted the
thereof.14 latter as surety in the counterbonds? Nothing but the reimbursement
of the moneys that the Luzon Surety Co. might have to disburse on
May an intervenor be considered a party to a contract of surety account of the obligations of the principal debtors. This
which he did not sign and which was executed by plaintiffs and reimbursement is a payment of a sum of money, resulting from an
defendants? obligation to give; and to the Luzon Surety Co., it was indifferent that
the reimbursement should be made by Hemady himself or by
It is a basic principle in law that contracts can bind only the someone else in his behalf, so long as the money was paid to it.
parties who had entered into it; it cannot favor or prejudice a
third person.15 Contracts take effect between the parties, their 2. The second exception of Article 1311, p. 1, is intransmissibility by
assigns, and heirs, except in cases where the rights and stipulation of the parties. Being exceptional and contrary to the
obligations arising from the contract are not transmissible by general rule, this intransmissibility should not be easily implied, but
their nature, or by stipulation or by provision of law.16 must be expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
A contract of surety is an agreement where a party called the agreements sued upon nowhere indicate that they are
surety guarantees the performance by another party called the nontransferable.
principal or obligor of an obligation or undertaking in favor of a
third person called the obligee.17 Specifically, suretyship is a Because under the law (Article 1311), a person who enters into a
contractual relation resulting from an agreement whereby one contract is deemed to have contracted for himself and his heirs and
person, the surety, engages to be answerable for the debt, default assigns, it is unnecessary for him to expressly stipulate to that effect;
or miscarriage of another, known as the principal.18 hence, his failure to do so is no sign that he intended his bargain to
terminate upon his death.
The obligation of a surety cannot be extended by implication
beyond its specified limits.19 "When a surety executes a bond, it 3. The third exception to the transmissibility of obligations under
does not guarantee that the plaintiff’s cause of action is Article 1311 exists when they are “not transmissible by operation of
meritorious, and that it will be responsible for all the costs that law”. The provision makes reference to those cases where the law
may be adjudicated against its principal in case the action fails. expresses that the rights or obligations are extinguished by death, as is
The extent of a surety’s liability is determined only by the clause the case in legal support (Article 300), parental authority (Article 327),
of the contract of suretyship."20 A contract of surety is not usufruct (Article 603), contracts for a piece of work (Article 1726),
presumed; it cannot extend to more than what is stipulated.21 partnership (Article 1830 and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty or suretyship (Articles
SINCE THE OBLIGATION OF THE SURETY CANNOT BE 2047 to 2084) contain no provision that the guaranty is extinguished
EXTENDED BY IMPLICATION, IT FOLLOWS THAT THE SURETY upon the death of the guarantor or the surety.\
CANNOT BE HELD LIABLE TO THE INTERVENOR WHEN THE
RELATIONSHIP AND OBLIGATION OF THE SURETY IS LIMITED It is self-evident that once the contract has become perfected and
TO THE DEFENDANTS SPECIFIED IN THE CONTRACT OF binding, the supervening incapacity of the guarantor would not
SURETY. operate to exonerate him of the eventual liability he has contracted;

ESTATE OF HEMADY VS LUZON SURETY The foregoing concept is confirmed by the next Article 2057, that runs
as follows: “ART. 2057. — If the guarantor should be convicted in first
HELD: We find this reasoning untenable. Under the present Civil instance of a crime involving dishonesty or should become insolvent,
Code (Article 1311), as well as under the Civil Code of 1889 the creditor may demand another who has all the qualifications
(Article 1257), the rule is that — required in the preceding article. The case is excepted where the
“Contracts take effect only as between the parties, their assigns creditor has required and stipulated that a specified person should be
and heirs, except in the case where the rights and obligations guarantor.” From this article it should be immediately apparent that
arising from the contract are not transmissible by their nature, or the supervening dishonesty of the guarantor (that is to say, the
by stipulation or by provision of law.” disappearance of his integrity after he has become bound) does not
terminate the contract but merely entitles the creditor to demand a
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court replacement of the guarantor. But the step remains optional in the
ruled:“Under the Civil Code the heirs, by virtue of the rights of creditor: it is his right, not his duty; he may waive it if he chooses, and
succession are subrogated to all the rights and obligations of the hold the guarantor to his bargain. Hence Article 2057 of the present
deceased (Article 661) and cannot be regarded as third parties Civil Code is incompatible with the trial court’s stand that the
with respect to a contract to which the deceased was a party, requirement of integrity in the guarantor or surety makes the latter’s
touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44).
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 22

undertaking strictly personal, so linked to his individuality that the

guaranty automatically terminates upon his death. In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and
OUR CONCLUSION IS THAT THE SOLIDARY GUARANTOR’S undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
LIABILITY IS NOT EXTINGUISHED BY HIS DEATH, AND THAT COMPANY all sums of money which the said PRUDENTIAL BANK AND
IN SUCH EVENT, THE LUZON SURETY CO., HAD THE RIGHT TRUST COMPANY may call upon us to pay arising out of or pertaining
TO FILE AGAINST THE ESTATE A CONTINGENT CLAIM FOR to, and/or in any event connected with the default of and/or
REIMBURSEMENT. non-fulfillment in any respect of the undertaking of the aforesaid:

NOTE: The liability of the solidary guarantor is not terminated by PHILIPPINE RAYON MILLS, INC.
his death.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY
WISE CO VS TANGLAO does not have to take any steps or exhaust its remedy against
Excerpt from power of attorney: aforesaid:
To sign for me as guarantor for himself in his indebtedness to
Wise & Company of Manila, which indebtedness appears in civil before making demand on me/us.
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 (Sgd.) Anacleto R. Chi
a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R. ANACLETO R. CHI
O. Cad. Rec. No. 124), to guarantee the said obligations to the
Wise & Company, Inc., of Manila. Our own reading of the questioned solidary guaranty clause yields no
other conclusion than that the obligation of Chi is only that of a
There is no doubt that under Exhibit, A, Tanglao empowered guarantor. This is further bolstered by the last sentence which speaks
David, in his name, to enter into a contract of suretyship and a of waiver of exhaustion, which, nevertheless, is ineffective in this case
contract of mortgage of the property described in the document, because the space therein for the party whose property may not be
with Wise & Co. However, David used said power of attorney only exhausted was not filled up. Under Article 2058 of the Civil Code, the
to mortgage the property and did not enter into contract of defense of exhaustion (excussion) may be raised by a guarantor before
suretyship. Nothing is stated in Exhibit B to the effect that he may be held liable for the obligation. Petitioner likewise admits that
Tanglao became David's surety for the payment of the sum in the questioned provision is a solidary guaranty clause, thereby clearly
question. Neither is this inferable from any of the clauses thereof, distinguishing it from a contract of surety. It, however, described the
and even if this inference might be made, it would be insufficient guaranty as solidary between the guarantors; this would have been
to create an obligation of suretyship which, under the law, must correct if two (2) guarantors had signed it. The clause "we jointly and
be express and cannot be presumed. severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves.
It appears from the foregoing that defendant, Tanglao could not It does not refer to the undertaking between either one or both of
have contracted any personal responsibility for the payment of them on the one hand and the petitioner on the other with respect to
the sum of P640. The only obligation which Exhibit B, in the liability described under the trust receipt. Elsewise stated, their
connection with Exhibit A, has created on the part of Tanglao, is liability is not divisible as between them, i.e., it can be enforced to its
that resulting from the mortgage of a property belonging to him full extent against any one of them.
to secure the payment of said P640. However, a foreclosure suit is
not instituted in this case against Tanglao, but a purely personal Furthermore, any doubt as to the import, or true intent of the solidary
action for the recovery of the amount still owed by David. guaranty clause should be resolved against the petitioner. The trust
receipt, together with the questioned solidary guaranty clause, is on a
At any rate, even granting that defendant Tanglao may be form drafted and prepared solely by the petitioner; Chi's participation
considered as a surety under Exhibit B, the action does not yet lie therein is limited to the affixing of his signature thereon. It is, therefore,
against him on the ground that all the legal remedies against the a contract of adhesion; 28 as such, it must be strictly construed against
debtor have not previously been exhausted (art. 1830 of the Civil the party responsible for its preparation. 29
Code, and decision of the Supreme Court of Spain of March 2,
1891). Neither can We agree with the reasoning of the public respondent that
this solidary guaranty clause was effectively disregarded simply
PRUDENTIAL BANK VS IAC because it was not signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed, the clause ought
RULING: to have been signed by two (2) guarantors, the fact that it was only Chi
We also conclude, for the reason hereinafter discussed, and not who signed the same did not make his act an idle ceremony or render
for that adduced by the public respondent, that private the clause totally meaningless.
respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The By his signing, Chi became the sole guarantor. The attestation by
statement at the dorsal portion of the said trust receipt, which witnesses and the acknowledgement before a notary public are not
petitioner describes as a "solidary guaranty clause", reads: required by law to make a party liable on the instrument. The rule is
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 23

that contracts shall be obligatory in whatever form they may have date hereof but may be renewed upon payment by JNDC of the
been entered into, provided all the essential requisites for their guarantee fee at the same rate of 1.5% per annum.40
validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that The guarantee was only up to 17 December 1980. JN’s obligation with
requirement is absolute and indispensable. 30 With respect to a TRB fell due on 30 June 1980, and demand on PhilGuarantee was made
guaranty, which is a promise to answer for the debt or default of by TRB on 08 October 1980. That payment was actually made only on
another, the law merely requires that it, or some note or 10 March 1981 does not take it out of the terms of the guarantee.
memorandum thereof, be in writing. Otherwise, it would be What is controlling is that default and demand on PhilGuarantee had
unenforceable unless ratified. taken place while the guarantee was still in force.

While the acknowledgement of a surety before a notary public is

There is likewise no merit in petitioners’ claim that PhilGuarantee’s
required to make the same a public document, under Article 1358
failure to give its express consent to the alleged extensions granted by
of the Civil Code, a contract of guaranty does not have to appear
TRB to JN had extinguished the guarantee.
in a public document.

THE REQUIREMENT THAT THE GUARANTOR SHOULD CONSENT

JN DEVT VS PHIL EXPORT
TO ANY EXTENSION GRANTED BY THE CREDITOR TO THE DEBTOR
UNDER ART. 2079 IS FOR THE BENEFIT OF THE GUARANTOR. As
Under a contract of guarantee, the guarantor binds himself to the
such, it is likewise waivable by the guarantor. Thus, even assuming
creditor to fulfill the obligation of the principal debtor in case the
that extensions were indeed granted by TRB to JN, PhilGuarantee
latter should fail to do so.34 The guarantor who pays for a debtor,
could have opted to waive the need for consent to such extensions.
in turn, must be indemnified by the latter.35 However, the
Indeed, a guarantor is not precluded from waiving his right to be
guarantor cannot be compelled to pay the creditor unless the
notified of or to give his consent to extensions obtained by the debtor.
latter has exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor.36 This is what is
otherwise known as the benefit of excussion. The benefit of excussion, as well as the requirement of consent to
extensions of payment, is a protective device pertaining to and
It is clear that excussion may only be invoked after legal remedies conferred on the guarantor. These may be invoked by the guarantor
against the principal debtor have been expanded. Thus, it was against the creditor as defenses to bar the unwarranted enforcement
held that the creditor must first obtain a judgment against the of the guarantee. However, PhilGuarantee did not avail of these
principal debtor before assuming to run after the alleged defenses when it paid its obligation according to the tenor of the
guarantor, "for obviously the ‘exhaustion of the principal’s guarantee once demand was made on it. What is peculiar in the instant
property’ cannot even begin to take place before judgment has case is that petitioners, the principal debtors themselves, are muddling
been obtained."37 The law imposes conditions precedent for the the issues and raising the same defenses against the guarantor, which
invocation of the defense. Thus, in order that the guarantor may only the guarantor may invoke against the creditor, to avoid payment
make use of the benefit of excussion, he must set it up against the of their own obligation to the guarantor.
creditor upon the latter’s demand for payment and point out to
the creditor available property of the debtor within the BITANGA VS PYRAMID
Philippines sufficient to cover the amount of the debt.38 Under a contract of guarantee, the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
While a guarantor enjoys the benefit of excussion, nothing should fail to do so. The guarantor who pays for a debtor, in turn, must
prevents him from paying the obligation once demand is made be indemnified by the latter. However, the guarantor cannot be
on him. Excussion, after all, is a right granted to him by law and as compelled to pay the creditor unless the latter has exhausted all the
such he may opt to make use of it or waive it. PhilGuarantee’s property of the debtor and resorted to all the legal remedies against
waiver of the right of excussion cannot prevent it from the debtor. This is what is otherwise known as the benefit of
demanding reimbursement from petitioners. The law clearly excussion.37
requires the debtor to indemnify the guarantor what the latter
has paid. Article 2060 of the Civil Code reads:

