SERFINO VS.

FAR EAST
Before the Court is a petition for review on certiorari, filed under Rule 45 of the
Rules of Court, assailing the decision dated February 23, 2006 of the Regional
Trial Court (RTC) of Bacolod City, Branch 41, in
Civil Case No. 95-9344.
FACTUAL ANTECEDENTS
The present case traces its roots to the compromise judgment dated October
24, 19953 of the RTC of Bacolod City, Branch 47, in Civil Case No. 95-9880. Civil
Case No. 95-9880 was an action for collection of sum of money instituted by the
petitioner spouses Godfrey and Gerardina Serfino against the spouses Domingo
and Magdalena Cortez (collectively, spouses Cortez). By way of settlement, the
spouses
Serfino and the spouses Cortez executed a compromise agreement on October
20, 1995, in which the spouses Cortez acknowledged their indebtedness to the
spouses Serfino in the amount of P108,245.71. To satisfy the debt, Magdalena
bound herself to pay in full the judgment debt out of her retirement benefits.
Payment of the debt shall be made one (1) week after Magdalena has received
her retirement benefits from the Government Service Insurance System (GSIS).
In case of default, the debt may be executed against any of the properties of
the spouses Cortez that is subject to execution, upon motion of the spouses
Serfino. After finding that the compromise agreement was not contrary to law,
morals, good custom, public order or public policy, the RTC approved the
entirety of the parties agreement and issued a compromise judgment based
thereon.
The debt was later reduced to P155,000.00 from P197,000.00 (including
interest), with the promise that the spouses Cortez would pay in full the
judgment debt not later than April 23, 1996.No payment was made as
promised. Instead, Godfrey discovered that
Magdalena deposited her retirement benefits in the savings account of Graces
savings account with FEBTC amounted to P245,830.37, the entire deposit
coming from Magdalenas retirement benefits.
That same day, the spouses Serfinos counsel sent two letters to FEBTC
informing the bank that the deposit in Graces name was owned by the spouses
Serfino by virtue of an assignment made in their favor by the spouses Cortez.
The letter requested FEBTC to prevent the delivery of the deposit to either
Grace or the spouses Cortez until its actual ownership has been resolved in
court.
On April 25, 1996, the spouses Serfino instituted Civil Case No. 95-9344 against
the spouses Cortez, Grace and her husband, Dante Cortez, and FEBTC for the
recovery of money on deposit and the payment of damages, with a prayer for
preliminary attachment.
On April 26, 1996, Grace withdrew P150,000.00 from her savings account with
FEBTC. On the same day, the spouses Serfino sent another letter to FEBTC
informing it of the pending action; attached to the letter was a copy of the
complaint filed as Civil Case No. 95-9344.
During the pendency of Civil Case No. 95-9344, the spouses Cortez manifested
that they were turning over the balance of the deposit in FEBTC (amounting to
P54,534.00) to the spouses Serfino as partial payment of their obligation under
the compromise judgment. The RTC issued an order dated July 30, 1997,
authorizing FEBTC to turn over the balance of the deposit to the spouses
Serfino.
Two deposits were made in Graces savings account: a check deposit in the
amount of P55,830.37 was made on April 12, 1996, the check was issued to
Magdalena and indorsed by her in favor of Grace; and a cash deposit of
P190,000.00 was made on April 19, 1996 (id. at 45). Decision G.R. No. 171845.
On February 23, 2006, the RTC issued the assailed decision (a) finding the
spouses Cortez, Grace and Dante liable for fraudulently diverting the amount

due the spouses Serfino, but (b) absolving FEBTC from any liability for allowing
Grace to withdraw the deposit. The RTC declared that FEBTC was not a party to
the compromise judgment; FEBTC was thus not chargeable with notice of the
parties agreement, as there was no valid court order or processes requiring it
to withhold payment of the deposit. Given the nature of bank deposits, FEBTC
was primarily bound by its contract of loan with Grace. There was, therefore, no
legal justification for the bank to refuse payment of the account,
notwithstanding the claim of the spouses Serfino as stated in their three letters.
THE PARTIES ARGUMENTS
The spouses Serfino appealed the RTCs ruling absolving FEBTC from liability for
allowing the withdrawal of the deposit. They allege that the RTC cited no legal
basis for declaring that only a court order or process can justify the withholding
of the deposit in Graces name. Since FEBTC was informed of their adverse
claim after they sent three letters, they claim that: [u]pon receipt of a notice of
adverse claim in proper form, it becomes the duty of the bank to: 1. Withhold
payment of the deposit until there is a reasonable opportunity to institute legal
proceedings to contest ownership; and 2) give prompt notice of the adverse
claim to the depositor. The bank may be held liable to the adverse claimant if it
disregards the notice of adverse claim and pays the depositor. When the bank
has reasonable notice of a bona fide claim that money deposited with it is the
property of another than the depositor, it should withhold payment until there is
reasonable opportunity to institute legal Decision G.R. No. 171845 proceedings
to contest the ownership.
Aside from the three letters, FEBTC should be deemed bound by the
compromise judgment, since Article 1625 of the Civil Code states that an
assignment of credit binds third persons if it appears in a public instrument.
They conclude that FEBTC, having been notified of their adverse claim, should
not have allowed Grace to withdraw the deposit. While they acknowledged that
bank deposits are governed by the
Civil Code provisions on loan, the spouses Serfino allege that the provisions on
voluntary deposits should apply by analogy in this case, particularly Article
1988 of the Civil Code, which states: Article 1988. The thing deposited must be
returned to the depositor upon demand, even though a specified period or time
for such return may have been fixed.
This provision shall not apply when the thing is judicially attached while in the
depositarys possession, or should he have been notified of the opposition of a
third person to the return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the attachment or
opposition.
Based on Article 1988 of the Civil Code, the depository is not obliged to return
the thing to the depositor if notified of a third partys adverse claim. By allowing
Grace to withdraw the deposit that is due them under the compromise
judgment, the spouses Serfino claim that FEBTC committed an actionable wrong
that entitles them to the payment of actual and
moral damages.
FEBTC, on the other hand, insists on the correctness of the RTC ruling. It claims
that it is not bound by the compromise judgment, but only by its contract of
loan with its depositor. As a loan, the bank deposit is owned by the bank; hence,
the spouses Serfinos claim of ownership over it is erroneous. Based on these
arguments, the case essentially involves a determination of the obligation of
banks to a third party who claims rights over a bank deposit standing in the
name of another.
THE COURTS RULING
We find the petition unmeritorious and see no reason to reverse the RTCs
ruling.
Claim for actual damages not meritorious because there could be no pecuniary
loss that should be compensated if there was no assignment of credit

The spouses Serfinos claim for damages against FEBTC is premised on their
claim of ownership of the deposit with FEBTC. The deposit consists of
Magdalenas retirement benefits, which the spouses Serfino claim to have been
assigned to them under the compromise judgment. That the retirement benefits
were deposited in Graces savings account with FEBTC supposedly did not
divest them of ownership of the amount, as the money already belongs to the
[spouses Serfino] having been absolutely an assignment of credit, right or
action shall produce no effect as against third persons, unless it appears in a
public instrument, or the instrument is recorded in the Registry of Property in
case the assignment involves real property. Decision G.R. No. 171845 assigned
to them and constructively delivered by virtue of the public instrument. By
virtue of the assignment of credit, the spouses Serfino claim ownership of the
deposit, and they posit that FEBTC was duty bound to protect their right by
preventing the withdrawal of the deposit since the bank had been notified of the
assignment and of their claim.
We find no basis to support the spouses Serfinos claim of ownership of the
deposit. An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor. It may be in the form of sale, but at times it may
constitute a dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has against a third
person.12 As a dation in payment, the assignment of credit operates as a
mode of extinguishing the obligation; the delivery and transmission of
ownership of a thing (in this case, the credit due from a third person) by the
debtor to the creditor is accepted as the equivalent of the performance of the
obligation.
The terms of the compromise judgment, however, did not convey an intent to
equate the assignment of Magdalenas retirement benefits (the credit) as the
equivalent of the payment of the debt due the spouses Serfino
There was actually no assignment of credit; if at all, the compromise judgment
merely identified the fund from which payment for the judgment debt would be
sourced: (c) That before the plaintiffs file a motion for execution of the decision
or order based [on this] Compromise Agreement, the defendant, Magdalena
Cortez undertake[s] and bind[s] herself to pay in full the judgment debt out of
her retirement benefits as Local Treasury Operation Officer in the City of
Bacolod, Philippines, upon which full payment, the plaintiffs waive, abandon and
relinquish absolutely any of their claims for attorneys fees stipulated in the
Promissory Note
Only when Magdalena has received and turned over to the spouses Serfino the
portion of her retirement benefits corresponding to the debt due would the debt
be deemed paid.
In Aquitey v. Tibong, the issue raised was whether the obligation to pay the loan
was extinguished by the execution of the deeds of assignment. The Court ruled
in the affirmative, given that, in the deeds involved, the respondent (the debtor)
assigned to the petitioner (the creditor) her credits to make good the balance
of her obligation; the parties agreed to relieve
the respondent of her obligation to pay the balance of her account, and for the
petitioner to collect the same from the respondents debtors.17 The Court
concluded that the respondents obligation to pay the balance of her accounts
with the petitioner was extinguished, pro tanto, by the deeds of assignment of
credit executed by the respondent in favor of the petitioner.
In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalenas retirement benefits as
the fund from which payment shall be sourced. That the compromise agreement

authorizes recourse in case of default on other executable properties of the

spouses Cortez, to satisfy the judgment debt, further supports our conclusion
that there was no assignment of Magdalenas credit with the GSIS that would
have extinguished the obligation.
The compromise judgment in this case also did not give the supposed
assignees, the spouses Serfino, the power to enforce Magdalenas credit against
the GSIS. In fact, the spouses Serfino are prohibited from enforcing their claim
until after the lapse of one (1) week from Magdalenas receipt of her retirement
benefits: (d) That the plaintiffs shall refrain from having the judgment based
upon this Compromise Agreement executed until after one (1) week from
receipt by the defendant, Magdalena Cortez of her retirement benefits from the
[GSIS] but fails to pay within the said period the defendants judgment debt in
this case, in which case [this] Compromise Agreement [may be] executed upon
any property of the defendants that are subject to execution upon motion by
the plaintiffs. An assignment of credit not only entitles the assignee to the credit
itself, but also gives him the power to enforce it as against the debtor of the
assignor.
Since no valid assignment of credit took place, the spouses Serfino cannot
validly claim ownership of the retirement benefits that were deposited with
FEBTC. Without ownership rights over the amount, they suffered no pecuniary
loss that has to be compensated by actual damages. The grant of actual
damages presupposes that the claimant suffered a duly proven pecuniary
Civil Code, Article 2199. Except as provided by law or by stipulation, one is
entitled to an adequate compensation only for such pecuniary loss suffered by
him as he has duly proven. Such compensation is referred to as actual or
compensatory damages. Decision: Claim for moral damages not meritorious
because no duty exists on the part of the bank to protect interest of third person
claiming deposit in the name of another. Under Article 2219 of the Civil Code,
moral damages are recoverable for acts referred to in Article 21 of the Civil
Code. Article 21 of the Civil Code, in conjunction with Article 19 of the Civil
Code, is part of the cause of action known in this jurisdiction as abuse of
rights. The elements of abuse of rights are: (a) there is a legal right or duty; (b)
exercised in bad faith; and (c) for the sole intent of prejudicing or injuring
another.
The spouses Serfino invoke American common law that imposes a duty upon a
bank receiving a notice of adverse claim to the fund in a depositors account to
freeze the account for a reasonable length of time, sufficient to allow the
adverse claimant to institute legal proceedings to enforce his right to the fund.
In other words, the bank has a duty not to release the deposits unreasonably
early after a third party makes known his adverse claim to the bank deposit.
Acknowledging that no such duty is imposed by law in this jurisdiction, the
spouses Serfino ask the
Court to adopt this foreign rule.23
To adopt the foreign rule, however, goes beyond the power of this Court to
promulgate rules governing pleading, practice and procedure in all courts. The
rule reflects a matter of policy that is better addressed by the other branches of
government, particularly, the Bangko Sentral ng Pilipinas, which is the agency
that supervises the operations and activities of Article 21. Any person who
willfully causes loss or injury to another in a manner that is contrary to morals,
good customs, or public policy shall compensate the latter for the damage.
22 See J. Adam Sholar, Bank Deposits: The Need for an Adverse Claim Statute in
North Carolina, banks, and which has the power to issue rules of conduct or the
establishment of standards of operation for uniform application to all institutions
or functions covered[.]25 To adopt this rule will have significant implications on
the banking industry and practices, as the
American experience has shown. Recognizing that the rule imposing duty on
banks to freeze the deposit upon notice of adverse claim adopts a policy

adverse to the bank and its functions, and opens it to liability to both the
depositor and the adverse claimant,26 many American states have since
adopted adverse claim statutes that shifted or, at least, equalized the burden.
Essentially, these statutes do not impose a duty on banks to freeze the deposit
upon a mere notice of adverse claim; they first require either a court order or an
indemnity bond.
In the absence of a law or a rule binding on the Court, it has no option but to
uphold the existing policy that recognizes the fiduciary nature of banking. It
likewise rejects the adoption of a judicially-imposed rule giving third parties with
unverified claims against the deposit of another a better right over the deposit.
As current laws provide, the banks contractual relations are with its depositor,
not with the third party; a bank is under obligation to treat the accounts of its
depositors with meticulous care and always to have in mind the fiduciary nature
of its relationship with them.
In the absence of any positive duty of the bank to an adverse claimant, there
could be no breach that entitles the latter to moral damages.

DURBAN APARTMENTS VS. PIONEER

INSURANCE
For review is the Decision [1] of the Court of Appeals (CA) in CA-G.R. CV No.
86869, which affirmed the decision[2] of the Regional Trial Court (RTC), Branch
66, Makati City, in Civil Case No. 03-857, holding petitioner Durban Apartments
Corporation solely liable to respondent Pioneer Insurance and Surety
Corporation for the loss of Jeffrey Sees (Sees) vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x x,
by right of subrogation, filed [with the RTC of Makati City] a Complaint for
Recovery of Damages against [petitioner] Durban Apartments Corporation,
doing business under the name and style of City GardenHotel, and [defendant
before the RTC] Vicente Justimbaste x x x. [Respondent averred] that: it is the
insurer for loss and damage of Jeffrey S. Sees [the insureds] 2001 Suzuki Grand
Vitara x x x with Plate No. XBH-510 under Policy No. MC-CV-HO-01-0003846-00D in the amount ofP1,175,000.00; on April 30, 2002, See arrived and checked in
at the City Garden Hotel in Makati corner Kalayaan Avenues, Makati City before
midnight, and its parking attendant, defendant x x x Justimbaste got the key to
said Vitara from See to park it[. O]n May 1, 2002, at about 1:00 oclock in the
morning, See was awakened in his room by [a] telephone call from the Hotel
Chief Security Officer who informed him that his Vitara was carnapped while it
was parked unattended at the parking area of Equitable PCI Bank along Makati
Avenue between the hours of 12:00 [a.m.] and 1:00 [a.m.]; See went to see the
Hotel Chief Security Officer, thereafter reported the incident to the Operations
Division of the Makati City Police Anti-Carnapping Unit, and a flash alarm was
issued; the Makati City Police Anti-Carnapping Unit investigated Hotel Security
Officer, Ernesto T. Horlador, Jr. x x x and defendant x x x Justimbaste; See gave
his Sinumpaang Salaysay to the police investigator, and filed a Complaint Sheet
with the PNP Traffic Management Group in Camp Crame, Quezon City; the Vitara
has not yet been recovered since July 23, 2002 as evidenced by a Certification
of Non- Recovery issued by the PNP TMG; it paid the P1,163,250.00 money
claim of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the
loss of the Vitara; the Vitara was lost due to the negligence of [petitioner]
Durban Apartments and [defendant] Justimbaste because it was discovered
during the investigation that this was the second time that a similar incident of
carnapping happened in the valet parking service of [petitioner] Durban
Apartments and no necessary precautions were taken to prevent its repetition;
[petitioner] Durban Apartments was wanting in due diligence in the selection
and supervision of its employees particularly defendant x x x Justimbaste; and

defendant Justimbaste and [petitioner] Durban Apartments failed and refused to

pay its valid, just, and lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and [defendant]
Justimbaste filed their Answer with Compulsory Counterclaim alleging that: See
did not check in at its hotel, on the contrary, he was a guest of a certain Ching
Montero defendant Justimbaste did not get the ignition key of Sees Vitara, on
the contrary, it was See who requested a parking attendant to park the Vitara at
any available parking space, and it was parked at the Equitable Bank parking
area, which was within Sees view, while he and Montero were waiting in front of
the hotel; they made a written denial of the demand of [respondent] Pioneer
Insurance for want of legal basis; valet parking services are provided by the
hotel for the convenience of its customers looking for a parking space near the
hotel premises; it is a special privilege that it gave to Montero and See; it does
not include responsibility for any losses or damages to motor vehicles and its
accessories in the parking area; and the same holds true even if it was See
himself who parked his Vitara within the premises of the hotel as evidenced by
the valet parking customers claim stub issued to him; the carnapper was able to
open the Vitara without using the key given earlier to the parking attendant and
subsequently turned over to See after the Vitara was stolen; defendant x x x
Justimbaste saw the Vitara speeding away from the place where it was parked;
he tried to run after it, and blocked its possible path but to no avail; and See
was duly and immediately informed of the carnapping of his Vitara; the matter
was reported to the nearest police precinct; and defendant x x x Justimbaste,
and Horlador submitted themselves to police investigation.
During the pre-trial conference on November 28, 2003, counsel for [respondent]
Pioneer Insurance was present. Atty. Monina Lee counsel of record of [petitioner]
Durban Apartments and Justimbaste was absent, instead, a certain Atty. Nestor
Mejia appeared for [petitioner] Durban Apartments and Justimbaste, but did not
file their pre-trial brief.
On November 5, 2004, the lower court granted the motion of [respondent]
Pioneer Insurance, despite the opposition of [petitioner] Durban Apartments and
Justimbaste, and allowed [respondent] Pioneer Insurance to present its
evidence ex parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the evening, he drove his
Vitara and stopped in front of City Garden Hotel in Makati Avenue, Makati City; a
parking attendant, whom he had later known to be defendant x x x Justimbaste,
approached and asked for his ignition key, told him that the latter would park
the Vitara for him in front of the hotel, and issued him a valet parking customers
claim stub; he and Montero, thereafter, checked in at the said hotel; on May 1,
2002, at around 1:00 in the morning, the Hotel Security Officer whom he later
knew to be Horlador called his attention to the fact that his Vitara was
carnapped while it was parked at the parking lot of Equitable PCI Bank which is
in front of the hotel; his Vitara was insured with [respondent] Pioneer Insurance;
he together with Horlador and defendant x x x Justimbaste went to Precinct 19
of the Makati City Police to report the carnapping incident, and a police officer
came accompanied them to the Anti-Carnapping Unit of the said station for
investigation, taking of their sworn statements, and flashing of a voice alarm; he
likewise reported the said incident in PNP TMG in Camp Crame where another
alarm was issued; he filed his claim with [respondent] Pioneer Insurance, and a
representative of the latter, who is also an adjuster of Vesper Insurance
Adjusters-Appraisers [Vesper], investigated the incident; and [respondent]
Pioneer Insurance required him to sign a Release of Claim and Subrogation
Receipt, and finally paid him the sum of P1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer
Insurance tasked, among others, with the receipt of claims and documents from

the insured, investigation of the said claim, inspection of damages, taking of

pictures of insured unit, and monitoring of the processing of the claim until its
payment; he monitored the processing of Sees claim when the latter reported
the incident to [respondent] Pioneer Insurance; [respondent] Pioneer Insurance
assigned the case to Vesper who verified Sees report, conducted an
investigation, obtained the necessary documents for the processing of the
claim, and tendered a settlement check to See; they evaluated the case upon
receipt of the subrogation documents and the adjusters report, and eventually
recommended for its settlement for the sum of P1,163,250.00 which was
accepted by See; the matter was referred and forwarded to their counsel, R.B.
Sarajan & Associates, who prepared and sent demand letters to [petitioner]
Durban Apartments and [defendant] Justimbaste, who did not pay [respondent]
Pioneer Insurance notwithstanding their receipt of the demand letters; and the
services of R.B. Sarajan & Associates were engaged, for P100,000.00 as
attorneys fees plus P3,000.00 per court appearance, to prosecute the claims of
[respondent] Pioneer Insurance against [petitioner] Durban Apartments and
Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper; [respondent]
Pioneer Insurance assigned to Vesper the investigation of Sees case, and he was
the one actually assigned to investigate it; he conducted his investigation of the
matter by interviewing See, going to the City Garden Hotel, required
subrogation documents from See, and verified the authenticity of the same; he
learned that it is the standard procedure of the said hotel as regards its valet
parking service to assist their guests as soon as they get to the lobby entrance,
park the cars for their guests, and place the ignition keys in their safety key
box; considering that the hotel has only twelve (12) available parking slots, it
has an agreement with Equitable PCI Bank permitting the hotel to use the
parking space of the bank at night; he also learned that a Hyundai Starex van
was carnapped at the said place barely a month before the occurrence of this
incident because Liberty Insurance assigned the said incident to Vespers, and
Horlador and defendant x x x Justimbaste admitted the occurrence of the same
in their sworn statements before the Anti-Carnapping Unit of the Makati City
Police; upon verification with the PNP TMG [Unit] in Camp Crame, he learned
that Sees Vitara has not yet been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle Sees claim
for P1,045,750.00; See contested the recommendation of Vesper by reasoning
out that the 10% depreciation should not be applied in this case considering the
fact that the Vitara was used for barely eight (8) months prior to its loss; and
[respondent] Pioneer Insurance acceded to Sees contention, tendered the sum
of P1,163,250.00 as settlement, the former accepted it, and signed a release of
claim and subrogation receipt.
The lower court denied the Motion to Admit Pre-Trial Brief and Motion for
Reconsideration field by [petitioner] Durban Apartments and Justimbaste in its
Orders dated May 4, 2005 and October 20, 2005, respectively, for being devoid
of merit.[3]
Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as
follows: WHEREFORE, judgment is hereby rendered ordering [petitioner Durban
Apartments Corporation] to pay [respondent Pioneer Insurance and Surety
Corporation] the sum of P1,163,250.00 with legal interest thereon from July 22,
2003 until the obligation is fully paid and attorneys fees and litigation expenses
amounting to P120,000.00.
On appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January 27, 2006 of the
RTC, Branch 66, Makati City in Civil Case No. 03-857 is hereby AFFIRMED insofar
as it holds [petitioner] Durban Apartments Corporation solely liable to

[respondent] Pioneer Insurance and Surety Corporation for the loss of Jeffrey
Sees Suzuki Grand Vitara.
Hence, this recourse by petitioner. The issues for our resolution are:

1. Whether the lower courts erred in declaring

petitioner as in default for failure to appear at the
pre-trial conference and to file a pre-trial brief
2. Corollary thereto, whether the trial court correctly
allowed respondent to present evidence ex-parte;
3. Whether petitioner is liable to respondent for
attorneys fees in the amount of P120,000.00;
andUltimately, whether petitioner is liable to
respondent for the loss of Sees vehicle.
The petition must fail.

We are in complete accord with the common

ruling of the lower courts that petitioner was in default for failure to appear at
the pre-trial conference and to file a pre-trial brief, and thus, correctly allowed
respondent to present evidence ex-parte. Likewise, the lower courts did not err
in holding petitioner liable for the loss of Sees vehicle.
Well-entrenched in jurisprudence is the rule that factual findings of the trial
court, especially when affirmed by the appellate court, are accorded the highest
degree of respect and are considered conclusive between the parties. [6] A review
of such findings by this Court is not warranted except upon a showing of highly
meritorious circumstances, such as: (1) when the findings of a trial court are
grounded entirely on speculation, surmises, or conjectures; (2) when a lower
courts inference from its factual findings is manifestly mistaken, absurd, or
impossible; (3) when there is grave abuse of discretion in the appreciation of
facts; (4) when the findings of the appellate court go beyond the issues of the
case, or fail to notice certain relevant facts which, if properly considered, will
justify a different conclusion; (5) when there is a misappreciation of facts; (6)
when the findings of fact are conclusions without mention of the specific
evidence on which they are based, are premised on the absence of evidence, or
are contradicted by evidence on record. [7]None of the foregoing exceptions
permitting a reversal of the assailed decision exists in this instance.
Petitioner urges us, however, that strong [and] compelling reason[s] such as the
prevention of miscarriage of justice warrant a suspension of the rules and
excuse its and its counsels non-appearance during the pre-trial conference and
their failure to file a pre-trial brief.
We are not persuaded. Rule 18 of the Rules of Court leaves no room for
equivocation; appearance of parties and their counsel at the pre-trial
conference, along with the filing of a corresponding pre-trial brief, is mandatory,
nay, their duty. Thus, Section 4 and Section 6 thereof provide: SEC.
4. Appearance of parties.It shall be the duty of the parties and their counsel to
appear at the pre-trial. The non-appearance of a party may be excused only if a
valid cause is shown therefor or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement, to submit to
alternative modes of dispute resolution, and to enter into stipulations or
admissions of facts and documents. SEC. 6. Pre-trial brief.The parties shall file
with the court and serve on the adverse party, in such manner as shall ensure
their receipt thereof at least three (3) days before the date of the pre-trial, their
respective pre-trial briefs which shall contain, among others: Failure to file the
pre-trial brief shall have the same effect as failure to appear at the pre-trial.

Contrary to the foregoing rules, petitioner and its counsel of record were not
present at the scheduled pre-trial conference. Worse, they did not file a pre-trial
brief. Their non-appearance cannot be excused as Section 4, in relation to
Section 6, allows only two exceptions: (1) a valid excuse; and (2) appearance of
a representative on behalf of a party who is fully authorized in writing to enter
into an amicable settlement, to submit to alternative modes of dispute
resolution, and to enter into stipulations or admissions of facts and documents.
Petitioner is adamant and harps on the fact that November 28, 2003 was merely
the first scheduled date for the pre-trial conference, and a certain Atty. Mejia
appeared on its behalf. However, its assertion is belied by its own admission
that, on said date, this Atty. Mejia did not have in his possession the Special
Power of Attorney issued by petitioners Board of Directors.
As pointed out by the CA, petitioner, through Atty. Lee, received the notice of
pre-trial on October 27, 2003, thirty-two (32) days prior to the scheduled
conference. In that span of time, Atty. Lee, who was charged with the duty of
notifying petitioner of the scheduled pre-trial conference, [8] petitioner, and Atty.
Mejia should have discussed which lawyer would appear at the pre-trial
conference with petitioner, armed with the appropriate authority therefor. Sadly,
petitioner failed to comply with not just one rule; it also did not proffer a reason
why it likewise failed to file a pre-trial brief. In all, petitioner has not shown any
persuasive reason why it should be exempt from abiding by the rules.
The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial
brief and with only his bare allegation that he is counsel for petitioner, was
correctly rejected by the trial court. Accordingly, the trial court, as affirmed by
the appellate court, did not err in allowing respondent to present evidence exparte.
Former Chief Justice Andres R. Narvasas words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory, and has been so
since January 1, 1964. Yet to this day its place in the scheme of things is not
fully appreciated, and it receives but perfunctory treatment in many courts.
Some courts consider it a mere technicality, serving no useful purpose save
perhaps, occasionally to furnish ground for non-suiting the plaintiff, or declaring
a defendant in default, or, wistfully, to bring about a compromise. The pre-trial
device is not thus put to full use. Hence, it has failed in the main to accomplish
the chief objective for it: the simplification, abbreviation and expedition of the
trial, if not indeed its dispensation. This is a great pity, because the objective is
attainable, and with not much difficulty, if the device were more intelligently
and extensively handled. Consistently with the mandatory character of the pretrial, the Rules oblige not only the lawyers but the parties as well to appear for
this purpose before the Court, and when a party fails to appear at a pre-trial
conference (he) may be non-suited or considered as in default. The obligation to
appear denotes not simply the personal appearance, or the mere physical
presentation by a party of ones self, but connotes as importantly, preparedness
to go into the different subject assigned by law to a pre-trial. And in those
instances where a party may not himself be present at the pre-trial, and another
person substitutes for him, or his lawyer undertakes to appear not only as an
attorney but in substitution of the clients person, it is imperative for that
representative of the lawyer to have special authority to make such substantive
agreements as only the client otherwise has capacity to make. That special
authority should ordinarily be in writing or at the very least be duly established
by evidence other than the self-serving assertion of counsel (or the proclaimed
representative) himself. Without that special authority, the lawyer or
representative cannot be deemed capacitated to appear in place of the party;
hence, it will be considered that the latter has failed to put in an appearance at
all, and he [must] therefore be non-suited or considered as in default,
notwithstanding his lawyers or delegates presence.[9]

We are not unmindful that defendants (petitioners) preclusion from presenting

evidence during trial does not automatically result in a judgment in favor of
plaintiff (respondent). The plaintiff must still substantiate the allegations in its
complaint.[10] Otherwise, it would be inutile to continue with the plaintiffs
presentation of evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a
contract of necessary deposit existed between the insured See and petitioner.
On this score, we find no error in the following disquisition of the appellate
court: [The] records also reveal that upon arrival at the City Garden Hotel, See
gave notice to the doorman and parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he entrusted its ignition key to the latter. x x
x Justimbaste issued a valet parking customer claim stub to See, parked the
Vitara at the Equitable PCI Bank parking area, and placed the ignition key inside
a safety key box while See proceeded to the hotel lobby to check in. The
Equitable PCI Bank parking area became an annex of City Garden Hotel when
the management of the said bank allowed the parking of the vehicles of hotel
guests thereat in the evening after banking hours. [
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns: Art. 1962. A
deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract. Art. 1998. The deposit of effects
made by travelers in hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as depositaries, provided
that notice was given to them, or to their employees, of the effects brought by
the guests and that, on the part of the latter, they take the precautions which
said hotel-keepers or their substitutes advised relative to the care and vigilance
of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited his
vehicle for safekeeping with petitioner, through the latters employee,
Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract
of deposit was perfected from Sees delivery, when he handed over to
Justimbaste the keys to his vehicle, which Justimbaste received with the
obligation of safely keeping and returning it. Ultimately, petitioner is liable for
the loss of Sees vehicle. Lastly, petitioner assails the lower courts award of
attorneys fees to respondent in the amount of P120,000.00. Petitioner claims
that the award is not substantiated by the evidence on record. We disagree.
While it is a sound policy not to set a premium on the right to litigate, [12] we find
that respondent is entitled to reasonable attorneys fees. Attorneys fees may be
awarded when a party is compelled to litigate or incur expenses to protect its
interest,[13] or when the court deems it just and equitable. [14] In this case,
petitioner refused to answer for the loss of Sees vehicle, which was deposited
with it for safekeeping. This refusal constrained respondent, the insurer of See,
and subrogated to the latters right, to litigate and incur expenses. However, we
reduce the award of P120,000.00 to P60,000.00 in view of the simplicity of the
issues involved in this case. WHEREFORE, the petition is DENIED. The Decision
of the Court of Appeals in CA-G.R. CV No. 86869 is AFFIRMED with
the MODIFICATION that the award of attorneys fees is reduced to P60,000.00.
Costs against petitioner.

