LEONARD A DANASEN April 30, 2019

Case Digest on Credit Transaction

1. BPI vs. Intermediate Appellate Court

Facts:
Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar savings
account and a peso current account. An application for a dollar drat was accomplished
by Virgillo Garcia branch manager of COMTRUST payable to a certain Leovigilda
Dizon. In the application, Garcia indicated that the amount was to be charged to the
dollar savings account of the Zshornacks. There was a no indication of the name of
the purchaser of the dollar draft. COMTRUST issued a check payable to the order of
Dizon. When Zshornack noticed the withdrawal from his account, he demanded an
explanation from the bank. In its answer, Comtrust claimed that the peso value of the
withdrawal was given to Atty. Ernesto Zshornack, brother of Rizaldy. When he
encashed with COMTRUST a cashier’s check for P8,450 issued by the manila banking
corporation payable to Ernesto.
Issue: Whether the contract between petitioner and respondent bank is a deposit?
Ruling:
The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show
that the intent of the parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later. The above arrangement is that
contract defined under Article 1962, New Civil Code, which reads:
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 of 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.
2. BPI vs. CA
Facts:
Private respondents Eastern Plywood Corporation and Benigno Lim as officer
of the corporation, had an “AND/OR” joint account with Commercial Bank and Trust
Co (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands.
Lim withdraw funds from such account and used it to open a joint checking account
(an “AND” account) with Mariano Velasco. When Velasco died in 1977, said joint
checking account had P662, 522.87. By virtue of an Indemnity Undertaking executed
by Lim and as President and General Manager of Eastern withdrew one half of this
amount and deposited it to one of the accounts of Eastern with CBTC. Eastern
obtained a loan of P73, 000.00 from CBTC which was not secured. However, Eastern
and CBTC executed a Holdout Agreement providing that the loan was secured by the
“Holdout of the C/A No. 2310-001-42” referring to the joint checking account of Velasco
and Lim. Meanwhile, a judicial settlement of the estate of Velasco ordered the
withdrawal of the balance of the account of Velasco and Lim. Asserting that the
Holdout Agreement provides for the security of the loan obtained by Eastern and that
it is the duty of CBTC to debit the account of respondents to set off the amount of P73,
000 covered by the promissory note, BPI filed the instant petition for recovery. Private
respondents Eastern and Lim, however, assert that the amount deposited in the joint
account of Velasco and Lim came from Eastern and therefore rightfully belong to
Eastern and/or Lim. Since the Holdout Agreement covers the loan of P73, 000, then
petitioner can only hold that amount against the joint checking account and must return
the rest.
Issue:
Whether BPI can demand the payment of the loan despite the existence of the
Holdout Agreement and whether BPI is still liable to the private respondents on the
account subject of the withdrawal by the heirs of Velasco.
Ruling:
Yes, for both issues. Regarding the first, the Holdout Agreement conferred on
CBTC the power, not the duty, to set off the loan from the account subject of the
Agreement. When BPI demanded payment of the loan from Eastern, it exercised its
right to collect payment based on the promissory note, and disregarded its option
under the Holdout Agreement. Therefore, its demand was in the correct order.
Regarding the second issue, BPI was the debtor and Eastern was the creditor with
respect to the joint checking account. Therefore, BPI was obliged to return the amount
of the said account only to the creditor. When it allowed the withdrawal of the balance
of the account by the heirs of Velasco, it made the payment to the wrong party. The
law provides that payment made by the debtor to the wrong party does not extinguish
its obligation to the creditor who is without fault or negligence. Therefore, BPI was still
liable to the true creditor, Eastern.
3. Serrano vs. CB
Facts:
Serrano filed a case against Overseas Bank and Central bank so that they may
jointly separately liable, because, the P350K worth of time deposits by Serrano in
overseas bank of Manila is not successful when he made a series of encashment,
because on the alleged failure of the Overseas Bank of Manila to return the time
deposits made by petitioner and assigned to him, because respondent Central Bank
failed in its duty to exercise strict supervision over respondent Overseas Bank of
Manila to protect depositors and the general public. On October 13, 1966 and
December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of
P150, 000.00 with the respondent Overseas Bank of Manila. Concepcion Maneja also
made a time deposit, for one year with 6% interest, on March 6, 1967, of Two Hundred
Thousand Pesos (P200, 000.00) with the same respondent Overseas Bank of Manila.
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned
and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with
respondent Overseas Bank of Manila. Notwithstanding series of demands for
encashment of the aforementioned time deposits from the respondent Overseas Bank
of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the
time deposit certificates was honored by respondent Overseas Bank of Manila. The
Petitioner filed a petition for mandamus and prohibition, with preliminary injunction,
that seeks the establishment of joint and solidary liability to the amount of Three
Hundred Fifty Thousand Pesos, with interest, against the respondents, on the alleged
failure of the Overseas Bank of Manila to return the time deposits made by petitioner.
The petition was dismissed because of lack of merit.
Issue: Whether the Central Bank is Liable for the case filed?
Held:
No, Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed, savings, or
current are to be treated as loans and are to be covered by the law on loans. Current
and savings deposit are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests with respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to
honor the time deposit is failure to pay s obligation as a debtor and not a breach of
trust arising from depositary’s failure to return the subject matter of the deposit.
Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust
in his favor when the respondent Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's overdrafts and emergency loans,
since these collaterals were acquired by the use of depositors' money. WHEREFORE,
the petition is dismissed for lack of merit, with costs against petitioner.
4. Luan Kian vs. Manila Railroad
Facts:
Lua Kian filed against the Manila Railroad Co. and Manila Port Service for the
recovery of the invoice value of imported evaporated "Carnation" milk alleged to have
been undelivered. On December 31, 1959, plaintiff Lua Kian imported 2,000 cases of
Carnation Milk from the Carnation Company of San Francisco, California, and shipped
on Board SS "GOLDEN BEAR" per Bill of Lading No. 17; Defendant Manila Port
Service delivered to the plaintiff thru its broker, Ildefonso Tionloc, Inc. 1,913 cases of
Carnation Milk marked "LUA KIAN 1458" per pertinent gate passes and broker's
delivery receipts.. A provisional claim was filed by the consignee's broker for and in
behalf of the plaintiff on January 19, 1960, with defendant Manila Port Service. The
invoice value of the 87 cases of Carnation Milk claimed by the plaintiff to have been
short-delivered by defendant Manila Port Service is P1,183.11 while the invoice value
of the 87 cases of Carnation Milk claimed by the defendant Manila Port Service to
have been over-delivered by it to plaintiff is P1,130.65; The 1,913 cases of Carnation
mentioned in paragraph 5 hereof were taken by the broker at Pier 13, Shed 3,
sometime in February, 1960, where at the time, there were stored therein, aside from
the shipment involved herein, 1000 cases of Carnation Milk bearing the same marks
and also consigned to plaintiff Lua Kian but had been discharged from SS `STEEL
ADVOCATE' and covered by Bill of Lading No. 11. Of the shipment of 1000 cases of
Carnation Milk which also came from the Carnation Company, San Francisco,
California, U.S.A. and bearing the same marks as the shipment herein but had been
discharged from S/S "STEEL ADVOCATE" and covered by Bill of Lading No. 11, Lua
Kian as consignee thereof filed a claim for short-delivery against defendant Manila
Port Service, and said defendant Manila Port Service paid Lua Kian plaintiff herein,
P750.00 in settlement of its claim.
Issue: Whether or not the defendant is liable?
Ruling:
Yes. The bill of lading in favor of Cebu United Enterprises indicated that only
3,000 cases were due to said consignee, although 3,171 cases were marked in its
favor. Accordingly, the excess 171 cases marked "Cebu United" placed the defendant
arrastre operator in a dilemma, nor should it deliver them to Lua Kian the goods could
be claimed by the consignee Cebu United Enterprises whose markings they bore, and
should it deliver according to markings, to Cebu United Enterprises, it might be sued
by the consignee, Lua Kian whose bill of lading indicated that it should receive 171
cases more. The dilemma itself, however, offered the solution. The legal relationship
between an arrastre operator and the consignee is akin to that of a depositor and
warehouseman.2 As custodian of the goods discharged from the vessel, it was
defendant arrastre operator's duty, like that of any ordinary depositary, to take good
care of the goods and to turn them over to the party entitled to their possession.3
Under this particular set of circumstances, said defendant should have withheld
delivery because of the discrepancy between the bill of lading and the markings and
conducted its own investigation, not unlike that under Section 18 of the Warehouse
Receipts Law, or called upon the parties, to interplead, such as in a case under Section
17 of the same law, in order to determine the rightful owner of the goods. It is true that
Section 12 of the Management Contract exempts the arrastre operator from
responsibility for misdelivery or non-delivery due to improper or insufficient marking.
