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CASE 218 FILIPINAS TEXTILE MILLS, INC. V.

COURT OF APPEALS
G.R. No. 119800
November 12, 2003
Facts: SIHI issued on various dates domestic letters of credit authorizing Indo-Philippine Textile
Mills, Inc. (Indo-Phil), Texfiber Corporation (Texfiber), and Philippine Polyamide Industrial
Corporation (Polyamide) to value on SIHI such drafts as may be drawn by said corporations
against Filtex. Upon the sale and delivery of the merchandise, Indo-Phil, Texfiber and Polyamide
issued several sight drafts on various dates payable to the order of SIHI, which were duly
accepted by Filtex. Subsequently, the sight drafts were negotiated to by SIHI which paid the
value thereof to Indo-Phil, Texfiber and Polyamide for the account of Filtex. To induce SIHI to
issue the domestic letters of credit, Villanueva executed a comprehensive surety agreement,
whereby he guaranteed, jointly and severally with Filtex, the full and punctual payment at
maturity to SIHI of all the indebtedness of Filtex. In order to ensure the payment of the sight
drafts, Filtex executed and issued to SIHI several trust receipts of various dates, which were later
extended with the issuance of replacement trust receipts, covering the merchandise sold. Under
the trust receipts, Filtex agreed to hold the merchandise in trust for SIHI, with liberty to sell the
same for SIHIs. Filtex likewise agreed to hand the proceeds, as soon as received, to SIHI to
apply against any indebtedness of the former to the latter. Due to its failure to pay its outstanding
obligation, SIHI filed a complaint for collection of money against Filtex and Villanueva.
Villanueva contended that SIHI materially altered the terms and conditions of the comprehensive
surety agreement by granting Filtex an extension of the period for payment thereby releasing him
from his obligation as surety.
Issue: Whether or not Villanueva is released from his obligation as surety by reason of the
material alteration in the agreement?
RULING: NO
As regards the purported material alteration of the terms and conditions of the
comprehensive surety agreement, we rule that the extension of time granted to Filtex to pay its
obligation did not release Villanueva from his liability. As this Court held in Palmares vs. Court
of Appeals: 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.
The raison detre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the rights and remedies of the creditor. It may not be amiss to add that
leniency shown to a debtor in default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an extension of the time of payment,
which would release the surety. In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an enforceable agreement
between the principal and the creditor, and that it was made without the consent of the surety or
with a reservation of rights with respect to him. The contract must be one which precludes the
creditor from, or at least hinders him in, enforcing the principal contract within the period during
which he could otherwise have enforced it, and precludes the surety from paying the debt.

CASE 212 CITIZENS SURETY and INSURANCE CO., INC. V. COURT OF APPEALS
G.R. No. L-48958

June 28, 1988

Facts: Citizens Surety and Insurance Co. issued two (2) surety bonds to guarantee compliance by
the principal Pascual M. Perez Enterprises of its obligation under a "Contract of Sale of Goods"
entered into with the Singer Sewing Machine Co. In consideration of the issuance of the
aforesaid bonds, Pascual M. Perez, in his personal capacity and as attorney-in-fact of his wife,
Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises executed on the same date
two (2) indemnity agreements wherein he obligated himself and the Enterprises to indemnify the
Citizens Surety jointly and severally, whatever payments advances and damage it may suffer or
pay as a result of the issuance of the surety bonds. In addition to the two indemnity agreements,
Pascual M. Perez Enterprises was also required to put up a collateral security to further insure
reimbursement of whatever losses or liabilities Citizen Surety may be made to pay under the
surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same day of his
stock of lumber and a second real estate mortgage was further executed to guarantee the
fulfillment of said obligation.

Pascual M. Perez Enterprises failed to comply with its obligation under the contract of
sale of goods. Consequently, the Citizen Surety was compelled to pay the fair value of the two
surety bonds in the total amount of P144,000.00. Except for partial payments and
notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse Citizen
Surety for the losses it sustained under the said surety bonds. A claim for sum of money against
the estate of the late Nicasia Sarmiento which was being administered by Pascual M. Perez was
filed. In opposing the money claim, Pascual M. Perez asserts that the surety bonds and the
indemnity agreements had been extinguished by the execution of the deed of assignment.

Issue: Whether or not the obligation under the surety bonds and indemnity agreements had been
extinguished by reason of the execution of the deed of assignment?

RULING: NO

In the light of the circumstances at the time of the execution of said deed of assignment,
the transaction cannot be regarded as an absolute conveyance. The transaction could not be
dation in payment. When the deed of assignment was executed, the obligation of the assignor to
refund the assignee had not yet arisen. There was nothing to be extinguished on that date, hence,
there could not have been a dation in payment. The subsequent acts of the private respondent
bolster the fact that the deed of assignment was intended merely as a security for the issuance of
the two bonds. Partial payments amounting to P55,600.00 were made after the execution of the
deed of assignment to satisfy the obligation under the two surety bonds. Since later payments
were made to pay the indebtedness, it follows that no debt was extinguished upon the execution
of the deed of assignment. Moreover, a second real estate mortgage was executed on April 12,
1960 and eventually cancelled only on May 15, 1962. If indeed the deed of assignment
extinguished the obligation, there was no reason for a second mortgage to still have to be
executed. The deed of assignment was therefore intended merely as another collateral security
for the issuance of the two surety bonds.