G.R. No.
160466 acted only as sureties for some of BMC’s debts, would be compelled to
January 17, 2005
SPOUSES ALFREDO and SUSANA ONG vs. PHILIPPINE
COMMERCIAL INTERNATIONAL BANK
FACTS: Petitioners-spouses Alfredo and Susana Ong are the President
and Treasurer of Baliwag Mahogany Corporation (BMC). Respondent
Philippine Commercial International Bank (now Equitable-Philippine
Commercial International Bank or E-PCIB) filed a case for collection of a
sum of money against petitioners-spouses and sought to hold them liable
as sureties on the three (3) promissory notes they issued to secure some of
BMC’s loans.
The complaint alleged that in 1991, BMC needed additional capital for its
business and applied for various loans, amounting to a total of five million
pesos, with the respondent bank. Petitioners-spouses acted as sureties for
these loans and issued three (3) promissory notes for the purpose. Under
the terms of the notes, it was stipulated that respondent bank may consider
debtor BMC in default and demand payment of the remaining balance of
the loan upon the levy, attachment or garnishment of any of its properties,
or upon BMC’s insolvency, or if it is declared to be in a state of suspension
of payments. Respondent bank granted BMC’s loan applications.
BMC filed a petition for rehabilitation and suspension of payments with the
SEC after its properties were attached by creditors. Respondent bank
considered debtor BMC in default of its obligations and sought to collect
payment thereof from petitioners-spouses as sureties.
On October 13, 1992, a Memorandum of Agreement (MOA) was executed
by debtor BMC, the petitioners-spouses as President and Treasurer of
BMC, and the consortium of creditor banks of BMC (of which respondent
bank is included). The MOA took effect upon its approval by the SEC on
November 27, 1992.
Thereafter, petitioners-spouses moved to dismiss the complaint. They
argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action
against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMC’s sureties in their contracts of loan
with respondent bank. Petitioners-spouses averred that respondent bank is
barred from pursuing its collection case filed against them.
Petitioners contend that it would prejudice them if the principal debtor BMC
would enjoy the suspension of payment of its debts while petitioners, who
make the payment. Petitioners add that compelling them to pay is contrary
to Article 2063 of the Civil Code which provides that a compromise between
the creditor and principal debtor benefits the guarantor and should not
prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: "the guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in the debt;
but not those which are purely personal to the debtor."
ISSUE: WON the collection suit filed by respondent bank against
petitioners-spouses as sureties can prosper. YES
HELD: Reliance of petitioners-spouses on Articles 2063 and 2081 of the
Civil Code is misplaced as these provisions refer to contracts of guaranty.
They do not apply to suretyship contracts. A guarantor insures the
solvency of the debtor while a surety is an insurer of the debt itself. A
contract of guaranty gives rise to a subsidiary obligation on the part of the
guarantor. It is only after the creditor has proceeded against the properties
of the principal debtor and the debt remains unsatisfied that a guarantor
can be held liable to answer for any unpaid amount. This is the principle of
excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt.
As the surety insures the debt itself, he obligates himself to pay the debt if
the principal debtor will not pay, regardless of whether or not the latter is
financially capable to fulfill his obligation. Thus, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay
or no prior demand is made on the principal debtor. A surety is directly,
equally and absolutely bound with the principal debtor for the payment of
the debt and is deemed as an original promissor and debtor from the
beginning.
Under Article 1216 of the Civil Code, respondent bank as creditor may
proceed against petitioners-spouses as sureties despite the execution of
the MOA which provided for the suspension of payment and filing of
collection suits against BMC. Respondent bank’s right to collect payment
from the surety exists independently of its right to proceed directly against
the principal debtor.
MIRA HERMANOS v. MANILA TOBACCONISTS
G.R. No. L-48979
September 29, 1943
FACTS:
Mira Hermanos, Inc., (Hermanos) agreed to deliver to Manila
Tobacconists, Inc. (Tobacconists) merchandise for sale on consignment.
 Hermanos required of Manila a bond of P3,000, which was
executed by Provident Insurance Co. to secure the fulfillment of the
obligation of Tobacconists.
In October, 1940, the volume of the business of Tobacconists
having increased that the merchandise received by it on consignment from
Hermanos exceeded P3,000 in value, Hermanos required an additional
bond of P2,000. In compliance with that requirement the defendant Manila
Compañia de Seguros executed a bond of P2,000.
A balance due from Tobacconists to Hermanos of P2,272.79 was
accounted for, which Tobacconists recognized but was unable to pay.
Hermanos made a demand upon the two surety companies for the payment
of said sum.
The Provident Insurance Co., paid only 60% of the amount owned
by the Tobacconists to Hermanos, alleging that the remaining 40% should
be paid by the other surety, Manila Compañia de Seguros.
The Manila Compañia de Seguros refused to pay the balance,
contending that so long as the liability of Manila did not exceed P3,000, it
was not bound to pay anything because its bond referred only to the
obligation of the Tobacconists in excess of P3,000 and up to P5,000.
Hence Hermanos brought this action to recover from the sureties jointly and
severally the sum of P909.12 with legal interest.
ISSUE:
Whether or not Provident Insurance is entitled to the "benefit of
division" provided in article 1837 (now Art. 2065 of NCC) of the Civil Code.
HELD:
No. It is inapplicable in this case.
Art. 1837 states: “Should there be several sureties of only one
debtor for the same debt, the liability therefor shall be divided among them
all. The creditor can claim from each surety only his proportional part unless
liability in solidum has been expressly stipulated.
The right to the benefit of division against the co-sureties for their
respective shares ceases in the same cases and for the same reason as
that to an exhaustion of property against the principal debtor.”