We cannot however excuse the aforestated defendant from liability in this case before
us now because the bill of lading showed that only 3,000 cases were consigned to
Cebu United Enterprises. The fact that the excess of 171 cases were marked for Cebu
United Enterprises and that the consignment to Lua Kian was 171 cases less than the
2,000 in the bill of lading, should have been sufficient reason for the defendant Manila
Port Service to withhold the goods pending determination of their rightful ownership.
5. Javellana vs Lim
Facts:
Defendants executed a document in favor of plaintiff appellee wherein it states
that they have received, as a deposit, without interest, money from plaintiff appellee
and agreed upon a date when they will return the money. Upon the stipulated due
date, defendants asked for an extension to pay and binding themselves to pay 15%
interest per annum on the amount of their indebtedness, to which the plaintiff-appellee
acceded. The defendants were not able to pay the full amount of their indebtedness
notwithstanding the request made by plaintiff-appellee. The lower court ruled in favor
of plain appellee for the recovery of the amount due.
Issue: Whether the agreement entered into by the parties is one of loan or of deposit?
Ruling:
The document executed was a contract of loan. Where money, consisting of
coins of legal tender, is deposited with a person and the la³er is authorized by the
depositor to use and dispose of the same, the agreement is not a contract of deposit,
but a loan. A subsequent agreement between the parties as to interest on the amount
said to have been deposited, because the same could not be returned at the time fixed
therefor, does not constitute a renewal of an agreement of deposit, but it is the best
evidence that the original contract entered into between therein was for a loan under
the guise of a deposit. The original joint obligation contracted by the defendant debtor
still exists, and it has not been shown or proven in the proceedings that the creditor
had released Joe Lim from complying with his obligation in order that he should not be
sued for or sentenced to pay the amount of capital and interest together with his co -
debtor, Ceferino Domingo Lim, because the record offers satisfactory evidence
against the pretension of Jose Lim, and it further appears that document No. 2 was
executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose
Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not
yet been settled, took steps to secure an extension of the time for payment, and
consented to pay interest in return for the concession requested from the creditor.
6. Baron vs. David
Facts:
Prior to January 17, 1921, the defendant Pablo David has been engaged in
running a rice mill in the municipality of Magalang, in the Province of Pampanga,. On
the date stated a fire occurred that destroyed the mill and its contents, and it was some
time before the mill could be rebuilt and put in operation again. Silvestra Baron, the
plaintiff in the first of the actions before us, is an aunt of the defendant; while Guillermo
Baron, the plaintiff in the other action; is his uncle. In the months of March, April, and
May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this,
in connection with some that she took over from Guillermo Baron, amounted to 1,012
cavans and 24 kilos. During approximately the same period Guillermo Baron placed
other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been
received by Silvestra Baron upon account of the palay delivered by Guillermo Baron,
he has received from the defendant advancements amounting to P2, 800; but apart
from this he has not been compensated. Both the plaintiffs claim that the palay which
was delivered by them to the defendant was sold to the defendant; while the
defendant, on the other hand, claims that the palay was deposited subject to future
withdrawal by the depositors or subject to some future sale which was never effected.
He therefore supposes himself to be relieved from all responsibility by virtue of the fire
.The plaintiff further say that their palay was delivered to the defendant at his special
request, coupled with a promise on his part to pay for the same at the highest price
per cavan at which palay would sell during the year 1920; and they say that in August
of that year the defendant promised to pay them severally the price of P8.40 per cavan,
which was about the top of the market for the season, provided they would wait for
payment until December. The trial judge found that no such promise had been given;
and the incredulity of the court upon this point seems to us to be justified. A careful
examination of the proof, however, leads us to the conclusion that the plaintiffs did,
sometime in the early part of August, 1920, make demand upon the defendant for a
settlement, which he evaded or postponed leaving the exact amount due to the
plaintiffs undetermined.
Issue: Whether or not palay was a deposit and defendants are liable to plaintiff?
Ruling:
In view of the of the nature of defendant’s activities and and the way in which
the palay was handled in defendant’s mill, it is quiet certain that all plaintiff’s palay,
which was put in before June 1, 1920, been milled and disposed of long prior to the
fire of January 17, 1921. Considering the fact that the defendant had thus milled and
doubtless sold the plaintiff’s palay prior to the date of fire, it result that he is bound to
account for its value and his liability was not extinguished by the occurrence of the fire.
Even if deposit, use of the thing binds defendant to account for its value. Even
supposing that the palay may have been delivered in in the character of deposit,
subject to future sale or withdrawal at plaintiff’s election, nevertheless if it was
understood that the defendant might mill the palay and he has in fact appropriated it
to his own use he is bound to account for its value. Under Art. 1768 of the civil code
when the depository has permission to make use of the thing deposited, the contract
loses the character of mere deposit and becomes a loan or a commodatum and by
appropriating a thing the bailee becomes responsible for value. I this connection the
court reject the defendant’s pretense that the palay delivered by the plaintiff or any
part of it was actually consumed by fire of January 1921. nor is the liability of
defendant. That by a custom, person placing palay with them without special
agreement as to price are at liberty to withdraw it, proper allowance being made for
storage and shrinkage a thing that is sometimes done rarely.
7. Vintola vs IBAA
Facts:
On August 20, 1975 the spouses Tirso and Loreta Vintola (VINTOLAS), doing
business under the name and style “Dax Kin International,” were granted a domestic
letter of credit by the Insular Bank of Asia and America (IBAA), Cebu City. in the
amount of P40,000.00. The Letter of Credit authorized the bank to negotiate for their
account drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the
purchase of puka and olive seashells. In consideration thereof, the VINTOLAS, jointly
and severally, agreed to pay the bank “at maturity, in Philippine currency, the
equivalent, of the aforementioned amount or such portion thereof as may be drawn or
paid, upon the faith of the said credit together with the usual charges. On the same
day, having received from Stalin Tan the puka and olive shells worth P40, 000.00, the
VINTOLAS executed a Trust Receipt agreement with IBAA, Cebu City. Under that
Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the “latter’s
property with liberty to sell the same for its account, ” and “in case of sale” to turn over
the proceeds as soon as received to (IBAA) the due date indicated in the document
was October 19, 1975. Having defaulted on their obligation, IBAA demanded payment
from the VINTOLAS in a letter dated January 1, 1976. The VINTOLAS, who were
unable to dispose of the shells, responded by offering to return the goods. IBAA
refused to accept the merchandise, and due to the continued refusal of the VINTOLAS
to make good their undertaking, IBAA charged them with Estafa for having
misappropriated, misapplied and converted for their own personal use and benefit the
aforesaid goods. During the trial of the criminal case the VINTOLAS turned over the
seashells to the custody of the Trial Court. The VINTOLAS rest their present appeal
on the principal allegation that their acquittal in the Estafa case bars IBAA’s filing of
the civil action because IBAA had not reserved in the criminal case its right to enforce
separately their civil liability.
Issue: Whether or not Vintolas in their criminal liability are absolved by settlement of
their liability to IBAA
Held:
Entruster does not become the real owner of the goods but merely the holder
of a security title for the advances made under the Letter of Credit—Contrary to the
allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was
merely the holder of a security title for the advances it had made to the VINTOLAS.
The goods the VINTOLAS had purchased through IBAA financing remain their own
property and they hold it at their own risk. The trust receipt arrangement did not convert
the IBAA into an investor; the latter remained a lender and creditor. Since the IBAA is
not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them
in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable
to sell the seashells in question does not affect IBAA’s right to recover the advances
it had made under the Letter of Credit. The foregoing premises considered, it follows
that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a
civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment
in the estafa case had declared that the facts from which the civil action might arise,
did not exist, for, it will be recalled that the decision of acquittal expressly declared that
“the remedy of the Bank is civil and not criminal in nature.” This amounts to a
reservation of the civil action in IBAA’s favor, for the Court would not have dwelt on a
civil liability that it had intended to extinguish by the same decision. The VINTOLAS
are liable ex contract for breach of the Letter of Credit—Trust Receipt, whether they
did or they did not “misappropriate, misapply or convert” the merchandise as charged
in the criminal case. Their civil liability does not arise ex delicto, the action for the
recovery of which would have been deemed instituted with the criminal action (unless
waived or reserved) and where acquittal based on a judicial declaration that the
criminal acts charged do not exist would have extinguished the civil action. Rather, the
civil suit instituted by IBAA is based ex contract and as such is distinct and independent
from any criminal proceedings and may proceed regardless of the result of the latter.