Excerpt: 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
In the event of default by JNDC and as a consequence thereof, demand for payment from him, and point out to the creditor available
PHILGUARANTEE is made to pay its obligation arising under the property of the debtor within Philippine territory, sufficient to cover
aforesaid guarantee PHILGUARANTEE shall pay the BANK the the amount of the debt.38
amount of ₱1.4 million or 70% of the total obligation unpaid…
The afore-quoted provision imposes a condition for the invocation of
.... the defense of excussion. Article 2060 of the Civil Code clearly requires
that in order for the guarantor to make use of the benefit of excussion,
This guarantee shall be valid for a period of one (1) year from he must set it up against the creditor upon the latter’s demand for
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 24

payment and point out to the creditor available property of the The right to the benefit of division against the co-sureties for their
debtor within the Philippines sufficient to cover the amount of the respective shares ceases in the same cases and for the same reason as
debt.39 that to an exhaustion of property against the principal debtor.

It must be stressed that despite having been served a demand GIST: 1837
letter at his office, petitioner still failed to point out to the
respondent properties of Macrogen Realty sufficient to cover its That article refers to several sureties of only one debtor for the same
debt as required under Article 2060 of the Civil Code. Such failure debt. In the instant case, altho the two bonds on their face appear to
on petitioner’s part forecloses his right to set up the defense of guarantee the same debt co-extensively up to P2,000 — that of the
excussion. Provident Insurance Co. alone extending beyond that sum up to
P3,000 — it was pleaded and conclusively proven that in reality said
Worthy of note as well is the Sheriff’s return stating that the only bonds, or the two sureties, do not guarantee the same debt because
property of Macrogen Realty which he found was its deposit of the Provident Insurance Co. guarantees only the first P3,000 and the
P20,242.23 with the Planters Bank. Manila Compañia de Seguros, only the excess over and above said
amount up to P5,000. Article 1837 does not apply to this factual
Article 2059(5) of the Civil Code thus finds application and situation.
precludes petitioner from interposing the defense of excussion.
We quote: MANILA SURETY VS BATU
A guarantor is the insurer of the solvency of the debtor; a surety is an
Art. 2059. This excussion shall not take place: insurer of the debt. A guarantor binds himself to pay if the principal is
unable to pay; a surety undertakes to pay if the principal does not
xxxx pay.1 The reason which could be invoked for the non-availability to a
surety of the provisions of the last paragraph of article 2071 of the new
(5) If it may be presumed that an execution on the property of the Civil Code would be the fact that guaranty like commodatum2 is
principal debtor would not result in the satisfaction of the gratuitous.
obligation.
But guaranty could also be for a price or consideration as provided for
As the Court of Appeals correctly ruled: in article 2048. So, even if there should be a consideration or price paid
to a guarantor for him to insure the performance of an obligation by
We find untenable the claim that the [herein petitioner] Benjamin the principal debtor, the provisions of article 2071 would still be
Bitanga cannot be compelled to pay Pyramid because the available to the guarantor. In suretyship the surety becomes liable to
Macrogen Realty has allegedly sufficient assets. Reason: The said the creditor without the benefit of the principal debtor's exclusion of
[petitioner] had not genuinely controverted the return made by his properties, for he (the surety) maybe sued independently. So, he is
Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent an insurer of the debt and as such he has assumed or undertaken a
efforts, he was not able to locate any property belonging to the responsibility or obligation greater or more onerous than that of
Macrogen Realty, except for a bank deposit with the Planter’s guarantor. Such being the case, the provisions of article 2071, under
Bank at Buendia, in the amount of P20,242.23. It is axiomatic that guaranty, are applicable and available to a surety.
the liability of the guarantor arises when the insolvency or
inability of the debtor to pay the amount of debt is proven by the The plaintiff's cause of action does not fall under paragraph 2 of article
return of the writ of execution that had not been unsatisfied 2071 of the new Civil Code, because there is no proof of the
defendants' insolvency. The fact that the contract was annulled
HERMANOS VS MANILA TOBACCONISTS because of lack of progress in the construction of the bridge is no
proof of such insolvency. It does not fall under paragraph 3, because
There was an issue of fact between the two surety companies, viz.: the defendants have not bound themselves to relieve the plaintiff from
whether the understanding between the plaintiff and the three the guaranty within a specified period which already has expired,
defendants was, that the bond of P2,000 given by the Manila because the surety bond does not fix any period of time and the
Compañia de Seguros was limited to and responded for the indemnity agreement stipulates one year extendible or renewable until
obligation of the Tobacconists only insofar as it might exceed the the bond be completely cancelled by the person or entity in whose
amount of P3,000 secured by the bond of the Provident Insurance behalf the bond was executed or by a Court of competent jurisdiction.
Co. That issue of fact was decided by the trial court in favor of the It does not come under paragraph 4, because the debt has not
contention of the Manila Compañia de Seguros; and judgment become demandable by reason of the expiration of the period for
was rendered by it against the Provident Insurance Co. alone for payment. It does not come under paragraph 5 because of the lapse of
the amount claimed by the plaintiff. 10 years, when the principal obligation has no period for its maturity,
etc., for 10 years have not yet elapsed. It does not fall under paragraph
Art. 1837. Should there be several sureties of only one debtor for 6, because there is no proof that "there are reasonable grounds to fear
the same debt, the liability therefor shall be divided among them that the principal debtor intends to abscond." It does not come under
all. The creditor can claim from each surety only his proportional paragraph 7, because the defendants, as principal debtors, are not in
part unless liability in solidum has been expressly stipulated. imminent danger of becoming insolvent, there being no proof to that
effect.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 25

The surety therefore becomes liable for the debt or duty of another
But the plaintiff's cause of action comes under paragraph 1 of although he possesses no direct or personal interest over the
article 2071 of the new Civil Code, because the action brought by obligations nor does he receive any benefit
Ricardo Fernandez and 105 persons in the Justice of the Peace therefrom.80chanrobleslaw
Court of Laoag, province of Ilocos Norte, for the collection of
unpaid wages amounting to P5,960.10, is in connection with the Bernardino cannot now renege on his obligation to pay the promissory
construction of the Bacarra Bridge, Project PR-72 (3), undertaken notes under the claim that there was a previous agreement between
by the Batu Construction & Company, and one of the defendants the parties for RCBC to execute a subrogation agreement before
therein is the herein plaintiff, the Manila Surety and Fidelity Co., Bernardino could be held liable under the surety agreements. We
Inc., and paragraph 1 of article 2071 of the new Civil Code stress that the right to subrogation of a paying surety is by operation
provides that the guarantor, even before having paid, may of law. Article 2067 of the Civil Code provides in part that the
proceed against the principal debtor "to obtain release from the guarantor who, pays is subrogated to all the rights which the creditor
guaranty, or to demand a security that shall protect him from any had against the debtor. Although Article 2067 explicitly pertains to
proceedings by the creditor or from the danger of insolvency of guarantors, the right to subrogation extends as well to sureties.
the debtor, when he (the guarantor) is sued for payment. It does
not provide that the guarantor be sued by the creditor for the SPECIAL STEEL VS VILLAREAL
payment of the debt. It simply provides that the guarantor of
surety be sued for the payment of an amount for which the surety Article 116 of the Labor Code, as amended, provides:
bond was put up to secure the fulfillment of the obligation
undertaken by the principal debtor. "ART. 116. Withholding of wages and kickbacks prohibited. – It shall be
unlawful for any person, directly or indirectly, to withhold any amount
RCBC VS BERNARDINO from the wages (and benefits) of a worker or induce him to give up any
As surety, Bernardino is principally and solidarity liable for the part of his wages by force, stealth, intimidation, threat or by any other
obligations arising from the promissory notes. means whatsoever without the worker’s consent."

In Rizal Commercial Banking Corporation v. Marcopper Mining The above provision is clear and needs no further elucidation. Indeed,
Corporation,72 We reversed the lower courts and found that petitioner has no legal authority to withhold respondents’ 13th month
MMC failed to prove that the parties agreed for RCBC to execute pay and other benefits. What an employee has worked for, his
a partial release of mortgage and pledge upon assignment to it of employer must pay.7 Thus, an employer cannot simply refuse to pay
the Forbes Park property.73 We also ruled favorably on the the wages or benefits of its employee because he has either defaulted
counterclaims of RCBC, with respect to the principal amount of in paying a loan guaranteed by his employer; or violated their
MMC's promissory notes, the interest, penalties, and attorney's memorandum of agreement; or failed to render an accounting of his
fees stipulated therein.74 We then directed MMC to pay the employer’s property.8
amounts expressly stipulated in Non-Negotiable Promissory
Notes No. 21-3697 and 21-3797. Nonetheless, petitioner, relying on Article 2071 (earlier cited), contends
that the right to demand security and obtain release from the guaranty
Article 2047 of the Civil Code it executed in favor of respondent Villareal may be exercised even
provides:ChanRoblesVirtualawlibrary without initiating a separate and distinct action.
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal There is no guaranty involved herein and, therefore, the provision of
debtor in case the latter should failto do so. Article 2071 does not apply.