Article 1837 refers to several sureties of only one debtor for the
same debt. In the instant case, although the two bonds on their face appear
to guarantee the same debt co-extensively up to P2,000 — that of the
Provident Insurance Co. alone extending beyond that sum up to P3,000 —
it was proven that in reality said bonds, or the two sureties, do not
guarantee the same debt because the Provident Insurance Co. guarantees
only the first P3,000 and the Manila Compañia de Seguros, only the excess
over and above said amount up to P5,000. Article 1837 does not apply to
this factual situation.
CACHO V. VALLES
Facts:
The National Sporting Club obligated itself by a promissory note payable at
four months to pay to Jose Ma. Cacho, or order, the sum of P9,360, value
received for commercial purposes.
Below the signature of said National Sporting Club, as signed by the proper
officers of the Club, the following personal guaranty was written: "We
guarantee this obligation." (Sgd.) J. A. Valles, J. L. Mateu, G. J. Heffting,
Ed. Chesley, Baldomero Roxas.
This note was not paid at maturity; and an action was instituted thereon
against the National Sporting Club and the guarantors. To this action no
defence was interposed either by the Club or any of the guarantors except
Baldomero Roxas, who, after denying generally the allegations of the
complaint, interposed a defence claiming the right of division as among
the cosureties, and asking that in case he should be found liable that he
should be held responsible only for his aliquot part of the debt, and
praying also that before he should be required to pay such proportionate
share the property of the National Sporting Club should first be exhausted.
After judgment had been given upon the default of the National Sporting
Club as obligor, the court entered judgment against the five guarantors
requiring each of them to pay his pro rata share of the total debt with
interest in case the National Sporting Club itself should not satisfy the debt
or should appear to be insolvent upon execution of the judgment.
The trial court upon motion modified the dispositive part of its decision as
against the guarantors by declaring that "in case either of the sureties shall
turn out to be insolvent his part shall fall proportionately upon the other
sureties." From this order the defendant Baldomero Roxas appealed to this
court.
Issue:
Whether in case of the insolvency of one or more of several simple
sureties, those who remain solvent can be made to pay the entire debt
Held:
No.
There is a difference between being insolvent, which practically means
exhaustion of assets, or that money cannot be made out of a person upon
execution, and the condition of a declared bankrupt. The authors of the
Code themselves were not unmindful of this distinction. Thus, we note that
in subsection 2 of article 1843 it is declared that a surety may proceed
against the principal debtor even before paying the debt in case of bankrupt
or insolvency; but in subsection 2 of article 1831, with which we are here
more especially concerned, the condition named is bankruptcy. None of the
sureties, so far as this record shows, has been declared bankrupt. The
benefit of division therefore has not been lost, and the rule declaring each
surety liable only for his aliquot part of the guaranteed debt, must hold.
The trial judge in all probability had in mind the second paragraph of article
1844 of the Civil Code; but we think this article inapplicable for more than
one reason. In the first place, that article deals with the situation which
arises when one surety has paid the debt to the creditor and is seeking
contribution from his cosureties. In the case before us the debt has not
been paid by any surety. In the second place, it is required in the third
paragraph of said article, that the surety paying the debt should have made
payment by virtue of judicial proceedings or when the principal debtor
should have become insolvent or bankrupt. Nothing of the kind has here
happened. The article referred to is thus automatically excluded from
operation.
In passing upon a question of the kind now before us it is to be
remembered that the obligation of the surety cannot be extended beyond its
specified limits (Civ. Code, art. 1827); and it is not legitimate for the court to
adopt doubtful intendments against him.
Also, according to Manresa:
A cosurety is entitled to the benefit of division from the very moment that he
contracts the obligation, except where there is stipulation to the contrary;
but if any of the circumstances enumerated in article 1831 should take
place either because he expressly waives such a benefit after making the
contract of suretyship, or because he later binds himself solidarily with the
debtor or any of the other cosureties, or any of the cosureties becomes
bankrupt or insolvent or cannot be sued within the kingdom; and again, if
such right is not availed of in due time, the benefit of division will cease in
any of these cases, as should the benefit of exhaustion of the debtor's
property. This is what the Code intended by inserting in the article under
comment the provision of paragraph 3, containing the reference their made.
TUASON, TUASON, INC. vs. ANTONIO MACHUCA
G.R. No. L-22177
December 2, 1924
Guaranty and Surety (Art. 2066)
FACTS:
The Universal Trading Company(Universal) was going to withdraw
from Insular Collector of Customs (now BoC) sundry goods to be delivered
to Bank of the Philippine Islands (BPI). To allow such withdrawal, Manila
Compañia de Seguros(Manila) executed a bond for the sum of P9,663; this
bond was secured by a solidary note signed by Antonio Muchaha, president
of Universal, and Tuason, Tuason Co.
In the solidary note, they solidary bound themselves to pay,
reimburse, and refund to the company all such sums or amounts of money
as it upon its obligation with Manila - whether or not it shall have actually
paid such sum.
Universal was later declared as insolvent, hence Manila demanded
payment. Tuason refused to pay, so Manila filed a case against it. Tuason
then payed but incurred litigation expenses. Tuason now demands payment
from Machuca. Tuason filed a case for collection of money from Machuca.
The action brought by the plaintiff is that which a surety, who pays the debt
of the debtor, is entitled to bring to recover the amount thus paid.
The lower court ruled that Machuca should pay the debt and the
expenses incurred by Tuason in the case for collection of money.
ISSUE:
Whether or not Machuca should be liable to pay for the expenses