MAKATI SHABGRI LA VS. HARPER

DOCTRINE: Negligence Article 2176 0f the New Civil Code provides Whoever
by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no preexisting contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
The hotel business is imbued with public interest. Hotelkeepers are bound to
provide not only lodging for their guests but also security to their persons and
belongings to their guest. The twin duty constitutes the essence of the business
(Arts 2000-2001 New Civil Code).
Hotel owner is liable for civil damages to surviving heirs of hotel guest whom
strangers murder inside his hotel room.
FACTS: Christian Harper was a Norwegian who came to Manila on a business
trip. He stayed at Makati Shangri-la Hotel, but he was murdered in his hotel
room [Specifically Room 1428. His ghost can be found there]. It was found that
the murderer, a caucasian male, was able to trespass into the hotel room of the
victim and was then able to murder and rob the victim. The heirs of the victim
blame the hotel's gross negligence in providing the most basic security system
of its guests.
The RTC held in favor of the heirs and ordered Shangri-la to pay damages. CA
affirmed.
ISSUE: WON Shangri-la Hotel is liable for damages.
HELD: Yes. Shangri-la is liable due to its own negligence. The testimony
revealed that the management practice of the hotel prior to the death of the
victim was to deploy only one security or roving guard for every three or four
floors of the hotel, which is inadequate because the hotel is L-shaped that
rendered hallways not visible end to end. That there was a recommendation to
increase security to one guard per floor but this was not followed. This omission
is critical. The hotel business is imbued with public interest. Hotelkeepers are
bound to provide not only lodging for their guests but also security to their
persons and belongings to their guest. The twin duty constitutes the essence of
the business. Therefore, the hotel has a greater degree of care and
responsibility for its guests, otherwise the hotelkeepers would just stand idly by
while strangers have unrestricted access to all hotel rooms on the pretense of
being visitors of the guests which is absurd.
Note: The decision of the CA was reproduced in the decision to which the SC
concurred. The CA discussed the test of negligence as: The test of negligence
is objective. WE measure the act or omission of the tortfeasor with a
perspective as that of an ordinary reasonable person who is similarly situated.
The test, as applied to the extant case, is whether or not [Shangri-la Hotel],
under the attendant circumstances, used that reasonable care and caution
which an ordinary person would have used in the same situation.

YHT REALTY VS. COURT OF APPEALS

The primary question of interest before this Court is the only legal issue in the
case: It is whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers
holding the establishment or its employees free from blame for such loss in light
of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision dated 19
October 1995 of the Court of Appeals which affirmed the Decision dated 16
December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila, finding
YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and
Anicia Payam (Payam) jointly and solidarily liable for damages in an action filed

by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment
Hotel, owned and operated by YHT Realty Corporation. The factual backdrop of
the case follows: Private respondent McLoughlin, an Australian businessmanphilanthropist, used to stay at Sheraton Hotel during his trips to the Philippines
prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts for the children
and in distributing the same to charitable institutions for poor children. Tan
convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where
Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of
the hotel while Lainez and Payam had custody of the keys for the safety deposit
boxes of Tropicana. Tan took care of McLoughlins booking at the Tropicana where
he started staying during his trips to the Philippines from December 1984 to
September 1987. On 30 October 1987, McLoughlin arrived from Australia and
registered with Tropicana. He rented a safety deposit box as it was his practice
to rent a safety deposit box every time he registered at Tropicana in previous
trips. As a tourist, McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety deposit box could only
be opened through the use of two keys, one of which is given to the registered
guest, and the other remaining in the possession of the management of the
hotel. When a registered guest wished to open his safety deposit box, he alone
could personally request the management who then would assign one of its
employees to accompany the guest and assist him in opening the safety deposit
box with the two keys. McLoughlin allegedly placed the following in his safety
deposit box: Fifteen Thousand US Dollars (US$15,000.00) which he placed in
two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars
(US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also
placed in another envelope; two (2) other envelopes containing letters and
credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside
the safety deposit box.
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin
opened his safety deposit box with his key and with the key of the management
and took there from the envelope containing Five Thousand US Dollars
(US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards.[6] McLoughlin left the
other items in the box as he did not check out of his room at the Tropicana
during his short visit to Hongkong. When he arrived in Hongkong, he opened the
envelope which contained Five Thousand US Dollars (US$5,000.00) and
discovered upon counting that only Three Thousand US Dollars (US$3,000.00)
were enclosed therein. Since he had no idea whether somebody else had
tampered with his safety deposit box, he thought that it was just a result of bad
accounting since he did not spend anything from that envelope. After returning
to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with
Ten Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and
stored in the safety deposit box upon his return to Tropicana was likewise
missing, except for a diamond bracelet. When McLoughlin came back to the
Philippines on 4 April 1988, he asked Lainez if some money and/or jewelry which
he had lost were found and returned to her or to the management. However,
Lainez told him that no one in the hotel found such things and none were turned
over to the management. He again registered at Tropicana and rented a safety
deposit box. He placed therein one (1) envelope containing Fifteen Thousand US
Dollars (US$15,000.00), another envelope containing Ten Thousand Australian

Dollars (AUS$10,000.00) and other envelopes containing his traveling

papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam
to open his safety deposit box. He noticed that in the envelope containing
Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars
(US$2,000.00) were missing and in the envelope previously containing Ten
Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred
Australian Dollars (AUS$4,500.00) were missing. When McLoughlin discovered
the loss, he immediately confronted Lainez and Payam who admitted that Tan
opened the safety deposit box with the key assigned to him.[11] McLoughlin
went up to his room where Tan was staying and confronted her. Tan admitted
that she had stolen McLoughlins key and was able to open the safety deposit
box with the assistance of Lopez, Payam and Lainez. Lopez also told McLoughlin
that Tan stole the key assigned to McLoughlin while the latter was asleep.
McLoughlin requested the management for an investigation of the incident.
Lopez got in touch with Tan and arranged for a meeting with the police and
McLoughlin. When the police did not arrive, Lopez and Tan went to the room of
McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows: I
promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988.
Lopez requested Tan to sign the promissory note which the latter did and Lopez
also signed as a witness. Despite the execution of promissory note by Tan,
McLoughlin insisted that it must be the hotel who must assume responsibility for
the loss he suffered. However, Lopez refused to accept the responsibility relying
on the conditions for renting the safety deposit box entitled Undertaking For the
Use Of Safety Deposit Box,[15] specifically paragraphs (2) and (4) thereof, to
wit: 2. To release and hold free and blameless TROPICANA APARTMENT HOTEL
from any liability arising from any loss in the contents and/or use of the said
deposit box for any cause whatsoever, including but not limited to the
presentation or use thereof by any other person should the key be lost; 4. To
return the key and execute the RELEASE in favor of TROPICANA APARTMENT
HOTEL upon giving up the use of the box. On 17 May 1988, McLoughlin went
back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for
being violative of universal hotel practices and customs. His lawyers prepared a
letter dated 30 May 1988 which was signed by McLoughlin and sent to President
Corazon Aquino.[17] The Office of the President referred the letter to the
Department of Justice (DOJ) which forwarded the same to the Western Police
District (WPD). After receiving a copy of the indorsement in Australia,
McLoughlin came to the Philippines and registered again as a hotel guest of
Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was
instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for
documentation. But McLoughlin went back to Australia as he had an urgent
business matter to attend to. For several times, McLoughlin left for Australia to
attend to his business and came back to the Philippines to follow up on his letter
to the President but he failed to obtain any concrete assistance. McLoughlin left
again for Australia and upon his return to the Philippines on 25 August 1989 to
pursue his claims against petitioners, the WPD conducted an investigation
which resulted in the preparation of an affidavit which was forwarded to the
Manila City Fiscals Office. Said affidavit became the basis of preliminary
investigation. However, McLoughlin left again for Australia without receiving the
notice of the hearing on 24 November 1989. Thus, the case at the Fiscals Office
was dismissed for failure to prosecute. Mcloughlin requested the reinstatement
of the criminal charge for theft. In the meantime, McLoughlin and his lawyers
wrote letters of demand to those having responsibility to pay the damage. Then
he left again for Australia. Upon his return on 22 October 1990, he registered at

the Echelon Towers at Malate, Manila. Meetings were held between McLoughlin
and his lawyer which resulted to the filing of a complaint for damages on 3
December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlins money which was discovered on 16
April 1988. After filing the complaint, McLoughlin left again for Australia to
attend to an urgent business matter. Tan and Lopez, however, were not served
with summons, and trial proceeded with only Lainez, Payam and YHT Realty
Corporation as defendants. After defendants had filed their Pre-Trial Brief
admitting that they had previously allowed and assisted Tan to open the safety
deposit box, McLoughlin filed an Amended/Supplemental Complaint[20] dated
10 June 1991 which included another incident of loss of money and jewelry in
the safety deposit box rented by McLoughlin in the same hotel which took place
prior to 16 April 1988.[21] The trial court admitted the Amended/Supplemental
Complaint. During the trial of the case, McLoughlin had been in and out of the
country to attend to urgent business in Australia, and while staying in the
Philippines to attend the hearing, he incurred expenses for hotel bills, airfare
and other transportation expenses, long distance calls to Australia, Meralco
power expenses, and expenses for food and maintenance, among others. After
trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads: WHEREFORE, above premises considered,
judgment is hereby rendered by this Court in favor of plaintiff and against the
defendants, to wit: 1. Ordering defendants, jointly and severally, to pay plaintiff
the sum of US$11,400.00 or its equivalent in Philippine Currency
of P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent in
Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with
12% interest from April 16 1988 until said amount has been paid to plaintiff
(Item 1, Exhibit CC); 2. Ordering defendants, jointly and severally to pay plaintiff
the sum of P3,674,238.00 as actual and consequential damages arising from
the loss of his Australian and American dollars and jewelries complained against
and in prosecuting his claim and rights administratively and judicially; 3.
Ordering defendants, jointly and severally, to pay plaintiff the sum
of P500,000.00 as moral damages (Item X, Exh. CC); 4. Ordering defendants,
jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary
damages (Item XI, Exh. CC); 5. And ordering defendants, jointly and severally,
to pay litigation expenses in the sum of P200,000.00 (Item XII, Exh. CC); 6.
Ordering defendants, jointly and severally, to pay plaintiff the sum
of P200,000.00 as attorneys fees, and a fee of P3,000.00 for every appearance;
and 7. Plus costs of suit. SO ORDERED.
The trial court found that McLoughlins allegations as to the fact of loss and as to
the amount of money he lost were sufficiently shown by his direct and
straightforward manner of testifying in court and found him to be credible and
worthy of belief as it was established that McLoughlins money, kept in
Tropicanas safety deposit box, was taken by Tan without McLoughlins consent.
The taking was effected through the use of the master key which was in the
possession of the management. Payam and Lainez allowed Tan to use the
master key without authority from McLoughlin. The trial court added that if
McLoughlin had not lost his dollars, he would not have gone through the trouble
and personal inconvenience of seeking aid and assistance from the Office of the
President, DOJ, police authorities and the City Fiscals Office in his desire to
recover his losses from the hotel management and Tan.
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry
worth approximately One Thousand Two Hundred US Dollars (US$1,200.00)
which allegedly occurred during his stay at Tropicana previous to 4 April 1988,
no claim was made by McLoughlin for such losses in his complaint dated 21
November 1990 because he was not sure how they were lost and who the

responsible persons were. But considering the admission of the defendants in

their pre-trial brief that on three previous occasions they allowed Tan to open
the box, the trial court opined that it was logical and reasonable to presume
that his personal assets consisting of Seven Thousand US Dollars (US$7,000.00)
and jewelry were taken by Tan from the safety deposit box without McLoughlins
consent through the cooperation of Payam and Lainez. The trial court also found
that defendants acted with gross negligence in the performance and exercise of
their duties and obligations as innkeepers and were therefore liable to answer
for the losses incurred by McLoughlin. Moreover, the trial court ruled that
paragraphs (2) and (4) of the Undertaking For The Use Of Safety Deposit
Box are not valid for being contrary to the express mandate of Article 2003 of
the New Civil Code and against public policy.[27] Thus, there being fraud or
wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual
obligations.[28] The Court of Appeals affirmed the disquisitions made by the
lower court except as to the amount of damages awarded. The decretal text of
the appellate courts decision reads: THE FOREGOING CONSIDERED, the
appealed Decision is hereby AFFIRMED but modified as follows: The appellants
are directed jointly and severally to pay the plaintiff/appellee the following
amounts:

of testimonial evidence by the trial court especially if what is at issue is the

credibility of the witness. The oft-repeated principle is that where the credibility
of a witness is an issue, the established rule is that great respect is accorded to
the evaluation of the credibility of witnesses by the trial court.[31] The trial
court is in the best position to assess the credibility of witnesses and their
testimonies because of its unique opportunity to observe the witnesses
firsthand and note their demeanor, conduct and attitude under grilling
examination. We are also not impressed by petitioners argument that the
finding of gross negligence by the lower court as affirmed by the appellate court
is not supported by evidence. The evidence reveals that two keys are required
to open the safety deposit boxes of Tropicana. One key is assigned to the guest
while the other remains in the possession of the management. If the guest
desires to open his safety deposit box, he must request the management for the
other key to open the same. In other words, the guest alone cannot open the
safety deposit box without the assistance of the management or its employees.
With more reason that access to the safety deposit box should be denied if the
one requesting for the opening of the safety deposit box is a stranger. Thus, in
case of loss of any item deposited in the safety deposit box, it is inevitable to
conclude that the management had at least a hand in the consummation of the
taking, unless the reason for the loss is force majeure.

1) P153,200.00 representing the peso equivalent of US$2,000.00 and

AUS$4,500.00; 2) P308,880.80, representing the peso value for the air fares
from Sidney [sic] to Manila and back for a total of eleven (11) trips; 3) One-half
of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment
Hotel; 4) One-half of P152,683.57 or P76,341.785 representing payment to
Echelon Tower; 5) One-half of P179,863.20 or P89,931.60 for the taxi
transportation from the residence to Sidney Airport and from MIA to the hotel
here in Manila, for the eleven (11) trips; 6) One-half of P7,801.94 or P3,900.97
representing Meralco power expenses; 7) One-half of P356,400.00
or P178,000.00 representing expenses for food and maintenance; 8) P50,000.00
for moral damages; 9) P10,000.00 as exemplary damages; and 10) P200,000
representing attorneys fees. With costs. SO ORDERED. Unperturbed, YHT Realty
Corporation, Lainez and Payam went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether
the appellate courts conclusion on the alleged prior existence and subsequent
loss of the subject money and jewelry is supported by the evidence on record;
(b) whether the finding of gross negligence on the part of petitioners in the
performance of their duties as innkeepers is supported by the evidence on
record; (c) whether the Undertaking For The Use of Safety Deposit Box
admittedly executed by private respondent is null and void; and (d) whether the
damages awarded to private respondent, as well as the amounts thereof, are
proper under the circumstances. The petition is devoid of merit. It is worthy of
note that the thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the bounds of this
mode of review. Petitioners point out that the evidence on record is insufficient
to prove the fact of prior existence of the dollars and the jewelry which had
been lost while deposited in the safety deposit boxes of Tropicana, the basis of
the trial court and the appellate court being the sole testimony of McLoughlin as
to the contents thereof. Likewise, petitioners dispute the finding of gross
negligence on their part as not supported by the evidence on record. We are not
persuaded. We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in
open court by McLoughlin. Such findings are factual and therefore beyond the
ambit of the present petition. The trial court had the occasion to observe the
demeanor of McLoughlin while testifying which reflected the veracity of the
facts testified to by him. On this score, we give full credence to the appreciation

Noteworthy is the fact that Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management when the loss
took place. In fact, they even admitted that they assisted Tan on three separate
occasions in opening McLoughlins safety deposit box. This only proves that
Tropicana had prior knowledge that a person aside from the registered guest
had access to the safety deposit box. Yet the management failed to notify
McLoughlin of the incident and waited for him to discover the taking before it
disclosed the matter to him. Therefore, Tropicana should be held responsible for
the damage suffered by McLoughlin by reason of the negligence of its
employees.
The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three
times in opening the safety deposit box of McLoughlin at around 6:30 A.M. to
7:30 A.M. while the latter was still asleep.[34] In light of the circumstances
surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of
McLoughlins money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most of
the time. The evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife. Such an inference
from the act of McLoughlin will not exculpate the petitioners from liability in the
absence of any showing that he made the management believe that Tan was his
wife or was duly authorized to have access to the safety deposit box. Mere close
companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of
McLoughlins deposit. If only petitioners exercised due diligence in taking care of
McLoughlins safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening
McLoughlins safety deposit box a number of times at the early hours of the
morning. Tans acts should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have exercised due
diligence required of them. Failure to do so warrants the conclusion that the

management had been remiss in complying with the obligations imposed upon
hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall
bear the burden of paying damages, Article 2180, paragraph (4) of the same
Code provides that the owners and managers of an establishment or enterprise
are likewise responsible for damages caused by their employees in the service
of the branches in which the latter are employed or on the occasion of their
functions. Also, this Court has ruled that if an employee is found negligent, it is
presumed that the employer was negligent in selecting and/or supervising him
for it is hard for the victim to prove the negligence of such employer.[35] Thus,
given the fact that the loss of McLoughlins money was consummated through
the negligence of Tropicanas employees in allowing Tan to open the safety
deposit box without the guests consent, both the assisting employees and YHT
Realty Corporation itself, as owner and operator of Tropicana, should be held
solidarily liable pursuant to Article 2193.[36] The issue of whether
the Undertaking For The Use of Safety Deposit Box executed by McLoughlin is
tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to
be null and void. We find no reason to reverse their common conclusion. Article
2003 is controlling, thus: Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to
2001[37] is suppressed or diminished shall be void. Article 2003 was
incorporated in the New Civil Code as an expression of public policy precisely to
apply to situations such as that presented in this case. The hotel business like
the common carriers business is imbued with public interest. Catering to the
public, hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the essence
of the business. The law in turn does not allow such duty to the public to be
negated or diluted by any contrary stipulation in so-called undertakings that
ordinarily appear in prepared forms imposed by hotel keepers on guests for
their signature. In an early case, the Court of Appeals through its then Presiding
Justice (later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees.
It is enough that such effects are within the hotel or inn. With greater reason
should the liability of the hotelkeeper be enforced when the missing items are
taken without the guests knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the
undertaking manifestly contravene Article 2003 of the New Civil Code for they
allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever. Evidently, the
undertaking was intended to bar any claim against Tropicana for any loss of the
contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the responsibility
of the hotel-keeper shall extend to loss of, or injury to, the personal property of
the guests even if caused by servants or employees of the keepers of hotels or
inns as well as by strangers, except as it may proceed from any force majeure.
It is the loss through force majeure that may spare the hotel-keeper from
liability. In the case at bar, there is no showing that the act of the thief or robber
was done with the use of arms or through an irresistible force to qualify the
same as force majeure.

Petitioners likewise anchor their defense on Article 2002 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or
visitors. Even a cursory reading of the provision would lead us to reject
petitioners contention. The justification they raise would render nugatory the
public interest sought to be protected by the provision. What if the negligence
of the employer or its employees facilitated the consummation of a crime
committed by the registered guests relatives or visitor? Should the law
exculpate the hotel from liability since the loss was due to the act of the visitor
of the registered guest of the hotel? Hence, this provision presupposes that the
hotel-keeper is not guilty of concurrent negligence or has not contributed in any
degree to the occurrence of the loss. A depositary is not responsible for the loss
of goods by theft, unless his actionable negligence contributes to the loss. In
the case at bar, the responsibility of securing the safety deposit box was shared
not only by the guest himself but also by the management since two keys are
necessary to open the safety deposit box. Without the assistance of hotel
employees, the loss would not have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was not the registered guest, to
open the safety deposit box of McLoughlin, even assuming that the latter was
also guilty of negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under
the pretense of being a family member or a visitor of the guest, to have access
to the safety deposit box without fear of any liability that will attach thereafter
in case such person turns out to be a complete stranger. This will allow the hotel
to evade responsibility for any liability incurred by its employees in conspiracy
with the guests relatives and visitors. Petitioners contend that McLoughlins case
was mounted on the theory of contract, but the trial court and the appellate
court upheld the grant of the claims of the latter on the basis of tort. There is
nothing anomalous in how the lower courts decided the controversy for this
Court has pronounced a jurisprudential rule that tort liability can exist even if
there are already contractual relations. The act that breaks the contract may
also be tort. As to damages awarded to McLoughlin, we see no reason to
modify the amounts awarded by the appellate court for the same were based on
facts and law. It is within the province of lower courts to settle factual issues
such as the proper amount of damages awarded and such finding is binding
upon this Court especially if sufficiently proven by evidence and not
unconscionable or excessive. Thus, the appellate court correctly awarded
McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five
Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at the time
of payment,[47] being the amounts duly proven by evidence.[48] The alleged
loss that took place prior to 16 April 1988 was not considered since the amounts
alleged to have been taken were not sufficiently established by evidence. The
appellate court also correctly awarded the sum of P308,880.80, representing
the peso value for the air fares from Sydney to Manila and back for a total of
eleven (11) trips;[49] one-half of P336,207.05 or P168,103.52 representing
payment to Tropicana;[50] one-half of P152,683.57 or P76,341.785 representing
payment to Echelon Tower;[51] one-half of P179,863.20 or P89,931.60 for the
taxi or transportation expenses from McLoughlins residence to Sydney Airport
and from MIA to the hotel here in Manila, for the eleven (11) trips;[52] one-half
of P7,801.94 or P3,900.97 representing Meralco power expenses;[53] one-half
of P356,400.00 or P178,000.00 representing expenses for food and
maintenance.[54] The amount of P50,000.00 for moral damages is reasonable.
Although trial courts are given discretion to determine the amount of moral
damages, the appellate court may modify or change the amount awarded when
it is palpably and scandalously excessive. Moral damages are not intended to
enrich a complainant at the expense of a defendant. They are awarded only to
enable the injured party to obtain means, diversion or amusements that will

serve to alleviate the moral suffering he has undergone, by reason of

defendants culpable action. The awards of P10,000.00 as exemplary damages
and P200,000.00 representing attorneys fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of
Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed,
jointly and severally, to pay private respondent the following amounts: (1)
US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of
payment; (2) P308,880.80, representing the peso value for the air fares from
Sydney to Manila and back for a total of eleven (11) trips; (3) One-half
of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana
Apartment Hotel; (4) One-half of P152,683.57 or P76,341.785 representing
payment to Echelon Tower; (5) One-half of P179,863.20 or P89,931.60 for the
taxi or transportation expense from McLoughlins residence to Sydney Airport
and from MIA to the hotel here in Manila, for the eleven (11) trips; (6) One-half
of P7,801.94 or P3,900.97 representing Meralco power expenses; (7) One-half
of P356,400.00 or P178,200.00 representing expenses for food and
maintenance; (8) P50,000.00 for moral damages; (9) P10,000.00 as exemplary
damages; and (10) P200,000 representing attorneys fees. With costs. SO
ORDERED.

PCIC VS. PETROLEUM DISTRIBUTORS

Before the Court is a petition for review under Rule 45 of the Rules of Court
seeking the reversal of the July 31, 2007 Decision [1] and the December 28, 2007
Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 82417, which
affirmed with modification the January 12, 2004 Decision of the Regional Trial
Court, Branch 111, Pasay City (RTC).
The Facts: On January 27, 1999, respondent Petroleum Distributors and
Services Corporation (PDSC), through its president, Conrado P. Limcaco, entered
into a building contract[3] with N.C. Francia Construction Corporation (FCC),
represented by its president and chief executive officer, Emmanuel T. Francia,
for the construction of a four-story commercial and parking complex located at
MIA Road corner Domestic Road, Pasay City, known as Park N Fly Building (Park
N Fly). Under the contract, FCC agreed to undertake the construction of Park N
Fly for the price of 45,522,197.72.
The parties agreed that the construction work would begin on February 1, 1999.
Under the Project Evaluation and Review Technique Critical Path Method (PERTCPM), the project was divided into two stages: Phase 1 [4] of the construction
work would be finished on May 17, 1999 and Phase 2[5] would begin on May 18,
1999 and finish on October 20, 1999. The project should be turned over
by October 21, 1999.[6] It was further stipulated that in the event FCC failed to
finish the project within the period specified, liquidated damages equivalent to
1/10 of 1% of the contract price for every day of delay shall accrue in favor of
PDSC.[7]
To ensure compliance with its obligation, FCCs individual officers, namely,
Natividad Francia, Emmanuel C. Francia, Jr., Anna Sheila C. Francia, San Diego
Felipe G. Bermudez, Emmanuel T. Francia, Charlemagne C. Francia, and Ruben
G. Caperia, signed the Undertaking of Surety [8] holding themselves personally
liable for the accountabilities of FCC.
Also, FCC procured Performance Bond No. 31915 amounting to 6,828,329.00
from petitioner Philippine Charter Insurance Corporation (PCIC) to secure full
and faithful performance of its obligation under the Building Contract.[9]
The construction of the Park N Fly started on February 1, 1999.

Pursuant to the Building Contract, PDSC sourced out construction materials and
subcontracted various phases of the work to help obtain the lowest cost of the
construction and speed up the work of the project. These resulted in the
reduction of the contract price.[10]During the Phase 1 of the project, PDSC
noticed that FCC was sixteen (16) days behind schedule. In a
Letter[11] dated March 25, 1999, it reminded FCC to catch up with the schedule
of the projected work path, or it would impose the penalty of 1/10 of the 1% of
the contract price. The problem, however, was not addressed, as the delay
increased to 30 days[12] and ballooned to 60 days.[13]
Consequently, on September 10, 1999, FCC executed a deed of assignment,
[14]
assigning a portion of its receivables from Caltex Philippines,
Inc. (Caltex), and a chattel mortgage, [15] conveying some of its construction
equipment to PDSC as additional security for the faithful compliance with its
obligation. On even date, PDSC and FCC likewise executed a memorandum of
agreement (MOA),[16] wherein the parties agreed to revise the work schedule of
the project. As a consequence, Performance Bond No. 31915 was extended up
to March 2, 2000.[17] For failure of FCC to accomplish the project within the
agreed completion period, PDSC, in a letter [18] dated December 3, 1999,
informed FCC that it was terminating their contract based on Article 12,
Paragraph 12.1 of the Building Contract. Subsequently, PDSC sent demand
letters[19] to FCC and its officers for the payment of liquidated damages
amounting to 9,149,962.02 for the delay. In the same manner, PDSC wrote
PCIC asking for remuneration pursuant to Performance Bond No. 31915. [20]
Despite notice, PDSC did not receive any reply from either FCC or PCIC,
constraining it to file a complaint [21] for damages, recovery of possession of
personal property and/or foreclosure of mortgage with prayer for the issuance of
a writ of replevin and writ of attachment, against FCC and its officers before the
RTC. PDSC later filed a supplemental complaint [22] impleading PCIC, claiming
coverage under Performance Bond No. 31915 in the amount of 6,828,329.66.
In its Amended Answer with affirmative defense and counterclaim, [23] FCC
admitted that it entered into a contract with PDSC for the construction of the
Park N Fly building. It, however, asserted that due to outsourcing of different
materials and subcontracting of various phases of works made by PDSC, the
contract price was invariably reduced to 19,809,822.12.
FCC denied any liability to PDSC claiming that any such claim by the latter had
been waived, abandoned or otherwise extinguished by the execution of
the September 10, 1999 MOA. FCC claimed that in the said MOA, PDSC assumed
all the obligations originally reposed upon it. FCC further explained that the
PERT-CPM agreed upon by the parties covering the first phase of the work
project was severely affected when PDSC deleted several scopes of work and
undertook to perform the same. In fact, the PERT-CPM was evaluated and it was
concluded that the delay was attributable to both of them. FCC added that after
Phase I of the project, it sent a progress billing in the amount of 939,165.00
but PDSC approved the amount of 639,165.00 only after deducting the cost of
the attributable delay with the agreement that from then on, PDSC should
shoulder all expenses in the construction of the building until completion; that
FCC would provide the workers on the condition that they would be paid by
PDSC; and that it would allow PDSC free use of the construction equipments
that were in the project site. For its part, PCIC averred that as a surety, it was
not liable as a principal obligor; that its liability under the bond was conditional
and subsidiary and that it could be made liable only upon FCCs default of its
obligation in the Building Contract up to the extent of the terms and conditions
of the bond. PCIC also alleged that its obligation under the performance bond
was terminated when it expired on October 15, 1999 and the extension of the
performance bond until March 2, 2000 was not binding as it was made without
its knowledge and consent.