 8. Sia vs. People
Facts:
Accused Jose 0. Sia sometime prior to 24 May, 1963, was General Manager of
the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture
of steel office equipment; on 31 May, 1963, because his company was in need of raw
materials to be imported from abroad, he applied for a letter of credit to import steel
sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the application being directed
to the Continental Bank, herein complainant, and his application having been
approved, the letter of credit was opened on 5 June, 1963 in the amount of $18,300, ;
and the goods arrived sometime in July, 1963 according to accused himself, tsn. II: 7;
now from here on there is some debate on the evidence; according to Complainant
Bank, there was permitted delivery of the steel sheets only upon execution of a trust
receipt, Exhibit A; while according to the accused, the goods were delivered to him
sometime before he executed that trust receipt in fact they had already been converted
into steel office equipment by the time he signed said trust receipt, tsn. II:8; but there
is no question - and this is not debated - that the bill of exchange issued for the purpose
of collecting the unpaid account thereon having fallen due neither accused nor his
company having made payment thereon notwithstanding demands, , dated 17 and 27
December, 1963, and the accounts having reached the sum in pesos of P46,818.68
after deducting his deposit valued at P28,736.47; that was the reason why upon
complaint by Continental Bank, the Fiscal filed the information after preliminary
investigation as has been said on 22 October, 1964.Petitioner contended that he
cannot be made liable for the crime charged as he only acted for and in behalf of
MEMAP as its president.
Issue: Whether petitioner could be held liable for estafa?
Ruling:
No. The case of People vs. Tan Boon Kong (54 Phil. 607) provides for the
general principle that for crimes committed by a corporation, the responsible officers
thereof would personally bear the criminal liability as a corporation is an artificial
person, an abstract being. However, the Court ruled that such principle is not
applicable in this case because the act alleged to be a crime is not in the performance
of an act directly ordained by law to be performed by the corporation. The act is
imposed by agreement of parties, as a practice observed in the usual pursuit of a
business or a commercial transaction. The offense may arise, if at all, from the peculiar
terms and condition agreed upon by the parties to the transaction, not by direct
provision of the law. In the absence of an express provision of law making the
petitioner liable for the criminal offense committed by the corporation of which he is a
president as in fact there is no such provisions in the Revised Penal Code under which
petitioner is being prosecuted, the existence of a criminal liability on his part may not
be said to be beyond any doubt. In all criminal prosecutions, the existence of criminal
liability for which the accused is made answerable must be clear and certain. Further,
the civil liability imposed by the trust receipt is exclusively on the Metal Company.
Speaking of such liability alone, the petitioner was never intended to be equally liable
as the corporation. Without being made so liable personally as the corporation is, there
would then be no basis for holding him criminally liable, for any violation of the trust
receipt.
9. Gonzales vs Go Tiong
Facts:
Go Tiong owned a rice mill and warehouse, located in Pangasinan. Thereafter,
he obtained a license to engage in the business of a bonded warehouseman.
Subsequently, respondent Tiong executed a Guaranty Bond with the Luzon Surety Co
to secure the performance of his obligations as such bonded warehouseman, in the
sum of P18, 334, in case he was unable to return the same. Afterwards, respondent
Tiong insured the warehouse and the palay deposited therein with the Alliance Surety
and Insurance Company. But prior to the issuance of the license to Respondent, he
had on several occasions received palay for deposit from Plaintiff Gonzales, totaling
368 sacks, for which he issued receipts. After he was licensed as a bonded
warehouseman, Go Tiong again received various deliveries of palay from Plaintiff,
totaling 492 sacks, for which he issued the corresponding receipts, all the grand total
of 860 sacks, valued at P8, 600 at the rate of P10 per sack. Noteworthy is that the
receipts issued by Go Tiong to the Plaintiff were ordinary receipts, not the "warehouse
receipts" defined by the Warehouse Receipts Act (Act No. 2137). On or about March
15, 1953, Plaintiff demanded from Go Tiong the value of his deposits in the amount of
P8, 600, but he was told to return after two days, which he did, but Go Tiong again
told him to come back. A few days later, the warehouse burned to the ground. Before
the fire, Go Tiong had been accepting deliveries of palay from other depositors and at
the time of the fire, there were 5,847 sacks of palay in the warehouse, in excess of the
5,000 sacks authorized under his license. After the burning of the warehouse, the
depositors of palay, including Plaintiff, filed their claims with the Bureau of Commerce.
However, according to the decision of the trial court, nothing came from Plaintiff's
efforts to have his claim paid. Thereafter, Gonzales filed the present action against Go
Tiong and the Luzon Surety for the sum of P8, 600, the value of his palay, with legal
interest, damages in the sum of P5,000 and P1,500 as attorney's fees. While the case
was pending in court, Gonzales and Go Tiong entered into a contract of amicable
settlement to the effect that upon the settlement of all accounts due to him by Go
Tiong, he, Gonzales, would have all actions pending against Go Tiong dismissed.
Inasmuch as Go Tiong failed to settle the accounts, Gonzales prosecuted his court
action.
Issue: Whether or not Plaintiff’s claim is governed by the Bonded Warehouse Act due
to Go Tiong’s act of issuing to the former ordinary receipts, not warehouse receipt?
Ruling:
Yes. SC ruled in plaintiff’s favor. Act No. 3893 provides that any deposit made
with Respondent Tiong as a bonded warehouseman must necessarily be governed by
the provisions of Act No. 3893. The kind or nature of the receipts issued by him for the
deposits is not very material much less decisive since said provisions are not
mandatory and indispensable. Under Section 1 of the Warehouse Receipts Act, the
issuance of a warehouse receipt in the form provided by it is merely permissive and
directory and not obligatory. "Receipt", under this section, can be construed as any
receipt issued by a warehouseman for commodity delivered to him. As the trial court
well observed, as far as Go Tiong was concerned, the fact that the receipts issued by
him were not "quedans" is no valid ground for defense because he was the principal
obligor. Furthermore, as found by the trial court, Go Tiong had repeatedly promised
Plaintiff to issue to him "quedans" and had assured him that he should not worry; and
that Go Tiong was in the habit of issuing ordinary receipts (not "quedans") to his
depositors. Furthermore, Section 7 of said law provides that as long as the depositor
is injured by a breach of any obligation of the warehouseman, which obligation is
secured by a bond, said depositor may sue on said bond. In other words, the surety
cannot avoid liability from the mere failure of the warehouseman to issue the
prescribed receipt.
10. Consolidated Terminals vs. Artex Development Co.
Facts:
CTI was the operator of a customs bonded warehouse located at Port Area,
Manila. It received on deposit 193 bales of high density compressed raw cotton valued
at P99, 609.76. It was understood that CTI would keep the cotton in behalf of Luzon
Brokerage Corporation until the consignee thereof, Paramount Textile Mills, Inc., had
opened the corresponding letter of credit in favor of shipper, Adolph Hanslik Cotton of
Corpus Christi, Texas. Allegedly by virtue of a forged permit to deliver imported goods,
purportedly issued by the Bureau of Customs, Artex was able to obtain delivery of the
bales of cotton on November 5 and 6, 1964 after paying CTI P15, 000 as storage and
handling charges. At the time the merchandise was released to Artex, the letter of
credit had not yet been opened and the customs duties and taxes due on the shipment
had not been paid. CTI, in its original complaint, sought to recover possession of the
cotton by means of a writ of replevin. The writ could not be executed. CTI then filed an
amended complaint by transforming its original complaint into an action for the
recovery from Artex of P99, 609.76 as compensatory damages, P10, 000 as nominal
and exemplary damages and P20, 000 as attorney's fees. CTI filed complaint for
damages against Artex. Artex moved to dismiss that it was not shown in the delivery
permit that Artex was the entity that presented that document to the CTI. Artex further
averred that it returned the cotton to Paramount Textile Mills, Inc. when the contract
of sale between them was rescinded because the cotton did not conform to the
stipulated specifications as to quality. RTC sustained the motion to dismiss for lack of
cause of action. CTI appealed to SC contending that, as warehouseman, it was
entitled to the possession (should bare possession) of the bales of cotton; that Artex
acted wrongfully in depriving CTI of the possession of the merchandise because Artex
presented a falsified delivery permit, and that Artex should pay damages to CTI..
Issue: Whether or not CTI have a cause of action against Artex?
Ruling:
SC hold that CTI's appeal has not merit. Its amended complaint does not clearly
show that, as warehouseman, it has a cause of action for damages against Artex. The
real parties interested in the bales of cotton were Luzon Brokerage Corporation as
depositor, Paramount Textile Mills, Inc. as consignee, Adolph Hanslik Cotton as
shipper and the Commissioners of Customs and Internal Revenue with respect to the
duties and taxes. These parties have not sued CTI for damages or for recovery of the
bales of cotton or the corresponding taxes and duties. The case might have been
different if it was alleged in the amended complaint that the depositor, consignee and
shipper had required CTI to pay damages, or that the Commissioners of Customs and
Internal Revenue had held CTI liable for the duties and taxes. In such a case, CTI
might logically and sensibly go after Artex for having wrongfully obtained custody of
the merchandise. But that eventuality has not arisen in this case. So, CTI's basic action
to recover the value of the merchandise seems to be untenable.