If a person binds himself solidarity with the principal debtor, the A guaranty is distinguished from a surety in that a guarantor is the
provisions of Section 4, Chapter 3, Title I of this Book shall be insurer of the solvency of the debtor and thus binds himself to pay if
observed. In such case, the contract; is called a suretyship. the principal is unable to pay, while a surety is the insurer of the debt,
and he obligates himself to pay if the principal does not pay.9
Suretyship is a contractual relation resulting from an agreement
whereby one person, the surety, engages to be answerable for Based on the above distinction, it appears that the contract executed
the debt, default or miscarriage of another, known as the by petitioner and respondent Villareal (in favor of the Bank of
principal.78 The surety's obligation is not an original and direct Commerce) is a contract of surety. In fact, it is denominated as a
one for the performance of his own act, but merely accessory or "continuing suretyship agreement." Hence, petitioner could not just
collateral to the obligation contract ed by the prin cipal. unilaterally withhold respondent’s wages or benefits as a preliminary
Nevertheless, although the contract of a surety is in essence remedy under Article 2071. It must file an action against respondent
secondary only to a valid principal obligation, his liability to the Villareal. Thus, the Appellate Court aptly ruled that petitioner "may
creditor or promisee of the principal is said to be direct, primary only protect its right as surety by instituting an ‘action to demand a
and absolute; in other words, he is directly and equally bound security’."
w i t h t h e p r i n c i p a l .
TUASON VS MACHUCA
The plaintiff company argues that, at all events, it is entitled to bring
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 26

this action under article 1843 of the Civil Code, which provides he is past the point where a the surety "relief from the
that the surety may, even before making payment, bring action preliminary protective remedy burden of his suretyship or a
against the principal debtor. This contention of the plaintiff is is of any value to him guaranty to defend him against
untenable. The present action, according to the terms of the any proceedings of the creditor
complaint, is clearly based on the fact of payment. It is true that, and from the danger of
under article 1843, an action lies against the principal debtor even insolvency of the debtor."
before the surety pays the debt, but it clearly appears in the
complaint that this is not the action brought by the plaintiff. It being evident that the purpose of article 1843 is to give to the surety
Moreover this article 1843 provided several cumulative remedies a remedy in anticipation of the payment of the debt, which debt, being
in favor of the surety, at his election, and the surety who brings an due, he could be called upon to pay at any time, it remains only to say,
action under this article must choose the remedy and apply for it in this connection, that the only procedure known under our present
specifically. At any rate this article does not provide for the practice to enforce that right is by action. (Manresa, Civil Code, vol. 12,
reimbursement of any amount, as is sought by the p. 320.)
plaintiff.lawphi1.net
But while the surety has the right to obtain as he did the judgments
But although the plaintiff has not as yet paid "Manila Compañia against the principal debtor, he ought not to be allowed to realize the
de Seguros" the amount of the judgment against it, and even said judgments to the point of actual collection of the same until he
considering that this action cannot be held to come under article has satisfied or caused to be satisfied the obligation the payment of
1843 of the Civil Code, yet the plaintiff is entitled to the relief which he assures. Otherwise, a great opportunity for collusion and
sought in view of the facts established by the evidence. The improper practices between the surety and his principal would be
plaintiff became bound, by virtue of a final judgment, to pay the offered which might result to the injury and prejudice of the creditor
value of the note executed by it in favor of "Manila Compañia de who holds the claim against them.
Seguros." According to the document executed solidarily by the
defendant and the Universal Trading Company, the defendant STRONGHOLD VS REPUBLIC
bound himself to pay the plaintiff as soon as the latter may have
become bound and liable, whether or not it shall have actually ISSUE
paid. It is indisputable that the plaintiff became bound and liable whether petitioner’s liability under the performance bond was
by a final judgment to pay the value of the note to "Manila automatically extinguished by the death of Santos, the principal.
Compañia de Seguros."
RULING:
Our conclusion is that the plaintiff has the right to recover of the The liability of petitioner is CONTRACTUAL IN NATURE, BECAUSE IT
defendant the sum of P9,663, the value of the note executed by EXECUTED A PERFORMANCE BOND
the plaintiff in favor of "Manila Compañia de Seguros" which the
plaintiff is under obligation to pay by virtue of final judgment. We AS A SURETY, PETITIONER IS SOLIDARILY LIABLE WITH SANTOS
do not believe, however, that the defendant must pay the plaintiff IN ACCORDANCE WITH THE CIVIL CODE, WHICH PROVIDES AS
the expenses incurred by it in the litigation between it and FOLLOWS:
"Manila Compañia de Seguros." That litigation was originated by
the plaintiff having failed to fulfill its obligation with "Manila "Art. 2047. By guaranty a person, called the guarantor, binds himself to
Compañia de Seguros," and it cannot charge the defendant with the creditor to fulfill the obligation of the principal debtor in case the
expenses which it was compelled to make by reason of its own latter should fail to do so.
fault. It is entitled, however, to the expenses incurred by it in this
action brought against the defendant, which are fixed at "If a person binds himself solidarily with the principal debtor, the
P1,653.65 as attorney's fees. provisions of Section 4,17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship."
KUENZLE VS STREIFF
xxxxxxxxx
1838 1843
Article 1838 provides for the Article 1843 provides for his "Art. 1216. The creditor may proceed against any one of the solidary
enforcement of the right of the protection before he has paid debtors or some or all of them simultaneously. The demand made
surety against the debtor after but after he has become liable against one of them shall not be an obstacle to those which may
he has paid the debt. to do so. subsequently be directed against the others, so long as the debt has
gives a right of action after a protective remedy before not been fully collected."
payment payment
A substantive right In the nature of a preliminary Elucidating on these provisions, the Court in Garcia v. Court of
remedy Appeals18 stated thus:
gives a right of action which, without the provisions of the of the
other, might be worthless "x x x. The SURETY’S OBLIGATION IS NOT AN ORIGINAL AND
article 1838, speaking under The remedy given in article DIRECT ONE FOR THE PERFORMANCE OF HIS OWN ACT, BUT
this article become available, 1843 purposes to obtain for MERELY ACCESSORY OR COLLATERAL TO THE OBLIGATION
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 27

CONTRACTED BY THE PRINCIPAL. Nevertheless, although the signed the same not in representation of WMC or as its president but
contract of a surety is in essence secondary only to a valid in his personal capacity. He is therefore personally bound. There is no
principal obligation, his liability to the creditor or promisee of the law that prohibits a corporate officer from binding himself personally
principal is said to be direct, primary and absolute; in other words, to answer for a corporate debt. While the limited liability doctrine is
he is directly and equally bound with the principal. x x x."19 intended to protect the stockholder by immunizing him from personal
liability for the corporate debts, he may nevertheless divest himself of
Under the law and jurisprudence, respondent may sue, separately this protection by voluntarily binding himself to the payment of the
or together, the principal debtor and the petitioner herein, in view corporate debts.
of the solidary nature of their liability. THE DEATH OF THE
PRINCIPAL DEBTOR WILL NOT WORK TO CONVERT, INSOFAR AS PETITIONERS STIPULATE IN THE CONTINUING
DECREASE OR NULLIFY THE SUBSTANTIVE RIGHT OF THE GUARANTY THAT RESPONDENT BANK "MAY AT ANY TIME, OR
SOLIDARY CREDITOR. Evidently, DESPITE THE DEATH OF THE FROM TIME TO TIME, IN [ITS] DISCRETION X X X EXTEND OR
PRINCIPAL DEBTOR, RESPONDENT MAY STILL SUE CHANGE THE TIME PAYMENT," this provision even if understood as
PETITIONER ALONE, IN ACCORDANCE WITH THE SOLIDARY a waiver is confined per se to the grant of an extension and does not
NATURE OF THE LATTER’S LIABILITY UNDER THE surrender the prerequisites therefor as mandated in the "letter-advise."
PERFORMANCE BOND. In other words, the authority of the Bank to defer collection
contemplates only authorized extensions, that is, those that meet the
SPS TOH VS SOLIDBANK terms of the "letter-advise."

ISSUE: CERTAINLY, WHILE THE BANK MAY EXTEND THE DUE DATE AT
WON the spouses Toh are liable as sureties to Solidbank. NO ITS DISCRETION PURSUANT TO THE CONTINUING GUARANTY, IT
SHOULD NONETHELESS COMPLY WITH THE REQUIREMENTS that
RULING: domestic letters of credit be supported by fifteen percent (15%)
marginal deposit extendible three (3) times for a period of thirty (30)
This Court holds that the CONTINUING GUARANTY IS A VALID days for each extension, subject to twenty-five percent (25%) partial
AND BINDING CONTRACT OF PETITIONER-SPOUSES as it is a payment per extension. This reading of the Continuing Guaranty is
public document that enjoys the presumption of authenticity and consistent with Philippine National Bank v. Court of Appeals50 that any
due execution. Although petitioners as appellees may raise issues doubt on the terms and conditions of the surety agreement should be
that have not been assigned as errors by respondent Bank as resolved in favor of the surety.
party-appellant, i.e., unenforceability of the surety contract, we
are bound by the consistent finding of the courts a quo that FURTHERMORE, THE ASSURANCE OF THE SURETIES IN THE
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed CONTINUING GUARANTY THAT "[N]O ACT OR OMISSION OF ANY
their signature[s]" on the surety agreement and were thus "at KIND ON [THE BANK'S] PART IN THE PREMISES SHALL IN ANY
some given point in time willing to be liable under those EVENT AFFECT OR IMPAIR THIS GUARANTY"51 MUST ALSO BE
forms."46 In the absence of clear, convincing and more than READ "STRICTISSIMI JURIS" FOR THE REASON THAT
preponderant evidence to the contrary, our ruling cannot be PETITIONERS ARE ONLY ACCOMMODATION SURETIES, i.e., they
otherwise. received nothing out of the security contract they signed.52 Thus said,
the acts or omissions of the Bank conceded by petitioners as not
Similarly, there is no basis for petitioners to limit their affecting nor impairing the surety contract refer only to those
responsibility thereon so long as they were corporate officers and occurring "in the premises," or those that have been the subject of the
stockholders of FBPC. NOTHING IN THE CONTINUING waiver in the Continuing Guaranty, and stretch to no other. STATED
GUARANTY RESTRICTS THEIR CONTRACTUAL UNDERTAKING OTHERWISE, AN EXTENSION OF THE PERIOD FOR ENFORCING
TO SUCH CONDITION OR EVENTUALITY. In fact the obligations THE INDEBTEDNESS DOES NOT BY ITSELF BRING ABOUT THE
assumed by them therein subsist "upon the undersigned, the DISCHARGE OF THE SURETIES UNLESS THE EXTRA TIME IS NOT
heirs, executors, administrators, successors and assigns of the PERMITTED WITHIN THE TERMS OF THE WAIVER,
undersigned, and shall inure to the benefit of, and be enforceable
by you, your successors, transferees and assigns," and that their Under Art. 2055 of the Civil Code, the liability of a surety is measured
commitment "shall remain in full force and effect until written by the terms of his contract, and while he is liable to the full extent
notice shall have been received by [the Bank] that it has been thereof, his accountability is strictly limited to that assumed by its
revoked by the undersigned." Verily, if petitioners intended not to terms.
be charged as sureties after their withdrawal from FBPC, they
could have simply terminated the agreement by serving the THE CONSEQUENCE OF THESE OMISSIONS IS TO DISCHARGE THE
required notice of revocation upon the Bank as expressly allowed SURETY, PETITIONERS HEREIN, UNDER ART. 2080 OF THE CIVIL
therein CODE,59 OR AT THE VERY LEAST, MITIGATE THE LIABILITY OF THE
SURETY UP TO THE VALUE OF THE PROPERTY OR LIEN RELEASED
In Garcia v. Court of Appeals[48] we ruled – –