PCIC added that PDSCs claim against it had been waived, abandoned or
extinguished by the September 10, 1999 MOA. It also argued that its obligation
was indeed extinguished when PDSC terminated the contract on December 3,
1999 and took over the construction and it failed to file its claim within ten (10)
days from the expiry date or from the alleged default of FCC. [24]Nonetheless, in
the event that PCIC would be made liable, its liability should be in proportion to
the liabilities of the other sureties.
On January 12, 2004, the RTC rendered its Decision [25] in favor of PDSC. The RTC
found FCC guilty of delay when it failed to finish and turn over the project
on October 15, 1999. It pronounced FCC and PCIC jointly and severally liable
and ordered them to pay PDSC the amount of 9,000,000.00 as damages and
50,000.00 as attorneys fees plus interest.
FCC and PCIC filed their respective notice of appeal [26] with the RTC. On February
12, 2004, the RTC issued its Order[27]giving due course to the notice of appeal.
On July 31, 2007, the CA modified the RTCs decision. [28] The CA agreed that FCC
incurred delay in the construction of the project. It, however, found that the
computation of the liquidated damages should be based on the reduced
contract price of 19,809,822.12. The dispositive portion reads: WHEREFORE,
the Decision dated 12 January 2004 of the Regional Trial Court of Pasay City,
Branch 111 is AFFIRMED with MODIFICATION in that appellants N.C. Francia
Construction Corporation, Natividad Francia, Emmanuel Francia, Jr., Anna Sheila
Francia San Diego, Felipe Bermudez, Emmanuel Francia, Charlemagne Francia,
Ruben Caperia, and Philippine Charter Insurance Corporation are hereby held
solidarily liable to pay appellee Petroleum Distributors & Services Corporation
(1) liquidated damages in the sum of 3,882,725.13, which shall earn legal
interest at the rate of 6% per annum from 10 January 2000 until finality of this
judgment; (2) attorneys fees amounting to 50,000.00; and (3) cost of suit.
Pursuant to Performance Bond No. 31915, the liability of appellant Philippine
Charter Insurance Corporation should not exceed6,828,329.66.
Appellants N.C Francia Construction Corporation, Emmanuel Francia and
Natividad Francia are adjudged liable to pay appellant Philippine Charter
Insurance Corporation for the amount the latter may have paid under
Performance Bond No. 31915. SO ORDERED.[29]
FCC and PCIC filed their separate motions for reconsideration [30] but the CA
denied them in its December 28, 2007Resolution.[31]
Hence, this petition.
It is well to note that only PCIC appealed the CAs decision. It became final and
executory with regard to FCC and the other parties in the case. Hence, the Court
shall limit its discussion to the liability of PCIC.
In its Memorandum,[32] PCIC anchored its petition on the following issues:
1. Whether or not the Court of Appeals, in adjudging Petitioner liable for
liquidated damages, expanded liability under Performance Bond No.
31915 which on its face answers only for actual and compensatory
damages, not liquidated damages. Assuming arguendo liability for
liquidated damages under the performance bond, whether or not the
Court of Appeals erred in not declaring that the award of liquidated
damages is iniquitous and unconscionable and in not applying the
provisions of Article 2227, Civil Code, and Palmares v. Court of Appeals,
288 SCRA 422.
2. Whether or not the Memorandum of Agreement dated Sept. 10, 1999
entered into by respondent and Francia Construction, confirmed in a
letter dated Sept. 20, 1999, --- without Petitioners knowledge or
consent---, the effect that all costs, expenses, payments and
obligations shall be deemed paid, performed and fully settled as of
Sept. 10, 1999, discharged Petitioner from liability under the
performance bond under Article 2079, Civil Code.

3.

Whether or not the Court of Appeals, having made the finding of fact
that the sums of Php2,793,000.00 and Php662,836.50 should be
deducted from Php3,882,725.13, erred in not deducting the amounts in
the dispositive portion of the decision.[33]

In sum, the issues before the Court are (1) whether or not PCIC is liable for
liquidated damages under the performance bond; (2) whether or not the
September 10, 1999 MOA executed by PDSC and FCC extinguished PCICs
liability under the performance bond; and (3) whether or not the amounts of
2,793,000.00 and 662,836.50 are deductible from the liquidated damages
awarded by the CA. PCIC argues that in case of a breach of contract, the
performance bond is answerable only for actual or compensatory, not for
liquidated damages. The terms of the bond are clear that the liability of the
surety is determined by the contract of suretyship and cannot be extended by
implication beyond the terms of the contract. Nonetheless, even assuming that
it is liable under the performance bond, the liability should be based on equity.
It claims that it is unlawful and iniquitous to hold FCC responsible for the delay
of the subcontractor commissioned by PDSC. PCIC adds that the act of PDSC of
subcontracting the various stages of the project resulted in a revision of work
schedule and extension of the completion date that ultimately released both
FCC and PCIC of whatever claims PDSC may have against them. PCIC is of the
impression that since the subcontracting made by PDSC was made without its
consent and knowledge, its liability under the performance bond should be
extinguished.
PCIC also pointed out that the receivable in the amount of 2,793,000.00
acquired by PDSC from Caltex and the proceeds from the auction sale in the
sum of 662,836.50 should be deducted from the award of 3,882,725.13. The
Court finds no merit in the petition.
The Building Contract entered into by PDSC and FCC provides that: Art.
2 ESSENCE OF THE CONTRACT: 2.1 It is understood that time, quality of work in
accordance with the OWNERs requirements, and reduced construction costs are
the essence of this Contract; 2.2 The CONTRACTOR shall commence the
construction for the first two (2) levels not later than five (5) days immediately
after the date of execution of this Contract and shall regularly proceed and
complete the construction within Two Hundred Fifty-Nine (259) calendar days
reckoned from the date of signing of this Contract or not later than October 15,
1999, whichever is earlier. To ensure completion of the work within the time
given herein, construction work shall be conducted at least twenty hours each
day with at least two (2) work shift for every day actually worked; 2.3 In the
event that the construction is not completed within the aforesaid period of time,
the OWNER is entitled and shall have the right to deduct from any amount that
may be due to the CONTRACTOR the sum of one-tenth (1/10) of one percent
(1%) of the contract price for every day of delay in whatever stage of the
project as liquidated damages, and not by way of penalty, and without prejudice
to such other remedies as the OWNER may, in its discretion, employ including
the termination of this Contract, or replacement of the CONTRACTOR; 2.4
Furthermore, the CONTRACTOR agrees not to request any extension of time due
to any delay in the procurement of materials needed in the construction other
than due to circumstances of Force Majeure. Force Majeure is hereby defined as
any war, civil commotion and disturbance, acts of God or any other cause
beyond the CONTRACTORs control and without any contributing fault on the
part of the CONTRACTOR; 2.5 Contractor shall arrange, schedule and carry on
the work so as not to interfere with the delivery and erection of the work of
others. To facilitate the erection of such other work, the CONTRACTOR shall
cease or resume work at any point or stage of the Project, when so directed by
the OWNER or his duly authorized representative; 2.3 of the Building Contract
clearly provides a stipulation for the payment of liquidated damages in case of

delay in the construction of the project. Such is in the nature of a penalty clause
fixed by the contracting parties as a compensation or substitute for damages in
case of breach of the obligation.[34] The contractor is bound to pay the stipulated
amount without need for proof of the existence and the measures of damages
caused by the breach.[35]
Article 2226 of the Civil Code allows the parties to a contract to stipulate on
liquidated damages to be paid in case of breach.It is attached to an obligation in
order to insure performance and has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of breach. [36] As a general
rule, contracts constitute the law between the parties, and they are bound by its
stipulations.[37] For as long as they are not contrary to law, morals, good
customs, public order, or public policy, the contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient.
[38]

In the case at bench, the performance bond issued by PCIC specifically provides
that: KNOW ALL MEN BY THESE PRESENTS: That we, N.C. FRANCIA
CONSTRUCTION CORPORATION of Merryland Corporate Offices, 3250 Gracia St.,
cor. Edsa, Brgy. Pinagkaisahan, Makati City, as Principal and PHILIPPINE
CHARTER INSURANCE CORPORATION, a corporation duly organized and existing
under and by virtue of the laws of the Philippines, as Surety, are held and firmly
bound unto PETROLEUM DISTRIBUTORS & SERVICES CORPORATION, as obligee
in the sum of PESOS SIX MILLION EIGHT HUNDRED TWENTY EIGHT THOUSAND
THREE HUNDRED TWENTY NINE & 66/100 ONLY (6,828,329.66) Philippine
Currency for the payment of which sum well and truly to be made, we bind
ourselves, our heirs, executors, administrators, successors, and assigns, jointly
and severally, firmly by these presents.
THE CONDITION OF THIS OBLIGATION ARE AS FOLLOWS:
WHEREAS, the above bounden principal, on the ____ day of ________
19___ entered into an ________________ with ___________, to fully and
faithfully guarantee that the above-named Principal shall furnish,
deliver, place and complete any and all necessary materials, labor,
plant,
tools
appliances
and
equipment,
supplies,
utilities
transportation, superintendence, supervision and all other facilities in
connection with the construction of a 4-storey commercial/parking
complex situated at MIA Road cor. Domestic Road, Pasay City as per
attached Building Contract dated January 27, 1999.
Provided, however, that the liability of the Surety Company under this bond
shall in no case exceed the face value hereof.
WHEREAS, said oblige requires said principal to give a good and sufficient bond
in the above stated sum to secure the full and faithful performance on its part of
said undertaking.
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms conditions and agreements stipulated in said
undertakings then this obligation shall be null and void; otherwise it shall
remain in full force and effect.
By the language of the performance bond issued by PCIC, it guaranteed the full
and faithful compliance by FCC of its obligations in the construction of the Park
N Fly. In fact, the primary purpose for the acquisition of the performance bond
was to guarantee to PDSC that the project would proceed in accordance with
the terms and conditions of the contract and to ensure the payment of a sum of
money in case the contractor would fail in the full performance of the contract.
[39]
This guaranty made by PCIC gave PDSC the right to proceed against it (PCIC)
following FCCs non-compliance with its obligation. A contract of suretyship is an
agreement whereby a party, called the surety, guarantees the performance by
another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee.[40] Although the contract of a surety is

secondary only to a valid principal obligation, the surety becomes liable for the
debt or duty of another although it possesses no direct or personal interest over
the obligations nor does it receive any benefit therefrom. [41] This was explained
in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation,[42] where it was written: The suretys obligation is not an original
and direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless, although
the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; in other words, he is directly and equally bound
with the principal. Corollary, when PDSC communicated to FCC that it was
terminating the contract, PCICs liability, as surety, arose. The claim of PDSC
against PCIC occurred from the failure of FCC to perform its obligation under the
building contract. As mandated by Article 2047 of 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. If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case, the
contract is called a suretyship.
Thus, suretyship arises upon the solidary binding of a person deemed the surety
with the principal debtor for the purpose of fulfilling an obligation. [43] A surety is
considered in law as being the same party as the debtor in relation to whatever
is adjudged touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable. [44] Therefore, as surety, PCIC becomes liable for
the debt or duty of FCC although it possesses no direct or personal interest over
the obligations of the latter, nor does it receive any benefit therefrom. [45]
The Court also found untenable the contention of PCIC that the principal
contract was novated when PDSC and FCC executed the September 10,
1999 MOA, without informing the surety, which, in effect, extinguished its
obligation. A surety agreement has two types of relationship: (1) the principal
relationship between the obligee and the obligor; and (2) the accessory surety
relationship between the principal and the surety. The obligee accepts the
suretys solidary undertaking to pay if the obligor does not pay. Such
acceptance, however, does not change in any material way the obligees
relationship with the principal obligor. Neither does it make the surety an active
party in the principal obligor-obligee relationship. It follows, therefore, that the
acceptance does not give the surety the right to intervene in the principal
contract. The suretys role arises only upon the obligors default, at which time, it
can be directly held liable by the obligee for payment as a solidary obligor. [46]
Furthermore, in order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and new obligation be in every point incompatible with
each other.[47] Novation of a contract is never presumed. In the absence of an
express agreement, novation takes place only when the old and the new
obligations are incompatible on every point.[48]
Undoubtedly, a surety is released from its obligation when there is a material
alteration of the principal contract in connection with which the bond is given,
such as a change which imposes a new obligation on the promising party, or
which takes away some obligation already imposed, or one which changes the
legal effect of the original contract and not merely its form.[49] In this case,
however, no new contract was concluded and perfected between PDSC and
FCC. A reading of the September 10, 1999 MOA reveals that only the revision of
the work schedule originally agreed upon was the subject thereof. The parties
saw the need to adjust the work schedule because of the various subcontracting
made by PDSC. In fact, it was specifically stated in the MOA that all other terms

and conditions of the Building Contract of 27 January 1999 not inconsistent

herewith shall remain in full force and effect. [50] There was no new
contract/agreement which could be considered to have substituted the Building
Contract. As correctly ruled by the CA, thus: At first blush, it would seem that
the parties agreed on a revised timetable for the construction of Park N Fly. But
then, nowhere in the voluminous records of this case could We find the Annex A
mentioned in the above-quoted agreement which could have shed light to the
question of whether a new period was indeed fixed by the parties. The
testimony of appellant Emmanuel Francia, Sr., President and Chief Executive
Officer of appellant N.C, Francia, candidly disclosed what truly happened to
Annex A, as he admitted that no new PERT/CPM was actually attached to the
Memorandum of Agreement.
Accordingly, We find no compelling reason to declare that novation ensued
under the prevailing circumstances. The execution of the Building Contract
dated 27 January 1999 does not constitute a novation of the Memorandum of
Agreement dated 10 September 1999. There lies no incompatibility between the
two contracts as their principal object and conditions remained the same. While
there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchtone for contrariety,
however, would be an irreconcilable incompatibility between the old and the
new obligations.[51]
It must likewise be emphasized that pursuant to the September 10, 1999 MOA,
PCIC extended the coverage of the performance bond until March 2, 2000.
[52]
Finally, as pointed out by PCIC, the receivable in the amount of 2,793,000.00
acquired by PDSC from Caltex and the proceeds from the auction sale in the
sum of 662,836.50 should be deducted from the award of 3,882,725.13.
There is no quibble on this point. The ruling of the CA on the matter is very
clear. It reads: With these points firmly in mind, We proceed to the next question
raised by appellants whether the value of the securities given as well as the
proceeds of the sale of chattels should be deducted from the claim of liquidated
damages.
We answer in the affirmative.
There is no quibble that appellant N.C Francia assigned a portion of its
receivables from Caltex Philippines, Inc. in the amount of 2,793,000.00
pursuant to the Deed of Assignment dated 10 September 1999. Upon transfer of
said receivables, appellee Petroleum Distributors automatically stepped into the
shoes of its transferor. It is in keeping with the demands of justice and equity
that the amount of these receivables be deducted from the claim for liquidated
damages. So too, vehicles and equipment owned by appellant N.C. Francia were
sold at public auction at 1,070,000.00. After deducting storage fees, the
amount of 662,836.50 was deposited before the court a quo. The latter
amount accrues in favor of appellee Petroleum Distributors as partial payment
of its claim for liquidated damages. WHEREFORE, the petition is DENIED. The
July 31, 2007 Decision and December 28, 2007 Resolution of the Court of
Appeals(CA) in CA-G.R. CV No. 82417 are AFFIRMED. The receivable in the
amount of 2,793,000.00 acquired by PDSC from Caltex and the proceeds from
the auction sale in the sum of 662,836.50 should be deducted from the award
of 3,882,725.13. SO ORDERED.

YULIM VS. INTERNATIONAL EXCHANGE

In the assailed Decision1 dated February 1, 2012 in CA-G.R. CV No. 95522, the
Court of Appeals (CA) modified the Decision2 dated December 21, 2009 of the
Regional Trial Court (RTC) of Makati City, Branch 145, in Civil Case No. 02-749,
holding that James Yu (James), Jonathan Yu (Jonathan) and Almerick Tieng Lim
(Almerick), who were capitalist partners in Yulim International Company Ltd.

(Yulim), collectively called as the petitioners, were jointly and severally liable
with Yulim for its loan obligations with respondent International Exchange Bank
(iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic
partnership, a credit facility in the form of an Omnibus Loan Line for
P5,000,000.00, as evidenced by a Credit Agreement 3 which was secured by a
Chattel Mortgage4 over Yulims inventories in its merchandise warehouse at 106
4th Street, 9th Avenue, Caloocan City. As further guarantee, the partners,
namely, James, Jonathan and Almerick, executed a Continuing Surety
Agreement5 in favor of iBank.
Yulim availed of its aforesaid credit facility with iBank. The above promissory
notes (PN) were later consolidated under a single promissory note, PN No.
SADDK001014188, for P4,246,310.00, to mature on February 28, 2002. 7 Yulim
defaulted on the said note. On April 5, 2002, iBank sent demand letters to
Yulim, through its President, James, and through Almerick, 8 but without success.
iBank then filed a Complaint for Sum of Money with Replevin 9against Yulim and
its sureties. On August 8, 2002, the Court granted the application for a writ of
replevin. Pursuant to the Sheriffs Certificate of Sale dated November 7,
2002,10 the items seized from Yulims warehouse were worth only P140,000.00,
not P500,000.00 as the petitioners have insisted.11
On October 2, 2002, the petitioners moved to dismiss the complaint insisting
that their loan had been fully paid after they assigned to iBank their
Condominium Unit No. 141, with parking space, at 20 Landsbergh Place in
Tomas Morato Avenue, Quezon City.12 They claimed that while the pre-selling
value of the condominium unit was P3.3 Million, its market value has since risen
to P5.5 Million.13 The RTC, however, did not entertain the motion to dismiss for
non-compliance with Rule 15 of the Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating that they have
paid their loan by way of assignment of a condominium unit to iBank, as well as
insisting that iBanks penalties and charges were exorbitant, oppressive and
unconscionable.14
Ruling of the RTC
After trial on the merits, the RTC rendered judgment on December 21, 2009, the
dispositive portion of which reads, as follows: WHEREFORE, in view of the
foregoing considerations, the Court finds the individual defendants James Yu,
Jonathan Yu and Almerick Tieng Lim, not liable to the plaintiff, iBank, hence the
complaint against them is hereby DISMISSED for insufficiency of evidence,
without pronouncement as to cost. This court, however, finds defendant
corporation Yulim International Company Ltd. liable; and it hereby orders
defendant corporation to pay plaintiff the sum of P4,246,310.00 with interest at
16.50% per annum from February 28, 2002 until fully paid plus cost of suit. The
counterclaims of defendants against plaintiff iBank are hereby DISMISSED for
insufficiency of evidence. SO ORDERED.15Thus, the RTC ordered Yulim alone to
pay iBank the amount of P4,246,310.00, plus interest at 16.50% per
annum from February 28, 2002 until fully paid, plus costs of suit, and dismissed
the complaint against petitioners James, Jonathan and Almerick, stating that
there was no iota of evidence that the loan proceeds benefited their families. 16
The petitioners moved for reconsideration on January 12, 2010; 17 iBank on
January 19, 2010 likewise filed a motion for partial reconsideration.18 In its Joint
Order19 dated March 8, 2010, the RTC denied both motions.
Ruling of the CA: On March 23, 2010, Yulim filed a Notice of Partial Appeal,
followed on March 30, 2010 by iBank with a Notice of Appeal.
Yulim interposed the following as errors of the court a quo:

I.
II.

THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY [iBANK] THE

AMOUNT OF P4,246,310.00 WITH INTEREST AT 16.5% PER ANNUM
FROM FEBRUARY 28, 2002 UNTIL FULLY PAID.
THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO PAY
ATTORNEYS FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES.20

For its part, iBank raised the following as errors of the RTC:
I.

II.
III.

THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL [PETITIONERS

JAMES, JONATHAN AND ALMERICK] SOLIDARILY LIABLE WITH [YULIM]
ON THE BASIS OF THE CONTINUING SURETYSHIP AGREEMENT
EXECUTED BY THEM.
THE TRIAL COURT ERRED IN NOT HOLDING ALL THE [PETITIONERS]
LIABLE FOR PENALTY CHARGES UNDER THE CREDIT AGREEMENT AND
PROMISSORY NOTES SUED UPON.
THE TRIAL COURT ERRED IN NOT HOLDING [THE PETITIONERS] LIABLE
TO [iBANK] FOR ATTORNEYS FEES AND INDIVIDUAL [PETITIONERS]
JOINTLY AND SEVERALLY LIABLE WITH [YULIM] FOR COSTS OF SUIT
INCURRED BY [iBANK] IN ORDER TO PROTECT ITS RIGHTS. 21

Chiefly, the factual issue on appeal to the CA, raised by petitioners James,
Jonathan and Almerick, was whether Yulims loans have in fact been
extinguished with the execution of a Deed of Assignment of their condominium
unit in favor of iBank, while the corollary legal issue, raised by iBank, was
whether they should be held solidarily liable with Yulim for its loans and other
obligations to iBank. The CA ruled that the petitioners failed to prove that they
have already paid Yulims consolidated loan obligations totaling P4,246,310.00,
for which it issued to iBank PN No. SADDK001014188 for the said amount. It
held that the existence of a debt having been established, the burden to prove
with legal certainty that it has been extinguished by payment devolves upon
the debtors who have offered such defense. The CA found the records bereft of
any evidence to show that Yulim had fully settled its obligation to iBank, further
stating that the so-called assignment by Yulim of its condominium unit to iBank
was nothing but a mere temporary arrangement to provide security for its loan
pending the subsequent execution of a real estate mortgage. Specifically, the
CA found nothing in the Deed of Assignment which could signify that iBank had
accepted the said property as full payment of the petitioners loan. The CA
cited Manila Banking Corporation v. Teodoro, Jr.22 which held that an assignment
to guarantee an obligation is in effect a mortgage and not an absolute
conveyance of title which confers ownership on the assignee. Concerning the
solidary liability of petitioners James, Jonathan and Almerick, the CA disagreed
with the trial courts ruling that it must first be shown that the proceeds of the
loan redounded to the benefit of the family of the individual petitioners before
they can be held liable. Article 161 of the Civil Code and Article 121 of the
Family Code cited by the RTC apply only where the liability is sought to be
enforced against the conjugal partnership itself. In this case, regardless of
whether the loan benefited the family of the individual petitioners, they signed
as sureties, and iBank sought to enforce the loan obligation against them as
sureties of Yulim. Thus, the appellate court granted the appeal of iBank, and
denied that of the petitioners, as follows:
WHEREFORE, the foregoing considered, [iBanks] appeal is PARTLY
GRANTED while [the petitioners] appeal is DENIED. Accordingly, the appealed
decision is herebyMODIFIED in that [petitioners] James Yu, Jonathan Yu and
A[l]merick Tieng Lim are hereby held jointly and severally liable with defendant-

appellant Yulim for the payment of the monetary awards. The rest of the
assailed decision is AFFIRMED. SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before this Court: (1)
The CA erred in ordering petitioners James, Jonathan and Almerick jointly and
severally liable with petitioner Yulim to pay iBank the amount of P4,246,310.00
with interest at 16.5% per annum from February 28, 2002 until fully paid; (2)
The CA erred in not ordering iBank to pay the petitioners moral damages,
exemplary damages, and attorneys fees.24
The petitioners insist that they have paid their loan to iBank. They maintain that
the letter of iBank to them dated May 4, 2001, which expressly stipulated that
the petitioners shall execute a Deed of Assignment over one condominium unit
No. 141, 3rd Floor and a parking slot located at 20 Landsbergh Place, Tomas
Morato Avenue, Quezon City, was with the understanding that the Deed of
Assignment, which they in fact executed, delivering also to iBank all the
pertinent supporting documents, would serve to totally extinguish their loan
obligation to iBank. In particular, the petitioners state that it was their
understanding that upon approval by iBank of their Deed of Assignment, the
same shall be considered as full and final payment of the petitioners
obligation. They further assert that iBanks May 4, 2001 letter expressly carried
the said approval.
The petitioner invoked Article 1255 of the Civil Code, on payment by cession,
which provides: Art. 1255. The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless there is stipulation to the
contrary, shall only release the debtor from responsibility for the net proceeds
of the thing assigned. The agreements which, on the effect of the cession, are
made between the debtor and his creditors shall be governed by special laws.
Ruling of the Court
The petition is bereft of merit.
Firstly, the individual petitioners do not deny that they executed the Continuing
Surety Agreement, wherein they jointly and severally with the PRINCIPAL
[Yulim], hereby unconditionally and irrevocably guarantee full and complete
payment when due, whether at stated maturity, by acceleration, or otherwise,
of any and all credit accommodations that have been granted to Yulim by
iBank, including interest, fees, penalty and other charges.25 Under Article 2047
of the Civil Code, these words are said to describe a contract of suretyship. It
states:Art. 2047. By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so. If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship.In a contract of suretyship, one
lends his credit by joining in the principal debtors obligation so as to render
himself directly and primarily responsible with him without reference to the
solvency of the principal.26 According to the above Article, if a person binds
himself solidarily with the principal debtor, the provisions of Articles 1207 to
1222, or Section 4, Chapter 3, Title I, Book IV of the Civil Code on joint and
solidary obligations, shall be observed. Thus, where there is a concurrence of
two or more creditors or of two or more debtors in one and the same obligation,
Article 1207 provides that among them, [t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.
A surety is considered in law as being the same party as the debtor in relation
to whatever is adjudged touching the obligation of the latter, and their liabilities

are interwoven as to be inseparable.27 And it is well settled that when the

obligor or obligors undertake to be jointly and severally liable, it means that
the obligation is solidary,28 as in this case. There can be no mistaking the same
import of Article I of the Continuing Surety Agreement executed by the
individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL, hereby
unconditionally and irrevocably guarantee full and complete payment when
due, whether at stated maturity, by acceleration, or otherwise, of any and all
credit accommodations that have been granted or may be granted, renewed
and/or extended by the BANK to the PRINCIPAL.
The liability of the SURETIES shall not be limited to the maximum principal
amount of FIVE MILLION PESOS (P5,000,000.00) but shall include interest, fees,
penalty and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of payment and not merely of
collection and is intended to be a perfect and continuing indemnity in favor of
the BANK for the amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and not contingent upon
the pursuit of the BANK of whatever remedies it may have against the
PRINCIPAL of the other securities for the Accommodation. 29
Thereunder, in addition to binding themselves jointly and severally with Yulim
to unconditionally and irrevocably guarantee full and complete payment of
any and all credit accommodations that have been granted to Yulim, the
petitioners further warrant that their liability as sureties shall be direct,
immediate and not contingent upon the pursuit [by] the BANK of whatever
remedies it may have against the PRINCIPAL of other securities. There can
thus be no doubt that the individual petitioners have bound themselves to be
solidarily liable with Yulim for the payment of its loan with iBank.
As regards the petitioners contention that iBank in its letter dated May 4, 2001
had accepted/approved the assignment of its condominium unit in Tomas
Morato Avenue as full and final payment of their various loan obligations, the
Court is far from persuaded. On the contrary, what the letter accepted was only
the collaterals provided for the loans, as well as the consolidation of the
petitioners various PNs under one PN for their aggregate amount of
P4,246,310.00. The letter goes on to spell out the terms of the new PN, such as,
that its expiry would be February 28, 2002 or a term of 360 days, that interest
would be due every 90 days, and that the rate would be based on the 91-day
Treasury Bill rate or other market reference.
Nowhere can it be remotely construed that the letter even intimates an
understanding by iBank that the Deed of Assignment would serve to extinguish
the petitioners loan. Otherwise, there would have been no need for iBank to
mention therein the three collaterals or supports provided by the
petitioners, namely, the Deed of Assignment, the Chattel Mortgage and the
Continuing Surety Agreement executed by the individual petitioners. In fact,
Section 2.01 of the Deed of Assignment expressly acknowledges that it is a
mere interim security for the repayment of any loan granted and those that
may be granted in the future by the BANK to the ASSIGNOR and/or the
BORROWER, for compliance with the terms and conditions of the relevant credit
and/or loan documents thereof.30The condominium unit, then, is a mere
temporary security, not a payment to settle their promissory notes. 31
Even more unmistakably, Section 2.02 of the Deed of Assignment provides that
as soon as title to the condominium unit is issued in its name, Yulim
shall immediately execute the necessary Deed of Real Estate Mortgage in
favor of the BANK to secure the loan obligations of the ASSIGNOR and/or the

BORROWER.32 This is a plain and direct acknowledgement that the parties

really intended to merely constitute a real estate mortgage over the property. In
fact, the Deed of Assignment expressly states, by way of a resolutory condition
concerning the purpose or use of the Deed of Assignment, that after the
petitioners have delivered or caused the delivery of their title to iBank, the Deed
of Assignment shall then become null and void. Shorn of its legal efficacy as
an interim security, the Deed of Assignment would then become functus
officio once title to the condominium unit has been delivered to iBank. This is so
because the petitioners would then execute a Deed of Real Estate Mortgage
over the property in favor of iBank as security for their loan obligations.
Respondent iBank certainly does not share the petitioners interpretation of its
May 4, 2001 letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and the
Vice President of iBanks Commercial Banking Group, declared in her testimony
that the purpose of the Deed of Assignment was merely to serve as collateral
for their loan. To stress, the assignment being in its essence a mortgage, it was
but a security and not a satisfaction of the petitioners indebtedness. 34 Article
125535 of the Civil Code invoked by the petitioners contemplates the existence
of two or more creditors and involves the assignment of the entire debtors
property, not a dacion en pago.36 Under Article 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 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 contemplated by the parties, the consideration for which
would consist of the amount of outstanding loan due to iBank from the
petitioners. WHEREFORE, premises considered, the petition is DENIED. SO
ORDERED.