11. Roman Catholic bishop vs de la Pena
Facts:
In 1898, Fr. De la Peña assigned as trustee of the sum of P6, 641, collected by
him for the charitable purposes he deposited in his personal account P19, 000 in the
Hongkong and Shanghai Bank at Iloilo. During the war of the revolution, Father De la
Peña was arrested by the military authorities as a political prisoner. The arrest of
Father De la Peña and the confiscation of the funds in the bank were the result of the
claim of the military authorities that he was an insurgent and that the funds deposited
had been collected by him is for revolutionary purposes. The money was taken from
the bank by the military authorities by virtue of such order, was confiscated and turned
over to the Government.
Issue: Whether or not Father De la Peña is liable for the loss of the funds?
Ruling:
No, he is not liable because there is no negligent act on the part of Fr. De la
Peña. It was so happened that during that time the money was taken from him by the
U.S. military forces which is unforeseen event. Although the Civil Code states that “a
person obliged to give something is also bound to preserve it with the diligence
pertaining to a good father of a family”, it also provides, following the principle of the
Roman law that “no one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares. ”There was no law
prohibiting him from depositing it as he did and there was no law which changed his
responsibility be reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the
results of which will be dangerous to his trust, to take all reasonable means and
measures to escape or, if unavoidable, to temper the effects of those events, we do
not feel constrained to hold that, in choosing between two means equally legal, he is
culpably negligent in selecting one whereas he would not have been if he had selected
the other. The court, therefore, finds and declares that the money which is the subject
matter of this action was deposited by Father De la Peña in the Hongkong and
Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from the
bank by the armed forces of the United States during the war of the insurrection; and
that said Father De la Peña was not responsible for its loss.
 12. The Imperial Insurance, Inc., vs. De Los Angeles
Facts:
Private respondent Rosa V. Reyes is the plaintiff in Civil Case entitled, 'Rosa
V. Reyes vs, Felicisimo V. Reyes, etc.,' where she obtained a writ of preliminary
attachment and, accordingly, levied upon all the properties of the defendant, Felicisimo
V. Reyes, in said case. The other two herein private respondents, namely, Pedro V.
Reyes and Consolacion V. Reyes, are the plaintiffs in Civil Case No. Q-5214 of the
same court entitled, 'Pedro V. Reyes, etc.,' and likewise, obtained a writ of preliminary
attachment and, accordingly, levied upon all the properties of the defendant, Felicisimo
V. Reyes, in said case. For the dissolution of the attachments referred to above, the
herein petitioner, The Imperial Insurance, Inc., as surety, and Felicisimo V. Reyes, as
principal, posted a 'defendant's bond for dissolution of attachment' in the amount of
P60,000.00 first case and another bond of the same nature in the amount of
P40,000.00 in second case. The two cases were jointly tried and the decision rendered
was in favor of the plaintiffs. On June 24, 1966, the Court below, presided by the herein
respondent Judge issued the writs of execution of judgment in said cases. On August
20, 1966, the Provincial Sheriff of Bulacan returned the writs of execution' unsatisfied
in whole or in part'. On September 9, 1966, private respondents filed a 'motion for
recovery on the surety bonds'. Said private respondents, demand upon petitioner
asking the latter to pay them the accounts on the counter-bonds. On September 24,
1966, petitioner filed its 'opposition' to the private respondents "Motion for recovery on
the surety bonds'. Respondent Judge, in his order, dated November 10, 1966,
rendered judgment against the counter-bonds.
Issue: Whether or not plaintiff may legally go directly after the surety in a counter bond
without prior exhaustion of defendant’s properties?
Ruling:
Petitioner cannot escape liability on its counter-bonds. Although the counter
bond contemplated in the aforequoted Sec. 17, Rule 57, of the Rules of Court is an
ordinary guaranty where the sureties assume a subsidiary liability, the rule cannot
apply to a counter bond where the surety bound itself "jointly and severally" (insolidum)
with the defendant as in the present case. Article 2059, par. 2 of the Civil Code of the
Philippines, 15 excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor." Section
17, Rule 57 of the Rules of Court cannot be construed that an "execution against the
debtor be first returned unsatisfied even if the bond were a solidary one, for a
procedural rule may not amend the substantive law expressed in the Civil Code, and
further would nullify the express stipulation of the parties that the surety's obligation
should be solidary with that of the defendant."
13. Machetti vs Hospicio de San Jose
Facts:
Machetti undertook to construct a building for Hospicio. One of the agreement’s
condition was for the contractor to obtain the "guarantee" of the Fidelity and Surety
Company. The guarantee was for the compliance of Machetti to the contract’s terms
and conditions. Subsequently it was found that the work had not been carried out in
accordance with the specifications which formed part of the contract. Hospicio
therefore refused to pay the balance of the contract price. Machetti thereupon brought
an action to which Hospicio presented a counterclaim. After the issue was joined,
Machetti, on petition of his creditors declared insolvency. An order was then entered
suspending the proceeding in the case. Hospicio filed a motion asking that the Fidelity
be made cross-defendant which was granted. Hospicio then filed a complaint against
the Fidelity asking for a judgment against the company upon its guaranty. CFI
rendered judgment against the Fidelity. The case is now before this court upon appeal
by the Fidelity from said judgment.
Issue: Whether the contract is one of guaranty or surety?
Ruling:
The circumstances in the contract are distinguishing features of contracts of
guaranty. The contract is the guarantor's separate undertaking in which the principal
does not join. It rests on a separate consideration moving from the principal and that
although it is written in continuation of the contract for the construction of the building,
it is collateral undertaking separate and distinction from the latter. While a surety
undertakes to pay if the principal does not pay, the guarantor only binds himself to pay
if the principal cannot pay. The one is the insurer of the debt, the other an insurer of
the solvency of the debtor. The Fidelity having bound itself to pay only in the event its
principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is
shown that Machetti is unable to pay. Such inability to pay is not determined until the
final liquidation of his estate and is not sufficiently established by the mere fact that he
has been declared insolvent in insolvency proceedings.
14. Castellvi vs. Sellner
Facts:
This is an action brought by plaintiffs to recover from defendant the sum of P10,
000. The brief decision of the trial court held that the suit was premature, and absolved
the defendant from the complaint, with the costs against the plaintiffs. Sellner wrote “I
will, within fifteen days after notice of such default, pay you in cash the sum of P10,
000 and interest upon your surrendering to me the three thousand shares of stock of
the Keystone Mining Co. held by you as security for the payment of said note.
Issue: What is the defendant's status in the transaction?
Ruling:
Sellner is a GUARANTOR. Sellner was not bound with Castellvi by the same
instrument executed at the time and the same consideration, but his responsibility was
secondary, one founded on an independent collateral agreement. Neither was he
jointly and severally liable with Castellvi. The points of difference between a surety
and a guarantor are familiar to American authorities. A surety and a guarantor area
like in that each promises to answer for the debt or default of another. A surety and a
guarantor are unlike in that the surety assumes liability as a regular party to the
undertaking, while the liability as a regular party to upon an independent agreement
to pay the obligation if the primary pay or fails to do so. A surety is charged as an
original promissory; the engagement of the guarantor is a collateral undertaking. The
obligation of the surety is primary; the obligation of the guarantor is secondary. It is
perfectly clear that the obligation assumed by defendant was simply that of a
guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil
Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity,
then, within fifteen days after notice of such default and upon surrender to him of the
three thousand shares of Keystone Mining Company stock, he will assume
responsibility. Sellner is not bound with the principals by the same instrument executed
at the same time and on the same consideration, but his responsibility is a secondary
one found in an independent collateral agreement, Neither is Sellner jointly and
severally liable with the principal debtors.
15. Severino vs. Severino
Facts:
Melecio Severino upon his death, left considerable properties. To end litigation
among heirs, a compromise was effected where defendant Guillermo (son of MS) took
over the property of deceased and agreed to pay installment of 100K to plaintiff (wife
of MS) payable first in 40K cash upon execution of document in 3 equal installments.
Enrique Echauz became guarantor. Upon failure to pay the balance, plaintiff filed and
action against the defendant and Echauz. Enchauz contends that he received nothing
from affixing his signature in the document and the contract lacked the consideration
as to him.
Issue: Whether or not there is a consideration for the guaranty?
