G.R. No.

L-26473, February 29, 1972

REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLEE, VS. PAL-FOX LUMBER CO., INC.
& FAR EASTERN SURETY & INSURANCE COMPANY, INC., DEFENDANTS, FAR EASTERN
SURETY & INSURANCE CO., INC., DEFENDANT-APPELLANT; FAR EASTERN SURETY &
INSURANCE CO., INC., THIRD-PARTY PLAINTIFF-APPELLANT, VS. GASPAR PALANCA &
JOSEPH LEE, THIRD-PARTY DEFENDANTS.
MAKALINTAL, J.:
Doctrine:
'If it (the guaranty) be simple or indefinite, it shall comprise not only the principal
obligation but also all its accessories, including judicial costs, provided with respect
to the latter, that the guarantor shall only be liable for those costs incurred after he
has been judicially required to pay.' (ltalics supplied)"
Facts:
Pal-Fox Lumber Co., was guaranteed by Far Eastern Surety & Insurance Co., Inc to
guaranty faithful compliance by the Pal-Fox with all the provisions of the Forest Law
and National Internal Revenue Code, as well as the "prompt and complete payment
of all charges lawfully accruing on the forest products cut or gathered by (Pal-Fox
Lumber Co., Inc.), and of all fines and penalties imposed in accordance with the
provisions of law"
In the CFI:
BIR in claiming that the said Lumber Company is indebted to it in the amount of
P11,851.56 (under Forestry Bond No. 7004) , instituted an action before the CFI of
Manila (Civ Case No. 32386) seeking to recover, jointly and severally, from Pal-Fox
and Eastern Surety &. Insurance Co., Inc.the sum of P5,000.00 plus interest from the
filing of the complaint, and from the Pal-Fox Lumber Co., Inc. alone the balance of
P6,841.56 plus legal interest.
Pal-Fox, due to failure to file an answer despite valid service of summons, was
subsequently declared in default. On one hand, The Far Eastern Surety & Insurance
Co., Inc. filed its answer with a cross-claim against its co-defendant Pal-Fox Lumber
Co., Inc. Later on, some 3rd party defendants were impleaded (Palanca and Lee,
who bound themselves to indemnify the surety company for all damages it may
incur for reason of the the forestry bond) but were similarly declared in default
CFI ruled in favor of BIR with dispositive portion, to wit: "WHEREFORE, judgment is
hereby rendered ordering defendants to pay to plaintiff, jointly and severally, the
sum of P5,000.00, with legal interest thereon from the filing of the complaint until
fully paid, and defendant Pal-Fox Lumber Co., Inc. to pay to plaintiff the further sum
of P6,841.56, with legal interest thereon from the filing of the complaint until fully
paid, plus costs; and likewise ordering cross-defendant Pal-Fox Lumber Co., Inc. and
third-party defendants Gaspar G. Palanca and Joseph Lee to pay to defendant Far
Eastern Surety & Insurance Co., Inc. jointly and severally, any amount which the
latter may pay to plaintiff under this judgment, plus premium in the amount of
P3,750.00 and stipulated attorney's fees and interest at the rate of 15% and 12%

per annum, respectively, on the total amount due, the said interest to be
compounded quarterly from November 22, 1946, until fully paid."
In the CA:
Far Eastern appealed the decision but CA subsequently certified the case here on a
finding that the appeal involves only questions of law, to wit:
Issue:
W/N the surety company is liable to pay the interest notwithstanding that in the
stipulation on forestry bond, such is bound to the plaintiff in the sum of P5,000.00
Held:
SC ruled in favor of the Plaintiff1, citing the case of National Marketing Corporation
vs. Marquez, et al., L-25553, January 31, 1969, (26 SCRA 722, 726), this Court
resolved a similar question as follows:
"On the third and last issue (on whether the surety's liability can exceed the amount
of its bond), it is enough to remark that while the guarantee was for the original
amount of the debt of Gabino Marquez, the amount of the judgment by the trial
court in no way violates the rights of the surety. The judgment on the principal was
only for P10,000.00, while the remaining of P9,990.91 represent the moratory
interest due on account of the failure to pay the principal obligation from and after
the same had fallen due, and default had taken place. Appellant surety was fully
aware that the obligation earned interest, since the note was annexed to its
contract, Exhibit 'C'. The contract of guaranty executed by the appellant Company
nowhere excludes this interest, and Article 2055, paragraph 2, of the Civil Code of
the Philippines is clearly applicable.
'If it (the guaranty) be simple or indefinite, it shall comprise not only the
principal obligation but also all its accessories, including judicial costs,
provided with respect to the latter, that the guarantor shall only be liable
for those costs incurred after he has been judicially required to pay.'
(ltalics supplied)"

Dispositive: WHEREFORE , the decision appealed from is affirmed, with the modification that the appellant should
pay the interest adjudged in said decision up to the date of payment of the principal sum of P5,000.00. No
pronouncement as to costs.