incurred by Tuason in its case
HELD: NO.
The plaintiff has the right to recover of the defendant Machuha the
sum of P9,663, the value of the note executed by the plaintiff in favor of
Manila Compañia de Seguros which the plaintiff is under obligation to pay
by virtue of a final judgment.
However, that defendant should not pay the plaintiff the expenses
incurred by it in the litigation between it and Manila Compañia de Seguros.
The litigation was originated by plaintiff Tuason because it failed to fulfill its
obligation with Manila Compañia de Seguros. It cannot charge the
defendant with the expenses, which it was compelled to make by reason of
its own fault.
It is entitled, however, to the expenses incurred by it in this action
brought against the defendant, which are fixed at P1,653.65 as attorney's
fees.
AUTOCORP and Rodriguez vs. ISAC and BOC
G.R. No. 166662
June 27, 2008
FACTS: Autocorp Group, represented by its President, Rodriguez, secured
an ordinary re-export bond from private respondent Intra Strata Assurance
Corporation (ISAC) in favor of public Bureau of Customs (BOC), to
guarantee the re-export of 2 units of car (at 2 different dates) and/or to pay
the taxes and duties thereon. Petitioners executed and signed two
Indemnity Agreements with identical stipulations in favor of ISAC, agreeing
to act as surety of the subject bonds
In sum, ISAC issued the subject bonds to guarantee compliance by
petitioners with their undertaking with the BOC to re-export the imported
vehicles within the given period and pay the taxes and/or duties due
thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the
liability the latter may incur on the said bonds
Autocorp failed to re-export the items guaranteed by the bonds and/or
liquidate the entries or cancel the bonds, and pay the taxes and duties
pertaining to the said items, despite repeated demands made by the BOC,
as well as by ISAC. By reason thereof, the BOC considered the two bonds
forfeited.
Failing to secure from petitioners the payment of the face value of the two
bonds, ISAC filed with the RTC an action against petitioners to recover a
sum of money plus AF. ISAC impleaded the BOC “as a necessary party
plaintiff in order that the reward of money or judgment shall be adjudged
unto the said necessary plaintiff.”
Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay
ISAC and/or BOC the face value of the subject bonds plus AF. Autocorp’s
MR was denied. CA affirmed the trial court’s decision. MR was denied.
Hence this Petition for Review on Certiorari
ISSUE: WON these bonds are now due and demandable, as there is yet no
actual forfeiture of the bonds, but merely a recommendation of forfeiture, for
no writ of execution has been issued against such bonds, therefore the
case was prematurely filed by ISAC
HELD: PETITION IS WITHOUT MERIT
YES
The Indemnity Agreements give ISAC the right to recover from petitioners
the face value of the subject bonds plus attorney’s fees at the time ISAC
becomes liable on the said bonds to the BOC, (specifically to re-export the
imported vehicles within the period of six months from their date of entry)
regardless of whether the BOC had actually forfeited the bonds, demanded
payment thereof and/or received such payment. It must be pointed out that
the Indemnity Agreements explicitly provide that petitioners shall be liable
to indemnify ISAC “whether or not payment has actually been made by the
[ISAC]” and ISAC may proceed against petitioners by court action or
otherwise “even prior to making payment to the [BOC] which may hereafter
be done by [ISAC].”
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty
within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed
period for its maturity, unless it be of such nature that it cannot be
extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends
to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the
debtor.
NOTES:
A demand is only necessary in order to put an obligor in a due and
demandable obligation in delay, which in turn is for the purpose of making
the obligor liable for interests or damages for the period of delay. Thus,
unless stipulated otherwise, an extrajudicial demand is not required before
a judicial demand, i.e., filing a civil case for collection, can be resorted to
SAENZ v. YAP CHUAN
G.R. No. 5470
March 22, 1910
Art. 2067 (Guaranties & Sureties)
FACTS:
Engracio Palanca gave a bond, by order of the court, to guarantee
his administration over the estate of Margarita Jose. The bond was
executed by Palanca himself, Luis Saenz de Vizmanos Ong-Quico
(Saenz/Vizmanos, plaintiff), and two others for the amount of P60,000.
At the same time, Yap Chuangco, Yap Chutco, Palanca Yap Poco,
Palanca Tanguinlay and Lim Pongco (defendants) executed a bond in favor
of Vizmanos, where they bound themselves jointly “to reimburse or pay
whatever amounts the later might have to pay or shall have paid by
reason of the judicial bond aforementioned.” They agreed to pay up to
P40,000, in the proportion of not exceeding P20,000 by Yap Chuangco
and P5,000 by each one of the other four. Yap Chuangco did not sign the
contract personally, but had his lawyer sign it. The other four signed
personally.
Eventually, Vizmanos was ordered to pay P41,690.15 as the
solidary surety of the ex-administrator Palanca. He paid P8,000 to the
administrator of the estate, and still owing P40,975.92 (everything here had
interest), he instituted a case against the 5 defendants. Yap Chuangco was
acquitted because the lawyer had no authority to sign for him (Vizmanos
did not contest this part of the decision), but the RTC1 ordered the other
1
. It’s 1910 so it’s not called RTC/CA.
four to pay P2,000 each to cover the P8,000 Vizmanos had already  Yap Chuangco was supposed to pay ½ the amount, the
paid. other four would split the other ½ evenly/in equal shares
Vizmanos appealed, claiming the defendants should pay him  The word “reimburse" is important, see quoted portion
the maximum amount agreed upon in the contract, or P5,000 each for above
a total of P20,000. The defendants claimed they should only have to
pay P1,000 each, according to the terms of the contract, or P4,000 Vizmanos’ Defendants’
(half, based on the proportionate amount – because Yap Chuangco would Contract RTC
Claim claim/CA/SC
have paid the other P4,000 had he not been acquitted.) The CA ruled in Yap Up to
favor of the defendants. - - -
Chuangco 20,000
Yap Chutco
ISSUE: and the other Up to 5,000
2,000 ea 5,000 ea 1,000 ea
four ea
WON the defendants have to pay only P1,000 each, for a total of P4,000. defendants