Regarding the petitioner's claim that he is liable only as a If the creditor x x x has acquired a lien upon the property of a principal,
corporate officer of WMC, the surety agreement shows that he the creditor at once becomes charged with the duty of retaining such
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 28

security, or maintaining such lien in the interest of the surety, and Article 1216. The creditor may proceed against any one of the solidary
any release or impairment of this security as a primary resource debtors or some or all of them simultaneously. The demand made
for the payment of a debt, will discharge the surety to the extent against one of them shall not be an obstacle to those which may
of the value of the property or lien released x x x x [for] there subsequently be directed against the others, so long as the debt has
immediately arises a trust relation between the parties, and the not been fully collected.
creditor as trustee is bound to account to the surety for the value
of the security in his hands.60 Comparing a surety’s obligations with that of a guarantor, the Court, in
the case of Palmares v. CA,54 illumined that a surety is responsible for
For the same reason, the grace period granted by respondent the debt’s payment at once if the principal debtor makes default,
Bank represents unceremonious abandonment and forfeiture of whereas a guarantor pays only if the principal debtor is unable to pay,
the fifteen percent (15%) marginal deposit and the twenty-five viz.:55
percent (25%) partial payment as fixed in the "letter-advise."
These payments are unmistakably additional securities intended A SURETY IS AN INSURER OF THE DEBT, WHEREAS A
to protect both respondent Bank and the sureties in the event GUARANTOR IS AN INSURER OF THE SOLVENCY OF THE DEBTOR
that the principal debtor FBPC becomes insolvent during the
extension period. Compliance with these requisites was not SURETY VS GUARANTOR
waived by petitioners in the Continuing Guaranty. For this SURETY GUARANTOR
unwarranted exercise of discretion, respondent Bank bears the A suretyship is an undertaking a guaranty, an undertaking
loss; due to its unauthorized extensions to pay granted to FBPC, that the debt shall be paid; that the debtor shall pay.
petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as
sureties under the Continuing Guaranty. Stated differently, a surety while a guarantor agrees that
promises to pay the principal’s the creditor, after proceeding
TIDCORP VS ASIA PACES CORP debt if the principal will not against the principal, may
pay, proceed against the guarantor
if the principal is unable to pay.
ISSUE : Whether the liabilities of the bonding companies are A surety binds himself to A guarantor, on the other
extinguished by payment extensions granted to tidcorp under the perform if the principal does hand, does not contract that
restructuring agreements. NO not, without regard to his the principal will pay, but
ability to do so. simply that he is able to do so.
RULING:
while a guarantor contracts to
A surety is considered in law as being the same party as the In other words, a surety pay if, by the use of due
debtor in relation to whatever is adjudged touching the undertakes directly for the diligence, the debt cannot be
obligation of the latter, and their liabilities are interwoven as to be payment and is so responsible made out of the principal
inseparable. Although the contract of a surety is in essence at once if the principal debtor debtor.
secondary only to a valid principal obligation, his liability to the makes default,
creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety &
personal interest over the obligations nor does he receive any Insurance Co., Inc.,56 and later in the case of Security Bank, held that
benefit therefrom.52 The fundamental reason therefor is that a Article 2079 of the Civil Code, which pertinently provides that "[a]n
contract of suretyship effectively binds the surety as a solidary extension granted to the debtor by the creditor without the consent of
debtor. This is provided under Article 2047 of the Civil Code which the guarantor extinguishes the guaranty," equally applies to both
states: contracts of guaranty and suretyship. The rationale therefor was
explained by the Court as follows:57
Article 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal The theory behind Article 2079 is that an extension of time given to the
debtor in case the latter should fail to do so. principal debtor by the creditor without the surety’s consent would
deprive the surety of his right to pay the creditor and to be
If a person binds himself solidarily with the principal debtor, the immediately subrogated to the creditor’s remedies against the
provisions of Section 4, Chapter 3, Title I of this Book shall be principal debtor upon the maturity date. The surety is said to be
observed. In such case the contract is called a suretyship. entitled to protect himself against the contingency of the principal
(Emphasis and underscoring supplied) debtor or the indemnitors becoming insolvent during the extended
period. (Emphasis and underscoring supplied; citations omitted)
Thus, since the surety is a solidary debtor, it is not necessary that
the original debtor first failed to pay before the surety could be APPLYING THESE PRINCIPLES, THE COURT FINDS THAT THE
made liable; it is enough that a demand for payment is made by PAYMENT EXTENSIONS GRANTED BY BANQUE INDOSUEZ AND
the creditor for the surety’s liability to attach.53 PCI CAPITAL TO TIDCORP UNDER THE RESTRUCTURING
AGREEMENT DID NOT HAVE THE EFFECT OF EXTINGUISHING THE
Article 1216 of the Civil Code provides that: BONDING COMPANIES’ OBLIGATIONS TO TIDCORP UNDER THE
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 29

SURETY BONDS, NOTWITHSTANDING THE FACT THAT SAID CALIBO VS CA

EXTENSIONS WERE MADE WITHOUT THEIR CONSENT.
RULING:
This is because Article 2079 of the Civil Code refers to a payment In a contract of pledge, the creditor is given the right to retain his
extension granted by the creditor to the principal debtor without debtor's movable property in his possession, or in that of a third
the consent of the guarantor or surety. In this case, the Surety person to whom it has been delivered, until the debt is paid. For the
Bonds are suretyship contracts which secure the debt of ASPAC, contract to be valid, it is necessary that:
the principal debtor, under the Deeds of Undertaking to pay (1) the pledge is constituted to secure the fulfillment of a principal
TIDCORP, the creditor, the damages and liabilities it may incur obligation;
under the Letters of Guarantee, within the bounds of the bonds’ (2) the pledgor be the absolute owner of the thing pledged; and
respective coverage periods and amounts. No payment extension (3) the person constituting the pledge has the free disposal of his
was, however, granted by TIDCORP in favor of ASPAC in this property, and in the absence thereof, that he be legally authorized for
regard; hence, Article 2079 of the Civil Code should not be the purpose.
applied with respect to the bonding companies’ liabilities to
TIDCORP under the Surety Bonds. As found by the trial court and affirmed by respondent court, the
PLEDGOR IN THIS CASE, MIKE ABELLA, WAS NOT THE ABSOLUTE
PNB VS MANILA SURETY OWNER of the tractor that was allegedly pledged to petitioner. The
tractor was owned by his father, private respondent, who left the
RULING: equipment with him for safekeeping. Clearly, the second requisite for a
valid pledge, that the pledgor be the absolute owner of the property, is
Even if the assignment with power of attorney from the principal absent in this case. Hence, there is no valid pledge.
debtor were considered as mere additional security still, by
allowing the assigned funds to be exhausted without notifying "He who is not the owner or proprietor of the property pledged or
the surety, the Bank deprived the former of any possibility of mortgaged to guarantee the fulfillment of a principal obligation,
recoursing against that security. The Bank thereby exonerated the cannot legally constitute such a guaranty as may validly bind the
surety, pursuant to Article 2080 of the Civil Code: property in favor of his creditor, and the pledgee or mortgagee in such
a case acquires no right whatsoever in the property pledged or
ART. 2080. — The guarantors, even though they be solidary, are mortgaged."
released from their obligation whenever by come act of the
creditor they cannot be subrogated to the rights, mortgages and BANGKO SENTRAL VS LIBO ON
preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", ISSUE: whether the BSP has the authority to foreclose the subject
addressed to the Bureau of Public Works, on May 5, 1949, and its mortgage. NO
letter to ATACO, Exhibit "G", informing the debtor that as of its
date, October 31, 1949, its outstanding balance was P156,374.83. BSP claimed that its authority to foreclose the subject mortgage was
Said Exhibit "G" has no bearing on the issue whether the Bank has by virtue of an alleged assignment of credit, i.e., "Promissory Note with
exercised due diligence in collecting from the Bureau of Public Trust Receipt Agreement" executed by the Rural Bank of Hinigaran in
Works, since the letter was addressed to ATACO, and the funds their favor where the latter assigned, deposited-and pledged the
were to come from elsewhere. As to the letter of demand on the promissory notes executed by the Spouses Libo-on including the
Public Works office, it does not appear that any reply thereto was contract of real estate mortgage to it.
made; nor that the demand was pressed, nor that the debtor or
the surety were ever apprised that payment was not being made. RULING:
The fact remains that because of the Bank's inactivity the other
creditors were enabled to collect P173,870.31, when the balance ASSIGNMENT, defined
due to appellant Bank was only P158,563.18. The finding of "An assignment of credit is an agreement by virtue of which the owner
negligence made by the Court of Appeals is thus not only of a credit, known as the assignor, by a legal cause, such as sale, dation
conclusive on us but fully supported by the evidence. in payment, exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to another, known as
Even if the Court of Appeals erred on the second reason it the assignee, who acquires the power to enforce it to the same extent
advanced in support of the decision now under appeal, because as the assignor could enforce it against the debtor. It may be in the
the rules on application of payments, giving preference to form of sale, but at times it may constitute a dation in payment, such
secured obligations are only operative in cases where there are as when a debtor, in order to obtain a release from his debt, assigns to
several distinct debts, and not where there is only one that is his creditor a credit he has against a third person." As a dation in
partially secured, the error is of no importance, since the principal payment, the assignment of credit operates as a mode of
reason based on the Bank's negligence furnishes adequate extinguishing the obligation; the delivery and transmission of
support to the decision of the Court of Appeals that the surety ownership of a thing (in this case, the credit due from a third person)
was thereby released. by the debtor to the creditor is accepted as the equivalent of the
performance of the obligation.[15]
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 30

FULFILLMENT OF A PRINCIPAL OBLIGATION, CANNOT LEGALLY

BSP is persistent in claiming that there was a valid assignment of CONSTITUTE SUCH A GUARANTY as may validly bind the property in
credit by virtue of the promissory note with trust receipt issued by favor of his creditor, and the pledgee or mortgagee in such a case
the Rural Bank of Hinigaran in its favor. However, other than acquires no right whatsoever in the property pledged or
BSP's allegation of assignment of credit, there was no mortgaged.[21]
document denominated as deed of assignment of
credit/mortgage ever presented to show that the Rural Bank Furthermore, a closer look at the subject promissory note with trust
of Hinigaran has indeed transferred its rights to BSP.[16] receipt agreement DOES NOT SHOW IN ANY ASPECT THAT THE
RURAL BANK OF HINIGARAN INTENDED TO MAKE AN ABSOLUTE
Even if we follow BSP's argument that the promissory note with CONVEYANCE OF TITLE OVER THE SECURITIES IT HAD DEPOSITED
trust receipt was actually an assignment of credit, the same will WITH BSP. What was given to BSP is lien for the payment of the note
still not hold as BSP foiled to comply with the formalities required pledged. There is nothing in the promissory note with trust receipt
by law for a valid assignment of credit involving real property. agreement which partakes the nature of an assignment of credit.
Indeed, a mortgage credit is a real right,[17] thus, the formality
required by law for its transfer or assignment, i.e., it must be in a
public instrument and must be registered and should be DBP VS PRUDENTIAL BANK
complied with in order to bind third person.[18]

THE MERE PLEDGE AND DEPOSIT OF THE MORTGAGE The agreements uniformly provided:
CONTRACT, TRANSFER CERTIFICATE OF TITLE AND
PROMISSORY NOTE EXECUTED BY THE THE RURAL BANK OF Received, upon the Trust hereinafter mentioned from the PRUDENTIAL
HINIGARAN IN FAVOR O'F BSP, DOES NOT PRODUCE THE BANK (hereinafter referred to as BANK) the following goods and
EFFECT OF GIVING BSP THE AUTHORITY TO INTERVENE merchandise, the property of said BANK specified in the bill of lading
WITH THE TRANSACTION between the Spouses Libo-on and as follows:
the Rural Bank of Hinigaran, much less foreclose the mortgaged
property of the Spouses Libo-on. In the absence of a notarized Amount of Bill
deed of assignment, BSP cannot be considered as an assignee
who can proceed against the Spouses Libo-on's property. Description of Security

Moreover, the Rural Bank of Hinigaran in fact has no authority to Marks & Nos.
pledge the security documents to BSP during the term of the real
estate mortgage contract between the Rural Bank of Hinigaran Vessel
and the Spouses Libo-on because if it is within the term of the
contract, the mortgaged property remains to be the property of
the latter. and in consideration thereof, I/We hereby agree to hold said goods in
trust for the BANK and as its property with liberty to sell the same for
It must be stressed that FOR A CONTRACT OF PLEDGE TO BE its account but without authority to make any other disposition
VALID, IT IS NECESSARY THAT: whatsoever of the said goods or any part thereof (or the proceeds
(1) the pledge is constituted to secure the fulfillment of a thereof) either by way of conditional sale, pledge, or otherwise.
principal obligation;.
(2) the pledgor be the absolute owner of the thing pledged; and x x x x x x x x x6 (Emphasis supplied)
(3) the person constituting the pledge has the free disposal of his
property, and in the absence thereof, that he be legally THE ARTICLES WERE OWNED BY PRUDENTIAL BANK AND THEY
authorized for the purpose.[ WERE ONLY HELD BY LITEX IN TRUST. While it was allowed to sell
the items, Litex had no authority to dispose of them or any part thereof
Here, the RURAL BANK OF HINIGARAN WAS NEITHER THE or their proceeds through conditional sale, pledge or any other means.
ABSOLUTE OWNER OF THE SUBJECT PROPERTY NOR THE
SECURITY DOCUMENTS IT HAD PLEDGED TO BSP, since again, Article 2085 (2) of the Civil Code requires that, in a contract of pledge
at the time of the transaction between the Rural Bank of or mortgage, it is essential that the pledgor or mortgagor should be
Hinigaran and BSP on September 19, 1997, there is still an the absolute owner of the thing pledged or mortgaged. Article 2085 (3)
existing real estate mortgage contract between the Spouses further mandates that the person constituting the pledge or mortgage
Libo-on and the Rural Bank of Hinigaran. must have the free disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
THE POSSESSION OF THE SECURITY DOCUMENTS WAS
GIVEN TO THE RURAL BANK OF HINIGARAN MERELY AS LITEX HAD NEITHER ABSOLUTE OWNERSHIP, FREE DISPOSAL
SECURITY COLLATERAL NOR THE AUTHORITY TO FREELY DISPOSE OF THE ARTICLES.
LITEX COULD NOT HAVE SUBJECTED THEM TO A CHATTEL
HE WHO IS-NOT THE OWNER OR PROPRIETOR OF THE MORTGAGE.
PROPERTY PLEDGED OR MORTGAGED TO GUARANTEE THE
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 31

THEIR INCLUSION IN THE MORTGAGE WAS VOID AND HAD

NO LEGAL EFFECT. There being no valid mortgage, there could
also be no valid foreclosure or valid auction sale.THUS, DBP
COULD NOT BE CONSIDERED EITHER AS A MORTGAGEE OR
AS A PURCHASER IN GOOD FAITH.