Ruling:
The proof shows that the money claimed in this action has never been paid and
is still owing to the plaintiff; and the only defense worth noting in this decision is the
assertion on the part of Enrique Echaus that he received nothing for affixing his
signature as guarantor to the contract which is the subject of suit and that in effect the
contract was lacking in consideration as to him. The guarantor or surety is bound by
the same consideration that makes the contract effective between the principal parties
thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable
consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola
Severino had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of money
stipulated in the contract which is the subject of this action. The promise of the
appellant Echaus as guarantor therefore binding. It is neither necessary that guarantor
or surety should receive any part of the benefit, if such there be accruing to his
principal. Thus, judgment affirmed.
 16. Wise snd Co vs. Tanglao
Facts:
David was an agent of Wise and Co. Manila. Atty. Tanglao, by power of attorney
mortgaged two real properties belonging to him to secure the payment of a judgment
credit of P640 obtained by Cornelio David from Wise and Co. The parties agreed to
register the compromise in the Register of Deeds. David paid the sum of 434 pesos
leaving an unpaid balance. As David paid only a part of the indebtedness, Wise & Co.
filed an action against Atty. Tanglao to recover the unpaid balance.
David’s defense was that he used said power of attorney only to mortgage the
property and did not enter into the contract of suretyship. That nothing is stated in the
compromise to the effect that Tanglao became David’s surety for the payment of the
sum in question. Even if this inference might be made, it would still be insufficient to
create an obligation of suretyship which, under the law, must be express and must not
be presumed. The only obligation which the compromise and the clause in the
executed power of attorney has created on the part of Tanglao, is resulting from the
mortgage of the property belonging to him to secure the payment of the P640. A
foreclosure suit is not instituted in this case against Tanglao, but a purely personal
action for the recovery of the amount still owed by David.
Issue: Whether or not Atty. Dionisio Tanglao is a surety and is liable for the balance?
Ruling:
No, nothing is stated in the compromise agreement to the effect that Atty.
Tanglao become David’s surety for the payment of the judgment debt. Tanglao did
not contract any personal responsibility for the payment of the sum of P640. The only
obligation which he contracted was that resulting from the mortgage. However, a
foreclosure suit was not instituted against Atty. Tanglao but a purely personal action
for the recovery of the amount still owned by Atty. Tanglao. Even granting that Atty.
Tanglao may be considered a surety (or guarantor), the action does not lie against him
on the ground that all the legal remedies against him have not previously been asked
for and David has property sufficient to pay the balance of the debt the payment of
which is sought of Tanglao in his alleged capacity as surety. A guaranty or surety
must be expressed and cannot be presumed. The Principle of Excussion is described
in Art 2058 which says that - the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has resorted to all
legal remedies against the debtor.
17. Manila Surety & Fidelity vs. Almeda
Facts:
Noemi Almeda, entered into a contract with the National Marketing Corporation
(NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates
of deliveries as required by the NAMARCO, a bond for P5, 000.00, undertaken by the
Manila Surety & Fidelity Co., Inc. was posted by the purchaser to secure the latter's
faithful compliance with the terms of the contract. The agreement was later
supplemented and a new bond for the same amount of P5, 000.00, also undertaken
by the Manila Surety & Fidelity Co., Inc. was given in favor of the NAMARCO. The
bonds uniformly contained the following provisions. The Surety expressly waives its
right to demand payment and notice of non-payment and agreed that the liability of the
Surety shall be direct and immediate and not contingent upon the exhaustion by the
NAMARCO of whatever remedies it may have against the Principal and same shall be
valid and continuous until the obligation so guaranteed is paid in full; and5. The Surety
also waives its right to be notified of any extension of the terms of payment which the
NAMARCO may give to the Principal, it being understood that were extension is given
to satisfy the account, that such extension shall not extinguish the guaranty unless the
same is made against the express wish of the Surety. The marketing firm demanded
from the purchaser Almeda Trading the settlement of its back accounts which,
allegedly amounted to P16, 335.09. Furnished with copy of the NAMARCO's demand-
letter, the surety company thereafter also wrote to the said purchaser urging it to
liquidate its unsettled accounts with the NAMARCO however, previous to this,
Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First
Instance of Laguna and by order of said court he was declared insolvent. Manila Surety
& Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case
against the spouses Noemi Almeda and Generoso Esquillo, and the NAMARCO, to
secure its release from liability under the bonds executed in favor of NAMARCO. The
action was based on the allegation that the defendant spouses had become insolvent
and that defendant NAMARCO had rescinded its agreement with them and had
already demanded payment of the outstanding accounts of the couple. The court
rendered judgment sustaining NAMARCO's contention that the insolvency of the
debtor-principal did not discharge the surety's liability under the bond.
Issue: Whether or not the insolvency of a debtor-principal does not release the surety
from its obligation to the creditor under the bond?
Ruling:
There is no question that under the bonds posted in favor of the NAMARCO in
this case, the surety company assumed to make immediate payment to said firm of
any due and unsettled accounts of the debtor-principal, even without demand and
notice of the debtor's non-payment, the surety, in fact, agreeing that its liability to the
creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to
remain valid and continuous until the guaranteed obligation is fully satisfied. Appellant
secured to the creditor not just the payment by the debtor-principal of his accounts,
but the payment itself of such accounts.it is true that the guaranteed claim of
NAMARCO was registered or filed in the insolvency proceeding. But appellant cannot
utilize this fact in support of its petition for release from the assumed undertaking. For
one thing, it is almost a certainty that creditor NAMARCO cannot secure full
satisfaction of its credit out of the debtor's properties brought into the insolvency
proceeding. Considering that under the contract of suretyship, which remains valid and
subsisting, the entire obligation may even be demanded directly against the surety
itself, the creditor's act in resorting first to the properties of the insolvent debtor is to
the surety's advantage At least, the latter would be answerable only for whatever
amount may remain not covered or unsatisfied by the disposition of the insolvent's
properties, with the right to go against debtor-principal after it has made the necessary
payment to the creditor. For another, the fact that the debtor- principal may be
discharged from all his outstanding obligations in the insolvency case would not benefit
the surety, as to relieve it of its liability under the surety agreement. That is so provided
in Section 68 of the Insolvency Act which shall be controlling in the case.
18. RCBC vs Arro
Facts:
Private respondent Residoro Chua, with Enrique Go, Sr., executed a
comprehensive surety agreement to guaranty, above all, any existing or future
indebtedness of Davao Agricultural Industries Corporation (Daicor), and/or induce the
bank at any time or from time to time to make loans or advances or to extend credit to
said Daicor, provided that the liability shall not exceed any time at Php100,000.00.A
promissory note for Php100,000.00 (for additional capital to the charcoal buy and sell
and the activated carbon importation business) was issued in favor of petitioner RCBC
payable a month after execution. This was signed by Go in his personal capacity and
in behalf of Daicor. Respondent Chua did not sign in said promissory note. As the note
was not paid despite demands, RCBC filed a complaint for a sum of money against
Daicor, Go and Chua. The complaint against Chua was dismissed upon his motion,
alleging that the complaint states no cause of action against him as he was not a
signatory to the note and hence he cannot be held liable. This was so despite RCBC’s
opposition, invoking the comprehensive surety agreement which it holds to cover not
just the note in question but also every other indebtedness that Daicor may incur from
petitioner bank. RCBC moved for reconsideration of the dismissal but to no avail.
Hence, this petition.
Issue: Whether or not respondent Chua may be held liable with Go and Daicor under
the promissory note, even if he was not a signatory to it?
Ruling:
Yes, he may be held liable. Order dismissing the complaint against respondent
Chua reversed and set aside. Case remanded to court of origin with instruction to set
aside motion to dismiss and to require defendant Chua to answer the complaint. The
comprehensive surety agreement executed by Chua and Go, as president and general
manager, respectively, of Daicor, was to cover existing as well as future obligations
which Daicor may incur with RCBC. This was only subject to the proviso that their
liability shall not exceed at any one time the aggregate principal amount of Php100,
000.00. The agreement was executed to induce petitioner Bank to grant any
application for a loan Daicor would request for. According to said agreement, the
guaranty is continuing and shall remain in full force or effect until the bank is notified
of its termination. During the time the loan under the promissory note was incurred,
the agreement was still in full force and effect and is thus covered by the latter
agreement. Thus, even if Chua did not sign the promissory note, he is still liable by
virtue of the surety agreement. The only condition necessary for him to be liable under
the agreement was that Daicor “is or may become liable as maker, endorser, acceptor
or otherwise. “The comprehensive surety agreement signed by Go and Chua was as
an accessory obligation dependent upon the principal obligation, i.e., the loan obtained
by Daicor as evidenced by the promissory note. The surety agreement unequivocally
shows that it was executed to guarantee future debts that may be incurred by Daicor
with petitioner, as allowed under NCC Art.2053.“A guaranty may also be given as
security for future debts, the amount of which isnot yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional obligation may also be
secured.”