HELD: MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,

YES. The court ruled that while the law says, “a surety who pays for a
debtor shall be indemnified by the latter,” it cannot be interpreted in such
absolute terms as to include more than the surety has paid for as it would
be unjust enrichment.
The benefit of subrogation is the means of utilizing the right of
reimbursement. Being as it is an act of subrogation, it is not exercisable
except when it’s actually been paid. The surety is subrogated by the
payment,2 says the law, in all the rights that the creditor had against the
debtor.
Notes:
 There are two bonds, one is judicial (over the
administration of the estate), the other is extrajudicial (for
the payment of one of the sureties of the first bond) 3
 The contract for the second bond refers to the defendants
as sureties, but they are bound only “jointly” (in the first
bond the parties are bound “jointly and severally”)
2
. “The Civil Code specifies five cases as exceptions wherein the surety, even
before paying, may proceed against the principal debtor, but ‘in all these cases
the action of the surety tends to obtain his release from the security or a guaranty
to defend him against any proceedings of the creditor and from the danger or
insolvency of the debtor.” (Direct quote, I don’t know what these five exceptions
are or if we’re still following the doctrine today.)
3
. Tangential discussion - Vizmanos called the bond a “subbond” but the SC
explained that it’s not a subbond because the two bonds are of a different nature,
one is judicial the other is extra-judicial.
vs.
BATU CONSTRUCTION AND COMPANY
In a complaint filed in the Court of First Instance of Manila, the plaintiff, a
domestic corporation engaged in the bonding business, hereafter called the
company, alleges that the Batu Construction & Company, a partnership the
members of which are the other three defendants, requested it to post, as it
did, a surety bond for P8,812 in favor of the Government of the Philippines
to secure the faithful Performance of the construction of the Bacarra Bridge,
Project PR-72 (3), in Ilocos Norte, undertaken by the partnership, as
stipulated in a construction on contract entered into on 11 July 1950 by and
between the partnership and the Government of the Philippines, on
condition that the defendants would "indemnify the COMPANY for any
damage, loss, costs, or charges, or expenses of whatever kind and nature,
including counsel or attorney's fees, which the COMPANY may, at any
time, sustain or incur, as a consequence of having become surety upon the
above mentioned bond; said attorney's fees shall not be less than fifteen
(15%) per cent of the total amount claimed in any action which the
COMPANY may institute against the undersigned (the defendants except
Andres Tunac) in Court," and that "Said indemnity shall be paid to the
COMPANY as soon as it has become liable for the payment of any amount,
under the above-mentioned bond, whether or not it shall have paid such
sum or sums of money, or any part thereof," as stipulated in a contract
executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the
unsatisfactory progress of the work on the bridge, the Director of Public
Works, with the approval of the Secretary of Public Works and
Communications, annulled, the construction contract referred to and
notified the plaintiff Company that the Government would hold it (the
Company) liable for any amount incurred by the Government for the
completion of the bridge, in excess of the contract price (Exhibit D); that on
19 December 1951 (should be 23 November 1951), Ricardo Fernandez
and 105 other persons brought an action in the Justice of the Peace Court
of Laoag, Ilocos Norte, against the partnership, the individual partners and
the herein plaintiff Company for the collection of unpaid wages amounting
to P5,960.10, lawful interests thereon and costs (Exhibit E); that the
defendants are in imminent danger of becoming insolvent, and are
removing and disposing, or about to remove and dispose, of their properties
with intent to defraud their creditors, particularly the plaintiff Company; and
that the latter has no other sufficient security to protect its rights against the
defendants. Upon these allegations, the plaintiff prays that, upon the
approval of a bond and on the strength of the allegations of the verified
complaint, a writ attachment be issued and levied upon the properties of the
defendants; and that after hearing, judgment be rendered " ordering the
defendants to deliver to the plaintiff such sufficient security as shall protect
plaintiff from the any proceedings by the creditors on the Surety Bond
aforementioned and from the danger of insolvency of the defendants; and
to allow costs to the herein plaintiff," and " for such other measures of relief
as may be proper and just in the premises." Attached to the complaint are a
verification and affidavit of attachment; and copies of the surety bond
marked Annex A; of the indemnity contract marked Annex B; and of the
letter of the Acting Director of Public Works to the plaintiff dated 30 May
1951, marked Annex C.
Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3
and 4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8
and 9 of the complaint, because he has never promised to put up an
indemnity bond in favor of the plaintiff nor has he ever entered into any
indemnity agreement with it; because the partnership or the Batu
Construction & Company was fulfilling its obligations in accordance with the
terms of the construction contract; because the Republic of the Philippines,
through the Director of Public, Works, had no authority to annul the contract
at its own initiative; because the Justice of the Peace court of Laoag, Ilocos
Norte had no jurisdiction to hear and decide a case for collection of
P5,960.10; and because the defendants were not in imminent danger of
insolvency, neither did they remove or dispose of their properties with intent
to defraud their creditors. By way of affirmative defenses, he alleges that
the signing by Carlos N. Baquiran of the indemnity agreement for and in
behalf of the partnership Batu Construction & Company did not bind the
latter to the plaintiff and as the partnership is not bound, he (Andres Tunac),
as a member thereof, is also not bound; that he not being a party to the
said agreement, the plaintiff has no cause of action against him; that in the
event the partnership is bound by the indemnity agreement he invokes his
right of exhaustion of the property of the partnership before the plaintiff may
proceed against his property. And as a counterclaim he alleges that the
plaintiff brought the action against him maliciously and in bad faith for the
purpose of annoying him and damaging his professional reputation, he
having a flourishing and successful practice as engineer in Ilocos Norte,
thereby compelling him to defend himself; that to secure the issuance of a
writ of attachment the plaintiff made false representations; and that the
issuance of the writ upon such false representations of the plaintiff caused
him damages in the sum of P10,000 including expenses of litigation and
attorney's fees. Upon the foregoing he prays that the complaint be
dismissed as to him and the defendant Batu Construction & Company, with
costs against the plaintiff; that the latter be ordered to pay him the sum of
P10,000; and that he be granted such other remedies as may be just,
equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint,
except those that may be deemed admitted in the special defenses, and
alleges that he is not in imminent danger of insolvency and is not removing
and disposing or about to remove and dispose of his properties, because
he has no property; that has been no liquidation of the expenses incurred in
the construction of the Bacarra Bridge, Project PR-72(3) to determine
whether there would be a balance of the contract price which may be
applied to pay the claim for unpaid wages of Ricardo Fernandez et al.
sought to be collected in civil case No. 198 of the Justice of the Peace
Court of Laoag, Ilocos Norte, and not until after such liquidation shall have
been made could his liability and that of his co-defendants be determined
and fixed; that if after proper liquidation's there be a deficit of the contract
price the defendants are willing to pay the claim for unpaid wages of
Ricardo Fernandez et al. Upon these allegations he prays that the issuance
of the writ of attachment prayed for by the plaintiff be held in abeyance until
after civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos
Norte, shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2,
3,4, 5, 6, and 11 of the complaint but alleges that he has no sufficient
knowledge to form a belief as to the truth of the claim of Ricardo Fernandez
et al. set forth in paragraph 7 of the complaint, for there has never been a
liquidation between the defendants and the Bureau of Public Works. He
further denies specifically paragraphs 8, 9 and 10 of the complaint. By way
of special defenses he alleges that there has been no liquidation by and
between the defendants and the Bureau of Public Works on Project PR-
72(3) to determine whether the total amount spent for the construction of
the bridge exceeded the contract price; that after the determination of the
respective liabilities of the parties in civil case No. 198 of the Justice of the
Peace Court of Laoag, Ilocos Norte, if any there be against the defendants
herein, and such liability could not be paid out of the balance of the contract
price of Project PR-72(3), the defendants are ready and willing to assume
their respective responsibilities. Upon these allegations he prays that the
complaint of the plaintiff be dismissed; that the issuance of the writ of
attachment prayed for be denied; and that he be granted such other relief
as may be just and equitable, with costs against the plaintiff.
At the hearing, the plaintiff presented its evidence. After the plaintiff had
rested its case, defendant Gonzalo P. Amboy moved for the dismissal of
the complaint, on the ground that the remedy provided for in the last
paragraph of article 2071 of the new Civil Code may be availed of by the
guarantor only and not by a surety.
Acting upon this motion to dismiss the trial court made the following
findings:
. . . That on July 8, 1950, the defendant Batu Construction &
Company, as principal, and the plaintiff Manila Surety & Fidelity Co.