No one can transfer a right to another greater than what he

himself has.11 Nemo dat quod non habet. Hence, Litex could not
transfer a right that it did not have over the disputed items.
Corollarily, DBP could not acquire a right greater than what its
predecessor-in-interest had. The spring cannot rise higher than its
source.12 DBP merely stepped into the shoes of Litex as trustee of
the imported articles with an obligation to pay their value or to
return them on Prudential Bank’s demand. By its failure to pay or
return them despite Prudential Bank’s repeated demands and by
selling them to Lyon without Prudential Bank’s knowledge and
conformity, DBP became a trustee ex maleficio.

DISCUSSION
Recall our discussion before regarding trust receipts transactions,
goods are released by the entrustor to the trustee, on the the
latter’s execution of delivery of a trust receipt two-fold obligation
to hold the goods in trust for the purpose of selling the goods
and to turn over to the entrustor either the proceed or the
unsold goods. Now, by virtue of that trust receipt, Litex, although
in possession of those machineries, was not the owner of the
subject property, the articles were owned by Prudential bank, and
they are only held by Litex in trust, while it was allowed to sell the
items, Litex had no authority to dispose them or any part thereof,
through sale pledge or any other means, and take note of the
second requisite in 2085.

That the pledgor mortgagor should be the absolute owner of the

thing and that paragraph 3 thereof that the pledgor constituting
the pledge must have the free disposal of his property and in
the absence thereof, he be legally authorize for the purpose .Litex
had neither absolute ownership it did not have free disposal or
authority go freely dispose of the articles.Litex could not have
subjected them to mortgage their inclusion in the mortgage was
therefore void and no legal effect, no valid mortgage no vaild
foreclosure in an auction sale so, DBP was not a purchaser in
good faith because the Prudential already informed DBP of its
rights by virtue of the trust receipts nevertheless, DBP still
proceeded with the foreclosure sale of the properties covered by
the trust receipts, so again, not in good faith, this is also in
relation to the principle nemo dat quod non habet.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 32

CAVITE DEVT BANK VS SPS LIM

The Deed of Real Estate Mortgage entered into by the Jayme spouses
CDB NEVER ACQUIRED A VALID TITLE TO THE PROPERTY partake of a THIRD PARTY MORTGAGE under Art. 2085 (3) of the
BECAUSE THE FORECLOSURE SALE, BY VIRTUE OF WHICH, Civil Code which reads:
THE PROPERTY HAD BEEN AWARDED TO CDB AS HIGHEST
BIDDER, IS LIKEWISE VOID SINCE THE MORTGAGOR WAS THE FOLLOWING REQUISITES ARE ESSENTIAL TO THE
NOT THE OWNER OF THE PROPERTY FORECLOSED. CONTRACTS OF PLEDGE AND MORTGAGE: xxx (3) That the persons
constituting the pledge or mortgage have the free disposal of their
A foreclosure sale, though essentially a "forced sale," is still a sale property, and in the absence thereof, that they be legally authorized
in accordance with Art. 1458 of the Civil Code, under which the for the purpose.
mortgagor in default, the forced seller, becomes obliged to
transfer the ownership of the thing sold to the highest bidder Third persons who are not parties to the principal obligation may
who, in turn, is obliged to pay therefor the bid price in money or secure the latter by pledging or mortgaging their own property.
its equivalent. Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure sale. This is In the case of Lustan vs. CA, et al.,19 this Court recognized the
the reason Art. 208516 of the Civil Code, in providing for the abovecited provision and held that "so long as valid consent was
essential requisites of the contract of mortgage and pledge, given, the fact that the loans were solely for the benefit of (the
requires, among other things, that the mortgagor or pledgor be debtor) would not invalidate the mortgage with respect to
the absolute owner of the thing pledged or mortgaged, in petitioner’s property. In consenting thereto even granting that
anticipation of a possible foreclosure sale should the mortgagor petitioner may not be assuming personal liability for the debt, her
default in the payment of the loan. property shall nevertheless secure and respond for the performance of
the principal obligation."
THERE IS, HOWEVER, A SITUATION WHERE, DESPITE THE
FACT THAT THE MORTGAGOR IS NOT THE OWNER OF THE Clearly, the law recognizes instances when persons not directly parties
MORTGAGED PROPERTY, HIS TITLE BEING FRAUDULENT, to a loan agreement may give as security their own properties for the
THE MORTGAGE CONTRACT AND ANY FORECLOSURE SALE principal transaction
ARISING THEREFROM ARE GIVEN EFFECT BY REASON OF
PUBLIC POLICY. This is the doctrine of "The Mortgagee In THE SPOUSES WERE ASSISTED BY THEIR OWN LAWYER, ATTY.
Good Faith" based on the rule that all persons dealing with CIRILO SANCHEZ, IN ALL THEIR TRANSACTIONS, INCLUDING THE
property covered by a Torrens Certificate of Title, as buyers or ONES WITH ASIANCARS AND MBTC.
mortgagees, are not required to go beyond what appears on the
face of the title.17 The public interest in upholding the WITH THE ASSISTANCE OF A LAWYER AND CONSULTATION WITH
indefeasibility of a certificate of title, as evidence of the lawful THEIR LITERATE CHILDREN, THE SPOUSES THOUGH ILLITERATE
ownership of the land or of any encumbrance thereon, protects a COULD NOT FEIGN IGNORANCE OF THE STIPULATIONS IN THE
buyer or mortgagee who, in good faith, relied upon what appears DEED.
on the face of the certificate of title.
MANILA BANKING VS TEODORO
This principle is cited by petitioners in claiming that, as a
mortgagee bank, it is not required to make a detailed a DEED OF ASSIGNMENT OF RECEIVABLES FROM THE EMERGENCY
investigation of the history of the title of the property given as EMPLOYMENT ADMINISTRATION which provided that it was for
security before accepting a mortgage. and in consideration of certain credits, loans, overdrafts and other
credit accommodations extended to defendants as security for the
In this case, THERE IS NO EVIDENCE THAT CDB OBSERVED ITS payment of said sum and the interest thereon, and that defendants do
DUTY OF DILIGENCE IN ASCERTAINING THE VALIDITY OF hereby remise, release and quitclaim all its rights, title, and interest in
RODOLFO GUANSING'S TITLE. It appears that Rodolfo and to the accounts receivables. Further.
Guansing obtained his fraudulent title by executing an
Extra-Judicial Settlement of the Estate With Waiver where he (1) The title and right of possession to said accounts receivable is to
made it appear that he and Perfecto Guansing were the only remain in the assignee, and it shall have the right to collect the same
surviving heirs entitled to the property, and that Perfecto had from the debtor, and whatsoever the Assignor does in connection with
waived all his rights thereto. This self-executed deed should have the collection of said accounts, it agrees to do as agent and
placed CDB on guard against any possible defect in or question representative of the Assignee and in trust for said Assignee ;.
as to the mortgagor's title. Moreover, the alleged ocular
inspection report20 by CDB's representative was never formally RULING:
offered in evidence. Indeed, petitioners admit that they are aware
that the subject land was being occupied by persons other than
Rodolfo Guansing and that said persons, who are the heirs of It is evident that the ASSIGNMENT OF RECEIVABLES EXECUTED BY
Perfecto Guansing, contest the title of Rodolfo.21 APPELLANTS ON JANUARY 24, 1964 DID NOT TRANSFER THE
OWNERSHIP OF THE RECEIVABLES TO APPELLEE BANK and release
VDA DE JAYME VS CA
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 33

appellants from their loans with the bank incurred under

promissory notes Nos. 11487,11515 and 11699. No valid mortgage has been constituted plaintiff's favor, the alleged
deed of mortgage being a mere private document and not registered;
The Deed of Assignment provided that it was for and in moreover, it contains a stipulation (pacto comisorio) which is null and
consideration of certain credits, loans, overdrafts, and their credit void under Article 2088 of the Civil Code. Even assuming that the
accommodations in the sum of P10,000.00 extended to property was validly mortgaged to the plaintiff, his recourse was to
appellants by appellee bank, and as security for the payment of foreclose the mortgage, not to seek annulment of the sale.
said sum and the interest thereon; that appellants as assignors,
remise, release, and quitclaim to assignee bank all their rights, NOTE:
title and interest in and to the accounts receivable assigned (lst What is regarded as null and void is the stipulation you cannot just
paragraph). take the property pledged or mortgaged as what is proper thing is to
sell the property and apply the proceeds thereof. So you have to
observe the remedies provided by law because again this is to protect
The characters of the transaction between the parties is to be the debtor who was already constrained due to circumstances and by
determined by their intention, regardless of what language was virtue of the default of the principal debtor, again the remedy of the
used or what the form of the transfer was. If it was intended to creditor, mortgagee, pledgee is not to have ownership over the
secure the payment of money, it must be construed as a pledge. property transferred to him because that is pactum commisorium but
HOWEVER, EVEN THOUGH A TRANSFER, IF REGARDED BY to sell the property and the proceeds will apply.
ITSELF, APPELLATE TO HAVE BEEN ABSOLUTE, ITS OBJECT
AND CHARACTER MIGHT STILL BE QUALIFIED AND
EXPLAINED BY A CONTEMPORANEOUS WRITING ALCANTARA VS ALINEA
DECLARING IT TO HAVE BEEN A DEPOSIT OF THE PROPERTY
AS COLLATERAL SECURITY. It has been Id that a transfer of We have in this case a CONTRACT OF LOAN AND A PROMISE OF
property by the debtor to a creditor, even if sufficient on its farm SALE OF A HOUSE AND LOT, the price of which should be the
to make an absolute conveyance, should be treated as a pledge if amount loaned, if within a fixed period of time such amount should
the debt continues in existence and is not discharged by the not be paid by the debtor-vendor of the property to the
transfer, and that accordingly, the use of the terms ordinarily creditor-vendee of same.
exporting conveyance, of absolute ownership will not be given
that effect in such a transaction if they are also commonly used in EITHER ONE OF THE CONTRACTS ARE PERFECTLY LEGAL AND
pledges and mortgages and therefore do not unqualifiedly BOTH ARE AUTHORIZED RESPECTIVELY BY ARTICLES 1451, 1740,
indicate a transfer of absolute ownership, in the absence of clear AND 1753, AND THOSE FOLLOWING, OF THE CIVIL CODE. The fact
and ambiguous language or other circumstances excluding an that the parties have agreed at the same time, in such a manner that
intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 the fulfillment of the promise of sale would depend upon the
[1982]). nonpayment or return of the amount loaned, has not produced any
charge in the nature and legal conditions of either contract, or any
DEFINITELY, THE ASSIGNMENT OF THE RECEIVABLES DID essential defect which would tend to nullify the same.
NOT RESULT FROM A SALE TRANSACTION.
If the promise of sale is not vitiated because, according to the
Obviously, the deed of assignment was intended as collateral agreement between the parties thereto, the price of the same is to be
security for the bank loans of appellants, as a continuing guaranty the amount loaned and not repaid, neither would the loan be null or
for whatever sums would be owing by defendants to plaintiff, as illegal, for the reason that the added agreement provides that in the
stated in stipulation No. 9 of the deed. event of failure of payment the sale of property as agreed will take
effect, the consideration being the amount loaned and not paid. No
In case of doubt as to whether a transaction is a pledge or a article of the Civil Code, under the rules or regulations of which such
dation in payment, the presumption is in favor of pledge, the double contract was executed, prohibits expressly, or by inference
latter being the lesser transmission of rights and interests (Lopez from any of its provisions, that an agreement could not be made in the
v. Court of Appeals, supra). form in which the same has been executed; on the contrary, article
1278 of the aforesaid code provides that "contracts shall be binding,
Ma’am: whatever may be the form in which they may have been executed,
What is the effect of this assignment of credit? An Assignment of provided the essential conditions required for their validity exist." This
Credit does not amount to Pactum Commissorium, there is no legal prescription appears firmly sustained by the settled practice of
automatic appropriation. The agreement, here, is that by virtue of the courts.
which the owner of the credit by legal cause, without need of the
consent of the debtor, transfers his credit and its accessory rights THE PROPERTY, THE SALE OF WHICH WAS AGREED TO BY THE
to another known as the assignee, who acquires the power to DEBTORS, DOES NOT APPEAR MORTGAGED IN FAVOR OF THE
enforce it to the same extent as the assignor could enforce it CREDITOR, BECAUSE IN ORDER TO CONSTITUTE A VALID
against the debtor. MORTGAGE IT IS INDISPENSABLE THAT THE INSTRUMENT BE
REGISTERED IN THE REGISTER OF PROPERTY, in accordance with
HECHANOVA VS ADIL article 1875 of the Civil Code, and the document of contract, Exhibit A,
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 34