GATEWAY VS. ASIANBANK

This petition for review under Rule 45 seeks to nullify and set aside the
Decision[1] dated October 28, 2005 of the Court of Appeals (CA) in CA-G.R. CV
No. 80734 and its Resolution[2] of March 17, 2006 denying petitioners motion for
reconsideration.
The Facts: Petitioner Gateway Electronics Corporation (Gateway) is a domestic
corporation that used to be engaged in the semi-conductor business. During the
period material, petitioner Geronimo B. delos Reyes, Jr. was its president and
one Andrew delos Reyes its executive vice-president. On July 23, 1996,
Geronimo and Andrew executed separate but almost identical deeds of
suretyship for Gateway in favor of respondent Asianbank Corporation
(Asianbank), pertinently providing: I/We Geronimo B. de los Reyes, Jr. x x x
warrant to the ASIANBANK CORPORATION, x x x due and punctual payment by
the following individuals/companies/firms, hereinafter called the DEBTOR(S), of
such amounts whether due or not, as indicated opposite their respective names,
to wit: NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLS CORPORATION [PURCHASED LINE]
*US$3,000,000.00*OMNIBUS CREDIT LINE owing to the said ASIANBANK CORPORATION, hereafter
called the CREDITOR, as evidenced by all notes, drafts, overdrafts and other [credit] obligations of
every kind and nature contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness
herein secured at maturity, I/WE jointly and severally agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, x x x of such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be
performed under any contracts evidencing indebtedness/obligations and any supplements,
amendments, changes or modifications made thereto, including but not limited to, the due and

punctual payment by the said DEBTOR(S).

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not
contingent upon the pursuit by the CREDITOR x x x of whatever remedies it or they may have
against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be
and remain bound upon this suretyship, x x x and notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum
hereinabove stated.[3]

Later developments saw Asianbank extending to Gateway several export

packing loans in the total aggregate amount of USD 1,700,883.48. This loan
package was later consolidated with Dollar Promissory Note (PN) No. FCD-05992749[4] for the amount of USD 1,700,883.48 and secured by a chattel mortgage
over Gateways equipment for USD 2 million.
Gateway initially made payments on its loan obligations, but eventually
defaulted. Upon Gateways request, Asianbank extended the maturity dates of
the loan several times. These extensions bore the conformity of three of
Gateways officers, among them Andrew.
On July 15 and 30, 1999, Gateway issued two Philippine Commercial
International Bank checks for the amounts of USD 40,000 and USD 20,000,
respectively, as payment for its arrearages and interests for the periods June 30
and July 30, 1999; but both checks were dishonored for insufficiency of funds.
Asianbanks demands for payment made upon Gateway and its sureties went
unheeded. As of November 23, 1999, Gateways obligation to Asianbank,
inclusive of principal, interest, and penalties, totaled USD 2,235,452.17. Thus,
on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC)
in Makati City a complaint for a sum of money against Gateway, Geronimo, and
Andrew. The complaint, as later amended, was eventually raffled to Branch 60
of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank
Corporation v. Gateway Electronics Corporation, Geronimo B. De Los Reyes, Jr.
and Andrew S. De Los Reyes. In its answer to the amended complaint, Gateway
traced the cause of its financial difficulties, described the steps it had taken to
address its mounting problem, and faulted Asianbank for trying to undermine its
efforts toward recovery. Andrew also filed an answer alleging, among other
things, that the deed of suretyship he executed covering the PhP 10 millionDomestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did
not include PN No. FCD-0599-2749, the payment of which was extended several
times without his consent. Geronimo, on the other hand, alleged that the
subject deed of suretyship, assuming the authenticity of his signature on it, was
signed without his wifes consent and should, thus, be considered as a mere
continuing offer. Like Andrew, Geronimo argued that he ought to be relieved of
his liability under the surety agreement inasmuch as he too never consented to
the repeated loan maturity date extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment dated October 7, 2003[5] in favor
of Gateway, the dispositive portion of which states: WHEREFORE then, in view
of the foregoing, judgment is rendered holding defendants Gateway Electronics
Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and
severally liable to pay the plaintiff the following: (1) The sum of $2,235,452.17
United States Currency with interest to be added on at the prevailing market
rate over a given thirty day London Interbank Offered Rate (LIBOR) plus a
spread of 5.5358 percent or ten and [45,455/100,000] percent per annum for
the first 35 days and every thirty days beginning November 23, 1999 until fully
paid; (2) a penalty charge after November 23, 1999 of two percent (2%) per
month until fully paid; (3) attorneys fees of twenty percent (20%) of the total
amount due and unpaid; and (4) costs of the suit. SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse
docketed as CA-G.R. CV No. 80734. Following the filing of its and Geronimos
joint appellants brief, Gateway filed on November 10, 2004 a petition for
voluntary insolvency[6] with the RTC in Imus, Cavite, Branch 22, docketed as SEC
Case No. 037-04, in which Asianbank was listed in the attached Schedule of

Obligations as one of the creditors. On March 16, 2005, Metrobank, as

successor-in-interest of Asianbank, via a Notice of Creditors Claim, prayed that it
be allowed to participate in the Gatewayss creditors meeting.
In its Decision dated October 28, 2005, the CA affirmed the decision of the
Makati City RTC. In time, Gateway and Geronimo interposed a motion for
reconsideration. This was followed by a Supplemental Motion for
Reconsideration dated January 20, 2006, stating that in SEC Case No. 037-04,
the RTC in Imus, Cavite had issued an Order dated December 2, 2004, declaring
Gateway insolvent and directing all its creditors to appear before the court on a
certain date for the purpose of choosing among themselves the assignee of
Gateways estate which the courts sheriff has meanwhile placed in custodia
legis.[7] Gateway and Geronimo thus prayed that the assailed decision of the
Makati City RTC be set aside, the insolvency court having acquired exclusive
jurisdiction over the properties of Gateway by virtue of Section 60 of Act No.
1956, without prejudice to Asianbank pursuing its claim in the insolvency
proceedings. In its March 17, 2006 Resolution, however, the CA denied the
motion for reconsideration and its supplement.
Hence, Gateway and Geronimo filed this petition anchored on the following
grounds:
I.
The [CA] erred in disregarding the established rule that an action
commenced by a creditor against a judicially declared insolvent for the
recovery of his claim should be dismissed and referred to the
insolvency court. Where, therefore, as in this case, petitioner GEC
[referring to Gateway] has been declared insolvent x x x, respondent
Asianbanks claim for the payment of GECs loans should be ventilated
before the insolvency court
II.
The [CA] erred in admitting as evidence the Deed of Surety purportedly
signed by petitioner GBR [referring to Geronimo] despite the
unexplained failure of respondent Asianbank to present the originals of
the Deed of Surety during the trial.
III.
The [CA] erred in holding that the repeated extensions granted by
respondent Asianbank to GEC without notice to and the express
consent of petitioner GBR did not discharge petitioner GBR from his
liabilities as surety GEC in that: (A) An extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the
guaranty; (B) The [CA] interpreted the supposed Deed of Surety of
petitioner GBR as too comprehensive and all encompassing as to
amount to absurdity; (C) The repeated extensions granted by
Asianbank to GEC prevented petitioner GBR from exercising his right of
subrogation under Article 2080 of the Civil Code. As such, petitioner
GBR should be released from his obligations as surety of GEC.
IV.
It is a well-settled rule that when a bank deviates from normal banking
practice in a transaction and sustains injury as a result thereof, the
bank is deemed to have assumed the risk and no right of payment
accrues to the latter against any party to the transaction. By
repeatedly extending the period for the payment of GECs obligations
and granting GEC other loans after the suretyship agreement despite
GECs default and in failing to foreclose the chattel mortgage
constituted as security for GECs loan contrary to normal banking
practices, Asianbank failed to exercise reasonable caution for its own
protection and assumed the risk of non-payment through its own acts,
and thus has no right to proceed against petitioner GBR as surety for
the payment of GECs loans.
V.
In Agcaoili v. GSIS, this Honorable Court had occasion to state that in
determining the precise relief to give, the court will balance the
equities or the respective interests of the parties and take into account
the relative hardship that one relief or another may occasion to them.

Upon a balancing of interests of both petitioner GBR and respondent

Asianbank, greater and irreparable harm and injury would be suffered
by petitioner GBR than respondent Asianbank if the assailed Decision
and Resolution of the [CA] would be upheld x x x. This Honorable Court
x x x should thus exercise its equity jurisdiction in the instant case to
the end that it may render complete justice to both parties and declare
petitioner GBR as released and discharged from any liability in respect
of respondent Asianbanks claims.[8]
The Ruling of the Court
Gateway May Be Discharged from Liability But Not Geronimo
Gateway, having been declared insolvent, argues that jurisdiction over all
claims against all of its properties and assets properly pertains to the insolvency
court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956, [9] as amended,
or the Insolvency Law, any pending action against its properties and assets
must be dismissed, the claimant relegated to the insolvency proceedings for the
claimants relief.
The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18
of Act No. 1956, as couched, the issuance of an order declaring the petitioner
insolvent after the insolvency court finds the corresponding petition for
insolvency to be meritorious shall stay all pending civil actions against the
petitioners property. For reference, said Sec. 18, setting forth the effects and
contents of a voluntary insolvency order, [10] pertinently provides: Section 18.
Upon receiving and filing said petition, schedule, and inventory, the court shall
make an order declaring the petitioner insolvent, and directing the sheriff of the
province or city in which the petition is filed to take possession of, and safely
keep, until the appointment of a receiver or assignee, all the deeds, vouchers,
books of account, papers, notes, bonds, bills, and securities of the debtor and all
his real and personal property, estate and effects x x x. Said order shall further
forbid the payment to the creditor of any debts due to him and the delivery to
the debtor, or to any person for him, of any property belonging to him, and the
transfer of any property by him, and shall further appoint a time and place for a
meeting of the creditors to choose an assignee of the estate. Said order shall
[be published]. Upon the granting of said order, all civil proceedings
pending against the said insolvent shall be stayed. When a receiver is
appointed, or an assignee chosen, as provided in this Act, the sheriff shall
thereupon deliver to such receiver or assignee, as the case may be all the
property, assets, and belongings of the insolvent which have come into his
possession. Complementing Sec. 18 which appropriately comes into play upon
the granting of [the] order of insolvency is the succeeding Sec. 60 which
properly applies to the period after the commencement of proceedings in
insolvency. The two provisions may be harmonized as follows: Upon the filing of
the petition for insolvency, pending civil actions against the property of the
petitioner are not ipso facto stayed, but the insolvent may apply with the court
in which the actions are pending for a stay of the actions against the insolvents
property. If the court grants such application, pending civil actions against the
petitioners property shall be stayed; otherwise, they shall continue. Once an
order of insolvency nevertheless issues, all civil proceedings against the
petitioners property are, by statutory command, automatically stayed. Sec. 60
is reproduced below: SECTION 60. Creditors proving claims cannot sue; Stay
of action.No creditor, proving his debt or claim, shall be allowed to maintain any
suit therefor against the debtor, but shall be deemed to have waived all right of
action and suit against him, and all proceedings already commenced, or any
unsatisfied judgment already obtained thereon, shall be deemed to be
discharged and surrendered thereby; and after the debtors discharge, upon
proper application and proof to the court having jurisdiction, all such
proceedings shall be, dismissed, and such unsatisfied judgments satisfied of
record: Provided,. A creditor proving his debt or claim shall not be held to have

waived his right of action or suit against the debtor when a discharge has have
been refused or the proceedings have been determined to the without a
discharge. No creditor whose debt is provable under this Act shall be
allowed, after the commencement of proceedings in insolvency, to
prosecute to final judgment any action therefore against the debtor
until the question of the debtors discharge shall have been
determined, and any such suit proceeding shall, upon the application
of the debtor or of any creditor, or the assignee, be stayed to await the
determination of the court on the question of discharge: Provided,
That if the amount due the creditor is in dispute, the suit, by leave of
the court in insolvency, may proceed to judgment for purpose of
ascertaining the amount due, which amount, when adjudged, may be
allowed in the insolvency proceedings, but execution shall be stayed
aforesaid.
Applying the aforequoted provisions, it can rightfully be said that the issuance
of the insolvency order of December 2, 2004had the effect of automatically
staying the civil action for a sum of money filed by Asianbank against Gateway.
In net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only
insofar as the claim against Gateway was concerned, was, or ought to have
been, suspended after December 2, 2004, Asianbank having been duly notified
of and in fact was a participant in the insolvency proceedings. The Court of
course takes stock of the proviso in Sec. 60 of Act No. 1956 which in a way
provided the CA with a justifying tool to continue and to proceed to judgment in
CA-G.R. CV No. 80734, but only for the purpose of ascertaining the amount due
from Gateway. At any event, on the postulate that jurisdiction over the
properties of the insolvent-declared Gateway lies with the insolvency court,
execution of the CA insolvency judgment against Gateway can only be pursued
before the insolvency court. Asianbank, no less, tends to agree to this
conclusion when it stated: [E]ven it if is assumed that the declaration of
insolvency of petitioner Gateway can be taken cognizance of, such fact does
relieve petitioner Geronimo and/or Andrew delos Reyes from performing their
obligations based on the Deeds of Suretyship x x x. [11]
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against Gateway is without
bearing on the liability of Geronimo as a surety, adding that claims against a
surety may proceed independently from that against the principal
debtor. Pursuing the point, Asianbank avers that Geronimo may not invoke the
insolvency of Gateway as a defense to evade liability.
Geronimo counters with the argument that his liability as a surety
cannot be separated from Gateways liability. As surety, he continues, he is
entitled to avail himself of all the defenses pertaining to Gateway, including its
insolvency, suggesting that if Gateway is eventually released from what it owes
Asianbank, he, too, should also be so relieved. Geronimos above contention is
untenable. Suretyship is covered by Article 2047 of the Civil Code, which states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. If a
person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship. The Courts disquisition in Palmares v. Court of
Appeals on suretyship is instructive, thus: A surety is an insurer of the debt,
whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is
an undertaking that the debt shall be paid x x x. Stated differently, a surety
promises to pay the principals debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A surety binds

himself to perform if the principal does not, without regard to his ability to do
so. x x x In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default x x
x.
A creditors right to proceed against the surety exists independently of
his right to proceed against the principal. Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The rule, therefore, is that if the obligation is
joint and several, the creditor has the right to proceed even against
the surety alone. Since, generally, it is not necessary for the creditor to
proceed against a principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the same as that of the
principal, then soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had
against the principal. Perforce, x x x a surety is primarily liable, and with the
rule that his proper remedy is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless permitted by statute and in the
absence of any agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort to and
exhaust his remedies against the principal, particularly where both principal and
surety are equally bound.[12]
Clearly, Asianbanks right to collect payment for the full amount from Geronimo,
as surety, exists independently of its right against Gateway as principal debtor;
[13]
it could thus proceed against one of them or file separate actions against
them to recover the principal debt covered by the deed on suretyship, subject
to the rule prohibiting double recovery from the same cause. [14] This legal
postulate becomes all the more cogent in case of an insolvency situation where,
as here, the insolvency court is bereft of jurisdiction over the sureties of the
principal debtor. As Asianbank aptly points out, a suit against the surety, insofar
as the suretys solidary liability is concerned, is not affected by an insolvency
proceeding instituted by or against the principal debtor. The same principle
holds true with respect to the surety of a corporation in distress which is subject
of a rehabilitation proceeding before the Securities and Exchange Commission
(SEC). As we held in Commercial Banking Corporation v. CA, a surety of the
distressed corporation can be sued separately to enforce his liability as such,
notwithstanding an SEC order declaring the former under a state of suspension
of payment.[15] Geronimo also states that, as things stand, his liability, as
compared to that of Gateway, is contextually more onerous and burdensome,
precluded as he is from seeking recourse against the insolvent
corporation. From this premise, Geronimo claims that since Gateway cannot,
owing to the order of insolvency, be made to pay its obligation, he, too, being
just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of
the Civil Code, as follows: A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount and the onerous
nature of the conditions. Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.
The Court is not convinced. The above article enunciates the rule that the
obligation of a guarantor may be less, but cannot be more than the obligation of
the principal debtor. The rule, however, cannot plausibly be stretched to mean
that a guarantor or surety is freed from liability as such guarantor or surety in
the event the principal debtor becomes insolvent or is unable to pay the
obligation. This interpretation would defeat the very essence of a suretyship
contract which, by definition, refers to an agreement whereunder one person,
the surety, engages to be answerable for the debt, default, or miscarriage of
another known as the principal. [16] Geronimos position that a surety cannot be

made to pay when the principal is unable to pay is clearly specious and must be
rejected.
The CA Did Not Err in Admitting the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA erred in admitting
the Deed of Suretyship purportedly signed by him, given that Asianbank failed
to present its original copy. This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbanks complaint alleged the following:
(1) The loan was secured by the Deeds of Suretyship dated July 23, 1996 that
were executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De
Los Reyes. Attached as Annexes B and C, respectively, are photocopies of the
Deeds of Suretyship executed by defendants Geronimo B. De Los Reyes, Jr. and
Andrew S. De Los Reyes. Subsequently, a chattel mortgage over defendant
Gateways equipment for $2 million,United States currency, was executed.[17]
Geronimo traversed in his answer the foregoing allegation in the following wise:
2.5. Paragraph 6 is denied, subject to the special and affirmative defenses and
allegations hereinafter set forth.
The ensuing special and affirmative defenses were raised in Gateways answer:
Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had
not given her consent thereto. Accordingly, the security created by the
suretyship shall be construed only as a continuing offer on the part of
[Geronimo] and plaintiff and may only be perfected as a binding contract upon
acceptance by Mrs. Delos Reyes. Moreover, assuming, gratia argumenti, that
[Geronimo] may be bound by the suretyship agreement, there is no showing
that he has consented to the repeated extensions made by plaintiff in favor of
GEC or to a waiver of notice of such extensions. It should be pointed out that Mr.
Geronimo delos Reyes executed the suretyship agreement in his personal
capacity and not in his capacity as Chairman of the Board of GEC. His consent,
insofar as the continuing application of the suretyship agreement to GECs
obligations in view of the repeated extension extended by plaintiff [is
concerned], is therefore necessary. Obviously, plaintiff cannot now hold him
liable as a surety to GECs obligations.[18]
The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure
should a suit or defense is predicated on a written document, thus: Sec.
7. Action or defense based on document.Whenever an action or defense is
based upon a written instrument or document, the substance of such
instrument or document shall be set forth in the pleading, and the original or
a copy thereof shall be attached to the pleading as an exhibit, which
shall be deemed to be a part of the pleading, or said copy may with like effect
be set forth in the pleading.
Sec. 8. How to contest such documents.When an action or defense is founded
upon a written instrument, copied in or attached to the corresponding pleading
as provided in the preceding section, the genuineness and due execution of
the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denies them, and sets forth what he claims to
be the facts; but the requirement of an oath does not apply when the adverse
party does not appear to be a party to the instrument or when compliance with
an order for an inspection of the original instrument is refused. (Emphasis
supplied.)
Given the above perspective, Asianbank, by attaching a photocopy of the Deed
of Suretyship to its underlying complaint, hewed to the requirements of the
above twin provisions. Asianbank, thus, effectively alleged the due execution
and genuineness of the said deed. From that point, Geronimo, if he intended to
contest the surety deed, should have specifically denied the due execution and
genuineness of the deed in the manner provided by Sec. 10, Rule 8 of the Rules
of Court, thus: Sec. 10. Specific denial.A defendant must specify each

material allegation of fact the truth of which he does not admit and,
whenever practicable, shall set forth the substance of the matters
upon which he relies to support his denial. Where a defendant desires to
deny only a part of an averment, he shall specify so much of it as is true and
material and shall deny only the remainder. Where a defendant is without
knowledge or information sufficient to form a belief as to the truth of a material
averment made in the complaint, he shall so state, and this shall have the effect
of a denial.
In the instant case, Geronimo should have categorically stated that he did not
execute the Deed of Suretyship and that the signature appearing on it was not
his or was falsified. His Answer does not, however, contain any such statement.
Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to
have admitted, the genuineness and due execution of the deed in question. In
this regard, Sec. 11, Rule 8 of the Rules of Court states: Sec. 11. Allegations not
specifically denied deemed admitted.Material averment in the complaint, other
than those as to the amount of unliquidated damages, shall be deemed
admitted when not specifically denied. x x x
Owing to Geronimos virtual admission of the genuineness and due execution of
the deed of suretyship, Asianbank, contrary to the view of Gateway and
Geronimo, need not present the original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so: Sec. 4. Judicial admissions.An
admission, verbal or written, made by the party in the course of the
proceedings in the same case, does not require proof. The admission
may be contradicted only by showing that it was made through palpable
mistake or that no such admission was made. (Emphasis supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749 under His Deed of
Suretyship
This brings us to the third ground which involves the issue of the coverage of
the suretyship. Preliminarily, an overview on the process of taking out loans
should first be made. Generally, especially for large loans, banks first approve a
line or facility out of which a client may avail itself of loans in the form of
promissory notes without need of further processing and/or approval every time
a draw down is made. In the instant case, Asianbank approved in favor of
Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3
million-Omnibus Credit Line. Asianbank approved these credit lines which were
covered by a chattel mortgage as well as the deeds of suretyship, such that
loans extended from these lines would already be secured and pre-approved. In
other words, these facilities are not financial obligations yet. Asianbank did not
yet lend out any money to Gateway with the approval of these lines. The loan
transaction occurred or the principal obligation, as secured by a surety
agreement, was born after the execution of loan documents, such as PN No.
FCD-0599-2749. Geronimo now excepts from the ruling that the deed of
suretyship he executed covered PN No. FCD-0599-2749 which embodied several
export packing loans issued by Asianbank to Gateway. He claims that the deed
only secured the PhP 10 million-Domestic Bills Purchased Line and the USD 3
million-Omnibus Credit Line. Geronimo describes as absurd the notion that a
deed of suretyship would secure a loan obligation contracted three (3) years
after the execution of the surety deed. Geronimos thesis that the deed in
question cannot be accorded prospective application is erroneous. To be sure,
the provisions of the subject deed of suretyship indicate a continuing
suretyship. In Fortune Motors (Phils.) v. Court of Appeals,[19] the Court, citing
cases, defined and upheld the validity of a continuing suretyship in this wise: Of
course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship agreement itself is valid and binding even

before the principal obligation intended to be secured thereby is born, any more
than there would be in saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank
or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.[20]
In Dio vs. Court of Appeals,[21] we again had occasion to discourse on continuing
guaranty/suretyship thus: A continuing guaranty is one which is not limited to a
single transaction, but which contemplates a future course of dealing, covering
a series of transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with
respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable.
Otherwise stated, a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or
contemplation of the contract, of guaranty, until the expiration or termination
thereof. A guaranty shall be construed as continuing when by the terms thereof
it is evident that the object is to give a standing credit to the principal debtor to
be used from time to time either indefinitely or until a certain period
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of any debt, any indebtedness, any deficiency, or
any sum, or the guaranty of any transaction or money to be furnished the
principal debtor at any time, or on such time that the principal debtor may
require, have been construed to indicate a continuing guaranty. By its nature, a
continuing suretyship covers current and future loans, provided that, with
respect to future loan transactions, they are, to borrow from Dio, as cited above,
within the description or contemplation of the contract of guaranty. The Deed of
Suretyship Geronimo signed envisaged a continuing suretyship when, by the
express terms of the deed, he warranted payment of the PhP 10 millionDomestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line, as
evidenced by: notes, drafts, overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as may
accrue thereon and all expenses which may be incurred by the latter in
collecting any or all such instruments.[22]
Evidently, under the deed of suretyship, Geronimo undertook to secure all
obligations obtained under the Domestic Bills Purchased Line and Omnibus
Credit Line, without any specification as to the period of the loan. Geronimos
application of Garcia v. Court of Appeals, a case covering two separate loans,
denominated as SWAP Loan andExport Loan, is quite misplaced. There, the
Court ruled that the continuing suretyship only covered the SWAP Loan as it was
only this loan that was referred to in the continuing suretyship. The Court wrote
in Garcia: Particular attention must be paid to the statement appearing on the
face of the Indemnity [Suretyship] Agreement x x x evidenced by those
certain loan documents dated April 20, From this statement, it is clear that
the Indemnity Agreement refers only to the loan document of April 20, 1982
which is the SWAP loan. It did not include the EXPORT loan. Hence, petitioner
cannot be held answerable for the EXPORT loan.[23](Emphasis supplied.)

The Indemnity Agreement in Garcia specifically identified loan documents

evidencing obligations of the debtor that the agreement was intended to
secure. In the present case, however, the suretyship Geronimo assumed did not
limit itself to a specific loan document to the exclusion of another. The
suretyship document merely mentioned the Domestic Bills Purchased Line and
Omnibus Credit Line as evidenced by all notes, drafts x x x contracted/incurred
by [Gateway] in favor of [Asianbank].[24] As explained earlier, such credit
facilities are not loans by themselves. Thus, the Deed of Suretyship was
intended to secure future loans for which these facilities were opened in the first
place.
Lest it be overlooked, both the trial and appellate courts found the Omnibus
Credit Line referred to in the Deed of Suretyship as covering the export packing
credit loans Asianbank extended to Gateway. We agree with this factual
determination. By the very use of the term omnibus, and in practice, an
omnibus credit line refers to a credit facility whence a borrower may avail of
various kinds of credit loans. Defined as such, an omnibus line is broad enough
to refer to or cover an export packing credit loan. Geronimos allegation that an
export packing credit loan is separate and distinct from an omnibus credit line is
but a bare and self-serving assertion bereft of any factual or legal basis. One
who alleges something must prove it: a mere allegation is not evidence.
[25]
Geronimo has not discharged his burden of proof. His contention cannot be
given any weight. As a final and major ground for his release as surety,
Geronimo alleges that Asianbank repeatedly extended the maturity dates of the
obligations of Gateway without his knowledge and consent. Pressing this point,
he avers that, contrary to the findings of the CA, he did not waive his right to
notice of extensions of Gateways obligations.
Such contention is unacceptable as it glosses over the fact that the waiver to be
notified of extensions is embedded in surety document itself, built in the
ensuing provision: In case of default by any and/or all of the DEBTOR(S) to pay
the whole part of said indebtedness herein secured at maturity, I/WE jointly and
severally, agree and engage to the CREDITOR, its successors and assigns, the
prompt payment, without demand or notice from said CREDITOR of such
notes, drafts, overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter become indebted to
the CREDITOR, together with all interests, penalty and other bank charges as
may accrue thereon and all expenses which may be incurred by the latter in
collecting any or all such instruments.[26]
In light of the above provision, Geronimo verily waived his right to notice of the
maturity of notes, drafts, overdraft, and other credit obligations for which
Gateway shall become indebted. This waiver necessarily includes new
agreements resulting from the novation of previous agreements due to changes
in their maturity dates. Additionally, Geronimos lament about losing his right to
subrogation is erroneous. He argues that by virtue of the order of insolvency
issued by the insolvency court, title and right to possession to all the properties
and assets of Gateway were vested upon Gateways assignee in accordance with
Sec. 32 of the Insolvency Law. The transfer of Gateways property to the
insolvency assignee, if this be the case, does not negate Geronimos right of
subrogation, for such right may be had or exercised in the insolvency
proceedings. The possibility that he may only recover a portion of the amount
he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does
not, however, render ineffectual, let alone invalidate, his suretyship.
Geronimos other arguments to escape liability are puerile and really partake
more of a plea for liberality. They need not detain us long. In gist, Geronimo
argues: first, that he is a gratuitous surety of Gateway; second, Asianbank
deviated from normal banking practice, such as when it extended the period for
payment of Gateways obligation and when it opted not to foreclose the chattel
mortgage constituted as guarantee of Gateways loan obligation; and third,

implementing the appealed CAs decision would cause him great harm and
injury. Anent the first argument, suffice it to state that Geronimo was then the
president of Gateway and, as such, was benefited, albeit perhaps indirectly, by
the loan thus granted by Asianbank. And as we said in Security Pacific
Assurance Corporation, the surety is liable for the debt of another although the
surety possesses no direct or personal interest over the obligation nor does the
surety receive any benefit from it. [27] Whether or not Asianbank really deviated
from normal banking practice by extending the period for Gateway to comply
with its loan obligation or by not going after the chattel mortgage adverted to is
really of no moment. Banks are primarily in the business of extending loans and
earn income from their lending operations by way of service and interest
charges. This is why Asianbank opted to give Gateway ample opportunity to pay
its obligations instead of foreclosing the chattel mortgage and in the process
holding on to assets of which the bank has really no direct use.
The following excerpts from Palmares are in point: We agree with respondent
corporation that its mere failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditors rights vis--vis the surety,
unless the surety requires him by appropriate notice to sue on the obligation.
Such gratuitous indulgence of the principal does not discharge the surety
whether given at the principals request or without it, and whether it is yielded
by the creditor through sympathy or from an inclination to favor the principal x
x x. The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal
becomes insolvent. And, in the absence of proof of resultant injury, a surety is
not discharged by the creditors mere statement that the creditor will not look to
the surety, or that he need not trouble himself. The consequences of the delay,
such as the subsequent insolvency of the principal, or the fact that the remedies
against the principal may be lost by lapse of time, are immaterial. [28]
The Courts Equity Jurisdiction Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from any liability arising
from Asianbanks claims if what he terms as complete justice is to be served. He
cites, as supporting reference, Agcaoili v. GSIS,[29] presenting in the same breath
the following arguments: first, the Deed of Suretyship is a gratuitous contract
from which he did not benefit; second, Asianbank assured him that the deed
would not be enforced against him; third, the enforcement of the judgment of
the CA would reduce Geronimo and his family to a life of penury; and fourth,
Geronimo would be unable to exercise his right of subrogation, Gateway having
already been declared as insolvent. The first and last arguments have already
been addressed and found to be without merit. The second argument is a
matter of defense which has remained unproved and even belied by Asianbank
by its filing of the complaint. We see no need to further belabor any of them. As
regards the third allegation, suffice it to state that the predicament Geronimo
finds himself in is his very own doing. His misfortune is but the result of the
implementation of a bona fide contract he freely executed, the terms of which
he is presumed to have thoroughly examined. He was not at all compelled to
act as surety; he had a choice. It may be more offensive to public policy or good
customs if he be allowed to go back on his undertaking under the surety
contract. The Court cannot be a party to the contracts impairment and relieve a
surety from the effects of an unwise but nonetheless a valid surety contract.
WHEREFORE, the instant petition is hereby DENIED. The appealed Decision
dated October 28, 2005 of the CA and its March 17, 2006 Resolution in CA-G.R.
CV No. 80734 are hereby AFFIRMED with the modification that any claim of
Asianbank or its successor-in-interest against Gateway, if any, arising from the
judgment in this suit shall be pursued before the RTC, Branch 22 in Imus, Cavite
as the insolvency court. Costs against petitioners. SO ORDERED.