Inc., as surety, executed a surety bond for the sum of P8,812.00 to
insure faithful performance of the former's obligation as contractor
for the construction of the Bacarra Bridge, Project PR-72 (No. 3)
Ilocos Norte Province. On the same date, July 8,1950, the Batu
Construction & Company and the defendants Carlos N. Baquiran
and Gonzales P. Amboy executed an indemnity agreement to
protect the Manila Surety & Fidelity Co. Inc.., against damage, loss
or expenses which it may sustain as a consequence of the surety
bond executed by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from the
Director of Public Works (Exhibit B) annulling its contract with the
Government for the construction of the Bacarra Bridge because of
its failure to make satisfactory progress in the execution of the
works, with the warning that ,any amount spent by the Government
in the continuation of the work, in excess of the contract price, will
be charged against the surety bond furnished by the plaintiff. It also
appears that a complaint by the laborers in said project of the Batu
Construction & Company was filed against it and the Manila Surety
and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10.
and, being of the opinion that the provisions of article 2071 of the new Civil
Code may be availed of by a guarantor only and not by a surety the
complaint, with costs against the plaintiff.
From this order the plaintiff Company has appealed to this Court, because it
proposes to raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and 20
July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for
leave to prove damages they allegedly suffered as a result of the
attachment levied upon their properties. On 15 August 1953 the Court
heard the evidence on damages. On 23 September 1953 the Court found
and held that the defendant Gonzalo P. Amboy is entitled to recover from
the plaintiff damages equivalent to 6 per cent interest per annum on the
sum of P35 in possession of the Provincial Treasurer of Ilocos Norte, which
was garnished pursuant to the writ of attachment, from the date of
garnishment until its charge; but the claims for damages of Andres Tunac
and Gonzalo P. Amboy allegedly suffered by them in their business, moral
damages and attorney's fees were without basis in law and in fact. Hence
their recovery was denied. The Court dissolved the writ of attachment.
From this last order only the plaintiff Company has appealed.
The main question to determine is whether the last paragraph of article
2071 of the new Civil Code taken from article 1843 of the old Civil Code
may be availed of by a surety.
A guarantor is the insurer of the solvency of the debtor; a surety is an
insurer of the debt. A guarantor binds himself to pay if the principal is
unable to pay; a surety undertakes to pay if the principal does not pay. 1 The
reason which could be invoked for the non-availability to a surety of the
provisions of the last paragraph of article 2071 of the new Civil Code would
be the fact that guaranty like commodatum2 is gratuitous. But guaranty
could also be for a price or consideration as provided for in article 2048. So,
even if there should be a consideration or price paid to a guarantor for him
to insure the performance of an obligation by the principal debtor, the
provisions of article 2071 would still be available to the guarantor. In
suretyship the surety becomes liable to the creditor without the benefit of
the principal debtor's exclusion of his properties, for he (the surety) maybe
sued independently. So, he is an insurer of the debt and as such he has
assumed or undertaken a responsibility or obligation greater or more
onerous than that of guarantor. Such being the case, the provisions of
article 2071, under guaranty, are applicable and available to a surety. The
reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1,
Book IV of the new Civil Code, on solidary or several obligations, does not
mean that suretyship which is a solidary obligation is withdrawn from the
applicable provisions governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article
2071 of the new Civil Code, because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of lack of
progress in the construction of the bridge is no proof of such insolvency. It
does not fall under paragraph 3, because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a specified
period which already has expired, because the surety bond does not fix any
period of time and the indemnity agreement stipulates one year extendible
or renewable until the bond be completely cancelled by the person or entity
in whose behalf the bond was executed or by a Court of competent
jurisdiction. It does not come under paragraph 4, because the debt has not
become demandable by reason of the expiration of the period for payment.
It does not come under paragraph 5 because of the lapse of 10 years,
when the principal obligation has no period for its maturity, etc., for 10 years
have not yet elapsed. It does not fall under paragraph 6, because there is
no proof that "there are reasonable grounds to fear that the principal debtor
intends to abscond." It does not come under paragraph 7, because the
defendants, as principal debtors, are not in imminent danger of becoming
insolvent, there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of article 2071
of the new Civil Code, because the action brought by Ricardo Fernandez
and 105 persons in the Justice of the Peace Court of Laoag, province of
Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is
in connection with the construction of the Bacarra Bridge, Project PR-72
(3), undertaken by the Batu Construction & Company, and one of the
defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co.,
Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the
guarantor, even before having paid, may proceed against the principal
debtor "to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor or from the danger of
insolvency of the debtor, when he (the guarantor) is sued for payment. It
does not provide that the guarantor be sued by the creditor for the payment
of the debt. It simply provides that the guarantor of surety be sued for the
payment of an amount for which the surety bond was put up to secure the
fulfillment of the obligation undertaken by the principal debtor. So, the suit
filed by Ricardo Fernandez and 105 persons in the Justice of the Peace
Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages
earned in connection with the work done by them in the construction of the
Bacarra Bridge, Project PR-72(3), is a suit for the payment of an amount for
which the surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal debtors (the
defendants) in favor of the creditor, the Government of the Philippines.
The order appealed from dismissing the complaint is reversed and set
aside, and the case remanded to the court below for determination of the
amount of security that would protect the plaintiff Company from any
proceedings by the creditor or from the danger of insolvency of the
defendants, the principal debtors, and direction to the defendants to put up
such amount of security as may be established by competent evidence,
without pronouncement as to costs.
The writ of attachment having been issued improvidently because, although
there is an allegation in the verified complaint that the defendants were in
imminent danger of insolvency and that they were removing or disposing, or
about to remove or dispose, of their properties, with intent to defraud their
creditors, particularly the plaintiff Company, still such allegation was not
proved, the fact that a complaint had been filed against the defendants and
the plaintiff Company in the Justice of the Peace Court of Laoag, Ilocos
Norte, for the collection of an amount for unpaid wages of the plaintiffs
therein who claimed to have worked in the construction of the bridge, being
insufficient to prove it, and because the relief prayed for in the complaint for
security that shall protect it from any proceedings by the creditor and from
the danger of the defendants becoming insolvent is inconsistent with the
state of insolvency of the defendants or their being in imminent danger of
insolvency, the order awarding 6 per cent on the sum of P35 in possession
of the Provincial Treasurer owned by the defendant Gonzalo P. Amboy
garnished by virtue of the writ of attachment, from the date of the
garnishment until its discharge, and denying recovery of the amounts of
damages claimed to have been suffered by the defendants, is affirmed, the
defendants not having appealed therefrom.
GENERAL INDEMNITY CO., INC. v. ESTANISLAO ALVEREZ
G.R. No. L-9434
March 29, 1957
Article 2071 (Guaranty and Surety)
FACTS:
Estanislao Alvarez obtained a P2,000 loan from the Philippine National
Bank (PNB), which was guaranteed by an indemnity bond from General
Indemnity Co., Inc. As a counter-guaranty, Alvarez executed, in General
Indemnity’s favor, a mortgage on his share of land.
However, Alvarez failed to pay his loan to PNB. As a result, PNB deducted
the amount from General Indemnity’s deposit/indemnity bond. Thus,
General Indemnity Co., Inc. filed a complaint against Estanislao Alvarez in
CFI Manila for the recovery of P2,000 with interest.
As a defense, Alvarez admitted the fact of the loan and the execution of the
mortgage. However, he averred that he only secured the loan in
accommodation of one Hao Lam and that General Indemnity agreed not to
take any steps against Alvarez and the mortgage until General Indemnity
has failed to obtain payment from said Hao Lam.
Later on, General Indemnity filed a motion for summary judgment and
presented its comptroller Pedro Mendiola. He stated that he has personal
knowledge that General Indemnity had made several demands for payment
from Alvarez and that notwithstanding said demands, he failed and still
refuses to pay.
CFI Manila ruled in favor of General Indemnity and ordered Alvarez to pay.
Alvarez appealed and raised the controversy as to whether or not General
Indemntiy had actually paid his obligation to PNB.
General Indemnity countered and said that it is immaterial to its cause of
action against Alvarez whether or not it had actually paid PNB, citing Art.
2071 of the Civil Code to the effect that a guarantor may proceed against
the principal debtor, even before having paid, when the debt has become
demandable.
ISSUE: Whether or not General Indemnity had a right to institute an action
and claim reimbursement against Alvarez.