19. Republic of The Philippines, vs Pal-Fox Lumber Co., Inc.
Facts:
Claiming that the Pal-Fox Lumber Co., Inc. was indebted to the Bureau of
Internal Revenue for forest charges and surcharges amounting to P11,851.56, and
that the Far Eastern Surety & Insurance Co., Inc. was jointly and severally liable with
the lumber company for the payment of said forest charges up to P5,000.00 on
account of a forestry bond which the surety company executed in favor of the plaintiff
.The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim
against its co-defendant Pal-Fox Lumber Co., Inc. which, due to the latter's failure to
file an answer despite valid service of summons, was subsequently declared in default.
With leave of court, the surety company later filed a third-party complaint against
certain persons based on a separate indemnity agreement wherein said third-party
defendants appear to have bound themselves to indemnify the surety company for all
damages it may suffer by reason of the execution of the forestry bond. In time, these
third-party defendants were similarly declared in default. After trial, the court a quo
rendered a decision rendered ordering defendants to pay to plaintiff, jointly and
severally, the sum of P5,000.00, with legal interest thereon from the filing of the
complaint until fully paid, and defendant Pal-Fox Lumber Co., Inc. to pay to plaintiff the
further sum of P6,841.56, with legal interest thereon from the filing of the complaint
until fully paid, plus costs; Unable to secure, in a motion for reconsideration, a
judgment absolving it from any and all liability under Forestry Bond No. 7004.
Issue: Whether the surety's liability can exceed the amount of its bond?
Ruling:
In view of the surety company's willingness to pay the amount of P5, 000.00
under its forestry bond, is its liability for the payment of legal interest thereon. The
said company's denial of liability for such interest is based on the stipulation in the
bond that it was bound to the plaintiff "in the sum of P5, 000.00.”. It is enough to remark
that while the guarantee was for the original amount of the debt of Gabino Marquez,
the amount of the judgment by the trial court in no way violates the rights of the surety.
The judgment on the principal was only for P10, 000.00, while the remaining P9,
990.91 represent the moratory interest due on account of the failure to pay the principal
obligation from and after the same had fallen due, and default had taken place.
Appellant surety was fully aware that the obligation earned interest, since the note was
annexed to its contract. The contract of guaranty executed by the appellant Company
nowhere excludes this interest, and Article 2055, paragraph 2, of the Civil Code of the
Philippines is clearly applicable. If it (the guaranty) be simple or indefinite, it shall
comprise not only the principal obligation but also all its accessories, including judicial
costs, provided with respect to the latter, that the guarantor shall only be liable for
those costs incurred after he has been judicially required to pay.
20. Central Surety and Insurance Company, Inc. vs. Ubay
Facts:
Ong Chi, doing business under the firm name "Tableria de Luxe", sued
Francisco Reyes, Jr. for a sum of money in the City Court of Caloocan City. Ong Chi
applied for a writ of attachment and upon filing a bond in the amount of P6, 464.18, a
jeep belonging to Reyes was placed in custodia legis. Reyes moved to dissolve the
writ of attachment. He posted a counter bond in the amount of P6, 465.00; his surety
was Central Surety and Insurance Co., the petitioner herein. The condition of the
counter bond is that "in consideration of the dissolution of said attachment, [Francisco
Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby jointly
and severally, bind ourselves in the sum of six thousand four hundred sixty five only
(P6,465.00) Philippine Currency, under the condition that in the case the plaintiff
recovers judgment in the action the defendant will on demand redeliver the attached
property so released to the officer of the Court to be applied to the payment of the
judgment or in default thereof that the defendant and surety will on demand pay to the
plaintiff the full value of the property released”. The writ of attachment was thereafter
lifted and the jeep was returned to Reyes. In the course of time, the City Court
rendered judgment as follows: Defendant Reyes appealed to the Court of First
Instance of Rizal but said court affirmed the judgment in toto. Upon finality of the
judgment, a writ of execution was issued against Reyes. The jeep which was the object
of the attachment was sold by the sheriff forP4, 000.00 and the amount was credited
against the judgment in partial satisfaction thereof. Soon after the sale of the jeep,
Central Surety and Insurance Co. filed a motion to cancel the counter bond. Ong Chi
not only opposed the motion but he also asked that the surety company pay the
deficiency on the judgment in the amount of P5, 730.00(P9, 730.00 as of the filing of
the motion, less P4, 000.00 the proceeds of the sale of the jeep).
Issue: Whether or not the petitioner surety is liable for the deficiency?
Ruling: Under the counter bond, the petitioner surety company bound itself solidarily
with the principal obligor "in the sum of P6, 465.00 under the condition that in case the
plaintiff recovers judgment in the action, the defendant will, on demand, redeliver the
attached property so released to the officer of the court to be applied to the payment
of the judgment or in default thereof that the defendant and surety will, on demand,
pay to the plaintiff the full value of the property released." The main obligation of the
surety was to redeliver the jeep so that it could be sold in case execution was issued
against the principal obligor. The amount of P6, 465.00 was merely to fix the limit of
the surety's liability in case the jeep could not be reached. In the instant case, the jeep
was made available for execution of the judgment by the surety. The surety had done
its part; the obligation of the bond had been discharged; the bond should be cancelled.
The impropriety of the orders of the respondent judge is made more manifest by still
another circumstance. The petitioner's surety bond was for the amount of P6, 465.00.
So even on the assumption that the bond was not discharged, since the sale of the
jeep yielded P4, 000.00, the surety can be held liable at most for P2, 465.00. But the
respondent judge ordered the surety to pay P5, 730.00 which is the entire deficiency
and is in excess of P2, 465.00. It is axiomatic that the obligation of a surety cannot
extend beyond what is stipulated.
21. Southern Motors, Inc., vs. Eliseo Barbosa
Facts:
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to
foreclose a real estate mortgage, constituted by the latter in favor of the former, as
security for the payment of the sum of P2, 889.53 due to said Plaintiff from one Alfredo
Brillantes, who had failed to settle his obligation in accordance with the terms and
conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa filed an
answer admitting the allegations of the complaint and alleging, by way of “special and
affirmative” defense: “That the Defendant herein has executed the deed of mortgage
Annex A for the only purpose of guaranteeing — as surety and/or guarantor — the
payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.“
That the Plaintiff until now has no right action against the herein Defendant on the
ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust
all recourses to collect from the true debtor Mr. Alfredo Brillantes Thereupon, Plaintiff
moved for summary judgment which RTC it was but denied upon the ground that it “is
premature”. Plaintiff moved for a reconsideration of the order to this effect. Soon later,
he filed, also, another motion praying that the case be transferred to another branch
of said court, because that of Judge Ibañez would be busy trying cadastral cases, and
had adopted the “policy of refraining from entertaining any other civil cases and all
incidents related thereto, until after said cadastral cases shall have been finally
disposed of.” With the express authority of Judge Ibañez, the case was referred to the
branch of said court, presided over by Hon. Querube C. Makalintal, Judge, for action,
upon said motion for reconsideration. Thereafter, Judge Makalintal rendered the
aforementioned decision, from which the Defendant has appealed
Issue: Whether or not plaintiff is required to exhaust debtor-principal‘s property before
he can proceed to foreclose mortgage?
Ruling:
No. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor, exists only
when a pledge or a mortgage has not been given as special security for the payment
of the principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title
XVI of the same Code, in which the following provisions, among others, are found
ART. 2087. “It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may be
alienated for the payment to the creditor.” ART. 2126. “The mortgage directly and
immediately subjects the property upon which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for whose security it was constituted. “It has
been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled
to the exhaustion of the property of the principal debtor. Although an ordinary personal
guarantor, not a mortgagor or pledger, may demand the aforementioned exhaustion,
the creditor may, prior thereto, secure a judgment against said guarantor, who shall
be entitled, however, to a deferment of the execution of said judgment against him
until after the properties of the principal debtor shall have been exhausted to satisfy
the obligation involved in the case.