does not constitute a mortgage, nor could it possibly be a The prohibition on pactum commissorium stipulations is provided for
mortgage, for the reason of said document is not vested with the by Article 2088 of the Civil Code:
character and conditions of a public instrument.
Art. 2088. The creditor cannot appropriate the things given by way of
The contract ( pactum commissorium) referred to in Law 41, title 5, pledge or mortgage, or dispose of the same. Any stipulation to the
and law 12, title 12, of the fifth Partida, and perhaps included in contrary is null and void.
the prohibition and declaration of nullity expressed in articles
1859 and 1884 of the Civil Code, indicates the existence of the The aforequoted provision furnishes the TWO ELEMENTS FOR
contracts of mortgage or of pledge or that of antichresis, none of PACTUM COMMISSORIUM TO EXIST:
which have coincided in the loan indicated herein. (1) that there should be a pledge or mortgage wherein a property is
pledged or mortgaged by way of security for the payment of the
It was agreed between plaintiff and defendants herein that if principal obligation; and (2) that there should be a stipulation for an
defendants should not pay the loan of 480 pesos in January, 1905, automatic appropriation by the creditor of the thing pledged or
the property belonging to the defendants and described in the mortgaged in the event of non-payment of the principal obligation
contract should remain sold for the aforesaid sum, and such within the stipulated period.
agreement must be complied with, inasmuch as there is no
ground in law to oppose the compliance with that which has been Second, THERE IS NO CASE OF AUTOMATIC APPROPRIATION OF
agreed upon, having been so acknowledged by the obligated THE PROPERTY BY BAYANIHAN. When the SPOUSES defaulted in
parties. their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific
The supreme court of Spain, applying the aforementioned laws of performance. The trial court rendered favorable judgment for
Spanish origin to a similar case, establishes in its decision of BAYANIHAN and ordered the SPOUSES to pay the balance of their
January 16, 1872, the following legal doctrine: obligation and in case of failure to do so, to execute a deed of
assignment over the property involved in this case. The SPOUSES
Basing the complaint upon the obligation signed by the debtor, elected to execute the deed of assignment pursuant to said judgment.
which judicially recognized his signature; and after confessing to
have received from the plaintiff a certain amount, binding himself CLEARLY, THERE WAS NO AUTOMATIC VESTING OF TITLE ON
to return same to the satisfaction of the plaintiff within the term BAYANIHAN BECAUSE IT TOOK THE INTERVENTION OF THE
of four years, or in case of default to transfer direct domain of the TRIAL COURT TO EXACT FULFILLMENT OF THE OBLIGATION,
properties described in the obligation and to execute the WHICH, BY ITS VERY NATURE IS ". . anathema to the concept of
necessary sale; and the term having expired and the aforesaid pacto commissorio"
amount not having been paid, said plaintiff has his right free from
impediment to claim same against the heirs of the debtor. And even granting that the original agreement between the parties
had the badges of pactum commissorium, the deed of assignment
The document of contract has been recognized by the defendant does not suffer the same fate as this was executed pursuant to a valid
Alinea and by the witnesses who signed same with him, being judgment in Civil Case No. 80420 as can be gleaned from its very terms
therefore an authentic and efficacious document, in accordance and conditions
with article 1225 of the Civil Code; and as the amount loaned has
not been paid and continues in possession of the debtor, it is only Note:
just that the promise of sale be carried into effect, and the (2) requisites for there to be a Pactum Commissorium:
necessary instrument be executed by the vendees.
1.There must be a pledge, mortgage or antichresis wherein the
property is pledged or mortgaged by way of security for the payment
Here: what really existed was a promise of sale that if alinea will
of the principal obligation;
nto be able to pay the loan, the promise of sale would push
through - no automatic appropriation. 2.There is a stipulation for automatic appropriation in case of
non-payment within a fixed period.
UY TONG VS CA
In the absence of any of these requirements, we cannot say that the
stipulation is Pactum Commissorium.
RULING: NO
Pactum Comisorio Dacion en pago
I. In support of the first argument, petitioners bring to the fore the special mode of payment there is a stipulation which
contract entered into by the parties whereby petitioner Kho Po grants the automatic
Giok agreed that the apartment in question will automatically acquisition by the creditor of
become the property of private respondent BAYANIHAN upon the property of the debtor.
her mere failure to pay her obligation. This agreement, according
to the petitioners is in the nature of a pactum commissorium there is a mortgage or pledge it extinguishes an existing
which is null and void, hence, the deed of assignment which was of a property as a security for obligation or an existing
the principal obligation monetary debt.
borne out of the same agreement suffers the same fate.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 35

PHILNICO VS PMO IT HAS BEEN CONSISTENTLY HELD THAT THE PRESENCE OF EVEN
ONE OF THE CIRCUMSTANCESENUMERATED IN ART. 1602 OF THE
RULING: NEW CIVIL CODE IS SUFFICIENT TO DECLARE A CONTRACT OF
SECTION 8.02 OF THE ARDA CONSTITUTES PACTUM SALE WITH RIGHT TO REPURCHASE AN EQUITABLE MORTGAGE.
COMMISSORIUM AND, THUS, NULL AND VOID FOR BEING This is so because pacto de retrosales with the stringent and onerous
CONTRARY TO ARTICLE 2088 OF THE CIVIL CODE. effects that accompany them are not favored. In case of doubt, a
Article 1305 of the Civil Code allowscontracting parties to contract purporting to be a sale with right to repurchase shall be
establish such stipulation, clauses, terms,and conditions asthey construed as an equitable mortgage.
may deem convenient, provided, however, that theyare not
contrary to law, morals, good customs, public order, or public A MORTGAGEE’S MERE ACT OF REGISTERING THE MORTGAGED
policy. PROPERTY IN HIS OWN NAME UPON THE MORTGAGOR’S
FAILURE TO REDEEM THE PROPERTY AMOUNTED TO THE
PACTUM COMMISSORIUMis among the contractual stipulations EXERCISE OF THE PRIVILEGE OF A MORTGAGEE IN A PACTUM
that are deemed contrary to law. It is defined as "a stipulation COMMISSORIUM. Obviously, from the nature of the transaction,
empowering the creditor to appropriate the thing given as applicant’s predecessor-in-interest is a mere mortgagee, and
guaranty for the fulfillment of the obligation in the event the ownership of the thing mortgaged is retained by Basilia Beltran, the
obligor fails to live up to his undertakings, without further mortgagor. The mortgagee, however, may recover the loan, although
formality, such as foreclosure proceedings, and a public sale."33 It the mortgage document evidencing the loan was nonregistrable being
is explicitly prohibited under Article 2088 of the Civil Code which a purely private instrument. Failure ofmortgagor to redeem the
provides: property does not automatically vest ownership of the property to the
mortgagee, which would grant the latter the right to appropriate the
ART. 2088. The creditor cannot appropriate the things given by thing mortgaged or dispose of it.
way of pledge or mortgage, or dispose of them. Any stipulation
to the contrary is null and void. This violates the provision of Article 2088 of the New Civil Code, which
reads:
There are two elements for pactum commissoriumto exist:
(1) that there should be a pledge or mortgage wherein a property The creditor cannot appropriate the things given by way of pledge or
is pledged or mortgaged by way of security for the payment of mortgage, or dispose by them. Any stipulation to the contrary is null
the principal obligation; and (2) that there should be a stipulation and void.
for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of nonpayment of the THE ACT OF APPLICANT INREGISTERING THE PROPERTY IN HIS
principal obligation within the stipulated period. OWN NAME UPON MORTGAGOR’SFAILURE TO REDEEM THE
PROPERTY WOULD AMOUNT TO A PACTUM
BOTH ELEMENTS OF PACTUM COMMISSORIUMARE PRESENT COMMISSORIUMWHICH IS AGAINST GOOD MORALSAND PUBLIC
IN THE INSTANT CASE: POLICY.
(1) By virtue of the Pledge Agreement dated May 2,1997, PIC
pledged its PPC shares of stock in favor of PMO as security for THUS, IN THE CASE AT BAR, THE STIPULATIONS IN THE
the fulfillment of the former’s obligations under the ARDA dated PROMISSORY NOTES PROVIDING THAT, UPON FAILURE OF
May 10, 1996 and the Pledge Agreement itself; and RESPONDENT SPOUSES TO PAY INTEREST, OWNERSHIP OF THE
PROPERTY WOULD BE AUTOMATICALLY TRANSFERRED TO
(2) There is automatic appropriation as under Section 8.02 of the PETITIONER A. FRANCISCO REALTY AND THE DEED OF SALE IN
ARDA, in the event of default by PIC, title to the PPC shares of ITS FAVOR WOULD BE REGISTERED, ARE IN SUBSTANCE A
stock shall ipso factorevert from PIC to PMO without need of PACTUM COMMISSORIUM. They embody the two elements of
demand. pactum commissoriumas laid down in Uy Tong v. Court of Appeals, x x
x. (Citations omitted.)
THE PLEDGE AGREEMENT SECURES, FOR THE BENEFIT OF
PMO, THE PERFORMANCE BY PIC OF ITS OBLIGATIONS AMONG THE REQUIREMENTS OF A CONTRACT OFPLEDGE IS
UNDER BOTH THE ARDA AND THE PLEDGE AGREEMENT THAT THE PLEDGOR IS THE ABSOLUTE OWNER OF THE THING
ITSELF. It is with the execution of the Pledge Agreement that PIC PLEDGED.37 Based on the provisions of the ARDA, ownership of the
turned over possession of its certificates of shares of stock in PPC PPC shares ofstock had passed on to PIC, hence, enabling PIC to
to PMO. As the RTC pertinently observed in its Order dated June pledge the very same shares to PMO. In accordance with Section
19, 2003, there had already been a shift in the relations of PMO 2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to PIC all
and PIC, from mere seller and buyer, to creditor-pledgee and rights, title, and interests in and to the PPC sharesof stock, and
debtor-pledgor. Having enjoyed the security and benefits of the delivered to PIC the certificates for said shares for cancellation and
Pledge Agreement, PMO cannot now insist on applying Section replacement of new certificates already in the name ofPIC. In addition,
8.02 of the ARDAand conveniently and arbitrarily exclude and/or Section 2.07(b) of the ARDA explicitly declares that PIC asbuyer shall
ignore the Pledge Agreement so as to evade the prohibition exercise all the rights, including the right to vote, of a shareholder in
against pactum commissorium. respect of the PPC shares of stock.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 36