HELD: NO.

The last paragraph of Article 2071 of the Civil Code, however, provides that
in such instance, the only action the guarantor can file against the debtor is
“to obtain release from the guaranty, or to demand a security that shall
protect him from any proceeding by the creditor and from the danger of
insolvency of the debtor.” An action by the guarantor against the
principal debtor for payment, before the former has paid the creditor,
is premature.

Moreover, the affidavit of comptroller Mendiola simply relates to the amount

of the loan and Alvarez’s failure to pay in spite of repeated demands, but
does not touch on the alleged payment made by General Indemnity to PNB.

RADIO CORPORATION OF THE PHILIPPINES vs. JESUS R. ROA, ET
AL
G.R. No. 42829
September 30, 1935
Guaranty Art 2079
Article 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on the
part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension of time referred to herein. (1851a)
FACTS:
Jesus R. Roa became indebted to the Philippine Theatrical Enterprises,
Inc., in the sum of P28,400 payable in seventy-one equal monthly
installments at the rate of P400 a month commencing thirty days after
December 11, 1931, with five days grace monthly until complete payment
of said sum. On that same date the Philippine Theatrical Enterprises, Inc.,
assigned all its right and interest in that contract to the Radio Corporation of
the Philippines.
The contract provide for an acceleration clause saying that upon
default in any of the installment, whole obligation will become due and
demandable, mortgage on property and Luzon Surety Bond will be
foreclosed.
On March 15, 1932, Radio Corporation (thru agent) wrote to the Jesus R.
Roa:
" xxx We have no objection to the extension requested by you to pay
the February installment by the first week of April. We would, however,
urge you to make every efforts to bring the account up-to date as we are
given very little discretion by the RCP in giving extension of payment."
ISSUE: Whether or not the extension granted in the letter of Radio Corp
without the consent of the guarantors, extinguishes the latter's liability not
only as to the installments due at that time, as held by the trial court, but
also as to the whole amount of their obligation.
HELD: YES.
The stipulation of the acceleration clause in the contract is to the effect that
upon failure to pay any installment when due, the other installments ipso
facto become due and payable. Meaning, the whole unpaid balance
automatically becomes due and payable upon failure to pay one
installment, the act of Radio Corp in extending the payment of the
installment corresponding to February to April, without the consent of the
guarantors, constituted in fact an extension of the payment of the whole
amount of the indebtedness. Hence guaranty is extinguished.
It is a familiar rule that if a creditor, by positive contract with the
principal debtor, and without the consent of the surety, extends the
time of payment, he thereby discharges the surety. The time of
payment may be quite as important a consideration to the surety as the
amount he has promised conditionally to pay. Again, a surety has the right,
on payment of the debt, to be subrogated to all the rights of the creditor,
and to proceed at once to collect it from the principal; but if the creditor has
tied own hands from proceeding promptly, by extending the time of
collection, the hands of the surety will equally be bound; and before they
are loosed, by the expiration of the extended credit, the principal debtor
may have become insolvent and the right of subrogation rendered
worthless.
It should be observed, however, that it is really unimportant whether the
extension given has actually proved prejudicial to the surety or not.
The rule stated is quite independent of the event, and the fact that the
principal is insolvent or that the extension granted promised to be
beneficial to the surety would give no right to the creditor to change
the terms of the contract without the knowledge or consent of the
surety. Nor does it matter for how short a period the time of payment may
be extended. The principle is the same whether the time is long or short.
The creditor must be in such a situation that when the surety comes to be
substituted in his place by paying the debt, he may have an immediate right
of action against the principal. The suspension of the right to sue for a
month, or even a day, is as effectual to release the surety as a year or
two years.
VILLA v. GARCIA BOSQUE
G.R. No. L-24543
FACTS:
Rosa Villa, widow of Enrique Bota, instituted an action in the Court
of First Instance of Manila for the recovery of the sum of P20,509.71 from
defendants Guillermo Garcia Bosque and Jose Romar Ruiz as principals
and R.G. France and F.H. Goulette as solidary sureties for the principals.
The liability arises from the purchase of a printing establishment and
bookstore (La Flor de Cataluna, Viuda de E. Bota) located at 89 Escolta,
Manila, which were sold to Bosque and Ruiz by the plaintiff through her
attorney-in-fact, Manuel Pirretas. Through the transactions, the plaintiff
remained in Barcelona, Spain where she is already a resident.
The stipulated sum for the sale was P55,000, payable through
instalment with interest at 7 percent per annum. France and Goulette
obligated themselves to be solidary sureties with the principals Bosque and
Ruiz to answer for any balance, including interest, which should remain due
and unpaid after dates stipulated for payment of said instalments, expressly
renouncing the benefit of exhaustion of the property of the principals. The
first instalment was paid conformably.
In the year 1920, prior to the payment of the second instalment,
Manuel Pirretas left the Philippines for a prolonged visit to Spain. As such,
he executed a document purporting to be a partial substitution of agency
where he transferred the authority collect sums of money to Figueras
Hermanos. About this time, the owners appeared to have converted it into a
limited partnership which in effect released the sureties from their
obligation.
All of the defendants even maintained that even supposing that
Figueras authority to novate the original contract and discharge the sureties
therefrom, the plaintiff nevertheless ratified the agreement by accepting
partial payment of the amount due with full knowledge of its terms.
ISSUE:
WON the obligations of France and Goulette as sureties were
extinguished
HELD: NO
Both sureties content that they were discharged by the agreement
between the principal debtor and Figueras Hermanos, as attorney in fact for
the plaintiff, whereby the period for the payment of the second instalment
was extended, without the assent of the sureties, and new promissory
notes for unpaid balance were executed in the manner already mentioned
in this opinion.
The execution of these new promissory notes undoubtedly
constituted an extension of time as to the obligation included therein, such
as would release a surety, even though a solidary type, under Article 1851
of the Civil Code.
Nevertheless it is to be borne in mind that said extension and
novation related only to the second installment of the original obligation and
interest accrued up to that time. Furthermore, the total amount of these
notes was afterwards paid in full, and they are not now the subject of
controversy.
It results that the extension thus effected could not discharge the
sureties from their liability as to other installments upon which alone they
have been sued in this action. The rule that an extension of time granted to
the debtor by the creditor, without the consent of the sureties, extinguishes