BANK OF COMMERCE VS. FLORES

Before the Court is a petition for review on certiorari under Rule 45 of the Rules
of Court, assailing the Decision [1] dated February 28, 2006 and the
Resolution[2] dated August 9, 2006 of the Court of Appeals (CA) in CA-G.R. CV
No. 80362.
The facts of the case are as follows: Respondents filed a case for specific
performance against petitioners before the Regional Trial Court (RTC) of Quezon
City, docketed as Civil Case No. Q-98-35425. Respondents are the registered
owners of a condominium unit in Embassy Garden Homes, West
Triangle, Quezon City, registered under Condominium Certificate of Title (CCT)
No. 2130,[3] issued by the Register of Deeds of Quezon City. [4] On October 22,
1993, respondents borrowed money from petitioner bank in the amount of Nine
Hundred Thousand Pesos (P900,000.00). Respondents executed a Real Estate
Mortgage[5] over the condominium unit as collateral, and the same was
annotated at the back of CCT No. 2130. On October 3, 1995, respondents again
borrowed One Million One Hundred Thousand Pesos (P1,100,000.00) from
petitioner bank, which was also secured by a mortgage over the same property
annotated at the back of CCT No. 2130.[6]
On January 2, 1996, respondents paid One Million Eleven Thousand Five
Hundred Fifty-Five Pesos and 54 centavos (P1,011,555.54), as evidenced by
Official Receipt No. 147741[7] issued by petitioner bank. On the face of the
receipt, it was written that the payment was in full payment of the loan and
interest. Respondents then asked petitioner bank to cancel the mortgage
annotations on CCT No. 2130 since the loans secured by the real estate
mortgage were already paid in full. However, the bank refused to cancel the
same and demanded payment of Four Million Six Hundred Thirty-Three
Thousand Nine Hundred Sixteen Pesos and Sixty-Seven Centavos
(P 4,633,916.67), representing the outstanding obligation of respondents as of
February 27, 1998. Respondents requested for an accounting which would
explain how the said amount was arrived at. However, instead of heeding
respondents request, petitioner bank applied for extra-judicial foreclosure of the
mortgages over the condominium unit. The public auction sale was scheduled
on September 4, 1998. Petitioner Stephen Z. Taala, a notary public, was tasked
to preside over the auction sale.[8] Respondents filed suit with the RTC, Quezon
City, assailing the validity of the foreclosure and auction sale of the property.
They averred that the loans secured by the property had already been paid in
full. Furthermore, they claimed that the Notice of Auction Sale by Notary
Public[9] failed to comply with the provisions of Act No. 3135, as amended by Act
No. 4118, requiring the publication and posting of the notice of auction sale in
at least three (3) public places in Quezon City.[10] Respondents likewise prayed
for the payment of moral and exemplary damages, and attorneys fees, and for
the issuance of a temporary restraining order and/or writ of preliminary
injunction to enjoin the extra-judicial foreclosure sale of the property. [11] On
October 23, 1998, the RTC granted respondents prayer for issuance of a writ of
preliminary injunction, restraining petitioner bank from foreclosing on the
mortgage.[12]
Petitioner bank admitted that there were only two (2) mortgage loans annotated
at the back of CCT No. 2130, but denied thatrespondents had already fully
settled their outstanding obligations with the bank. [13] It averred that several
credit lines were granted to respondent Andres Flores by petitioner bank that
were secured by promissory notes executed by him, and which were either
increased or extended from time to time. The loan that was paid on January 2,
1996, in the amount of P1,011,555.54, was only one of his loans with the bank.

There were remaining loans already due and demandable, and had not been
paid by respondents despite repeated demands by petitioner bank. The
remaining loans, although not availed of at the same time, were similarly
secured by the subject real estate mortgage as provided in the continuing
guaranty agreement therein.[14]Petitioner bank alleged that respondents
requested and were granted an increase in their Bills Discounted Line from Nine
Hundred Thousand Pesos (P900,000.00) to Two Million Pesos (P2,000,000.00),
which was secured by the same real estate mortgage on CCT No. 2130.
However, the subject condominium unit commanded only a market value of One
Million Seven Hundred Twenty-Three Thousand Six Hundred Pesos
(P1,723,600.00), and a loan value of Nine Hundred Fifty-Nine Thousand Six
Hundred Sixteen Pesos (P959,616.00). Since the market value of the
condominium unit was lower than the combined loans, the parties agreed to fix
the amount of the real estate mortgage at P1,100,000.00. Moreover, petitioner
bank stressed that under the terms of the two real estate mortgages, future
loans of respondents were also covered. [15] On December 4, 2002, the RTC
rendered a resolution,[16] the fallo of which reads: FROM THE FOREGOING
MILIEU, the present case for specific performance with damages and injunction
filed by plaintiffs, Sps. Andres and Eliza Flores against defendants, Bank of
Commerce and Stephen Z. Taala, is hereby DISMISSED. Likewise, the
counterclaim filed by defendants, Bank of Commerce and Stephen Z. Taala
against plaintiffs, Sps. Andres and Eliza Flores is DISMISSED for insufficiency of
evidence.
In denying respondents complaint for specific performance, the RTC ratiocinated
that respondents right of action hinged mainly on the veracity of their claim that
they faithfully complied with their loan obligations and had fully paid them in
January 1996. The RTC stated that the evidence submitted by petitioner bank,
specifically the promissory notes and statement of account dated February 27,
1998, negated this contention. The RTC declared that respondents incurred
other debts from petitioner bank, which must be paid first before they could be
absolved of liability, and, consequently, demand the release of the
mortgage. The RTC also struck down respondents assertion that petitioner bank
did not comply with the posting and publication requirements under Act No.
3135, as amended. Respondents filed a motion for reconsideration, which was,
however, denied by the RTC in a decision [18] dated August 8, 2003. Aggrieved,
respondents appealed to the CA. Meanwhile, on March 25, 2004, the auction
sale of the subject property was conducted, and petitioner bank was awarded
the property, as the highest bidder. On February 28, 2006, the CA rendered a
Decision[19] reversing the decision and the resolution of the RTC. The dispositive
portion of the CA Decision reads: IN VIEW OF ALL THE FOREGOING, the instant
appeal is GRANTED; the challenged Decision dated December 4, 2002,
is REVERSED and SET ASIDE; and a new one entered: (a) ordering the
cancellation of the real estate mortgage annotations on the dorsal side of CCT
No. 2130 of the Registry of Deeds of Quezon City; (b) ordering appellee Bank to
issue a corresponding release of mortgages to plaintiffs-appellants CCT No.
2130; (c) declaring null and void the challenged extra-judicial foreclosure and
public auction sale held on March 25, 2004 together with the Certificate of Sale
dated April 14, 2004 issued in favor of appellee Bank; and, (d) appellees
counterclaims are ordered dismissed, for lack of sufficient basis therefor.
The CA ratiocinated that the principal obligation or loan was already
extinguished by the full payment thereof. Consequently, the real estate
mortgages securing the principal obligation were also extinguished. A real
estate mortgage, being an accessory contract, cannot survive without the
principal obligation it secures. The CA also noted that the two mortgages were
individually annotated at the back of CCT No. 2130. Thus, the CA opined that
the individual annotations clearly indicated that the said mortgages were not

meant to serve as a continuing guaranty for any future loan that respondents
would obtain from petitioner bank.
Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued
a Resolution[21] denying the same.
Hence, the instant petition. The sole issue for resolution is whether the real
estate mortgage over the subject condominium unit is a continuing guaranty for
the future loans of respondent spouses despite the full payment of the principal
loans annotated on the title of the subject property. We resolve this issue in the
affirmative. The contested portion of the Deed of Real Estate Mortgage dated
October 22, 1993 for the principal obligation of P900,000.00 and of the second
one dated October 3, 1995 for the sum of P1,100,000.00, uniformly read:
It is petitioner banks contention that the said undertaking, stipulated in the
Deed of Real Estate Mortgage dated October 22, 1993 and October 3, 1995, is a
continuing guaranty meant to secure future debts or credit accommodations
granted by petitioner bank in favor of respondents. On the other hand,
respondents posit that, since they have already paid the loans secured by the
real estate mortgages, the mortgage should not be foreclosed because it does
not include future debts of the spouses or debts not annotated at the back of
CCT No. 2130.
A continuing guaranty is a recognized exception to the rule that an action to
foreclose a mortgage must be limited to the amount mentioned in the mortgage
contract.[23] Under Article 2053 of the Civil Code, a guaranty may be given to
secure even future debts, the amount of which may not be known at the time
the guaranty is executed. This is the basis for contracts denominated as a
continuing guaranty or suretyship. A continuing guaranty is not limited to a
single transaction, but contemplates a future course of dealing, covering a
series of transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with
respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable.
In other words, a continuing guaranty is one that covers all transactions,
including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination
thereof.[24]
A guaranty shall be construed as continuing when, by the terms thereof, it is
evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period, especially if
the right to recall the guaranty is expressly reserved. In other jurisdictions, it
has been held that the use of particular words and expressions, such as
payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished the principal debtor
"at any time" or "on such time" that the principal debtor may require, has been
construed to indicate a continuing guaranty. [25]
In the instant case, the language of the real estate mortgage unambiguously
reveals that the security provided in the real estate mortgage is continuing in
nature. Thus, it was intended as security for the payment of the loans annotated
at the back of CCT No. 2130, and as security for all amounts that respondents
may owe petitioner bank. It is well settled that mortgages given to secure future
advance or loans are valid and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for which the mortgage
may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.[26]
A mortgage given to secure advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage until the full
amounts of the advancements are paid. [27] Respondents full payment of the
loans annotated on the title of the property shall not effect the release of the
mortgage because, by the express terms of the mortgage, it was meant to

secure all future debts of the spouses and such debts had been obtained and
remain unpaid. Unless full payment is made by the spouses of all the amounts
that they have incurred from petitioner bank, the property is burdened by the
mortgage.
WHEREFORE, in view of the foregoing, the Decision dated February 28, 2006
and the Resolution dated August 9, 2006 of the Court of Appeals in CA-G.R. CV
No. 80362 are hereby REVERSED and SET ASIDE. The decision of the Regional
Trial Court dated December 4, 2002 is hereby REINSTATED. SO ORDERED.

LIM VS. SECURITY CORP

This deals with the Petition for Review on Certiorari under Rule 45 of the Rules
of Court praying that the Decision1of the Court of Appeals (CA), promulgated on
July 30, 2008, and the Resolution2 dated June 1, 2009, denying petitioner's
motion for reconsideration thereof, be reversed and set aside. Petitioner
executed a Continuing Suretyship in favor of respondent to secure "any and all
types of credit accommodation that may be granted by the bank hereinto and
hereinafter" in favor of Raul Arroyo for the amount of P2,000,000.00 which is
covered by a Credit Agreement/Promissory Note. 3 Said promissory note stated
that the interest on the loan shall be 19% per annum, compounded monthly, for
the first 30 days from the date thereof, and if the note is not fully paid when
due, an additional penalty of 2% per month of the total outstanding principal
and interest due and unpaid, shall be imposed. In turn, the Continuing
Suretyship4 executed by petitioner stipulated that: 3. Liability of the Surety. The liability of the Surety is solidary and not contingent upon the pursuit of the
Bank of whatever remedies it may have against the Debtor or the
collaterals/liens it may possess. If any of the Guaranteed Obligations is not paid
or performed on due date (at stated maturity or by acceleration), the Surety
shall, without need for any notice, demand or any other act or deed,
immediately become liable therefor and the Surety shall pay and perform the
same.5
Guaranteed Obligations are defined in the same document as follows: a)
"Guaranteed Obligations" - the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings, amendments or novations
thereof, as well as (i) all obligations of the Debtor presently or hereafter owing
to the Bank, as appears in the accounts, books and records of the Bank,
whether direct or indirect, and (ii) any and all expenses which the Bank may
incur in enforcing any of its rights, powers and remedies under the Credit
Instruments as defined hereinbelow.6
The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner
received a Notice of Final Demand dated August 2, 2001, informing him that he
was liable to pay the loan obtained by Raul and Edwina Arroyo, including the
interests and penalty fees amounting to P7,703,185.54, and demanding
payment thereof. For failure of petitioner to comply with said demand,
respondent filed a complaint for collection of sum of money against him and the
Arroyo spouses. Since the Arroyo spouses can no longer be located, summons
was not served on them, hence, only petitioner actively participated in the case.
After trial, the Regional Trial Court of Davao (RTC) rendered judgment against
petitioner.7 The dispositive portion of the RTC Decision reads as follows:
Wherefore, judgment is hereby rendered ordering defendant Lim to pay the
following sums: (1) The principal sum of two million pesos plus nineteen percent
interest of the outstanding principal interest due and unpaid to be computed
from January 28, 1997 until fully paid, plus two percent interest per month as
penalty to be computed from February 28, 1997 until fully paid; (2) Four

hundred thousand pesos as attorney's fees; (3) Thirty thousand pesos as

litigation expenses. SO ORDERED.8
Petitioner appealed to the CA, but the appellate court, in its Decision dated July
30, 2008, affirmed the RTC judgment with the modification that interest be
computed from August 1, 1997; the penalty should start only from August 28,
1997; the award of attorney's fees is set at 10% of the total amount due; and
the award for litigation expenses increased to P92,321.10.9 Petitioner's motion
for reconsideration of the CA Decision was denied per Resolution dated June 1,
2009. Petitioner then elevated the matter to this Court via a petition for review
on certiorari, where the main issue is whether petitioner may validly be held
liable for the principal debtor's loan obtained six months after the execution of
the Continuing Suretyship. The other issues, such as the proper computation of
the total indebtedness and the amount of litigation expenses are factual
matters that had been satisfactorily addressed by the CA, to wit: (1) the CA
ruled that respondent should recompute the total amount due, since the
proceeds from the foreclosure of the real estate and chattel mortgages were
deducted only on June 20, 2001, when the public auctions were conducted on
August 26, 1998 and September 7, 1999, respectively, thus, the amount of the
proceeds from the foreclosure of the mortgaged properties should have been
deducted from the amount of indebtedness on the date the public auction was
held; and (2) the CA likewise pointed out that as can be seen from the Legal
Fees Form,10 the litigation expense incurred by respondent was P92,321.10, the
amount it paid as filing fee. It is hornbook principle that this Court is not a trier
of facts, hence, such issues will not be revisited by this Court in the present
petition. With regard to the propriety of making petitioner a hostile witness,
respondent is correct that the issue cannot be raised for the first time on
appeal. Thus, the Court will no longer address these issues which had been
improperly raised in this petition for review on certiorari.
The main issue deserves scant consideration, but the matter of the award of
attorney's fees deserves reexamination. The nature of a suretyship is elucidated
in Philippine Charter Insurance Corporation v. Petroleum Distributors & Service
Corporation11 in this wise: A contract of suretyship is an agreement whereby a
party, called the surety, guarantees the performance by another party, called
the principal or obligor, of an obligation or undertaking in favor of another party,
called the obligee. Although the contract of a surety is secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over the obligations nor
does it receive any benefit therefrom. This was explained in the case of
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, where
it was written: The surety's obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the obligation
contracted by the principal. Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, his liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal. Thus, suretyship
arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. A surety is considered
in law as being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable. x x x.12 In this case, what petitioner executed was a Continuing
Suretyship, which the Court described in Saludo, Jr. v. Security Bank
Corporation13 as follows: The essence of a continuing surety has been
highlighted in the case of Totanes v. China Banking Corporation in this wise:
Comprehensive or continuing surety agreements are, in fact, quite
commonplace in present day financial and commercial practice. A bank or
financing company which anticipates entering into a series of credit

transactions with a particular company, normally requires the projected

principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended to
the principal debtor.14 The terms of the Continuing Suretyship executed by
petitioner, quoted earlier, are very clear.1wphi1 It states that petitioner, as
surety, shall, without need for any notice, demand or any other act or deed,
immediately become liable and shall pay "all credit accommodations extended
by the Bank to the Debtor, including increases, renewals, roll-overs, extensions,
restructurings, amendments or novations thereof, as well as (i) all obligations of
the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any
and all expenses which the Bank may incur in enforcing any of its rights, powers
and remedies under the Credit Instruments as defined hereinbelow." 15 Such
stipulations are valid and legal and constitute the law between the parties, as
Article 2053 of the Civil Code provides that "[a] guaranty may also be given as
security for future debts, the amount of which is not yet known; x x x." Thus,
petitioner is unequivocally bound by the terms of the Continuing Suretyship.
There can be no cavil then that petitioner is liable for the principal of the loan,
together with the interest and penalties due thereon, even if said loan was
obtained by the principal debtor even after the date of execution of the
Continuing Suretyship.
With regard to the award of attorney's fees, it should be noted that Article 2208
of the Civil Code does not prohibit recovery of attorney's fees if there is a
stipulation in the contract for payment of the same. Thus, in Asian Construction
and Development Corporation v. Cathay Pacific Steel Corporation
(CAPASCO),16 the Court, citing Titan Construction Corporation v. Uni-Field
Enterprises, Inc.,17 expounded as follows: The law allows a party to recover
attorney's fees under a written agreement. In Barons Marketing Corporation v.
Court of Appeals, the Court ruled that: [T]he attorney's fees here are in the
nature of liquidated damages and the stipulation therefor is aptly called a penal
clause. It has been said that so long as such stipulation does not contravene
law, morals, or public order, it is strictly binding upon defendant. The attorney's
fees so provided are awarded in favor of the litigant, not his counsel.
On the other hand, the law also allows parties to a contract to stipulate on
liquidated damages to be paid in case of breach. A stipulation on liquidated
damages is a penalty clause where the obligor assumes a greater liability in
case of breach of an obligation. The obligor is bound to pay the stipulated
amount without need for proof on the existence and on the measure of
damages caused by the breach.18 However, even if such attorney's fees are
allowed by law, the courts still have the power to reduce the same if it is
unreasonable. In Trade & Investment Corporation of the Philippines v. Roblett
Industrial Construction Corp.,19 the Court equitably reduced the amount of
attorney's fees to be paid since interests and penalties had ballooned to thrice
as much as the principal debt. That is also the case here. The award of
attorney's fees amounting to ten percent (10%) of the principal debt, plus
interest and penalty charges, would definitely exceed the principal amount;
thus, making the attorney's fees manifestly exorbitant. Hence, we reduce the
amount of attorney's fees to ten percent (10%) of the principal debt only.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of the Court of
Appeals, dated July 30, 2008, in CA-G.R. CV No. 00462, is AFFIRMED with
MODIFICATION in that the award of attorney's fees is reduced to ten percent

(10%) of the principal debt only. SO ORDERED.

AGLIBOT vs. SANTIA

FACTS: Engr. Ingersol L. Santia (Santia) loaned the amount of P2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner
Fideliza J. Aglibot (Aglibot). The loan was evidenced by a promissory note.
Allegedly as a guaranty for the payment of the note, Aglibot issued and
delivered to Santia eleven (11) post-dated personal checks drawn from her own
account maintained at Metrobank. Upon presentment of the checks for
payment, they were dishonored by the bank for having been drawn against
insufficient funds or closed account. Santia thus demanded payment from PLCC
and Aglibot of the face value of the checks, but neither of them heeded his
demand. Consequently, eleven (11) Informations for violation of B.P. 22 were
filed before the MTCC. MTCC acquitted Aglibot. On appeal, the RTC rendered a
decision absolving Aglibot and dismissing the civil aspect of the case on the
ground of failure to fulfill a condition precedent of exhausting all means to
collect from the principal debtor. On appeal, the Court of Appeals ruled that the
RTC erred when it dismissed the civil aspect of the case. Hence, the CA ruled
that Aglibot is personally liable for the loan. Thus, Aglibot filed this instant
petition for certiorari. She argued that she was merely a guarantor of the
obligation and therefore, entitled to the benefit of excussion under Article of the
2058 of the Civil Code. She further posited that she is not personally liable on
the checks since she merely contracted the loan in behalf of PLCC.
ISSUES:
I. Whether or not Aglibot is entitled to the benefit of excussion?
II. Whether or not Aglibot is personally liable on the checks?
HELD: The petition is bereft of merit.
CIVIL LAW: guaranty; benefit of excussion; Statute of Frauds; contracts
FIRST ISSUE: Aglibot cannot invoke the benefit of excussion.
It is settled that the liability of the guarantor is only subsidiary, and all the
properties of the principal debtor, the PLCC in this case, must first be exhausted
before the guarantor may be held answerable for the debt. Thus, the creditor
may hold the guarantor liable only after judgment has been obtained against
the principal debtor and the latter is unable to pay, for obviously the exhaustion
of the principals property the benefit of which the guarantor claims cannot even
begin to take place before judgment has been obtained. This rule is contained in
Article 2062 of the Civil Code, which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in some
instances mentioned in Article 2059 when the action may be brought against
both the guarantor and the principal debtor.
The Court must, however, reject Aglibots claim as a mere guarantor of the
indebtedness of PLCC to Santia for want of proof, in view of Article 1403(2) of
the Civil Code, embodying the Statute of Frauds. Under the above provision,
concerning a guaranty agreement, which is a promise to answer for the debt or
default of another, the law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable
unless ratified, although under Article 1358 of the Civil Code, a contract of
guaranty does not have to appear in a public document. Contracts are generally

obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present, and the Statute of Frauds
simply provides the method by which the contracts enumerated in Article
1403(2) may be proved, but 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 evidentiary purposes only.
On the other hand, Article 2055 of the Civil Code also provides that a guaranty
is not presumed, but must be express, and cannot extend to more than what is
stipulated therein. This is the obvious rationale why a contract of guarantee is
unenforceable unless made in writing or evidenced by some writing.
MERCANTILE LAW: accommodation party
SECOND ISSUE: Aglibot is an accommodation party and therefore liable
to Santia.
The appellate court ruled that by issuing her own post-dated checks, Aglibot
thereby bound herself personally and solidarily to pay Santia, and dismissed her
claim that she issued her said checks in her official capacity as PLCCs manager
merely to guarantee the investment of Santia. The facts present a clear
situation where Aglibot, as the manager of PLCC, agreed to accommodate its
loan to Santia by issuing her own post-dated checks in payment thereof. She is
what the Negotiable Instruments Law calls an accommodation party.
The relation between an accommodation party and the party accommodated is,
in effect, one of principal and surety the accommodation party being the surety.
It is a settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promisor and debtor from the beginning.
The liability is immediate and direct. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he
executed the instrument; nor is it correct to say that the holder for value is not
a holder in due course merely because at the time he acquired the instrument,
he knew that the indorser was only an accommodation party. Unlike in a
contract of suretyship, the liability of the accommodation party remains not only
primary but also unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for payment without
the consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder
for value is concerned, he is a solidary co-debtor. Petition is DENIED. Court of
Appeals is AFFIRMED.

BITANGA VS. PYRAMID

Assailed in this Petition for Review under Rule 45 of the Revised Rules of Court
are: (1) the Decision dated 11 April 2006 of the Court of Appeals in CA-G.R. CV
No. 78007 which affirmed with modification the partial Decision dated 29
November 2002of the Regional Trial Court (RTC), Branch 96, of Quezon City, in
Civil Case No. Q-01-45041, granting the motion for summary judgment filed by
respondent Pyramid Construction and Engineering Corporation and declaring
petitioner Benjamin Bitanga and his wife,
Marilyn Bitanga (Marilyn), solidarily liable to pay P6,000,000.000 to respondent;
and (2) the Resolution dated 5 July 2006 of the appellate court in the same case
denying petitioners Motion for Reconsideration. The generative facts are: On 6
September 2001, respondent filed with the RTC a Complaint for specific
performance and damages with application for the issuance of a writ of
preliminary attachment against the petitioner and Marilyn. The Complaint was
docketed as Civil Case No. Q-01-45041. Respondent alleged in its Complaint
that on 26 March 1997, it entered into an agreement with Macrogen Realty, of
which petitioner is the President, to construct for the latter the Shoppers Gold

Building, located at Dr. A. Santos Avenue corner

Palayag Road, Sucat,Paraaque City. Respondent commenced civil, structural,
and architectural works on the construction project by May
1997. However,Macrogen Realty failed to settle respondents progress
billings. Petitioner, through his representatives and agents, assured respondent
that the outstanding account of Macrogen Realty would be paid, and requested
respondent to continue working on the construction project. Relying on the
assurances made by petitioner, who was no less than the President
of Macrogen Realty, respondent continued the construction project. In August
1998, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including payment of
unsettled accounts, had not been complied with by Macrogen Realty. On 1
September 1999, respondent instituted with the Construction Industry
Arbitration Commission (CIAC) a case for arbitration
against MacrogenRealty seeking payment by the latter of its unpaid billings and
project costs. Petitioner, through counsel, then conveyed to respondent his
purported willingness to amicably settle the arbitration case. On 17 April 2000,
before the arbitration case could be set for trial, respondent
and Macrogen Realty entered into a Compromise Agreement, with petitioner
acting as signatory for and in behalf ofMacrogen Realty. Under the Compromise
Agreement, Macrogen Realty agreed to pay respondent the total amount
of P6,000,000.00 in six equal monthly installments, with each installment to be
delivered on the 15th day of the month, beginning 15 June
2000.Macrogen Realty also agreed that if it would default in the payment of two
successive monthly installments, immediate execution could issue against it for
the unpaid balance, without need of judgment or decree from any court or
tribunal. Petitioner guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of Guaranty in favor of
respondent, by virtue of which he irrevocably and unconditionally guaranteed
the full and complete payment of the principal amount of liability
ofMacrogen Realty in the sum of P6,000,000.00. Upon joint motion of
respondent and Macrogen Realty, the CIAC approved the Compromise
Agreement on 25 April 2000.