PMO CANNOT MAINTAIN THAT THE OWNERSHIP OF THE That the questioned contracts were freely and voluntarily executed by
PPC SHARES OF STOCK DID NOT PASS ON TO PIC, BUT IN petitioners and respondent is of no moment, pactum commissorium
THE SAME BREATH CLAIM THAT NON-PAYMENT BY PIC OF being void for being prohibited by law.
THE INSTALLMENTS DUE ON THE PURCHASE PRICE IS A
RESOLUTORY CONDITION FOR THE CONTRACT OF SALE – NOTE: In this case, while it was denominated as a Dation in Payment,
THESE TWO ARGUMENTS ARE ACTUALLY CONTRADICTORY. respondent here, in effect automatically acquires ownership of the
properties upon failure to pay the obligation within the stipulated
SPS ONG VS ROBAN LE NDING period. The alienation of the properties was by way of security and not
by satisfying the debt. So the Dation in Payment did not extinguish
This Court finds that the Memorandum of Agreement and Dacion petitioner’s obligation to respondent. Being Pactum Commissorium, it
in Payment constitute pactum commissorium, which is prohibited is considered void for being prohibited by law.
under Article 2088 of the Civil Code which provides:
SPS PEN VS JULIAN
THE CREDITOR CANNOT APPROPRIATE THE THINGS GIVEN ISSUES
BY WAY OF PLEDGE OR MORTGAGE, OR DISPOSE OF THEM.
ANY STIPULATION TO THE CONTRARY IS NULL AND VOID." (1) Is the deed of sale void by reason of pactum commissorium? YES
Was there a valid dacion en pago? NO
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property RULING
without the need of any foreclosure proceedings,30 are:
(1) there should be a property mortgaged by way of security for Article 2088 of the Civil Code prohibits the creditor from appropriating
the payment of the principal obligation, and the things given by way of pledge or mortgage, or from disposing of
(2) there should be a stipulation for automatic appropriation by them; any stipulation to the contrary is null and void.
the creditor of the thing mortgaged in case of non-payment of
the principal obligation within the stipulated period.31 THE ELEMENTS FOR PACTUM COMMISSORIUM to exist are as
follows, to wit: (a) that there should be a pledge or mortgage wherein
IN THE CASE AT BAR, the Memorandum of Agreement and the property is pledged or mortgaged by way of security for the payment
Dacion in Payment contain no provisions for foreclosure of the principal obligation; and (b) that there should be a stipulation
proceedings nor redemption. Under the Memorandum of for an automatic appropriation by the creditor of the thing pledged or
Agreement, the failure by the petitioners to pay their debt within mortgaged in the event of non-payment of the principal obligation
the one-year period gives respondent the right to enforce the within the stipulated period.
Dacion in Payment transferring to it ownership of the properties
covered by TCT No. 297840. Respondent, in effect, automatically THE FIRST ELEMENT WAS PRESENT considering that the property of
acquires ownership of the properties upon petitioners’ failure to the respondents was mortgaged by Linda in favor of Adelaida as
pay their debt within the stipulated period. security for the farmer's indebtedness.

RESPONDENT ARGUES THAT THE LAW RECOGNIZES DACION AS TO THE SECOND, the authorization for Adelaida to appropriate
EN PAGO AS A SPECIAL FORM OF PAYMENT WHEREBY THE the property subject of the mortgage upon Linda's default was implied
DEBTOR ALIENATES PROPERTY TO THE CREDITOR IN from Linda's having signed the blank deed of sale simultaneously with
SATISFACTION OF A MONETARY OBLIGATION. her signing of the real estate mortgage. The haste with which the
transfer of property was made upon the default by Linda on her
IN A TRUE DACION EN PAGO, THE ASSIGNMENT OF THE obligation, and the eventual transfer of the property in a manner not in
PROPERTY EXTINGUISHES THE MONETARY DEBT. the form of a valid dacion en pago ultimately confirmed the nature of
the transaction as a pactum commissorium.
In the case at bar, the alienation of the properties was by way of
security, and not by way of satisfying the debt. THE PETITIONERS HAVE THEORIZED THAT THEIR TRANSACTION
WITH THE RESPONDENTS WAS A VALID DACION EN PAGO by
The Dacion in Payment did not extinguish petitioners’ obligation highlighting that it was Linda who had offered to sell her property
to respondent. On the contrary, under the Memorandum of upon her default. Their theory cannot stand scrutiny. Dacion en pago is
Agreement executed on the same day as the Dacion in Payment, in the nature of a sale because property is alienated in favor of the
petitioners had to execute a promissory note for ₱5,916,117.50 creditor in satisfaction of a debt in money.
which they were to pay within one year.
For a valid dacion en pago to transpire, however, the attendance of the
Respondent cites Solid Homes, Inc. v. Court of Appeals36 where following elements must be established, namely:
this Court upheld a Memorandum of Agreement/Dacion en (a) the existence of a money obligation;
Pago.37 That case did not involve the issue of pactum (b) the alienation to the creditor of a property by the debtor with the
commissorium.38 consent of the former; and
(c) the satisfaction of the money obligation of the debtor.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 37

To have a valid dacion en pago, therefore, the alienation of the unenforceable against her, it would be wholly unjust, by declaring its
property must fully extinguish the debt. Yet, the debt of the preference over a debt acknowledged by and conclusive against her,
respondents subsisted despite the transfer of the property in to require that said funds be paid over to the holder of said document.
favor of Adelaida. That would be to require her to pay a debt which has not only not
been shown to be enforceable against her but which, as a witness for
To reach that moment of perfection, the parties must agree on the defendant Martinez on the trial of this cause, she expressly and
the same thing in the same sense, so that their minds meet as to vehemently repudiated as a valid claim against her.
all the terms. They must have a distinct intention common to both
and without doubt or difference; until all understand alike, there Note:
can be no assent, and therefore no contract. The minds of parties While it is true that there was a pledge, contract, evidence in a public
must meet at every point; nothing can be left open for further instrument, that pledge was ineffective. The document of pledge in a
arrangement. So long as there is any uncertainty or indefiniteness, public instrument contains an admission of debt. It is in a public
or future negotiations or considerations to be had between the instrument but again there could be no valid contract of pledge.
parties, there is not a completed contract, and in fact, there is no
contract at all. A pledge of personal property to secure an indebtedness is without
force or effect unless the property pledged is delivered to the pledgee
In a sale, the contract is perfected at the moment when the seller or to some third person agreed upon as provided in Article 2093. Now
obligates herself to deliver and to transfer ownership of a thing or where a pledge is in the form of a public instrument, as in the case of
right to the buyer for a price certain, as to which the latter agrees. McMiking, duly executed as such, contains an admission of the
indebtedness in a specified amount to secure which debt said pledge
THE ABSENCE OF THE CONSIDERATION FROM LINDA'S COPY was made, while the pledge is void for failure of delivery, nevertheless
OF THE DEED OF SALE WAS CREDIBLE PROOF OF THE LACK it could be considered as an evidence of indebtedness and appearing
OF AN ESSENTIAL REQUISITE FOR THE SALE. IN OTHER in a public instrument, it would take preference over other creditors of
WORDS, THE MEETING OF THE MINDS OF THE PARTIES SO Maria Aniversario, but not with regard to that specific property, just an
VITAL IN THE PERFECTION OF THE CONTRACT OF SALE DID evidence of indebtedness.
NOT TRANSPIRE.
The general rule here is that the kind of property involved is personal
And, even assuming that Linda's leaving the consideration blank property that can actually be delivered, actual possession can be
implied the authority of Adelaida to fill in that essential detail in transferred to the pledgee. The creditor himself will take possession of
the deed of sale upon Linda's default on the loan, the conclusion the thing or a third person by common agreement, or as agreed by the
of the CA that the deed of sale was a pactum commisorium still creditor and debtor.
holds, for, as earlier mentioned, all the elements of pactum
commisorium were present. CALTEX VS CA

MCMIKING VS MARTINEZ Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
The court below found with the contention of the said Pedro negotiated when it is transferred from one person to another in such a
Martinez, declared a preference in his favor, and ordered the manner as to constitute the transferee the holder thereof, 21 and a
sheriff to pay over the said funds in consonance therewith. An holder may be the payee or indorsee of a bill or note, who is in
appeal was taken from said judgment. possession of it, or the bearer thereof.

The conclusion of the court below that the property was not In the present case, however, there was no negotiation in the sense of
delivered in accordance with the provisions of article 1863 of the a transfer of the legal title to the CTDs in favor of petitioner in which
Civil Code is sustained by the proofs. His conclusion that the situation, for obvious reasons, mere delivery of the bearer CTDs would
pledge was ineffective against Martinez is correct. have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard the fact that the
It appears, however, that the document of pledge is a public amount involved was not disclosed) could at the most constitute
document which contains an admission of indebtedness. In other petitioner only as a holder for value by reason of his lien.
words, while it is intended to be a pledge, it is also a credit
which appears in a public document. Accordingly, A NEGOTIATION FOR SUCH PURPOSE CANNOT BE
EFFECTED BY MERE DELIVERY OF THE INSTRUMENT SINCE,
Article 1924, paragraph 3, letter a, is therefore applicable; and, NECESSARILY, THE TERMS THEREOF AND THE SUBSEQUENT
said public document antedating the judgment of defendant DISPOSITION OF SUCH SECURITY, IN THE EVENT OF
Martinez, takes preference thereover. The validity of that NON-PAYMENT OF THE PRINCIPAL OBLIGATION, MUST BE
document in so far as it shows an indebtedness against Maria CONTRACTUALLY PROVIDED FOR.
Aniversario and its effectiveness against her have not, however,
been determined. She is not a party to this action. No judgment The pertinent law on this point is that where the holder has a lien on
can be rendered affecting her rights or liabilities under said the instrument arising from contract, he is deemed a holder for value
instrument. If said instrument is invalid or for any other cause to the extent of his lien. 23 As such holder of collateral security, he
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 38

would be a pledgee but the requirements therefor and the effects

thereof, not being provided for by the Negotiable Instruments Although the pledgee or the assignee, Litton, Sr. did not ipso facto
Law, shall be governed by the Civil Code provisions on pledge of become the creditor of private respondent Mendoza, the pledge being
incorporeal rights, 24 which inceptively provide: valid, the incorporeal right assigned by Tan in favor of the former can
only be alienated by the latter with due notice to and consent of Litton,
Art. 2095. Incorporeal rights, evidenced by negotiable Sr. or his duly authorized representative. To allow the assignor to
instruments, . . . may also be pledged. The instrument proving the dispose of or alienate the security without notice and consent of the
right pledged shall be delivered to the creditor, and if negotiable, assignee will render nugatory the very purpose of a pledge or an
must be indorsed. assignment of credit.