the latter's liability is common both to Spanish jurisprudence and the
common law; and it is well settled in English and American jurisprudence
that where a surety is liable for different payments, such as installments of
rent, or upon a series of promissory notes, an extension of time as to one or
more will not affect the liability of the surety for the others.
Hospicio de San Jose vs. Fidelity
Contractor Romulo Machetti entered a contract with Hospicio de San Jose
for the construction of a building. Machetti promised to follow agreed upon
specifications for such construction and fulfillment of which, guaranteed by
Fidelity and Surety Co as surety. 150-day period given to Machetti to finish
the same, however, while construction was ongoing, he asked for a 25-day
extension due to delay in transporting gravel and sand since the road
leading to the site is also under repair. Hospicio agreed. In the end, the
building was not constructed according to the specs agreed upon which
prompted Hospicio to recover from Machetti damages and incurred
expenses to repair the latter’s faulty work. Machetti, however was declared
insolvent. In a recovery suit, CFI Manila ordered Fidelity to pay Hospicio as
surety. Fidelity contests that since he was not informed of the 25-day
extension, he should be relieved of his obligation.
Issue: Whether or not the extension released Fidelity as surety? NO.
Fidelity only guaranteed the faithful performance of Machetti in accordance
with the specs of the contact without any mention of a period. The same did
not state the term within which the work must be completed hence such
agreement upon the 150 day period is not covered by the bond.
Since the obligation of Fidelity did not extend to answer for the completion
of work within the 150-day period, the 25-day extension granted then, even
without the consent of Fideity, could not work to extinguish the liability.
Decision of lower court affirmed—Fidelity to pay HSJ for damages.
SECURITY BANK AND TRUST COMPANY, Inc. vs. Rodolfo Cuenca
FACTS:
Defendant-appellant Sta. Ines Melale (‘Sta. Ines’/SIMC) is a corporation
engaged in logging operations. It was a holder of a Timber License
Agreement issued by the DENR.
On 10 November 1980, Security Bank and Trust Co. granted SIMC a credit
line in the amount of (P8,000,000.00) effective till November 30, 1981 to
assist the latter in meeting the additional capitalization requirements of its
logging operations.
To secure payment, it executed a chattel mortgage over some of its
machineries and equipment. As an additional security, its President and
Chairman of the Board Rodolfo Cuenca, executed an Indemnity agreement
in favor of Security Bank whereby he bound himself jointly and severally
with SIMC.
Specific stipulations:
- The bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower.
- As additional security for the payment of the loan, Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17 December
1980 solidary binding himself:
- Rodolfo M. Cuenca hereby binds himself jointly and severally with
the client (SIMC) in favor of the bank for the payment, upon
demand and without the benefit of excussion of whatever amount
the client maybe indebted to the bank by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of
the aforesaid credit accommodation(s)
1985: Cuenca resigned as President and Chairman of the Board of
Directors of SIMC. Subsequently, the shareholdings of Cuenca in SIMC
were sold at a public auction to Adolfo Angala. Before and after this, SIMC
availed of its credit line.
SIMC encountered difficulty in making the amortization payments on its
loans and requested SBTC for a complete restructuring of its indebtedness.
SBTC accommodated SIMC’s request and signified its approval.
Wherein SBTC and SIMC, without notice to or the prior consent of Cuenca,
agreed to restructure the past due obligations of SIMC. To formalize their
agreement to restructure the loan obligations of SIMC. Security Bank and
Sta. Ines executed a Loan Agreement dated 31 October 1989
SIMC made payments up to (P1,757,000.00) then defaulted in the payment
of its restructured loan obligations to SBTC despite demands made upon
appellant SIMC and CUENCA, SBTC filed a complaint for collection of sum
of money resulting after trial on the merits in a decision by the court a quo,
from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement novated
the 1980 credit accommodation which extinguished the Indemnity
Agreement for which Cuenca was liable solidarily. No notice/consent to
restructure. Since with expiration date, liable only up to that date and up to
that amount (8M). Amounted to extension of time with no notice to surety
therefore released from liability.
ISSUES:
(a) WoN the 1989 Loan Agreement novated the original credit
accommodation and Cuenca’s liability under the Indemnity Agreement YES
(b) WoN Cuenca waived his right to be notified of and to give consent to
any substitution, renewal, extension, increase, amendment, conversion or
revival of the said credit accommodation. NO
(c) WoN The Loan was a Continuing Surety. PARTLY YES
RULING + RATIO:
(A) An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. The 1989 Loan Agreement
expressly stipulated that its purpose was to “liquidate,” not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or
consent to the 1989 Loan Agreeement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be
deemed extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that “[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty.
An essential alteration in the terms of a Loan Agreement without the
consent of the surety extinguishes the latter’s obligation. The opinion that
only the borrower, not the surety, is entitled to be notified of any
modification in the original loan accommodation is untenable -such theory is
contrary to the to the principle that a surety cannot assume an obligation
more onerous than that of the principal. That the Indemnity Agreement is a
continuing surety does not authorize the lender to extend the scope of the
principal obligation inordinately.
(B) While respondent held himself liable for the credit accommodation or
any modification thereof, such clause should be understood in the context
of the P8 million limit and the November 30, 1981 term. It did not give the
bank or Sta. Ines any license to modify the nature and scope of the original
credit accommodation, without informing or getting the consent of
respondent who was solidarily liable.
A contract of surety cannot extend to more than what is stipulated. It is
strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety
It should also be observed that the Credit Approval Memorandum clearly
shows that the bank did not have absolute authority to unilaterally change
the terms of the loan accommodation. Indeed, it may do so only upon
notice to the borrower, pursuant to this condition: “The Bank reserves the
right to amend any of the aforementioned terms and conditions upon written
notice to the Borrower.
(C) The Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and
(2) that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on
or before the aforementioned expiry date and not exceeding the total of P8
million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation, that were obtained in
1986. Certainly, he could not have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
The CFI of Manila ordeed ATACO and MSFC to pay PNB; but the CA
reversed the decision because PNB, as the agent, was negligent in failing
to collect sums due ATACO from BOPW.
ISSUE:
1. W/N PNB exonerated MSFC as surety by allowing sums due to be
exhausted by other creditors