However, contrary to petitioners assurances, Macrogen Realty failed and refused to

pay all the monthly installments agreed upon in the Compromise Agreement. Hence,
on 7 September 2000, respondent moved for the issuance of a writ of
executionagainst Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff[9] filed a return stating that he was unable to
locate any property of Macrogen Realty, except its bank deposit of P20,242.33, with
the Planters Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written demand[10] on petitioner, as
guarantor of Macrogen Realty, to pay theP6,000,000.00, or to point out available
properties of the Macrogen Realty within the Philippines sufficient to cover the
obligation guaranteed. It also made verbal demands on petitioner. Yet, respondents
demands were left unheeded.
Thus, according to respondent, petitioners obligation as guarantor was already due
and demandable. As to Marilyns liability, respondent contended
that Macrogen Realty was owned and controlled by petitioner and Marilyn and/or by
corporations owned and controlled by them. Macrogen Realty is 99% owned by the
Asian Appraisal Holdings, Inc. (AAHI), which in turn is 99% owned by Marilyn. Since
the completion of the construction project would have rebounded to the benefit of
both petitioner and Marilyn and/or their corporations; and considering, moreover,
Marilyns enormous interest in AAHI, the corporation which controls MacrogenRealty,
Marilyn cannot be unaware of the obligations incurred by Macrogen Realty and/or
petitioner in the course of the business operations of the said corporation.

Respondent prayed in its Complaint that the RTC, after hearing, render a judgment
ordering petitioner and Marilyn to comply with their obligation under the Contract of
Guaranty by paying respondent the amount of P6,000,000.000 (less the bank
deposit of Macrogen Realty with Planters Bank in the amount of P20,242.23)
and P400,000.000 for attorneys fees and expenses of litigation. Respondent also
sought the issuance of a writ of preliminary attachment as security for the
satisfaction of any judgment that may be recovered in the case in its favor.
Marilyn filed a Motion to Dismiss, asserting that respondent had no cause of action
against her, since she did not co-sign the Contract of Guaranty with her husband;
nor was she a party to the Compromise Agreement between respondent
and Macrogen Realty. She had no part at all in the execution of the said
contracts. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of another corporation is not by itself a sufficient
ground for disregarding the separate personality of the latter
corporation. Respondent misread Section 4, Rule 3 of the Revised Rules of Court.
The RTC denied Marilyns Motion to Dismiss for lack of merit, and in its Order
dated 24 January 2002 decreed that: The Motion To Dismiss Complaint
Against Defendant Marilyn Andal Bitanga filed on November 12, 2001 is denied for
lack of merit considering that Sec. 4, Rule 3, of the Rules of Court (1997) specifically
provides, as follows: SEC. 4. Spouses as parties. Husband and wife shall sue or be
sued jointly, except as provided by law and that this case does not come within the
exception.[12]
Petitioner filed with the RTC on 12 November 2001, his Answer[13] to
respondents Complaint averring therein that he never made
representations to respondent that Macrogen Realty would faithfully comply
with its obligations under the Compromise Agreement.He did not offer to
guarantee the obligations of Macrogen Realty to entice respondent to enter
into the Compromise Agreement but that, on the contrary, it was
respondent that required Macrogen Realty to offer some form of security for
its obligations before agreeing to the compromise. Petitioner further alleged
that his wife Marilyn was not aware of the obligations that he assumed
under both the Compromise Agreement and the Contract of Guaranty as he
did not inform her about said contracts, nor did he secure her consent
thereto at the time of their execution.
As a special and affirmative defense, petitioner argued that the benefit
of excussion was still available to him as a guarantor since he had set it up prior to
any judgment against him. According to petitioner, respondent failed to exhaust all
legal remedies to collect fromMacrogen Realty the amount due under the
Compromise Agreement, considering that Macrogen Realty still had uncollected
credits which were more than enough to pay for the same. Given these premise,
petitioner could not be held liable as guarantor.Consequently, petitioner presented
his counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the following issues
for the resolution of the RTC: (1) whether the defendants were liable under the
contract of guarantee dated April 17, 2000 entered into between
Benjamin Bitanga and the plaintiff; (2) whether defendant wife Marilyn Bitanga is
liable in this action; (3) whether the defendants are entitled to the benefit
of excussion, the plaintiff on the one hand claiming that it gave due notice to the
guarantor, Benjamin Bitanga, and the defendants contending that no proper notice
was received by Benjamin Bitanga; (4) if damages are due, which party is liable; and
(5) whether the benefit of excussion can still be invoked by the defendant guarantor
even after the notice has been allegedly sent by the plaintiff although proper receipt
is denied.
On 20 September 2002, prior to the trial proper, respondent filed a Motion
for Summary Judgment. Respondent alleged therein that it was entitled to a
summary judgment on account of petitioners admission during the pre-trial

of the genuineness and due execution of the Contract of Guaranty. The

contention of petitioner and Marilyn that they were entitled to the benefit
of excussionwas not a genuine issue. Respondent had already exhausted all
legal remedies to collect from Macrogen Realty, but its efforts proved
unsuccessful. Given that the inability of Macrogen Realty as debtor to pay
the amount of its debt was already proven by the return of the writ of
execution to CIAC unsatisfied, the liability of petitioner as guarantor already
arose.[16] In any event, petitioner and Marilyn were deemed to have
forfeited their right to avail themselves of the benefit of excussion because
they failed to comply with Article 2060[17] of the Civil Code when petitioner
ignored respondents demand letter dated 3 January 2001 for payment of
the amount he guaranteed.[18] The duty to collect the supposed receivables
of Macrogen Realty from its creditors could not be imposed on respondent,
since petitioner and Marilyn never informed respondent about such
uncollected credits even after receipt of the demand letter for
payment. The allegation of petitioner and Marilyn that they could not
respond to respondents demand letter since they did not receive the same
was unsubstantiated and insufficient to raise a genuine issue of fact which
could defeat respondents Motion for Summary Judgment. The claim that
Marilyn never participated in the transactions that culminated in petitioners
execution of the Contract of Guaranty was nothing more than a sham.
In opposing respondents foregoing Motion for Summary Judgment, petitioner and
Marilyn countered that there were genuinely disputed facts that would require trial
on the merits. They appended thereto an affidavit executed by petitioner, in which
he declared that his spouse Marilyn could not be held personally liable under the
Contract of Guaranty or the Compromise Agreement, nor should her share in the
conjugal partnership be made answerable for the guaranty petitioner assumed,
because his undertaking of the guaranty did not in any way redound to the benefit
of their family. As guarantor, petitioner was entitled to the benefit of excussion, and
he did not waive his right thereto. He never received the respondents demand letter
dated 3 January 2001, as Ms. Dette Ramos, the person who received it, was not an
employee of Macrogen Realty nor was she authorized to receive the letter on his
behalf. As a guarantor, petitioner could resort to the benefit of excussion at any time
before judgment was rendered against him.[19] Petitioner reiterated
that Macrogen Realty had uncollected credits which were more than sufficient to
satisfy the claim of respondent.
On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion
of which provides: WHEREFORE, summary judgment is rendered ordering defendants
SPOUSES BENJAMIN BITANGA and MARILYN ANDAL BITANGA to pay the [herein
respondent], jointly and severally, the amount of P6,000,000.00, less P20,242.23
(representing the amount garnished bank deposit of MACROGEN in the Planters
Bank, Buendia Branch); and the costs of suit. Within 10 days from receipt of this
partial decision, the [respondent] shall inform the Court whether it shall still pursue
the rest of the claims against the defendants. Otherwise, such claims shall be
considered waived.[20]Petitioner and Marilyn filed a Motion for Reconsideration of the
afore-quoted Decision, which the RTC denied in an Order dated 26 January 2003.[21]In
time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as
CA-G.R. CV 78007. In its Decision dated 11 April 2006, the appellate court held:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must
be, as it hereby is, MODIFIED to the effect that defendant-appellant
Marilyn Bitanga is adjudged not liable, whether solidarily or otherwise, with her
husband the defendant-appellant BenjaminBitanga, under the compromise
agreement or the contract of guaranty. No costs in this instance.[22]
In holding that Marilyn Bitanga was not liable, the Court of Appeals
cited Ramos v. Court of Appeals,[23] in which it was declared that a contract
cannot be enforced against one who is not a party to it. The Court of

Appeals stated further that the substantial ownership of shares

in Macrogen Realty by Marilyn Bitanga was not enough basis to hold her
liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioners Motion
for Reconsideration[24] of its earlier Decision.
Petitioner is now before us via the present Petition with the following assignment of
errors:
I.
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE VALIDITY OF
THE PARTIAL SUMMARY JUDGMENT BY THE REGIONAL TRIAL COURT OF
QUEZON CITY, BRANCH 96, DESPITE THE CLEAR EXISTENCE OF DISPUTED
GENUINE AND MATERIAL FACTS OF THE CASE THAT SHOULD HAVE
REQUIRED A TRIAL ON THE MERITS.
II.
THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING THE RIGHT OF
PETITIONER BENJAMIN M. BITANGA AS A MERE GUARANTOR TO THE
BENEFIT OF EXCUSSION UNDER ARTICLES 2058, 2059, 2060, 2061, AND
2062 OF THE CIVIL CODE OF THE PHILIPPINES.[25]
As in the two courts below, it is petitioners position that summary judgment is
improper in Civil Case No. Q-01-45041 because there are genuine issues of fact
which have to be threshed out during trial, to wit: (A) Whether or not there was
proper service of notice to petitioner considering the said letter of demand was
allegedly received by one DetteRamos at Macrogen office and not by him at his
residence; (B) Whether or not petitioner is entitled to the benefit of excussion?[26]
We are not persuaded by petitioners arguments. Rule 35 of the Revised
Rules of Civil Procedure provides: Section 1. Summary judgment for
claimant. A party seeking to recover upon a claim, counterclaim, or crossclaim or to obtain a declaratory relief may, at any time after the pleading in
answer thereto has been served, move with supporting affidavits,
depositions or admissions for a summary judgment in his favor upon all or
any part thereof.
For a summary judgment to be proper, the movant must establish two
requisites: (a) there must be no genuine issue as to any material fact,
except for the amount of damages; and (b) the party presenting the motion
for summary judgment must be entitled to a judgment as a matter of law.
Where, on the basis of the pleadings of a moving party, including
documents appended thereto, no genuine issue as to a material fact exists,
the burden to produce a genuine issue shifts to the opposing party. If the
opposing party fails, the moving party is entitled to a summary judgment.
[27]

In a summary judgment, the crucial question is: are the issues raised by the
opposing party not genuine so as to justify a summary judgment?[28]
First off, we rule that the issue regarding the propriety of the service of a copy of the
demand letter on the petitioner in his office is a sham issue. It is not a bar to the
issuance of a summary judgment in respondents favor.
A genuine issue is an issue of fact which requires the presentation of evidence as
distinguished from an issue which is a sham, fictitious, contrived or false claim. To
forestall summary judgment, it is essential for the non-moving party to confirm the
existence of genuine issues, as to which he has substantial, plausible and fairly
arguable defense, i.e.,[29] issues of fact calling for the presentation of evidence upon
which reasonable findings of fact could return a verdict for the non-moving party,
although a mere scintilla of evidence in support of the party opposing summary
judgment will be insufficient to preclude entry thereof.
Significantly, petitioner does not deny the receipt of the demand letter from the
respondent. He merely raises a howl on the impropriety of service thereof, stating
that the address to which the said letter was sent was not his residence but the

office ofMacrogen Realty, thus it cannot be considered as the correct manner of

conveying a letter of demand upon him in his personal capacity. [30]
Section 6, Rule 13 of the Rules of Court states: SEC. 6. Personal service. Service of
the papers may be made by delivering personally a copy to the party or his
counsel, or by leaving it in his office with his clerk or with a person having
charge thereof. If no person is found in his office, or his office is not known, or he
has no office, then by leaving the copy, between the hours of eight in the morning
and six in the evening, at the partys or counsels residence, if known, with a person
of sufficient age and discretion then residing therein.
The affidavit of Mr. Robert O. Pagdilao, messenger of respondents counsel
states in part: 2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one
of the Associates of the ACCRA Law Offices, instructed me to deliver to the
office of Mr. Benjamin Bitanga a letter dated 3 January 2001, pertaining to
Construction Industry Arbitration Commission (hereafter, CIAC) Case No.
99-56, entitled Pyramid Construction Engineering Corporation
vs. Macrogen Realty Corporation; 3. As instructed, I
immediately proceeded to the office of Mr. Bitanga located at the
12th Floor, Planters Development Bank Building, 314 Senator
Gil Puyat Avenue, Makati City. I delivered the said letter to
Ms. Dette Ramos, a person of sufficient age and discretion, who introduced
herself as one of the employees of Mr. Bitanga and/or of the latters
companies.
We emphasize that when petitioner signed the Contract of Guaranty and assumed
obligation as guarantor, his address in the said contract was the same address
where the demand letter was served.[32] He does not deny that the said place of
service, which is the office of Macrogen, was also the address that he used when he
signed as guarantor in the Contract of Guaranty. Nor does he deny that this is his
office address; instead, he merely insists that the person who received the letter and
signed the receiving copy is not an employee of his company. Petitioner could have
easily substantiated his allegation by a submission of an affidavit of the personnel
manager of his office that no such person is indeed employed by petitioner in his
office, but that evidence was not submitted. [33] All things are presumed to have been
done correctly and with due formality until the contrary is
proved. This juristantum presumption stands even against the most well-reasoned
allegation pointing to some possible irregularity or anomaly.[34] It is petitioners
burden to overcome the presumption by sufficient evidence, and so far we have not
seen anything in the record to support petitioners charges of anomaly beyond his
bare allegation. Petitioner cannot now be heard to complain that there was an
irregular service of the demand letter, as it does not escape our attention that
petitioner himself indicated 314 Sen. Gil Puyat Avenue,Makati City as his office
address in the Contract of Guaranty.
Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of
service when the papers, or in this case, when the demand letter is personally
delivered to the party or his counsel, or by leaving it in his office with his clerk
or with a person having charge thereof, such as what was done in this case. We
have consistently expostulated that in summary judgments, the trial court can
determine a genuine issue on the basis of the pleadings, admissions, documents,
affidavits or counter affidavits submitted by the parties. When the facts as pleaded
appear uncontested or undisputed, then there is no real or genuine issue or question
as to any fact, and summary judgment is called for. [35]
The Court of Appeals was correct in holding that: Here, the issue of non-receipt of
the letter of demand is a sham or pretended issue, not a genuine and substantial
issue. Indeed, against the positive assertion of Mr. Roberto O. Pagdilao (the private

courier) in his affidavit that he delivered the subject letter to a certain

Ms. Dette Ramos who introduced herself as one of the employees of [herein
petitioner] Mr. Benjamin Bitanga and/or of the latters companies, said [petitioner]
merely offered a bare denial. But bare denials, unsubstantiated by facts, which
would be admissible in evidence at a hearing, are not sufficient to raise a genuine
issue of fact sufficient to defeat a motion for summary judgment.[36]
We further affirm the findings of both the RTC and the Court of Appeals
that, given the settled facts of this case, petitioner cannot avail himself of
the benefit of excussion.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. The
guarantor who pays for a debtor, in turn, must be indemnified by the
latter. However, the guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise known as the benefit
of excussion.
Article 2060 of the Civil Code reads: 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
latters demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover the amount of
the debt.[38]
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, he must set it up against the
creditor upon the latters demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the
debt.[39]It must be stressed that despite having been served a demand letter at his
office, petitioner still failed to point out to the respondent properties
of Macrogen Realty sufficient to cover its debt as required under Article 2060 of the
Civil Code. Such failure on petitioners part forecloses his right to set up the defense
of excussion.
Worthy of note as well is the Sheriffs return stating that the only property
of Macrogen Realty which he found was its deposit ofP20,242.23 with the Planters
Bank. Article 2059(5) of the Civil Code thus finds application and precludes
petitioner from interposing the defense of excussion. We quote: Art.
2059. This excussion shall not take place: (5) If it may be presumed that an
execution on the property of the principal debtor would not result in the satisfaction
of the obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot be
compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient
assets. Reason: The said [petitioner] had not genuinely controverted the return
made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he
was not able to locate any property belonging to the Macrogen Realty, except for a
bank deposit with the Planters Bank at Buendia, in the amount of P20,242.23. It is
axiomatic that the liability of the guarantor arises when the insolvency or inability of
the debtor to pay the amount of debt is proven by the return of the writ of execution
that had not been unsatisfied.[40]IN ALL, we fail to point out any impropriety in the
rendition of a summary judgment in favor of the respondent. WHEREFORE,
premises considered, the instant petition is DENIED for lack of merit. The Decision
of the Court of Appeals dated 11 April 2006 and its Resolution dated 5 July
2006 are AFFIRMED. Costs against petitioner.

SPOUSES ONG VS. PCIB

This is a petition for review on certiorari under Rule 45 of the Rules of Court to set
aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February
17, 2003, affirming the decision of the trial court denying petitioners motion to
dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged
in the manufacture and export of finished wood products. Petitioners-spouses
Alfredo and Susana Ong are its President and Treasurer, respectively. On April 20,
1992, respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a
sum of money[1] against petitioners-spouses. Respondent bank sought to hold
petitioners-spouses liable as sureties on the three (3) promissory notes they issued
to secure some of BMCs loans, totalling five million pesos (P5,000,000.00). The
complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to a total of five million pesos, with the
respondent bank. Petitioners-spouses acted as sureties for these loans and issued
three (3) promissory notes for the purpose. Under the terms of the notes, it was
stipulated that respondent bank may consider debtor BMC in default and demand
payment of the remaining balance of the loan upon the levy, attachment or
garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to
be in a state of suspension of payments. Respondent bank granted BMCs loan
applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its properties
were attached by creditors. Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from petitioners-spouses as
sureties. In due time, petitioners-spouses filed their Answer. On October 13, 1992, a
Memorandum of Agreement (MOA)[2] was executed by debtor BMC, the petitionersspouses as President and Treasurer of BMC, and the consortium of creditor banks of
BMC (of which respondent bank is included). The MOA took effect upon its approval
by the SEC on November 27, 1992. [3] Thereafter, petitioners-spouses moved to
dismiss[4] the complaint. They argued that as the SEC declared the principal debtor
BMC in a state of suspension of payments and, under the MOA, the creditor banks,
including respondent bank, agreed to temporarily suspend any pending civil action
against the debtor BMC, the benefits of the MOA should be extended to petitionersspouses who acted as BMCs sureties in their contracts of loan with respondent bank.
Petitioners-spouses averred that respondent bank is barred from pursuing its
collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the
Court of Appeals which affirmed the trial courts ruling that a creditor can proceed
against petitioners-spouses as surety independently of its right to proceed against
the principal debtor BMC.
Hence this appeal. Petitioners-spouses claim that the collection case filed against
them by respondent bank should be dismissed for three (3) reasons: First, the MOA
provided that during its effectivity, there shall be a suspension of filing or pursuing
of collection cases against the BMC and this provision should benefit petitioners as
sureties. Second, principal debtor BMC has been placed under suspension of
payment of debts by the SEC; petitioners contend that it would prejudice them if the
principal debtor BMC would enjoy the suspension of payment of its debts while
petitioners, who acted only as sureties for some of BMCs debts, would be compelled
to make the payment; petitioners add that compelling them to pay is contrary
to Article 2063 of the Civil Code which provides that a compromise between the
creditor and principal debtor benefits the guarantor and should not prejudice the
latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that:
the guarantor may set up against the creditor all the defenses which pertain to the

principal debtor and are inherent in the debt; but not those which are purely
personal to the debtor. Petitioners aver that if the principal debtor BMC can set up
the defense of suspension of payment of debts and filing of collection suits against
respondent bank, petitioners as sureties should likewise be allowed to avail of these
defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs
debts. There is a sea of difference in the rights and liabilities of a guarantor and a
surety. A guarantor insures the solvency of the debtor while a surety is an insurer of
the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the
part of the guarantor. It is only after the creditor has proceeded against the
properties of the principal debtor and the debt remains unsatisfied that a guarantor
can be held liable to answer for any unpaid amount. This is the principle of
excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt . As the
surety insures the debt itself, he obligates himself to pay the debt if the principal
debtor will not pay, regardless of whether or not the latter is financially capable to
fulfill his obligation. Thus, a creditor can go directly against the surety although the
principal debtor is solvent and is able to pay or no prior demand is made on the
principal debtor. A surety is directly, equally and absolutely bound with the principal
debtor for the payment of the debt and is deemed as an original promissor and
debtor from the beginning.[5]
Under the suretyship contract entered into by petitioners-spouses with
respondent bank, the former obligated themselves to be solidarily bound with the
principal debtor BMC for the payment of its debts to respondent bank amounting to
five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,
[6]
respondent bank as creditor may proceed against petitioners-spouses as sureties
despite the execution of the MOA which provided for the suspension of payment and
filing of collection suits against BMC. Respondent banks right to collect payment
from the surety exists independently of its right to proceed directly against the
principal debtor. In fact, the creditor bank may go against the surety alone without
prior demand for payment on the principal debtor.[7]
The provisions of the MOA regarding the suspension of payments by BMC and
the non-filing of collection suits by the creditor banks pertain only to the property of
the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only
the properties of BMC were mentioned in the petition with the SEC. [8] Secondly, there
is nothing in the MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the
MOA executed by BMC and signed by the creditor-banks was approved by the SEC
whose jurisdiction is limited only to corporations and corporate assets. It has no
jurisdiction over the properties of BMCs officers or sureties. Clearly, the collection
suit filed by respondent bank against petitioners-spouses as sureties can prosper.
The trial courts denial of petitioners motion to dismiss was proper. IN VIEW
WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to
costs. SO ORDERED.

REPUBLIC FLOUR VS. FORBES

Petitioner filed this present Petition for Review [1] under Rule 45 of the Rules of Court,
seeking a reversal of the Court of Appeals Decision, [2] the dispositive portion of
which states: WHEREFORE, premises considered, the Decision dated April 15, 1996
rendered by the Regional Trial Court of Makati City, Branch 60, is hereby AFFIRMED,

with MODIFICATIONS, as follows:

1. The legal interest rate of six percent (6%) per annum should be computed
from the date of the filing of the complaint which shall become twelve
percent (12%) per annum from the time the judgment becomes final and
executory until its satisfaction.
2. The award of P300,000.00 as exemplary damages is reduced
to P50,000.00;
3. The award of P400,00.00 as attorneys fees is likewise reduced
to P75,000.00;
4. The Decision is hereby affirmed in all other respects. SO ORDERED.
The case arose when petitioner refused to pay the demurrage being collected by
respondent.
The facts are as follows: In a contract dated 26 April 1983, respondent was
appointed as the exclusive Philippine indent representative of Richco Rotterdam B.V.
(Richco), a foreign corporation, in the sale of the latters commodities. Under one of
the terms of the contract, respondent was to assume the liabilities of all the
Philippine buyers, should they fail to honor the commitments on the discharging
operations of each vessel, including the payment of demurrage and other penalties.
In such instances, Richco shall have the option to debit the account of respondent
corresponding to the liabilities of the buyers, and respondent shall then be deemed
to be subrogated to all the rights of Richco against these defaulting buyers.
[3]
Sometime in 1987, petitioner purchased Canadian barley and soybean meal from
Richco. The latter thereafter chartered four (4) vessels to transport the products to
the Philippines. Each of the carrier bulk cargoes was covered by a Contract of Sale
executed between respondent as the seller and duly authorized representative of
Richco and petitioner as the buyer. The four contracts specifically referred to the
charter party in determining demurrage or dispatch rate. The contract further
provided that petitioner guarantees to settle any demurrage due within one (1)
month from respondents presentation of the statement.
Upon delivery of the barley and soybean meal, petitioner failed to
discharge the cargoes from the four (4) vessels at the computed allowable period to
do so. Thus, it incurred a demurrage amounting to a total of US$193,937.41. On
numerous occasions, on behalf of Richco, respondent demanded from petitioner the
payment of the demurrage, to no avail. Consequently, on 20 October 1991, Richco
sent a communication to respondent, informing it that the demurrage due from
petitioner had been debited from the respondents account. Thereafter, on 12
February 1992, respondent filed with the Regional Trial Court (RTC), National Capital
Judicial Region, Makati City, a Complaint for demurrage and damages against
petitioner. Meanwhile, the latter raised the defense that the delay was due to
respondents inefficiency in unloading the cargo.
On 15 April 1996, after trial on the merits, the RTC rendered a Decision [4] holding
petitioner liable to pay demurrage and damages to respondent, to wit:
WHEREFORE, the Court hereby renders judgment as follows:
1. The defendant REPUBLIC FLOUR MILLS CORPORATION is ordered to pay the
plaintiff FORBES FACTORS, INC. the following:
2. US$193,937.41 or its Philippine PESO equivalent at the rate of exchange at
the time of payment As demurrage.
3. Six (6) percent of the amount in the preceding paragraph 34.1.1 Per annum
from October 29, 1991 until the said amount is fully paid As damages.
4. P300,000.00 As exemplary damage
5. P 400,000.00 As attorneys fees.
6. The COUNTERCLAIM is DISMISSED; and
7. Cost is taxed against the defendant.
The RTC found that the delay in discharging the cargoes within the allowable period
was due to petitioners failure to provide enough barges on which to load the goods.
It likewise found that petitioner in fact acknowledged that the latter had incurred
demurrage when it alleged that the computation was bloated. Petitioner was thus

liable to pay demurrage based on the sales contracts executed with respondent and
on the contract executed between respondent and Richco. Finally, the court ruled
that respondent was entitled to damages from petitioners wanton, fraudulent,
reckless, oppressive or malevolent refusal to pay the latters liabilities despite
repeated demands.
Subsequently, petitioner appealed to the Court of Appeals (CA), alleging that
respondent was not a real party-in-interest to bring the collection suit. Petitioner
insisted that the payment of demurrage should be made to the owner of the vessels
that transported the goods, and not to respondent who was merely the indent
representative of Richco, the charterer of the vessel. In addition, petitioner claimed
that it was denied due process when the RTC refused to reset the hearing for the
presentation of Reynaldo Santos, petitioners witness and export manager. Finally,
petitioner contested the RTCs award of exemplary damages and attorneys fees. On
18 February 2002, the CA promulgated the assailed Decision. It upheld the validity
of the Contracts of Sale and held that these had the force of law between the
contracting parties and must be complied with in good faith. However, the appellate
court modified the trial courts award of damages. It held that exemplary damages
are not intended to enrich anyone, thus, reducing the amount from P300,000
to P50,000. It also found the award of attorneys fees to be excessive, and
consequently reduced it fromP400,000 to P75,000.
Hence this Petition. Three issues are raised for the resolution by this Court. First,
petitioner assails the right of respondent to demand payment of demurrage.
Petitioner asserts that, by definition, demurrage is the sum fixed by the contract of
carriage as remuneration to the ship owner for the detention of the vessel beyond
the number of days allowed by the charter party.[5] Thus, since respondent is not the
ship owner, it has no right to demand the payment of demurrage and has no
personality to bring the claim against petitioner. Second, petitioner questions the
propriety of the award of damages in favor of respondent. And third, the former
insists that it was denied due process when the RTC denied its Motion to reset the
hearing to present its witness.
We find the petition without merit. The facts are undisputed. The delay incurred by
petitioner in discharging the cargoes from the vessels was due to its own fault. Its
obligation to demurrage is established by the Contracts of Sale it executed, wherein
it agreed to the conditions to provide all discharging facilities at its expense in order
to effect the immediate discharge of cargo; and to place for its account all
discharging costs, fees, taxes, duties and all other charges incurred due to the
nature of the importation.[6]Meanwhile, respondent unequivocally established that
Richco charged to it the demurrage due from petitioner. Thus, at the moment that
Richco debited the account of respondent, the latter is deemed to have subrogated
to the rights of the former, who in turn, paid demurrage to the ship owner. It is
therefore immaterial that respondent is not the ship owner, since it has been able to
prove that it has stepped into the shoes of the creditor. Subrogation is either legal or
conventional. Legal subrogation is an equitable doctrine and arises by operation of
the law, without any agreement to that effect executed between the parties;
conventional subrogation rests on a contract, arising where an agreement is made
that the person paying the debt shall be subrogated to the rights and remedies of
the original creditor.[7] The case at bar is an example of legal subrogation, the
petitioner and respondent having no express agreement on the right of subrogation.
Thus, it is of no moment that the Contracts of Sale did not expressly state that
demurrage shall be paid to respondent. By operation of law, respondent has become
the real party-in-interest to pursue the payment of demurrage. As aptly stated by
the RTC: 19. True it is that demurrage is, as a rule, an amount payable to a
shipowner by a charterer for the detention of the vessel beyond the period allowed
for the loading or unloading or sailing. This however, does not mean that a party
cannot stipulate with another who is not a shipowner, on demurrage. In this case,

FORBES stipulated under the charter parties on demurrage with the shipowners. This
stipulation could be the basis of the provisions on demurrage in the four (4)
Contracts of Sale (Exhs. B, N, X, and CC) and contract between FORBES and RICHCO
(Exh. A).
20. RICHCO debited the US$193,937.41 from the accounts of FORBES as
evidenced by Exh. OO. Hence, FORBES was subrogated to the right of
RICHCO to collect the said amount from RFM pursuant to the contract
between RICHCO and FORBES (Exh. A).
21. Under Exh. A, FORBES guaranteed its buyers (sic) payment schedule
Consequently, it was subrogated to the rights of RICHCO arising from the
failure of RFM to pay its demurrage and FORBES paid for it. The subrogation
was pursuant to Articles 1302 and 2067, New Civil Code, which read: Art.
1302. It is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is preferred, even
without the debtors knowledge;
2. When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
3. When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latters share.
Art. 2067. The guarantor who pays is subrogated by virtue thereof
to all the rights which the creditor had against the debtor. If the
guarantor has compromised with the creditor, he cannot demand
of the debtor more than what he has really paid. As we held
in Firemans Fund Insurance Company v. Jamila & Company, Inc.:
Subrogation has been referred to as the doctrine of substitution. It
is an arm of equity that may guide or even force one to pay a debt
for which an obligation was incurred but which was in whole or in
part paid by another. Subrogation is founded on principles of
justice and equity, and its operation is governed by principles of
equity. It rests on the principle that substantial justice should be
attained regardless of form, that is, its basis is the doing of
complete, essential, and perfect justice between all the parties
without regard to form(83 C.J.S. 579- 80) [8]
Anent the second issue, we have previously held in Pepsi Cola Products Phil., Inc. v.
Court of Appeals,[9] that a motion for continuance of postponement is not a matter of
right. Rather, the motion is addressed to the sound discretion of the court, whose
action thereon will not be disturbed by appellate courts in the absence of clear and
manifest abuse of discretion, resulting in a denial of substantial justice. On the last
issue, we find that the award of exemplary damages proper. Petitioner refused to
honor the contract despite respondents repeated demands and its proof of payment
to Richco; and despite its repeated promise to settle its outstanding obligations in
the span of almost five years. Petitioner indeed acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. Because respondent was also forced to
initiate the present Complaint, it was only proper that it was awarded attorneys fees.
Lastly, the CA was correct in reducing the award of exemplary damages or attorneys
fees, since neither is meant to enrich anyone. WHEREFORE, in view of the
foregoing, the assailed Decision of the Court of Appeals is hereby AFFIRMED. The
present Petition is DENIED. SO ORDERED.