22. Manila Surety and Fidelity vs. Almeda
Facts:
The bonds uniformly contained the following provisions. Should the Principal's
account on any purchase be not paid on time, then the Surety, shall, upon demand,
pay said account immediately to the NAMARCO. Should the account of the Principal
exceed the amount of FIVE THOUSAND (P5, 000.00) PESOS, Philippine Currency,
such excess up to twenty (20%) per cent of said amount shall also be deemed secured
by this Bond. The Surety expressly waives its right to demand payment and notice of
non-payment and agreed that the liability of the Surety shall be direct and immediate
and not contingent upon the exhaustion by the NAMARCO of whatever remedies it
may have against the Principal and same shall be valid and continuous until the
obligation so guaranteed is paid in full; and5. The Surety also waives it’s right to be
notified of any extension of the terms of payment which the NAMARCO may give to
the Principal, it being understood that were extension is given to satisfy the account,
that such extension shall not extinguish the guaranty unless the same is made against
the express wish of the Surety. The marketing firm demanded from the purchaser
Almeda Trading the settlement of its back accounts which, allegedly amounted to P16,
335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company
thereafter also wrote to the said purchaser urging it to liquidate its unsettled accounts
with the NAMARCO however, previous to this, Generoso Esquillo instituted voluntary
insolvency proceeding in the Court of First Instance of Laguna and by order of said
court he was declared insolvent. Manila Surety & Fidelity Co., Inc., commenced in the
Court of First Instance of Manila Civil Case against the spouses Noemi Almeda and
Generoso Esquillo, and the NAMARCO, to secure its release from liability under the
bonds executed in favor of NAMARCO. The action was based on the allegation that
the defendant spouses had become insolvent and that defendant NAMARCO had
rescinded its agreement with them and had already demanded payment of the
outstanding accounts of the couple. The court rendered judgment sustaining
NAMARCO's contention that the insolvency of the debtor-principal did not discharge
the surety's liability under the bond.
Issue: Whether a surety can avail itself of the relief specifically afforded in Article 2071
of the Civil Code and be released from its liability under the bonds?
Ruling:
It is true that the guaranteed claim of NAMARCO was registered or filed in the
insolvency proceeding. But appellant cannot utilize this fact in support of its petition
for release from the assumed undertaking. For one thing, it is almost a certainty that
creditor NAMARCO cannot secure full satisfaction of its credit out of the debtor's
properties brought into the insolvency proceeding. Considering that under the contract
of suretyship, which remains valid and subsisting, the entire obligation may even be
demanded directly against the surety itself, the creditor's act in resorting first to the
properties of the insolvent debtor is to the surety's advantage. At least, the latter would
be answerable only for whatever amount may remain not covered or unsatisfied by
the disposition of the insolvent's properties, with the right to go against debtor-principal
after it has made the necessary payment to the creditor. For another, the fact that the
debtor-principal may be discharged from all his outstanding obligations in the
insolvency case would not benefit the surety, as to relieve it of its liability under the
surety agreement. That is so provided in Section 68 of the Insolvency Act, which shall
be controlling in the case. Finally, even supposing that the present action is not
blocked by the insolvency proceedings because it does not aim at reducing the
insolvent's assets, but only at having the suretyship substituted by other equivalent
security, still it is difficult to see how the principal debtor, with his business, property
and assets impounded by the in solvency court, can obtain other securities with which
to replace the guaranty given by the plaintiff-appellant. The action at bar would seem,
under the circumstances, destined to end in futility.
23. Associated Insurance and Surety vs Bacolod
Facts:
Mamerto Tingson, a planter adherent, to the defendant-appellee Bacolod-
Murcia Milling Co., Inc., obtained from the latter a crop loan of P27,640.00 on the
condition that Tingson post a bond equivalent to 25% of the crop loan; that in
compliance with said requirement, plaintiff-appellant, at the request of Tingson,
executed in favor of the defendant-appellee a surety bond in the amount of P6,910
to guaranty the payment of 25% of the crop loan extended. That defendant-appellee,
in violation of express terms of the bond, issued to Tingson a loan much more in
excess of the planter's expected income from his harvest during the crop year for
which the crop loan was granted, without the prior consent of the surety; that in
accordance with paragraph 1 of the terms of the bond, defendant-appellee should
have notified appellant of the amount which Tingson had obtained from the credit line
granted to him under the crop loan agreement; that also pursuant to the above-
quoted condition appellee should have advised appellant of the actual proceeds from
the harvest of Tingson and notified appellant in advance of the sale and disposition
of the sugar of the appellee so that appellant may know its liability and adequately
protect its interest; and that appellee failed to give the notice required in paragraphs
5 and 7 of the complaint, in violation of the terms and conditions of the surety bond.
In its second cause of action, appellant alleges that it is a condition sine qua non of
the surety bond agreement that appellee should extend to Tingson loans that will be
utilized exclusively for planting, clearing, cultivation and harvesting the crop of the
planter for the crop year for which the loan was granted and that in violation of the
latter deliberately utilized for purposes other than those mentioned in the agreement
and herein above mentioned; that as a result of the illegal diversion of the loan
Tingson was not able to produce crops sufficient to cover the loan under the
agreement; that if such diversion was not made Tingson could have planted in the
ordinary course of events more crops than he had actually harvested, thereby
relieving appellant of responsibility or liability under the bond.
Issue: Whether or not plaintiff incurred liability?
Ruling:
The purpose of the action is not to dispute the validity of any demand for
payment that may have been made upon plaintiff by defendant company on the
strength of its liability under the bonds but rather to ask for its release from its liability
under the bonds for certain breach of its conditions committed by the milling company,
and it is for this reason that the action was brought against the milling company. It is
true that, as an alternative action, the debtor and the other surety were also
included to exact liability from them under the indemnity agreement, but that is an
action distinct and separate from that alleged against the milling company and as such
it cannot in any way affect the relation of the latter to the plaintiff. We find therefore
immaterial or unnecessary to allege in the complaint that plaintiff has either paid or
been required to pay its obligation under the bonds by the creditor considering the
nature of the main cause of action. It is sufficient if it alleges therein, as it actually
does, that the conditions agreed upon in the bonds had been violated. We therefore
conclude that the complaint states a valid cause of action insofar as the milling
company is concerned. The order appealed from is set aside. The case is remanded
to the lower court for further proceedings, with costs against appellees.
24. Rural Bank of Caloocan, Inc. v. CA
Facts:
Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of
Caloocan to apply for a loan. Valencia arranged everything about the loan with the
bank. He supplied to the latter the personal data required for Castro's loan application.
After the bank approved the loan for the amount of P3, 000.00, Castro, accompanied
by the Valencia spouses, signed a promissory note corresponding to her loan in favor
of the bank. On the same day, the Valencia spouses obtained from the bank an equal
amount of loan for P3, 000.00. They signed another promissory note (Exhibit "2")
corresponding to their loan in favor of the bank and had Castro affixed thereon her
signature as co-maker. Both loans were secured by a real-estate mortgage on Castro's
house and lot. Later, the sheriff of Manila sent a notice to Castro, saying that her
property would be sold at public auction to satisfy the obligation covering the two
promissory notes plus interest and attorney's fees. Upon request by Castro and the
Valencias and with conformity of the bank, the auction sale was postponed, but was
nevertheless auctioned at a later date. Castro claimed that she is a 70-year old widow
who cannot read and write in English. According to her, she has only finished second
grade. She needed money in the amount of P3, 000.00 to invest in the business of the
defendant spouses Valencia, who accompanied her to the bank to secure a loan of
P3, 000.00. While at the bank, an employee handed to her several forms already
prepared which she was asked to sign, with no one explaining to her the nature and
contents of the documents. She also alleged that it was only when she received the
letter from the sheriff that she learned that the mortgage contract which was an
encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she
was made to sign as co-maker of the promissory note without her being informed.
Castro filed a suit against petitioners contending that thru mistake on her part or fraud
on the part of Valencias she was induced to sign as co-maker of a promissory note
and to constitute a mortgage on her house and lot to secure the questioned note. At
the time of filing her complaint, respondent Castro deposited the amount of P3, 383.00
with the court a quoin full payment of her personal loan plus interest
Issue: Whether or not the promissory executed is valid?
Ruling: While the Valencias defrauded Castro by making her sign the promissory note
and the mortgage contract, they also misrepresented to the bank Castro's personal
qualifications in order to secure its consent to the loan. Thus, as a result of the fraud
upon Castro and the misrepresentation to the bank inflicted by the Valencias both
Castro and the bank committed mistake in giving their consents to the contracts
In other words, substantial mistake vitiated their consents given. For if Castro
had been aware of what she signed and the bank of the true qualifications of the loan
applicants, it is evident that they would not have given their consents to the contracts.
Article 1342 of the Civil Code which provides: Art. 1342. Misrepresentation by a third
person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. We cannot declare the promissory note
valid between the bank and Castro and the mortgage contract binding on Castro
beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar
as they affect the bank and Castro on the ground of fraud because the bank was not
a participant thereto, such may however be invalidated on the ground of substantial
mistake mutually committed by them as a consequence of the fraud and
misrepresentation inflicted by the Valencias Thus, in the case of Hill vs. Veloso this
Court declared that a contract may be annulled on the ground of vitiated consent if
deceit by a third person, even without connivance or complicity with one of the
contracting parties, resulted in mutual error on the part of the parties to the contract.