Art. 2096. A pledge shall not take effect against third persons if a Moreover, under Article 1634, 24 the debtor has a corresponding
description of the thing pledged and the date of the pledge do obligation to reimburse the assignee, Litton, Sr. for the price he paid or
not appear in a public instrument. for the value given as consideration for the deed of assignment. Failing
in this, the alienation of the litigated credit made by Tan in favor of
Aside from the fact that the CTDs were ONLY DELIVERED BUT private respondent by way of a compromise agreement does not bind
NOT INDORSED, the factual findings of respondent court quoted the assignee, petitioner herein.
at the start of this opinion show that petitioner failed to produce
any document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. YULIONGSIU VS PNB

The mere delivery of the CTDs did not legally vest in petitioner RULING:
any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere for purposes of showing the transfer of control to the pledgee, delivery
rule of adjective law prescribing the mode whereby proof may be to him of the keys to the warehouse sufficed. In other words, the type
made of the date of a pledge contract, but a rule of substantive of delivery will depend upon the nature and the peculiar circumstances
law prescribing a condition without which the execution of a of each case. The parties here agreed that the vessels be delivered by
pledge contract cannot affect third persons adversely. the "pledgor to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of this case and
Note: the nature of the objects pledged, i.e., vessels used in maritime
Take note here that in this case of Caltex vs CA, there was also a business, such delivery is sufficient.
reference to the provisions in your negotiable instruments law.
Notice here that it was emphasized that the negotiable Since the defendant bank was, pursuant to the terms of
instrument, in this case, the certificate of time deposit, is a bearer pledge contract, in full control of the vessels thru the plaintiff, the
instrument. So it can be negotiated by delivery. While it can be former could take actual possession at any time during the life of the
negotiated by delivery, technically, it was not negotiated in favor pledge to make more effective its security. Its taking of the vessels
of Caltex as it was delivered to Caltex to guarantee the purchases therefore on April 6, 1948, was not unlawful. Nor was it unjustified
of fuel products by Mr. Dela Cruz. So here, although the CTTs are considering that plaintiff had just defrauded the defendant bank in the
bearer instruments, a valid negotiation for the true purpose and huge sum of P184,000.
agreement between Caltex and Dela Cruz requires both delivery
and indorsement in the sense that it was delivered for the security The stand We have taken is not without precedent. The
for the purchases of fuel products. Supreme Court of Spain, in a similar case involving Art. 1863 of the old
Civil Code, 13 has ruled: 14
ESTATE OF LITTON VS MENDOZA
English:
The fact that the deed of assignment was done by way of
That while the nature of the pledge contract consists in passing
securing or guaranteeing Tan's obligation in favor of George
things to the creditor or a third party and not remaining in the
Litton, Sr., as observed by the appellate court, will not in any way
debtor's, as has been the case in the present case, it is true that all
alter the resolution on the matter.
interested parties, that is Creditor, debtor and Company, agreed
to continue the cars held by the debtor so as not to suspend the
The validity of the guaranty or pledge in favor of Litton has not
traffic, and the right of non-use of the pledge belongs to the
been questioned. Our examination of the deed of assignment
debtor, and to leave the thing under his responsibility to the
shows that it fulfills the requisites of a valid pledge or mortgage.
creditor, and both agreed to Believing it useful for the contracting
22 Although it is true that Tan may validly alienate the litigatious
parties, and these do not claim damages, was not infringed,
credit as ruled by the appellate court, citing Article 1634 of the
among others this article.
Civil Code, said provision should not be taken to mean as a grant
of an absolute right on the part of the assignor Tan to
Discussion:
indiscriminately dispose of the thing or the right given as security.
Here, the defendant bank was the actual pledgee; therefore, it was
The Court rules that the said provision should be read in
entitled to the actual possession of the vessels subject of the pledge.
consonance with Article 2097 of the same code.
The possession of Yuliongsiu who is the pledger, was expressly made
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 39

subject to the order of the pledgee.

There is no showing that petitioner made any attempt to foreclose or
Again, the SC took into consideration the delivery of the keys in a sell the shares through public or private auction, as stipulated in the
warehouse. For purposes of showing the transfer of control to the contracts of pledge and as required by Article 2112 of the Civil Code.
pledgee, delivery to him of the keys to the warehouse sufficed. In Therefore, ownership of the shares could not have passed to him. The
other words, the type of delivery will depend upon the nature and pledgor remains the owner during the pendency of the pledge and
the peculiar circumstances of each case. prior to foreclosure and sale, as explicitly provided by Article 2103 of
the same Code:
Take note of this exception although it is very rare that this will be
applied because of the clear provision in Art. 2110. But is it UNLESS THE THING PLEDGED IS EXPROPRIATED, THE DEBTOR
possible for temporary return which will not extinguish the CONTINUES TO BE THE OWNER THEREOF.
obligation? Yes. Example, the subject of a pledge is cellphone.
You want to delete the pictures. So, hiramin mo muna. In this Nevertheless, the creditor may bring the actions which pertain to the
instance, it’s only a temporary return of the thing which will not owner of the thing pledged in order to recover it from, or defend it
necessarily extinguish the contract of pledge. against a third person.

The pledger and pledgee may stipulate the thing pledge shall be NOTE: The prescriptive period within which to demand the return of
in the possession of a third person but it cannot be back to the the thing pledged should begin to run only after the payment of the
pledger. loan and a demand for the thing has been made, because it is only
then that respondents acquire a cause of action for the return of the
LIM TAY VS CA thing pledged.

ISSUE: WON the ownership of the shares of stock was transferred By virtue of prescription, laches or lapse of time, still, Tay could not be
to Tay despite lack of foreclosure of the thing pledged. NO considered as the owner of the shares of stock. It is in fact Lim Tay
who may be guilty of laches. He had all the time to demand payment
RULING: of the debt. More important, under the contracts of pledge, petitioner
Without Foreclosure and Purchase at Auction, Pledgor Is Not the could have foreclosed the pledges as soon as the loans became
Owner of Pledged Shares due. But for still unknown or unexplained reasons, he failed to do so,
preferring instead to pursue his baseless claim to ownership.
At the outset, it must be underscored that petitioner did not
acquire ownership of the shares by virtue of the contracts of INSULAR LIFE VS YOUNG
pledge. Article 2112 of the Civil Code states: ISSUE: WON the foreclosure sale is valid. YES

The creditor to whom the credit has not been satisfied in due time, RULING:
may proceed before a Notary Public to the sale of the thing
pledged. This sale shall be made at a public auction, and with MOA PROVIDES
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be "1. Insular Life and the Pension Fund hereby agree to purchase
held. If at the first auction the thing is not sold, a second one with from the Vendor and the Vendor agrees to convey, transfer,
the same formalities shall be held; and if at the second auction assign EIGHT HUNDRED THIRTY THOUSAND EIGHT HUNDRED
there is no sale either, the creditor may appropriate the thing SIXTY (830,860) Common Shares and THREE HUNDRED ELEVEN
pledged. In this case he shall be obliged to give an acquittance THOUSAND FIVE HUNDRED SEVENTY TWO (311,572) Common
for his entire claim. Shares of Home Bankers Savings and Trust Co., respectively,
Insular Life and the Pension Fund, or to such person designated
Furthermore, the contracts of pledge contained a common by Insular Life or the Pension Fund, for a total consideration of
proviso, which we quote again for the sake of clarity: ONE HUNDRED NINETY-EIGHT MILLION PESOS
(₱198,000,000.00), subject to the following terms and conditions
3. In the event of the failure of the PLEDGOR to pay the amount and representations and warranties made by the Vendor:
within a period of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose the pledge upon the the foregoing provisions of the MOA negate the existence of a
said shares of stock hereby created by selling the same at public perfected contract of sale. The MOA is MERELY A CONTRACT TO
or private sale with or without notice to the PLEDGOR, at which SELL since the parties therein specifically undertook to enter into a
sale the PLEDGEE may be the purchaser at his option; and "the contract of sale if the stipulated conditions are met and the
PLEDGEE is hereby authorized and empowered at his option to representation and warranties given by Young prove to be true. The
transfer the said shares of stock on the books of the corporation obligation of petitioner Insular Life to purchase, as well as the
to his own name, and to hold the certificate issued in lieu thereof concomitant obligation of Young to convey to it the shares, are subject
under the terms of this pledge, and to sell the said shares to issue to the fulfillment of the conditions contained in the MOA.
to him and to apply the proceeds of the sale to the payment of
the said sum and interest, in the manner hereinabove provided;
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 40

THE COURT OF APPEALS ALSO ERRED IN DECLARING THAT The reviewed decision further assumes that the extinctive effect of the
THE AUCTION SALE IS VOID SINCE PETITIONERS FAILED TO sale of the pledged chattels must be derived from stipulation. This is
SEND A SEPARATE NOTICE FOR THE SECOND AUCTION. incorrect, because Article 2115, in its last portion, clearly establishes
that the extinction of the principal obligation supervenes by operation
Article 2112 of the Civil Code provides: of imperative law that the parties cannot override:

"The creditor to whom the credit has not been satisfied in due If the price of the sale is less, neither shall the creditor be entitled to
time, may proceed before a Notary Public for the sale of the thing recover the deficiency notwithstanding any stipulation to the contrary.
pledged. The sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a The provision is clear and unmistakable, and its effect can not be
proper case, stating the amount for which the public sale is to be evaded. By electing to sell the articles pledged, instead of suing on the
held. If at the first auction the thing is not sold, a second one with principal obligation, the creditor has waived any other remedy, and
the same formalities shall be held; and if at the second auction must abide by the results of the sale. No deficiency is recoverable.
there is no sale either, the creditor may appropriate the thing
pledged. In this case he shall be obliged to give an acquittance It is well to note that the rule of Article 2115 is by no means unique. It
for his entire claim." is but an extension of the legal prescription contained in Article 1484(3)
of the same Code, concerning the effect of a foreclosure of a chattel
There is no prohibition contained in the law against the sending mortgage constituted to secure the price of the personal property sold
of one notice for the first and second public auction as was done in installments, and which originated in Act 4110 promulgated by the
here by petitioner Insular Life. The purpose of the law in requiring Philippine Legislature in 1933.
notice is to sufficiently apprise the debtor and the pledgor that
the thing pledged to secure payment of the loan will be sold in a Note:
public auction and the proceeds thereof shall be applied to satisfy You have other remedies under the law. You can file an action for
the debt. collection of sum of money wherein you could really collect the whole
amount that is due. And what happens to the thing pledged? You can
When petitioner Insular Life sent a notice to Young informing him attach it as long as you have the grounds for attachment. Or even if
of the public auction scheduled on October 28, 1991, and a you do not want to attach, subsequently, you can subject the
second auction on the next day, October 29, in the event that the properties the things pledged to a writ of execution. Pero at least kung
shares are not sold on the first auction, the purpose of the law ganoon yung ginawa mo, although it may take longer than following
was achieved. We thus reject respondents' argument that the the procedure in Art. 2112, you can assure that you can collect the
term "second one" refers to a separate notice which requires the whole amount of the obligation. Again, weigh the pros and cons
same formalities as the first notice. whether you’d want to avail of the remedy in Art. 2112 in selling the
property subject of the pledge.
Note: based on recit - there must be a notice of the exact date of
the first and second sale, but no requisite that there be two
notices - pwede isa lang.

MANILA SURETY VS VELAYO

Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said
amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary.

The accessory character is of the essence of pledge and mortgage.

As stated in Article 2085 of the 1950 Civil Code, an essential
requisite of these contracts is that they be constituted to secure
the fulfillment of a principal obligation, which in the present case
is Velayo's undertaking to indemnify the surety company for any
disbursements made on account of its attachment counterbond.
Hence, the fact that the pledge is not the principal agreement is
of no significance nor is it an obstacle to the application of Article
2115 of the Civil Code.
Credit Transactions Case Summaries| 2nd exam| Anastasia Beaverhausen 41