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

SOUTHERN MOTORS, INC., PLAINTIFF AND APPELLEE, VS. ELISEO BARBOSA,

DEFENDANT AND APPELLANT.
CONCEPCION, J.
Doctrine:
The right of guarantors, under article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the
principal obligation. Guarantees, without any such pledge or mortgage, are
governed by title XV of said Code, whereas pledges and mortgages fall under title
XVI tbereof, in which articles 2087 and 2126 of same code among others are found.
Facts:
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to
foreclose a real estate mortgage, constituted by the latter in favor of the former, as
security for the payment of the sum of P2,889.53 due to said plaintiff from one
Alfredo Brillantes, who had failed to settle his obligation in accordance with the
terms and conditions of the corresponding deed of mortgage.
By way of "special and affirmative" defense, he contended in his answer that he
only execued the he deed of mortgage for the only purpose of guaranteeing - as
surety and/or guarantor - the payment of the debt of Mr. Alfredo Brillante. Moreover,
that Southern did not exhaust all recourses available to collect first from true debtor
Brillantes given that the same is solvent and has many properties in Iloilo.
In the CFI: Judgment was rendered in favor of Southern Motors ordering Barbosa to:
a) pay the sum of P2,889.53, with interest at the rate of 12% per annum, attorney's
fees and costs; and b) upon failure to pay, that the real property subject of
mortgage be sold at public auction in order to cover said obligation.
In the CA: CA certified the case record to SC in view of the fact that the issues
raised in the appeal involve merely questions of law.
Issue: W/N Barbosa is correct in his argument (mortgage was for the purpose of
guaranteeing and that Southern should have exhausted all recourses first with
Brillantes)

Held:
No. Barbosa's defense is devoid of merit for the following ratiocinations:
1. The deed of mortgage executed by him specifically provides:
"That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and trolly perform the full obligations
above-stated according to the terms thereof, then this mortgage shall be null and
void, otherwise it shall remain in full force and effect, in which event herein
mortgagor authorizes and empowers herein mortgagee-company to tab
any of the following actions to enforce said payment; '
"(a) Foreclose, judicially or extrajudicially, the chattel mortgage above
referred to and/or also this mortgage, applying the proceeds of the
purchase price at public sale of the real property herein mortgaged to any
deficiency or difference between the purchase price of said chattel at public auction
and the amount of P2,889.53, together with its interest hereby secured; or

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

2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the
principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title
XVI of the same Code, in which the following provisions, among others, are found:
Art. 2087. "It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment to the creditor."
Art. 2126. "The mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted."
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is
not entitled to the exhaustion of the property of the principal debtor.
4. Although an ordinary personal guarantornot a mortgagor or pledgormay
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.

G.R. No. L-40334, February 28, 1985

CENTRAL SURETY AND INSURANCE COMPANY, INC., PETITIONER, VS. HON. ALBERTO
Q. UBAY AS JUDGE OF THE COURT OF FIRST INSTANCE OF RIZAL, CALOOCAN CITY,
BRANCH XXXII AND ONG CHI, DOING BUSINESS UNDER THE FIRM NAME, "TABLERIA
DE LUXE," RESPONDENTS.
ABAD SANTOS, J.:
Doctrine:
- Where the surety had done its part and the obligation of the bond had been
discharged, the counterbond should be cancelled.
- The obligation of a surety cannot extend beyond what is stipulated in the surety
bond
Facts:
Francisco Reyes was sued for sum of Money by Ong Chi (who was doing business in
the name of "Tableris de Luxe"). Ong Chi applied for a writ of attachment on Reyes'
jeep after filing a bond amounting to Php 6,464.18. Reyes moved to dissolve the
writ and filed a counterbond. Reyes' surety was Petitioner Central Surety and
Insurance Co which undertook to be jointly and severally bound to pay Ong Chi in
the amount of Php 6,465 only under ther condition that Reyes will deliver the jeep
or, in case of default, Reyes and Central will undertake to pay the value of the jeep
instead.