The fraud particularly averred in the complaint, having been proven, is deemed
sufficient basis for the declaration of the promissory note invalid insofar as it affects
Castro vis-a-vis the bank, and the mortgage contract valid only up to the amount of
P3, 000.00.
24. Cristina Marcelo Vda. De Bautista, vs. Brigida Marcos, Et Al.
Facts:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of
P2, 000 from plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof
conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered
parcel of land situated in Sta. Ignacia, Tarlac. That possession of the land mortgaged
was to be turned over to the mortgagee by way of usufruct, but with no obligation on
her part to apply the harvests to the principal obligation; that said mortgage would be
released only upon payment of the principal loan of P2, 000 the mortgagor promised
to defend and warrant the mortgagee's rights over the land mortgaged. Mortgagor
Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet
(who are Brigida herself and her three sisters), an application for the issuance of a free
patent over the land in question. Free Patent was issued to the applicants and was
registered in their names. Defendant Brigida Marcos' indebtedness of P2,000 to
plaintiff having remained unpaid up to 1959, the latter, on March 4, 1959, filed the
present action against Brigida and her husband (Civil Case No. 3382) in the court
below for the payment thereof, or in default of the debtors to pay, for the foreclosure
of her mortgage on the land give as security. Defendants moved to dismiss the action,
pointing out that the land in question is covered by a free patent and could not,
therefore, under the Public Land Law, be taken within five years from the issuance of
the patent for the payment of any debts of the patentees contracted prior to the
expiration of said five-year period; but the lower court denied the motion to dismiss on
the ground that the law cited does not apply because the mortgage sought to be
foreclosed was executed before the patent was issued. Lower court rendered
judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share
of 15,333 square meters in the land in question, on the theory that the Public Land
Law does not apply in this case because the mortgage in question was executed
before a patent was issued over the land in question; that the agreement of the parties
could not be antichresis because the deed Exhibit "A" clearly shows a mortgage with
usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of
P2,000 to plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's
mortgage on defendant Brigida Marcos' undivided share in the land in question. From
this judgment, defendants Brigida Marcos and her husband Osmondo Apolocio
appealed to this Court.
Issue: Whether the deed of mortgage is at all valid and enforceable?
Ruling:
As it is an essential requisite for the validity of a mortgage that the mortgagor
be the absolute owner of the thing mortgaged (Art. 2085), the mortgage here in
question is void and ineffective because at the time it was constituted, the mortgagor
was not yet the owner of the land mortgaged and could not, for that reason, encumber
the same to the plaintiff-appellee. Nor could the subsequent acquisition by the
mortgagor of title over said land through the issuance of a free patent validate and
legalize the deed of mortgage under the doctrine of estoppel, since upon the issuance
of said patient, the land in question was thereby brought under the operation of the
Public Land Law that prohibits the taking of said land for the satisfaction of debts
contracted prior to the expiration of five years from the date of the issuance of the
patent. This prohibition should include not only debts contracted during the five-year
period immediately preceding the issuance of the patent but also those contracted
before such issuance, if the purpose and policy of the law. The invalidity of the
mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the collate
agreement in the same deed of mortgage whereby possession of the land mortgaged
was transferred to plaintiff-appellee in usufruct, without any obligation on her part to
account for its harvests or deduct them from defendants' indebtedness of P2,000.
Defendant Brigida Marcos, who, together with her sisters, was in possession of said
land by herself and through her deceased mother before her since 1915, had
possessory rights over the same even before title vested in her as co-owner by the
issuance of the free patent to her and her sisters, and these possessory right she could
validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage
Exhibit "A". The latter, upon the other hand, believing her mortgagor to be the owner
of the land mortgaged and not being aware of any flaw which invalidated her mode of
acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right
to all the fruits received during the entire period of her possession in good faith (Art.
544, N.C.C.). She is, therefore, entitled to the full payment of her credit of P2, 000 from
defendants, without any obligation to account for the fruits or benefits obtained by her
from the land in question.
25. Vincent P. Dayrit, v. The Court Of Appeals, Hon. Francisco Arca,
Facts:
On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and
Reynaldo Angeles entered into a contract with the Mobil Oil Philippines, Inc., entitled
"LOAN & MORTGAGE AGREEMENT," providing, among others, that: in consideration
of Sales Agreement the parties herein, Mobil grants a loan of P150, 000 to borrowers.
Defendants-Borrowers shall repay Mobil the whole amount of P150, 000 plus 10%
interest per annum on the diminishing balance for 48 months. To secure the prompt
repayment of such loan by defendants-borrowers to Mobil and the faithful performance
by Borrowers of that Sales Agreement, Defendants-Borrowers hereby transfer in favor
of Mobil by way of first mortgage lands together with the improvements existing in said
two (2) parcels of land. In case of default of Defendants-Borrowers in payment of any
of the installments and/or their failure to purchase the quantity of products stated
therein Mobil shall have the right to foreclose this mortgage. Shall be entitled to
attorney’s fees and cost of collection equivalent to not less than 25% of total
indebtedness remaining unpaid. The defendants violated the Loan & Mortgage
Agreement, they having paid but one installment in the amount of P3, 816, of which
P1, 250 was applied to interest, and the remaining P2,566 to the principal obligation.
Judgment is hereby rendered in favor of the plaintiff and against the defendants
ordering them to pay to the plaintiff one-third each of the sum of P147, 434.00 with
interest of 10%
An undated Mobil’s motion for execution of the decision and for the appointment
of Eladio Ylagan as special sheriff (annex D) was received by the herein petitioner
Dayrit on February 8, 1968. Whereupon, he filed his opposition and motion to stay
execution, alleging that before the finality of the aforesaid judgment, he and the plaintiff
had agreed not to appeal and/or file any motion for reconsideration, the petitioner
offering to pay his one-third share with a reasonable discount, if possible, in so far as
the interests and the award for attorney’s fees were concerned, with the corresponding
release of the mortgage on all his properties, and praying, in view thereof, for a 30-
day grace period within which to pay the plaintiff. The 30-day grace period was granted
by the court in its order of February 24, 1968.
Issue: Whether or not CFI erred in ordering that the sale at public auction of the
mortgaged properties to answer for the entire P147, 434 principal obligation?
Ruling: Well-entrenched in law is the rule that a mortgage directly and immediately
subjects the property upon which it is imposed, the same being indivisible even though
the debt may be divided, and such indivisibility likewise being unaffected by the fact
that the debtors are not solidarily liable. As Tolentino, in his Commentaries and
Jurisprudence on the Civil Code of the Philippines, puts it —"When several things are
pledged or mortgaged, each thing for a determinate portion of the debt, the pledges
or mortgages are considered separate from each other. But when the several things
are given to secure the same debt in its entirety, all of them are liable for the debt, and
the creditor does not have to divide his action by distributing the debt among the
various things pledged or mortgaged. Even when only a part of the debt remains
unpaid, all the things are still liable for such balance. Hence, a mortgage voluntarily
constituted by the debtor on two or more parcels of land is one and indivisible, and the
mortgagee has the right to have either or both parcels, jointly or singly, sold to satisfy
his claim. In case the mortgaged properties are a house and lot, it cannot be claimed
that the lot and the house should be sold separately and not together
But then there is this other seeming posture of the petitioner: that the judgment
which has become final and executory either modified or superseded the Loan and
Mortgage Agreement between the parties, and since the obligation is merely joint,
upon payment thereof, as in attachment, the properties mortgaged are released from
liability. The decision under consideration, however, did nothing of the sort. The
petitioner conveniently refuses to recognize the true import of the dispositive portion
of the judgment. The said portion unequivocally states that "in default of such payment,
the properties put up in collateral shall be sold in foreclosure sale in accordance with
law, the proceeds to be applied in payment of the amount due to the plaintiff as claimed
in the complaint." And the claim in the complaint was the full satisfaction of the total
indebtedness of P147, 434; therefore, the release of all the mortgaged properties may
be authorized only upon the full payment of the above-stated amount secured by the
said mortgage. With respect to the provisions of section 2 of Rule 68 of the Rules of
Court giving the petitioner a period of 90 days within which he might voluntarily pay
the debt before the sale of the collateral at public auction was ordered, we agree that
the trial court failed to provide such period. However, this failure can be regarded as
having resulted in mere damnum absque injuria. From November 17, 1967 when the
decision was rendered to May 23, 1968 when the final order to sell the mortgaged
properties was issued, a period of more than six months had passed, which is
considerably much more than the 90-day period of grace allowed the petitioner to
validly tender the proper payment.