AFP GENERAL INSURANCE VS. MOLINA

This is a petition for review on certiorari of the Decision [1] dated August 20,

2001 of the Court of Appeals in CA-G.R. SP No. 58763 which dismissed herein
petitioners special civil action for certiorari. Before the appellate court,
petitioner AFP General Insurance Corporation (AFPGIC) sought to reverse the
Resolution[2] dated October 5, 1999 of the National Labor Relations Commission
(NLRC) in NLRC NCR CA-011705-96 for having been issued with grave abuse of
discretion. The NLRC affirmed the Order[3] dated March 30, 1999 of Labor Arbiter
Edgardo Madriaga in NLRC NCR Case No. 02-00672-90 which had
deniedAFPGICs Omnibus Motion to Quash Notice/Writ of Garnishment and
Discharge AFPGICs appeal bond for failure of Radon Security & Allied Services
Agency (Radon Security) to pay the premiums on said bond. Equally challenged
is the Resolution[4]dated December 14, 2001 of the appellate court in CA-G.R. SP
No. 58763 which denied herein petitioners motion for reconsideration.
The facts of this case are not disputed. The private respondents are the
complainants in a case for illegal dismissal, docketed as NLRC NCR Case No. 0200672-90, filed against Radon Security & Allied Services Agency and/or Raquel
Aquias and Ever Emporium, Inc. In his Decision dated August 20, 1996, the Labor
Arbiter ruled that the private respondents were illegally dismissed and ordered
Radon Security to pay them separation pay, backwages, and other monetary
claims. Radon Security appealed the Labor Arbiters decision to public respondent
NLRC and posted a supersedeas bond, issued by herein petitioner AFPGIC as
surety. The appeal was docketed as NLRC NCR CA-011705-96. On April 6, 1998,
the NLRC affirmed with modification the decision of the Labor Arbiter. The NLRC
found the herein private respondents constructively dismissed and ordered
Radon Security to pay them their separation pay, in lieu of reinstatement with
backwages, as well as their monetary benefits limited to three years, plus
attorneys fees equivalent to 10% of the entire amount, with Radon Security and
Ever Emporium, Inc. adjudged jointly and severally liable. Radon Security duly
moved for reconsideration, but this was denied by the NLRC in its Resolution
dated June 22, 1998. Radon Security then filed a Petition for Certiorari docketed
as G.R. No. 134891 with this Court, but we dismissed this petition in our
Resolution of August 31, 1998. When the Decision dated April 6, 1998 of the
NLRC became final and executory, private respondents filed an Urgent Motion
for Execution. As a result, the NLRC Research and Information Unit submitted a
Computation of the Monetary Awards in accordance with the NLRC
decision. Radon Security opposed said computation in its Motion for
Recomputation. On February 5, 1999, the Labor Arbiter issued a Writ of
Execution[5] incorporating the computation of the NLRC Research and
Information Unit. That same date, the Labor Arbiter dismissed the Motion for
Recomputation filed by Radon Security. By virtue of the writ of execution, the
NLRC Sheriff issued a Notice of Garnishment[6] against the supersedeas bond.
Both Ever Emporium, Inc. and Radon Security moved to quash the writ of execution.
On March 30, 1999, the Labor Arbiter denied both motions, and Radon Security
appealed to the NLRC. On April 14, 1999, AFPGIC entered the fray by filing before
the Labor Arbiter an Omnibus Motion to Quash Notice/Writ of Garnishment and to
Discharge AFPGICs Appeal Bond on the ground that said bond has been cancelled
and thus non-existent in view of the failure of Radon Security to pay the yearly
premiums.[7] On April 30, 1999, the Labor Arbiter denied AFPGICs Omnibus Motion
for lack of merit.[8] The Labor Arbiter pointed out that the question of non-payment
of premiums is a dispute between the party who posted the bond and the insurer; to
allow the bond to be cancelled because of the non-payment of premiums would
result in a factual and legal absurdity wherein a surety will be rendered nugatory by
the simple expedient of non-payment of premiums. The petitioner then appealed the
Labor Arbiters order to the NLRC. The appeals of Radon Security and AFPGIC were
jointly heard as NLRC NCR CA-011705-96. On October 5, 1999, the NLRC disposed of

NLRC NCR CA-011705-96 in this wise: WHEREFORE, premises considered, the

appeals under consideration are hereby DISMISSED for lack of merit. SO ORDERED. [9]
In dismissing the appeal of AFPGIC, the NLRC pointed out that AFPGICs theory that
the bond cannot anymore be proceeded against for failure of Radon Security to pay
the premium is untenable, considering that the bond is effective until the finality of
the decision.[10] The NLRC stressed that a contrary ruling would allow respondents to
simply stop paying the premium to frustrate satisfaction of the money judgment. [11]
AFPGIC then moved for reconsideration, but the NLRC denied the motion in its
Resolution[12] dated February 29, 2000. AFPGIC then filed a special civil action for
certiorari, docketed as CA-G.R. SP No. 58763, with the Court of Appeals, on the
ground that the NLRC committed a grave abuse of discretion in affirming the Order
dated March 30, 1999 of the Labor Arbiter. On August 20, 2001, the appellate court
dismissed CA-G.R. SP No. 58763, disposing as follows: WHEREFORE, the foregoing
considered, the petition is denied due course and accordingly DISMISSED. SO
ORDERED.[13] AFPGIC seasonably moved for reconsideration, but this was denied by
the appellate court in its Resolution[14] of December 14, 2001. Hence, the instant
case anchored on the lone assignment of error that: THE COURT OF APPEALS
SERIOUSLY ERRED IN SUSTAINING THE PUBLIC RESPONDENT NLRC ALTHOUGH THE
LATTER GRAVELY ABUSED ITS DISCRETION WHEN IT ARBITRARILY IGNORED THE FACT
THAT SUBJECT APPEAL BOND WAS ALREADY CANCELLED FOR NON-PAYMENT OF
PREMIUM AND THUS IT COULD NOT BE SUBJECT OF EXECUTION OR GARNISHMENT.
[15]
The petitioner contends that under Section 64 [16] of the Insurance Code, which is
deemed written into every insurance contract or contract of surety, an insurer may
cancel a policy upon non-payment of the premium. Said cancellation is binding upon
the beneficiary as the right of a beneficiary is subordinate to that of the
insured. Petitioner points out that in South Sea Surety & Insurance Co., Inc. v. CA,
[17]
this Court held that payment of premium is a condition precedent to and
essential for the efficaciousness of a contract of insurance. [18] Hence, following UCPB
General Ins. Co., Inc. v. Masagana Telamart, Inc.,[19] no insurance policy, other than
life, issued originally or on renewal is valid and binding until actual payment of the
premium.[20] The petitioner also points to Malayan Insurance Co., Inc. v. Cruz
Arnaldo,[21] which reiterated that an insurer may cancel an insurance policy for nonpayment of premium.[22] Hence, according to petitioner, the Court of Appeals
committed a reversible error in not holding that under Section 77 [23] of the Insurance
Code, the surety bond between it and Radon Security was not valid and binding for
non-payment of premiums, even as against a third person who was intended to
benefit therefrom. The private respondents adopted in toto the ratiocinations of the
Court of Appeals that inasmuch as a supersedeas bond was posted for the benefit of a
third person to guarantee that the money judgment will be satisfied in case it is affirmed
on appeal, the third person who stands to benefit from said bond is entitled to notice of
its cancellation for any reason. Likewise, the NLRC should have been notified to enable it
to take the proper action under the circumstances. The respondents submit that from its
very nature, asupersedeas bond remains effective and the surety liable thereon until
formally discharged from said liability. To hold otherwise would enable a losing party to
frustrate a money judgment by the simple expedient of ceasing to pay premiums. We
find merit in the submissions of the private respondents. The controversy before the
Court involves more than just the mere application of the provisions of the Insurance
Code to the factual circumstances. This instant case, after all, traces its roots to a
labor controversy involving illegally dismissed workers. It thus entails the application
of labor laws and regulations. Recall that the heart of the dispute is not an ordinary
contract of property or life insurance, but an appeal bond required by both
substantive and adjective law in appeals in labor disputes, specifically Article
223[24]of the Labor Code, as amended by Republic Act No. 6715, [25] and Rule VI,

Section 6[26] of the Revised NLRC Rules of Procedure. Said provisions mandate that in
labor cases where the judgment appealed from involves a monetary award, the
appeal may be perfected only upon the posting of a cash or surety bond issued by a
reputable bonding company accredited by the NLRC. [27] The perfection of an appeal
by an employer only upon the posting of a cash or surety bond clearly and
categorically shows the intent of the lawmakers to make the posting of a cash or
surety bond by the employer to be the exclusive means by which an employers
appeal may be perfected.[28] Additionally, the filing of a cash or surety bond is a
jurisdictional requirement in an appeal involving a money judgment to the NLRC.
[29]
In addition, Rule VI, Section 6 of the Revised NLRC Rules of Procedure is a
contemporaneous construction of Article 223 by the NLRC. As an interpretation of a
law by the implementing administrative agency, it is accorded great respect by this
Court.[30] Note that Rule VI, Section 6 categorically states that the cash or surety
bond posted in appeals involving monetary awards in labor disputes shall be in
effect until final disposition of the case. This could only be construed to mean that
the surety bond shall remain valid and in force until finality and execution of
judgment, with the resultant discharge of the surety company only thereafter, if we
are to give teeth to the labor protection clause of the Constitution. To construe the
provision any other way would open the floodgates to unscrupulous and heartless
employers who would simply forego paying premiums on their surety bond in order
to evade payment of the monetary judgment. The Court cannot be a party to any
such iniquity. Moreover, the Insurance Code supports the private respondents
arguments. The petitioners reliance on Sections 64 and 77 of the Insurance Code is
misplaced. The said provisions refer to insurance contracts in general. The instant
case pertains to a surety bond; thus, the applicable provision of the Insurance Code
is Section 177,[31] which specifically governs suretyship. It provides that a surety
bond, once accepted by the obligee becomes valid and enforceable, irrespective of
whether or not the premium has been paid by the obligor. The private respondents,
the obligees here, accepted the bond posted by Radon Security and issued by the
petitioner. Hence, the bond is both valid and enforceable. A verbis legis non est
recedendum (from the language of the law there must be no departure).[32]When
petitioner surety company cancelled the surety bond because Radon Security failed
to pay the premiums, it gave due notice to the latter but not to the NLRC. By its
failure to give notice to the NLRC, AFPGIC failed to acknowledge that the NLRC had
jurisdiction not only over the appealed case, but also over the appeal bond. This
oversight amounts to disrespect and contempt for a quasi-judicial agency tasked by
law with resolving labor disputes. Until the surety is formally discharged, it remains
subject to the jurisdiction of the NLRC. Our ruling, anchored on concern for the
employee, however, does not in any way seek to derogate the rights and interests of
the petitioner as against Radon Security. The former is not devoid of remedies
against the latter. Under Section 176[33] of the Insurance Code, the liability of
petitioner and Radon Security is solidary in nature. There is solidary liability only
when the obligation expressly so states, or when the law so provides, or when the
nature of the obligation so requires. [34] Since the law provides that the liability of the
surety company and the obligor or principal is joint and several, then either or both
of them may be proceeded against for the money award. The Labor Arbiter directed
the NLRC Sheriff to garnish the surety bond issued by the petitioner. The latter, as
surety, is mandated to comply with the writ of garnishment, for as earlier
pointed out, the bond remains enforceable and under the jurisdiction of the NLRC
until it is discharged. In turn, the petitioner may proceed to collect the amount it
paid on the bond, plus the premiums due and demandable, plus any interest owing
from Radon Security. This is pursuant to the principle of subrogation enunciated in
Article 2067[35] of the Civil Code which we apply to the suretyship agreement
between AFPGIC and Radon Security, in accordance with Section 178 [36] of the
Insurance Code. Finding no reversible error committed by the Court of Appeals in

CA-G.R. SP No. 58763, we sustain the challenged decision. WHEREFORE, the instant
petition is DENIED for lack of merit. The assailed Decision dated August 20, 2001 of
the Court of Appeals in CA-G.R. SP No. 58763 and the Resolution dated December
14, 2001, of the appellate court denying the herein petitioners motion for
reconsideration are AFFIRMED. Costs against the petitioner. SO ORDERED.

SPOUSES TOH VS. SOLID BANK

RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an omnibus line
credit facility worth P10 million in favor of respondent First Business Paper
Corporation (FBPC). The terms and conditions of the agreement as well as the
checklist of documents necessary to open the credit line were stipulated in a letteradvise of the Bank dated 16 May 1993 addressed to FBPC and to its President,
respondent Kenneth Ng Li.[1] The letter-advise[2] was effective upon compliance with
the documentary requirements.[3]
The documents essential for the credit facility and submitted for this purpose were
the (a) Board Resolution or excerpts of the Board of Directors Meeting, duly ratified
by a Notary Public, authorizing the loan and security arrangement as well as
designating the officers to negotiate and sign for FBPC specifically stating authority
to mortgage, pledge and/or assign the properties of the corporation; (b) agreement
to purchase Domestic Bills; and, (c) Continuing Guaranty for any and all amounts
signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses
Kenneth and Ma. Victoria Ng Li.[4] The spouses Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President, respectively, of FBPC, while respondentspouses Kenneth Ng Li and Ma. Victoria Ng Li were President and General Manager,
respectively, of the same corporation.[5]It is not disputed that the credit facility as
well as its terms and conditions was not cancelled or terminated, and that there was
no prior notice of such fact as required in the letter-advise, if any was done. On 10
May 1993, more than thirty (30) days from date of the letter-advise, petitionerspouses Luis Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li signed the required Continuing Guaranty, which was embodied in a
public document prepared solely by respondent Bank. [6] The terms of the instrument
defined the contract arising therefrom as a surety agreement and provided for the
solidary liability of the signatories thereto for and in consideration of loans or
advances and credit in any other manner to, or at the request or for the account of
FBPC. The Continuing Guaranty set forth no maximum limit on the indebtedness that
respondent FBPC may incur and for which the sureties may be liable, stating that the
credit facility covers any and all existing indebtedness of, and such other loans and
credit facilities which may hereafter be granted to FIRST BUSINESS PAPER
CORPORATION. The surety also contained a de facto acceleration clause if default be
made in the payment of any of the instruments, indebtedness, or other obligation
guaranteed by petitioners and respondents. So as to strengthen this security, the
Continuing Guaranty waived rights of the sureties against delay or absence of notice
or demand on the part of respondent Bank, and gave future consent to the Banks
action to extend or change the time payment, and/or the manner, place or terms of
payment, including renewal, of the credit facility or any part thereof in such manner
and upon such terms as the Bank may deem proper without notice to or further
assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event
or cause other than the written revocation thereof with notice to the Bank that may
be executed by the sureties. On 16 June 1993 respondent FBPC started to avail of

the credit facility and procure letters of credit. [7] On 17 November 1993 FBPC opened
thirteen (13) letters of credit and obtained loans totaling P15,227,510.00.[8] As the
letters of credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria
Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the
goods allegedly purchased from the proceeds of the loans. [9]On 13 January 1994
respondent Bank received information that respondent-spouses Kenneth Ng Li and
Ma. Victoria Ng Li had fraudulently departed from their conjugal home. [10] On 14
January 1994 the Bank served a demand letter upon FBPC and petitioner Luis Toh
invoking the acceleration clause[11] in the trust receipts of FBPC and claimed
payment for P10,539,758.68 as unpaid overdue accounts on the letters of credit plus
interests and penalties within twenty-four (24) hours from receipt thereof. [12] The
Bank also invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh
and Vicky Tan Toh who were the only parties known to be within national jurisdiction
to answer as sureties for the credit facility of FBPC.[13]
On 17 January 1994 respondent Bank filed a complaint for sum of money
with ex parte application for a writ of preliminary attachment against FBPC, spouses
Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh,
docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig City. [14] Alias summonses were
served upon FBPC and spouses Luis Toh and Vicky Tan Toh but not upon Kenneth Ng
Li and Ma. Victoria Ng Li who had apparently absconded. [15]Meanwhile, with the
implementation of the writ of preliminary attachment resulting in the impounding of
purported properties of FBPC, the trial court was deluged with third-party claims
contesting the propriety of the attachment. [16] In the end, the Bank relinquished
possession of all the attached properties to the third-party claimants except for two
(2) insignificant items as it allegedly could barely cope with the yearly premiums on
the attachment bonds.[17]Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint
answer to the complaint where they admitted being part of FBPC from its
incorporation on 29 August 1991, which was then known as MNL Paper, Inc., until its
corporate name was changed to First Business Paper Corporation. [18] They also
acknowledged that on 6 March 1992 Luis Toh was designated as one of the
authorized corporate signatories for transactions in relation to FBPCs checking
account with respondent Bank.[19] Meanwhile, for failing to file an answer,
respondent FBPC was declared in default.[20]Petitioner-spouses however could not be
certain whether to deny or admit the due execution and authenticity of the
Continuing Guaranty.[21]They could only allege that they were made to sign papers in
blank and the Continuing Guaranty could have been one of them. Still, as petitioners
asserted, it was impossible and absurd for them to have freely and consciously
executed the surety on 10 May 1993, the date appearing on its face [22] since
beginning March of that year they had already divested their shares in FBPC and
assigned them in favor of respondent Kenneth Ng Li although the deeds of
assignment were notarized only on 14 June 1993.[23] Petitioners also contended that
through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was removed
as an authorized signatory for FBPC and replaced by respondent-spouses Kenneth
Ng Li and Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with
respondent Bank.[24] They even resigned from their respective positions in FBPC as
reflected in the 12 June 1993 Secretarys Certificate submitted to the Securities and
Exchange Commission[25] as petitioner Luis Toh was succeeded as Chairman by
respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of
petitioner Vicky Tan Toh as Vice-President. [26]
Finally, petitioners averred that sometime in June 1993 they obtained from
respondent Kenneth Ng Li their exclusion from the several surety agreements they
had entered into with different banks, i.e., Hongkong and Shanghai Bank, China
Banking Corporation, Far East Bank and Trust Company, and herein respondent
Bank.[27] As a matter of record, these other banks executed written surety
agreements that showed respondent Kenneth Ng Li as the only surety of FBPCs

indebtedness.[28]On 16 May 1996 the trial court promulgated its Decision in Civil
Case No. 64047 finding respondent FBPC liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per
annum from finality of the Decision until fully paid, but absolving petitioner-spouses
Luis Toh and Vicky Tan Toh of any liability to respondent Bank. [29] The court a
quo found that petitioners voluntarily affixed their signature[s] on the Continuing
Guaranty and were thus at some given point in time willing to be liable under those
forms,[30] although it held that petitioners were not bound by the surety contract
since the letters of credit it was supposed to secure were opened long after
petitioners had ceased to be part of FBPC. [31]The trial court described the Continuing
Guaranty as effective only while petitioner-spouses were stockholders and officers of
FBPC since respondent Bank compelled petitioners to underwrite FBPCs
indebtedness as sureties without the requisite investigation of their personal
solvency and capability to undertake such risk. [32] The lower court also believed that
the Bank knew of petitioners divestment of their shares in FBPC and their
subsequent resignation as officers thereof as these facts were obvious from the
numerous public documents that detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC and the Bank, including the
many trust receipts being signed by persons other than petitioners, [33] as well as the
designation of new FBPC officers which came to the notice of the Banks VicePresident Jose Chan Jr. and other officers. [34]
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of
its Decision.[35] On 9 October 1996 respondent Bank appealed the Decision to the
Court of Appeals, docketed as CA-G.R. CV No. 55957. [36] Petitioner-spouses did not
move for reconsideration nor appeal the finding of the trial court that they
voluntarily executed the Continuing Guaranty. The appellate court modified
the Decision of the trial court and held that by signing the Continuing Guaranty,
petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the
amount of P10,539,758.68 as principal with twelve percent (12%) interest per
annumfrom finality of the judgment until completely paid. [37] The Court of Appeals
ratiocinated that the provisions of the surety agreement did not indicate that
Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as
Chairman of the Board and Vice-President, respectively, of FBPC only. [38] Hence, the
court a quo deduced, [a]bsent any such indication, it was error for the trial court to
have presumed that the appellees indeed signed the same not in their personal
capacities.[39] The appellate court also ruled that as petitioners failed to execute any
written revocation of the Continuing Guaranty with notice to respondent Bank, the
instrument remained in full force and effect when the letters of credit were availed
of by respondent FBPC.[40]
Finally, the Court of Appeals rejected petitioners argument that there were material
alterations in the provisions of the letter-advise, i.e., that only domestic letters of
credit were opened when the credit facility was for importation of papers and other
materials, and that marginal deposits were not paid, contrary to the requirements
stated in the letter-advise.[41] The simple response of the appellate court to this
challenge was, first, the letter-advise itself authorized the issuance of domestic
letters of credit, and second, the several waivers extended by petitioners in the
Continuing Guaranty, which included changing the time and manner of payment of
the indebtedness, justified the action of respondent Bank not to charge marginal
deposits.[42]Petitioner-spouses moved for reconsideration of the Decision, and after
respondent Banks comment, filed a lengthy Reply with Motion for Oral Argument.
[43]
On 2 July 2002 reconsideration of the Decision was denied on the ground that no
new matter was raised to warrant the reversal or modification thereof. [44] Hence,
this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied

them due process when it did not grant their motion for reconsideration and without
bother[ing] to consider [their] Reply with Motion for Oral Argument. They maintain
that the Continuing Guaranty is not legally valid and binding against them for having
been executed long after they had withdrawn from FBPC. Lastly, they claim that the
surety agreement has been extinguished by the material alterations thereof and of
the letter-advise which were allegedly brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the flight of their co-sureties,
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit
facility despite the non-payment of marginal deposits in an amount beyond the
credit limit of P10 million pesos; (d) the inordinate delay of the Bank in demanding
the payment of the indebtedness; (e) the presence of ghost deliveries and fictitious
purchases using the Banks letters of credit and trust receipts; (f) the extension of
the due dates of the letters of credit without the required 25% partial payment per
extension; (g) the approval of another letter of credit, L/C 93-0042, even after
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on their
previous obligations; and, (h) the unmistakable pattern of fraud. Respondent Solid
Bank maintains on the other hand that the appellate court is presumed to have
passed upon all points raised by petitioners Reply with Motion for Oral Argument as
this pleading formed part of the records of the appellate court. It also debunks the
claim of petitioners that they were inexperienced and ignorant parties who were
taken advantage of in the Continuing Guaranty since petitioners are astute
businessmen who are very familiar with the ins and outs of banking practice. The
Bank further argues that the notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due execution thereof, and
that the Decision of the trial court in the civil case finding the surety agreement to
be valid and binding is now res judicata for failure of petitioners to appeal therefrom.
As a final point, the Bank refers to the various waivers made by petitioner-spouses in
the Continuing Guaranty to justify the extension of the due dates of the letters of
credit. To begin with, we find no merit in petitioners claim that the Court of Appeals
deprived them of their right to due process when the court a quodid not address
specifically and explicitly their Reply with Motion for Oral Argument. While
the Resolution of the appellate court of 2 July 2002made no mention thereof in
disposing of their arguments on reconsideration, it is presumed that all matters
within an issue raised in a case were laid before the court and passed upon it. [45] In
the absence of evidence to the contrary, we must rule that the court a
quo discharged
its
task
properly. Moreover,
a
reading
of
the
assailed Resolution clearly makes reference to a careful review of the records, which
undeniably includes the Reply with Motion for Oral Argument, hence there is no
reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of
petitioner-spouses as it is a public document that enjoys the presumption of
authenticity and due execution. Although petitioners as appellees may raise issues
that have not been assigned as errors by respondent Bank as party-appellant, i.e.,
unenforceability of the surety contract, we are bound by the consistent finding of the
courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh voluntarily affixed
their signature[s] on the surety agreement and were thus at some given point in
time willing to be liable under those forms. [46] In the absence of clear, convincing and
more than preponderant evidence to the contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long
as they were corporate officers and stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to such condition or eventuality. In
fact the obligations assumed by them therein subsist upon the undersigned, the
heirs, executors, administrators, successors and assigns of the undersigned, and
shall inure to the benefit of, and be enforceable by you, your successors, transferees
and assigns, and that their commitment shall remain in full force and effect until
written notice shall have been received by [the Bank] that it has been revoked by

the undersigned. Verily, if petitioners intended not to be charged as sureties after

their withdrawal from FBPC, they could have simply terminated the agreement by
serving the required notice of revocation upon the Bank as expressly allowed
therein.[47] In Garcia v. Court of Appeals[48] we rule. Regarding the petitioners claim
that he is liable only as a corporate officer of WMC, the surety agreement shows that
he signed the same not in representation of WMC or as its president but in his
personal capacity. He is therefore personally bound. There is no law that prohibits a
corporate officer from binding himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to protect the stockholder by
immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he
has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they
signed so must we also hold respondent Bank to its representations in the letteradvise of 16 May 1993. Particularly, as to the extension of the due dates of the
letters of credit, we cannot exclude from the Continuing Guaranty the preconditions
of the Bank that were plainly stipulated in the letter-advise. Fairness and justice
dictate our doing so, for the Bank itself liberally applies the provisions of cognate
agreements whenever convenient to enforce its contractual rights, such as, when it
harnessed a provision in the trust receipts executed by respondent FBPC to declare
its entire indebtedness as due and demandable and thereafter to exact payment
thereof from petitioners as sureties. [49] In the same manner, we cannot disregard the
provisions of the letter-advise in sizing up the panoply of commercial obligations
between the parties herein. Insofar as petitioners stipulate in the Continuing
Guaranty that respondent Bank may at any time, or from time to time, in [its]
discretion x x x extend or change the time payment, this provision even if
understood as a waiver is confined per se to the grant of an extension and does not
surrender the prerequisites therefor as mandated in the letter-advise. In other
words, the authority of the Bank to defer collection contemplates
only authorized extensions, that is, those that meet the terms of the letter-advise.
Certainly, while the Bank may extend the due date at its discretion pursuant to the
Continuing Guaranty, it should nonetheless comply with the requirements that
domestic letters of credit be supported by fifteen percent (15%) marginal deposit
extendible three (3) times for a period of thirty (30) days for each extension, subject
to twenty-five percent (25%) partial payment per extension. This reading of the
Continuing Guaranty is consistent with Philippine National Bank v. Court of
Appeals[50] that any doubt on the terms and conditions of the surety agreement
should be resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that [n]o act
or omission of any kind on [the Banks] part in the premises shall in any event affect
or impair this guaranty[51] must also be read strictissimi juris for the reason that
petitioners are only accommodation sureties, i.e., they received nothing out of the
security contract they signed.[52] Thus said, the acts or omissions of the Bank
conceded by petitioners as not affecting nor impairing the surety contract refer only
to those occurring in the premises, or those that have been the subject of the waiver
in the Continuing Guaranty, and stretch to no other. Stated otherwise, an extension
of the period for enforcing the indebtedness does not by itself bring about the
discharge of the sureties unless the extra time is not permitted within the terms of
the waiver, i.e., where there is no payment or there is deficient settlement of the
marginal deposit and the twenty-five percent (25%) consideration, in which case
the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the
liability of a surety is measured by the terms of his contract, and while he is liable to
the full extent thereof, his accountability is strictly limited to that assumed by its
terms. It is admitted in the Complaint of respondent Bank before the trial court that

several letters of credit were irrevocably extended for ninety (90) days with
alarmingly flawed and inadequate consideration - the indispensable marginal
deposit of fifteen percent (15%) and the twenty-five percent (25%) prerequisite for
each extension of thirty (30) days. It bears stressing that the requisite marginal
deposit and security for every thirty (30) - day extension specified in the letteradvise were not set aside or abrogated nor was there any prior notice of such fact, if
any was done.
The foregoing extensions of the letters of credit made by respondent Bank without
observing the rigid restrictions for exercising the privilege are not covered by the
waiver
stipulated
in
the
Continuing
Guaranty. Evidently,
they
constitute illicit extensions prohibited under Art. 2079 of theCivil Code, [a]n
extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. This act of the Bank is not mere failure or delay on its
part to demand payment after the debt has become due, as was the case in unpaid
five (5) letters of credit which the Bank did not extend, defer or put off, [54] but
comprises conscious, separate and binding agreements to extend the due date, as
was admitted by the Bank itself.
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan
Toh are relieved of their obligations as sureties of respondent FBPC under Art. 2079
of the Civil Code. Further, we note several suspicious circumstances that militate
against the enforcement of the Continuing Guaranty against the accommodation
sureties. Firstly, the guaranty was executed more than thirty (30) days from the
original acceptance period as required in the letter-advise. Thereafter, barely two (2)
days after the Continuing Guaranty was signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC
ensued in the month of June 1993, which the Bank did not investigate although such
were made known to it. By the same token, there is no explanation on record for the
utter worthlessness of the trust receipts in favor of the Bank when these documents
ought to have added more security to the indebtedness of FBPC. The Bank has in
fact no information whether the trust receipts were indeed used for the purpose for
which they were obtained.[56] To be sure, the goods subject of the trust receipts were
not entirely lost since the security officer of respondent Bank who conducted
surveillance of FBPC even had the chance to intercept the surreptitious transfer of
the items under trust: We saw two (2) delivery vans with Plates Nos. TGH 257 and
PAZ 928 coming out of the compound [which were] taking out the last supplies
stored in the compound.[57] In addition, the attached properties of FBPC, except for
two (2) of them, were perfunctorily abandoned by respondent Bank although the
bonds therefor were considerably reduced by the trial court. [58]
The consequence of these omissions is to discharge the surety, petitioners herein,
under Art. 2080 of the Civil Code,[59] or at the very least, mitigate the liability of the
surety up to the value of the property or lien release. If the creditor has acquired a
lien upon the property of a principal, the creditor at once becomes charged with the
duty of retaining such security, or maintaining such lien in the interest of the surety,
and any release or impairment of this security as a primary resource for the
payment of a debt, will discharge the surety to the extent of the value of the
property or lien released x x x x [for] there immediately arises a trust relation
between the parties, and the creditor as trustee is bound to account to the surety for
the value of the security in his hands. [60]For the same reason, the grace
period granted by respondent Bank represents unceremonious abandonment and
forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent
(25%) partial payment as fixed in the letter-advise. These payments are
unmistakably additional securities intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC becomes insolvent during the
extension period. Compliance with these requisites was not waived by petitioners in

the Continuing Guaranty. For this unwarranted exercise of discretion, respondent

Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC,
petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty. Finally, the foregoing omission or negligence of respondent
Bank in failing to safe-keep the security provided by the marginal deposit and the
twenty-five percent (25%) requirement results in the material alteration of the
principal contract, i.e., the letter-advise, and consequently releases the surety.
[61]
This inference was admitted by the Bank through the testimony of its lone
witness that [w]henever this obligation becomes due and demandable, except when
you roll it over, (so) there is novation there on the original obligations. As has been
said, if the suretyship contract was made upon the condition that the principal shall
furnish the creditor additional security, and the security being furnished under these
conditions is afterwards released by the creditor, the surety is wholly discharged,
without regard to the value of the securities released, for such a transaction
amounts to an alteration of the main contract. [62]WHEREFORE, the instant Petition
for Review is GRANTED. The Decision of the Court of Appeals dated 12 December
2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding
petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business
Paper Corporation to pay Solid Bank Corporation the amount of P10,539,758.68 as
principal with twelve percent (12%) interest per annum until fully paid, and its
Resolution of 2 July 2002 denying reconsideration thereof are REVERSED and SET
ASIDE. The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No.
64047, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li,
Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First Business Paper
Corporation liable to pay respondent Solid Bank Corporation the principal
of P10,539,758.68 plus twelve percent (12%) interest per annum until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent
Solid Bank Corporation is REINSTATED and AFFIRMED. No costs. SO ORDERED.