In the City Court:

Judgment was rendered in favor of Ong Chi and against Reyes, ordering Reyes to
pay Ong Chi the sum of P6,964.18, with legal interests thereon from the date of the
filing of this complaint until fully paid, plus the sum of P500.00, as and by way of
attorney's fees, and the costs of the suit

In the CFI:
Reyes appealed but CFI affirmed judgment of City Court (in toto). Upon judgment's
finality, writ of execution was issued and the jeep was sold for Php 4,000.00 (this
amount was credited against the money judgment against Reyes).

After the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel
the counterbond. Ong Chi not only opposed the motion but he also asked that the
surety company pay the deficiency on the judgment in the amount of P5,730.00
(P9,730.00 as of the filing of the motion, less P4,000.00 the proceeds of the sale of
the jeep). The motion for a deficiency judgment was opposed by the surety on the
ground that it had fulfilled the condition of the counterbond. Despite the opposition,
the court ordered the surety to pay. A motion for reconsideration was denied which
accounts for the instant petition.
Issue: W/N Central is liable for the deficiency
Held: No. The stipulation in the counterbond executed by the petitioner is the law
between the parties in this case and not the provisions of the Rules of Court (Sec
172, Rule 57)
Under the counterbond, the petitioner surety company bound itself solidarily with
the principal obligor "in the sum of P6,465.00 under the condition that in case the
plaintiff recovers judgment in the action, the defendant will, on demand, redeliver
the attached property so released to the officer of the court to be applied to the
payment of the judgment or in default thereof that the defendant and surety will, on
demand, pay to the plaintiff the full value of the property released." The main
obligation of the surety was to redeliver the jeep so that it could be sold in case
execution was issued against the principal obligor. The amount of P6,465.00 was
merely to fix the limit of the surety's liability in case the jeep could not be
reached. In the instant case, the jeep was made available for execution of the
judgment by the surety. The surety had done its part; the obligation of the bond
had been discharged; the bond should be cancelled.

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

G.R. No. L-27249, July 31, 1970

MANILA SURETY & FIDELITY CO., INC., PLAINTIIF-APPELLANT, VS. NOEMI ALMEDA,
DOING BUSINESS UNDER THE NAME AND STYLE OF ALMEDA TRADING, GENEROSO
ESQUILLO AND NATIONAL MARKETING CORPORATION, DEFENDANTS-APPELLEES.
REYES, J. B. L., J.:
Doctrine:
Remedy of guaranty where debtor is declared insolvent. - Where a debtor is
judicially declared insolvent, the remedy of the guarantor would be to file a
contingent claim in the insolvency proceeding, if his rights as such guarantor or
surety are not to be barred by the subsequent discharge of the insolvent debtor
from all his liabilities.
Facts:
In 1961 Noemi Almeda, married to Generoso Esquillo, and doing business under the
name and style of Almeda Trading, entered into a contract with the National
Marketing Corporation (NAMARCO) for the purchase of goods on credit, A bond for
P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc., was posted to
secure the Almeda's faithful compliance with the terms of the contract.
On March 1965, Husband Generoso Esquillo instituted voluntary insolvency
proceeding in the Court of First Instance of Laguna and by order of said court, he
was declared insolvent, with listed credits and properties valued. In the meeting of
the named creditors of the insolvent, for the purpose of electing the assignee of his
properties, the NAMARCO was represented and its contingent claim duly registered.

On June 1965, having unsetteled back accounts, NAMARCO demanded payment

thru demand letter sent to Almeda and Manila Surety.
On September 1965 Manila Surety commenced an action before the CFI against the
spouses and NAMARCO in order to be released from liability under the bonds earlier
executed, on the grounds that spouses had already become insolvent and that
NAMARCO had rescinded its agreement with and demanded payment with the
spouses.
Issue: W/N Manila Surety is relieved granting that the spouses principal debtors are
declared insolvent.
Held: No. Clearly, a contract of surety ship was thus created, Manila Surety becomes
an insurer, not merely of the debtor's solvency or ability to pay, but of the debt
itself. Under the Civil Code, with the debtor's insolvency having been judicially
recognized, herein Manila Surety's resort to the courts to be released from the
undertaking thus assumed would have been appropriate. Nevertheless, the
guarantor's action for release can only be exercised against the principal debtor and
not against the creditor, as is apparent from the precise terms of the legal provision.
"The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before
having paid, may proceed against the principal debtor . to obtain a release
from the guaranty. The juridical rule grants no cause of action against
the creditor for a release of the guaranty, before payment of the credit, for a plain
reason: the creditor is not compellable to release the guaranty (which is a property
right) against his will.