JN DEVELOPMENT VS. PHILIPPINE EXPORT

Before us are consolidated petitions questioning the Decision[1] of the Court of
Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan
Guarantee Corporation v. JN Development Corporation, et al., which reversed
the Decision of the Regional Trial Court (RTC) of Makati, Branch 60. On 13 December
1979, petitioner JN Development Corporation (JN) and Traders Royal Bank (TRB)
entered into an agreement whereby TRB would extend to JN an Export Packing
Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by several
securities, including a real estate mortgage [2] and a letter of guarantee from
respondent Philippine Export and Foreign Loan Guarantee Corporation
(PhilGuarantee), now Trade and Investment Development Corporation of the
Philippines, covering seventy percent (70%) of the credit line.[3]With PhilGuarantee
issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta.
Ana[5] and petitioner Narciso Cruz[6] executed a Deed of
Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October
1980 TRB requested PhilGuarantee to make good its guarantee. [8] PhilGuarantee
informed JN about the call made by TRB, and inquired about the action of JN to settle
the loan.[9] Having received no response from JN, on 10 March 1981 PhilGuarantee
paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and
Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several
demands on JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo
Sta. Ana, proposed to settle the obligation by way of development and sale of the

mortgaged property.[11]PhilGuarantee, however, rejected the proposal. PhilGuarantee

thus filed a Complaint[12] for collection of money and damages against herein
petitioners. In its Decision dated 20 August 1998, the RTC dismissed
PhilGuarantees Complaint as well as the counterclaim of petitioners. It ruled that
petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial
to this holding were the courts finding that TRB was able to foreclose the real estate
mortgage executed by JN, thus extinguishing petitioners obligation.[13] Moreover,
there was no showing that after the said foreclosure, TRB had demanded from JN
any deficiency or the payment of the difference between the proceeds of the
foreclosure sale and the actual loan.[14] In addition, the RTC held that since
PhilGuarantees guarantee was good for only one year from 17 December 1979, or
until 17 December 1980, and since it was not renewed after the expiry of said
period, PhilGuarantee had no more legal duty to pay TRB on 10 March 1981. [15] The
RTC likewise ruled that Cruz cannot be held liable under the Undertaking since he
was not the one who signed the document, in line with its finding that his signature
found in the records is totally different from the signature on the Undertaking. [16]
According to the RTC, the failure of TRB to sue JN for the recovery of the loan
precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and
Cruz what it paid to TRB. Thus, PhilGuarantees payment to TRB amounts to a waiver
of its right under Art. 2058 of the Civil Code.[17] Aggrieved by the RTC Decision,
PhilGuarantee appealed to the CA. The appellate court reversed the RTC and ordered
petitioners to pay PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred
Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge and
interest.[18]
In reaching its denouement, the CA held that the RTCs finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no
factual support,[19] and that such finding is negated by Rodrigo Sta. Anas testimony
that JN did not receive any notice of foreclosure from PhilGuarantee or from
TRB. [20] Moreover, Sta. Ana even offered the same mortgaged property to
PhilGuarantee to settle its obligations with the latter.[21]The CA also ruled that JNs
obligation had become due and demandable within the one-year period of effectivity
of the guarantee; thus, PhilGuarantees payment to TRB conformed with its
guarantee, although the payment itself was effected one year after the maturity
date of the loan.[22] Contrary to the trial courts finding, the CA ruled that the contract
of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantees consent to the extensions granted by TRB to JN.[23] Interpreting Art.
2058 of the Civil Code,[24] the appellate court explained that while the provision
states that the guarantor cannot be compelled to pay unless the properties of the
debtor are exhausted, the guarantor is not precluded from waiving the benefit of
excussion and paying the obligation altogether.[25]
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to
overcome the presumption of regularity of the Undertaking which is a notarized
document. [26]Petitioners sought reconsideration of the Decision and prayed for
the admission of documents evidencing the foreclosure of the real estate mortgage,
but the motion for reconsideration was denied by the CA for lack of merit. The CA
ruled that the documentary evidence presented by petitioners cannot be considered
as newly discovered evidence, it being already in existence while the case was
pending before the trial court, the very forum before which it should have been
presented. Besides, a foreclosure sale per se is not proof of petitioners payment of
the loan to PhilGuarantee, the CA added.[27]
So now before the Court are the separate petitions for review of the CA Decision. JN
and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in
interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.
[28]
Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the CA erred
when it held that petitioners are liable to PhilGuarantee despite its payment after

the expiration of its contract of guarantee and the lack of PhilGuarantees consent to
the extensions granted by TRB to JN. Moreover, Cruz questions the reversal of the
ruling of the trial court anent his liability as a signatory to the Undertaking. [29]On the
other hand, PhilGuarantee maintains that the date of default, not the actual date of
payment, determines the liability of the guarantor and that having paid TRB when
the loan became due, it should be indemnified by petitioners.[30] It argues that,
contrary to petitioners claim, there could be no waiver of its right to excussion more
explicit than its act of payment to TRB very directly. [31] Besides, the right to
excussion is for the benefit of the guarantor and is not a defense for the debtor to
raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is no
sufficient evidence proving the alleged forgery of Cruzs signature on the
Undertaking, which is a notarized document and as such must be accorded the
presumption of regularity.[33]
The Court finds for PhilGuarantee. Under a contract of guarantee, the guarantor
binds himself to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so.[34] The guarantor who pays for a debtor, in turn, must
be indemnified by the latter.[35] However, the guarantor cannot be compelled to pay
the creditor unless the 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. It is clear that excussion may only be invoked
after legal remedies against the principal debtor have been expanded. Thus, it was
held that the creditor must first obtain a judgment against the principal debtor
before assuming to run after the alleged guarantor, for obviously the exhaustion of
the principals property cannot even begin to take place before judgment has been
obtained.[37] The law imposes conditions precedent for the invocation of the defense.
Thus, in order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latters demand for payment and point out to
the creditor available property of the debtor within the Philippines sufficient to cover
the amount of the debt.[38]While a guarantor enjoys the benefit of excussion, nothing
prevents him from paying the obligation once demand is made on him. Excussion,
after all, is a right granted to him by law and as such he may opt to make use of it or
waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from
demanding reimbursement from petitioners. The law clearly requires the debtor to
indemnify the guarantor what the latter has paid. [39]Petitioners claim that
PhilGuarantee had no more obligation to pay TRB because of the alleged expiration
of the contract of guarantee is untenable. The guarantee, dated17 December 1979,
states: In the event of default by JNDC and as a consequence thereof,
PHILGUARANTEE is made to pay its obligation arising under the aforesaid guarantee
PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total
obligation unpaid This guarantee shall be valid for a period of one (1) year from
date hereof but may be renewed upon payment by JNDC of the guarantee fee at the
same rate of 1.5% per annum.[40]
The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on
30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980.
That payment was actually made only on 10 March 1981 does not take it out of the
terms of the guarantee. What is controlling is that default and demand on
PhilGuarantee had taken place while the guarantee was still in force. There is
likewise no merit in petitioners claim that PhilGuarantees failure to give its express
consent to the alleged extensions granted by TRB to JN had extinguished the
guarantee. The requirement that the guarantor should consent to any extension
granted by the creditor to the debtor under Art. 2079 is for the benefit of the
guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming
that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted
to waive the need for consent to such extensions. Indeed, a guarantor is not
precluded from waiving his right to be notified of or to give his consent to extensions
obtained by the debtor. Such waiver is not contrary to public policy as it is purely

personal and does not affect public interest. [41] In the instant case, PhilGuarantees
waiver can be inferred from its actual payment to TRB after the latters demand,
despite JNs failure to pay the renewal/guarantee fee as indicated in the guarantee.
[42]
For the above reasons, there is no basis for petitioners claim that PhilGuarantee
was a mere volunteer payor and had no legal obligation to pay TRB. The law does
not prohibit the payment by a guarantor on his own volition, heedless of the benefit
of excussion. In fact, it recognizes the right of a guarantor to recover what it has
paid, even if payment was made before the debt becomes due,[43] or if made without
notice to the debtor,[44] subject of course to some conditions. Petitioners invocation
of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals [45] is misplaced, if
not irrelevant. In the said case, the guarantor claimed that it could not be proceeded
against without first exhausting all of the properties of the debtor. The Court, finding
that there was an express renunciation of the benefit of excussion in the contract of
guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not invoking
the benefit of excussion. It cannot be overemphasized that excussion is a right
granted to the guarantor and, therefore, only he may invoke it at his discretion. The
benefit of excussion, as well as the requirement of consent to extensions of
payment, is a protective device pertaining to and conferred on the guarantor. These
may be invoked by the guarantor against the creditor as defenses to bar the
unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of
these defenses when it paid its obligation according to the tenor of the guarantee
once demand was made on it. What is peculiar in the instant case is that petitioners,
the principal debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the guarantor. The Court cannot
countenance their self-seeking desire to be exonerated from the duty to reimburse
PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves
at the expense of PhilGuarantee. Petitioners assert that TRBs alleged foreclosure of
the real estate mortgage over the land executed as security for the loan agreement
had extinguished PhilGuarantees obligation; thus, PhilGuarantees recourse should
be directed against TRB, as per the pari-passu provision[46] in the contract of
guarantee.[47] We disagree. The foreclosure was made on 27 August 1993, after the
case was submitted for decision in 1992 and before the issuance of the decision of
the court a quo in 1998.[48] Thus, foreclosure was resorted to by TRB against JN when
they both had become aware that PhilGuarantee had already paid TRB and that
there was a pending case filed by PhilGuarantee against petitioners. This matter was
not raised and proved in the trial court, nor in the appeal before the CA, but raised
for the first time in petitioners motion for reconsideration in the CA. In their
appellants Brief, petitioners claimed that there was no need for the defendantappellee JNDC to present any evidence before the lower court to show that indeed
foreclosure of the REM took place.[49] As properly held by the CA, Firstly, the
documents evidencing foreclosure of mortgage cannot be considered as newly
discovered evidence. The said documents were already subsisting and should have
been presented during the trial of the case. The alleged foreclosure sale was made
on August 23, 1993 while the decision was rendered by the trial court on August 20,
1998 about five (5) years thereafter. These documents were likewise not submitted
by the defendants-appellees when they submitted their appellees Brief to this Court.
Thus, these cannot be considered as newly discovered evidence but are more
correctly ascribed as suppressed forgotten evidence Secondly, the alleged
foreclosure sale is not proof of payment of the loan by defendant-appellees to the
plaintiffs-appellants.[50]Besides, the complaint a quo was filed by PhilGuarantee as
guarantor for JN, and its cause of action was premised on its payment of JNs
obligation after the latters default. PhilGuarantee was well within its rights to
demand reimbursement for such payment made, regardless of whether the creditor,
TRB, was subsequently able to obtain payment from JN. If double payment was

indeed made, then it is JN which should go after TRB, and not PhilGuarantee.
Petitioners have no one to blame but themselves, having allowed the foreclosure of
the property for the full value of the loan despite knowledge of PhilGuarantees
payment to TRB. Having been aware of such payment, they should have opposed
the foreclosure, or at the very least, filed a supplemental pleading with the trial
court informing the same of the foreclosure sale. Likewise, petitioners cannot invoke
the pari-passu clause in the guarantee, not being parties to the said agreement. The
clause is clearly for the benefit of the guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JNs
obligations to PhilGuarantee, the very same parcel of land mortgaged as security for
the loan agreement. This further weakens the position of petitioners, since it
becomes obvious that they acknowledged the payment made by PhilGuarantee on
their behalf and that they were in fact willing to negotiate with PhilGuarantee for the
settlement of the said obligation before the filing of the complaint a quo. Anent the
issue of forgery, the CA is correct in reversing the decision of the trial court. Save for
the denial of Narciso Cruz that it was not his signature in the Undertaking and the
perfunctory comparison of the signatures, nothing in the records would support the
claim of forgery. Forgery cannot be presumed and must be proved by clear, positive
and convincing evidence and the burden of proof lies on the party alleging forgery.
[52]
Mere denial will not suffice to overcome the positive value of the Undertaking,
which is a notarized document, has in its favor the presumption of regularity, and
carries the evidentiary weight conferred upon it with respect to its due execution.
[53]
Even in cases where the alleged forged signature was compared to samples of
genuine signatures to show its variance therefrom, this Court still found such
evidence insufficient.[54] Mere variance of the signatures cannot be considered as
conclusive proof that the same were forged. [55]WHEREFORE, the consolidated
petitions are DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 61318
is AFFIRMED. No pronouncement as to costs. SO ORDERED.

TRADE & INVESTMENT VS. ASIA PACES

Assailed in this petition for review on certiorari1 are the Decision2 dated April 30,
2008 and Resolution3 dated March 27, 2009 of the Court of Appeals (CA) in CA-G.R.
CV No. 86558 which affirmed the Decision4 dated April 29, 2005 of the Regional Trial
Court of Makati, Branch 132 (RTC) in Civil Case No. 95-1812. The CA upheld the
RTCs finding that the liabilities of Paramount Insurance Corporation (Paramount),
and respondents Philippine Phoenix Surety and Insurance, Inc. (Phoenix), Mega
Pacific Insurance Corporation5 (Mega Pacific), and Fortune Life and General
Insurance Company (Fortune) on their respective counter-surety bonds have been
extinguished due to the extension of the principal obligations these bonds covered,
to which said respondents did not give their consent.
The Facts: On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and
Paces Industrial Corporation (PICO) entered into a sub-contracting agreement,
denominated as "200 KV Transmission Lines Contract No. 20-/80-II Civil Works &
Electrical Erection," with the Electrical Projects Company of Libya (ELPCO), as main
contractor, for the construction and erection of a double circuit bundle phase
conductor transmission line in the country of Libya. To finance its working capital
requirements, ASPAC obtained loans from foreign banks Banque Indosuez and PCI
Capital (Hong Kong) Limited (PCI Capital) which, upon the latters request, were
secured by several Letters of Guarantee issued by petitioner Trade and Investment
Development Corporation of the Philippines (TIDCORP),6then Philippine Export and
Foreign Loan Guarantee Corp., a government owned and controlled corporation
created for the primary purpose of, among others, "guarantee[ing], with the prior

concurrence of the Monetary Board, subject to the rules and regulations that the
Monetary Board may prescribe, approved foreign loans, in whole or in part, granted
to any entity, enterprise or corporation organized or licensed to engage in business
in the Philippines."7 Under the Letters of Guarantee, TIDCORP irrevocably and
unconditionally guaranteed full payment of ASPACs loan obligations to Banque
Indosuez and PCI Capital in the event of default by the latter. 8The denominations of
these letters, including the loan agreements secured by each, are detailed as
follows:9
As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee,
ASPAC, PICO, and ASPACs President, respondent Nicolas C. Balderrama
(Balderrama) had to execute several Deeds of Undertaking,10binding themselves to
jointly and severally pay TIDCORP for whatever damages or liabilities it may incur
under the aforementioned letters. In the same light, ASPAC, as principal debtor,
entered into surety agreements (Surety Bonds) with Paramount, Phoenix, Mega
Pacific and Fortune (bonding companies), as sureties, also holding themselves
solidarily liable to TIDCORP, as creditor, for whatever damages or liabilities the latter
may incur under the Letters of Guarantee. 11 The details of said bonds, including their
respective coverage amounts and expiration dates, among others, are as follows:
ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI
Capital, prompting them to demand payment from TIDCORP under the Letters of
Guarantee. The demand letter of Banque Indosuez was sent to TIDCORP on March 5,
1984,23 while that of PCI Capital was sent on February 21, 1985.24 In turn, TIDCORP
demanded payment from Paramount,25 Phoenix,26 Mega Pacific,27 and
Fortune28 under the Surety Bonds. TIDCORPs demand letters to the bonding
companies were sent on May 28, 1985, or before the final expiration dates of all the
Surety Bonds, but to no avail.29
Taking into account the moratorium request30 issued by the Minister of Finance of the
Republic of the Philippines (whereby members of the international banking
community were requested to grant government financial institutions, 31 such as
TIDCORP, among others, a 90-day roll over from their foreign debts beginning
October 17, 1983), TIDCORP and its various creditor banks, such as Banque
Indosuez and PCI Capital, forged a Restructuring Agreement 32 on April 16, 1986,
extending the maturity dates of the Letters of Guarantee.33 The bonding companies
were not privy to the Restructuring Agreement and, hence, did not give their
consent to the payment extensions granted by Banque Indosuez and PCI Capital,
among others, in favor of TIDCORP. Nevertheless, following new payment
schedules,34 TIDCORP fully settled its obligations under the Letters of Guarantee to
both Banque Indosuez and PCI Capital on December 1, 1992, and April 19 and June
4, 1991, respectively.35 Seeking payment for the damages and liabilities it had
incurred under the Letters of Guarantee and with its previous demands therefor left
unheeded, TIIDCORP filed a collection case 36 against: (a) ASPAC, PICO, and
Balderrama on account of their obligations under the deeds of undertaking; and (b)
the bonding companies on account of their obligations under the Surety Bonds.
The RTC Ruling: In a Decision37 dated April 29, 2005, the RTC partially granted
TIDCORPs complaint and thereby found ASPAC, PICO, and Balderrama jointly and
severally liable to TIDCORP in the sum of P277,891,359.66 pursuant to the terms of
the Deeds of Undertaking, but absolved the bonding companies from liability on the
ground that the moratorium request and the consequent payment extensions
granted by Banque Indosuez and PCI Capital in TIDCORPs favor without their
consent extinguished their obligations under the Surety Bonds. As basis, the RTC
cited Article 2079 of the Civil Code which provides that an extension granted to the
debtor by the creditor without the consent of the guarantor/surety extinguishes the
guaranty/suretyship, and, in this relation, added that the bonding companies "should
not be held liable as sureties for the extended period." 38Dissatisfied, TIDCORP and
Balderrama filed separate appeals before the CA.39 For its part, TIDCORP averred,
among others, that Article 2079 of the Civil Code is only limited to contracts of

guaranty, and, hence, should not apply to contracts of suretyship. Meanwhile,

Balderrama theorized that the main contractors (i.e., ELPCO) failure to pay ASPAC
due to the war/political upheaval in Libya which further resulted in the latters
inability to pay Banque Indosuez and PCI Capital had the effect of releasing him from
his obligations under the Deeds of Undertaking.
The CA Ruling: In a Decision40 dated April 30, 2008, the CA upheld the RTCs ruling
that the moratorium request "had the effect of an extension granted to a debtor,
which extension was without the consent of the guarantor, and thus released the
surety companies from their respective liabilities under the issued surety bonds"
pursuant to Article 2079 of the Civil Code.41 To this end, it noted that "the maturity of
the foreign loans was extended to December 31, 1989 or up to December 31, 1994
as provided under Section 4.01 of the Restructuring Agreement," and that "said
extension is beyond the expiry date[s] of the surety bonds x x x and the maturity
date of the principal obligations it purportedly secured, which extension was without
[the bonding companies] consent," 42 It further discredited TIDCORPs contention
that Article 2079 of the Civil Code is only limited to contracts of guaranty by citing
the Courts pronouncement on the provisions applicability to suretyships in the case
of Security Bank and Trust Co., Inc. v. Cuenca43 (Security Bank). As for Balderrama,
the CA debunked his assignment of error, ratiocinating that "[h]is undertaking to pay
is not dependent upon the payment to be made by ELPCO to ASPAC." 44 The CA,
however, modified the RTC decision to the extent of holding ASPAC, PICO, and
Balderrama liable to TIDCORP for attorneys fees in the reasonable amount
of P2,000,000.00 since the payment of attorneys fees was stipulated by the parties
in the Deed of Undertaking dated April 2, 1982.45
Aggrieved, TIDCORP and Balderrama filed separate motions for
reconsideration,46 which were, however, denied in a Resolution 47 dated March 27,
2009. Only TIDCORP elevated the matter to the Court on appeal. Pending resolution
thereof, or on October 6, 2010, TIDCORP filed a Motion for Partial Withdrawal 48 of its
claim against Paramount in view of their Compromise Agreement49 dated June 24,
2010 which was approved50 by the CA in CA-G.R. CV No. 92818, entitled "Trade &
Investment Corporation of the Phils., et al. v. Roblet Industrial Construction Corp.
and Paramount Insurance Corp., et al." 51
The Issue Before the Court: The essential issue raised for the Courts resolution is
whether or not the CA erred in holding that the bonding companies liabilities to
TIDCORP under the Surety Bonds have been extinguished by the payment
extensions granted by Banque Indosuez and PCI Capital to TIDCORP under the
Restructuring Agreement.
The Courts Ruling: The petition is granted. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation
of the latter, and their liabilities are interwoven as to be inseparable. Although the
contract of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or personal interest over
the obligations nor does he receive any benefit therefrom. 52 The fundamental reason
therefor is that a contract of suretyship effectively binds the surety as a solidary
debtor. This is provided under Article 2047 of the Civil Code which states:
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. If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract
is called a suretyship. 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 made liable; it is
enough that a demand for payment is made by the creditor for the suretys liability
to attach.53
Article 1216 of the Civil Code provides that: Article 1216. The creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The

demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully
collected.
Comparing a suretys obligations with that of a guarantor, the Court, in the case of
Palmares v. CA,54 illumined that a surety is responsible for the debts payment at
once if the principal debtor makes default, whereas a guarantor pays only if the
principal debtor is unable to pay, viz.: 55 A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking
that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.
Stated differently, a surety promises to pay the principals debt if the principal will
not pay, while a guarantor agrees that the creditor, after proceeding against the
principal, may proceed against the guarantor if the principal is unable to pay. A
surety binds himself to perform if the principal does not, without regard to his ability
to do so. A guarantor, on the other hand, does not contract that the principal will
pay, but simply that he is able to do so. In other words, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor.
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & Insurance
Co., Inc.,56 and later in the case of Security Bank, held that Article 2079 of the Civil
Code, which pertinently provides that "[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty," equally
applies to both contracts of guaranty and suretyship. The rationale therefor was
explained by the Court as follows:57 The theory behind Article 2079 is that an
extension of time given to the principal debtor by the creditor without the suretys
consent would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditors remedies against the principal debtor upon
the maturity date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent during
the extended period. (Emphasis and underscoring supplied; citations omitted)
Applying these principles, the Court finds that the payment extensions granted by
Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement did
not have the effect of extinguishing the bonding companies obligations to TIDCORP
under the Surety Bonds, notwithstanding the fact that said extensions were made
without their consent. This is because Article 2079 of the Civil Code refers to a
payment extension granted by the creditor to the principal debtor without the
consent of the guarantor or surety. In this case, the Surety Bonds are suretyship
contracts which secure the debt of ASPAC, the principal debtor, under the Deeds of
Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur
under the Letters of Guarantee, within the bounds of the bonds respective coverage
periods and amounts. No payment extension was, however, granted by TIDCORP in
favor of ASPAC in this regard; hence, Article 2079 of the Civil Code should not be
applied with respect to the bonding companies liabilities to TIDCORP under the
Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital pertain to
TIDCORPs own debt under the Letters of Guarantee wherein it (TIDCORP)
irrevocably and unconditionally guaranteed full payment of ASPACs loan obligations
to the banks in the event of its (ASPAC) default. In other words, the Letters of
Guarantee secured ASPACs loan agreements to the banks. Under this arrangement,
TIDCORP therefore acted58 as a guarantor,59with ASPAC as the principal debtor, and
the banks as creditors. Proceeding from the foregoing discussion, it is quite clear
that there are two sets of transactions that should be treated separately and
distinctly from one another following the civil law principle of relativity of contracts
"which provides that contracts can only bind the parties who entered into it, and it
cannot favor or prejudice a third person, even if he is aware of such contract and has
acted with knowledge thereof."60 Verily, as the Surety Bonds concern ASPACs debt to
TIDCORP and not TIDCORPs debt to the banks, the payments extensions (which

conversely concern TIDCORPs debt to the banks and not ASPACs debt to TIDCORP)
would not deprive the bonding companies of their right to pay their creditor
(TIDCORP) and to be immediately subrogated to the latters remedies against the
principal debtor (ASPAC) upon the maturity date. It must be stressed that these
payment extensions did not modify the terms of the Letters of Guarantee but only
provided for a new payment scheme covering TIDCORPs liability to the banks. In
fine, considering the inoperability of Article 2079 of the Civil Code in this case, the
bonding companies liabilities to TIDCORP under the Surety Bonds except those
issued by Paramount and covered by its Compromise Agreement with TIDCORP
have not been extinguished. Since these obligations arose and have been duly
demanded within the coverage periods of all the Surety Bonds, 61TIDCORPs claim is
hereby granted and the CAs ruling on this score consequently reversed.
Nevertheless, given that no appeal has been filed on Balderramas adjudged liability
or on the award of attorney's fees, the CA's dispositions on these matters are now
deemed as final and executory. WHEREFORE, the petition is GRANTED. The Decision
dated April 30, 2008 and Resolution dated March 27, 2009 of the Court of Appeals in
CA-G.R. CV No. 86558 are MODIFIED in that respondents Philippine Phoenix Surety
and Insurance, Inc., Mega Pacific Insurance Corporation, Fortune Life and General
Insurance Company are ORDERED to fulfill their respective obligations to petitioner
Trade and Investment Development Corporation of the Philippines (TIDCORP) under
the Surety Bonds subject of this case, discounting the obligations arising from the

Surety Bonds issued by Paramount Insurance Corporation and covered by its

Compromise Agreement with TIDCORP. SO ORDERED.