For, the release of the guarantor imports an extinction of his obligation to the
creditor; it connotes, therefore, either a remission or a novation by subrogation, and
either operation requires the creditor's assent for its validity (See Article 1270 and
Article 1301). Especially should this be the case where the principal debtor has
become insolvent, for the purpose of a guaranty is exactly to protect the creditor
against such a contingency.
Considering that under the contract of suretyship, which remains valid and
subsisting, the entire obligation may even be demanded directly against the surety
itself, the creditor's act in resorting first to the properties of the insolvent debtor is
to the surety's advantage. At least, the latter would be answerable only for
whatever amount may remain not covered or unsatisfied by the disposition of the
insolvent's properties, with the right to go against debtor-principal after it has made
the necessary payment to the creditor. For another, the fact that the debtorprincipal may be discharged from all his outstanding obligations in the insolvency
case would not benefit the surety, as to relieve it of its liability under the surety
agreement. That is so provided in Section 68 of the Insolvency Act, which shall be
controlling in the case.

G. R. No. L-12333, February 28, 1959

ASSOCIATED INSURANCE & SURETY CO., INC., PLAINTIFF AND APPELLANT, VS.
BACOLOD-MURCIA MILLING CO., INC., ET AL., DEFENDANTS AND APPELLEES.
BAUTISTA ANGELO, J.:
Doctrine:
There the purpose of the action is not to dispute the validity of any demand for
payment that may have been made upon plaintiff by defendant company on the
strength of its liability under the bonds but rather to ask for its release from its
liability under the bonds for certain breach of its conditions committed by the
milling company, it is immaterial or unnecessary to allege in the complaint that
plaintiff has either paid or been required to pay its obligation under the bonds by
the creditor considering the nature of the main cause of action. It is sufficient if it
alleges therein, as it actually does, that the conditions agreed upon in the bonds has
been violated. The complaint states a valid cause of action insofar as the milling
company is concerned.

Facts:
- Sixto R. Ruiz obtained two crop loans in the aggregate amount of P11,626.00
from Bacolod-Murcia Milling Co., Inc. (BM), subject to the condition that he shall
post surety bonds to guarantee the payment of 25% of said crop loans;
- 2 surety bonds under Associated Insureance (AI) in the aggregate amount of
P2,956.50 were executed subject to the following conditions where AI put up as
protection of its interest:
(1) the BM shall apply the share of the debtor in the harvest of the crops
for which the loans were granted to the liquidation of said loans and no part
thereof shall be applied to other indebtedness until the loans have been fully
liquidated;
(2) the BM shall not grant any additional loan to the debtor in excess of the
latter's share in the crops covered by the bonds without the prior written consent of
AI; and
(3) the liability of AI will terminate upon complete payment of the
indebtedness guaranteed by the bonds;
- However BM failed to comply with conditions 1 and 2 when it granted to the debtor
loans in excess of the latter's share in the harvest of the crops covered by the
bonds without the written consent of AI, and when it failed to notify AI of the
amount the debtor has actually availed himself of the crop loans obtained by him,
thereby depriving AI of its right to be apprised of the amount of the loan actually
obtained, this notice being necessary to enable plaintiff to take steps to protect its
interest; and that in view of the violations of the conditions above-mentioned,
plaintiff is deemed to have been relieved of its liability under the bonds
- BM filed a Motion to Dismiss stating that AIs complaint lacks cause of action as
there had been no valid demand to pay has been made against Ruiz and AI is not
then yet made liable for it. CFI granted the Motion.
Issue: W/N AI has valid cause of action notwithstanding BM, in increasing the debt,
has not made any valid demand for payment.
Held: Yes. The purpose of the action is not to dispute the validity of any demand for
payment that may have been made upon AI by BM on the strength of its liability
under the bonds but rather to ask for its release from its liability under the bonds
for certain breach of its conditions committed by the milling company, and it is for
this reason that the action was brought against the milling company. It is sufficient
if it alleges therein, as it actually does, that the conditions agreed upon in the
bonds had been violated. We therefore conclude that the complaint states a valid
cause of action insofar as the milling company is concerned.