PNB v. Manila Surety HELD:

G.R. No. L-20567
July 30, 1965 Yes, by allowing the assigned funds to be exhausted by other
Art. 2080: Release when guarantor not subrogated; PNB’s negligence creditors without notifying MSFC, PNB deprived ATACO any recourse
as agent exonerated surety against the security:

ART. 2080. — The guarantors, even though they be solidary, are

FACTS:
The Philippine National Bank (PNB) had opened a letter of credit and
advanced $120,000 in favor of Edington Oil Refinery for 8,000 tons of hot
asphalt.
Of this amount, 2,000 tons worth P279,000 were released and delivered to
Adams & Taguba Corporation (ATACO) under a trust receipt guaranteed up
to P75,000 by Manila Surety & Fidelity Co (MSFC).
To pay for the asphalt, ATACO constitued PNB as its assignee and
attorney-in-fact to receive and collect from the Burueau of Public
Works (BOPW) the amounts aforesaid out of funds payable to ATACO as
per their purchase order. PNB’s power of attorney was to remain
irrevocable until ATACO’s total indebtedness to PNB is fully liquidated.
released from their obligation whenever by come act of the creditor
they cannot be subrogated to the rights, mortgages and
preferences of the latter.
PNB’s negligence in collecting the sums due to ATACO allowed other
creditors to collect the latter’s assigned funds.
PNB acted contrary to its duty as holder of an exclusive and irrevocable
power of attorney to collect funds due ATACO. An agent is required to act
with care of a good father of the family and becomes liable for damages
which the principal may suffer through non-performance.

ATACO delivered to BOPW asphalt worth P431,466.52. Of this amount,

PNB regularly collected P106,382.01 from April 1948 to November 1948.
PNB, for unexplained reasons, ceased collecting for almost five years.
Investigators then found that P311,230.41 payable to ATACO from
BPW was collected and exhausted by other creditors.

PNB filed a complaint against ATACO and MSFC to recover the balance
with interests and costs after both refused to demands for payment.

PNB contends that (1) the power of attorney obtained from ATACO was
merely an additional security in its favor; (2) that it was the duty of the
MSFC not that of the PNB to see to it that the obligor fulfills his obligations
and; (3) that the PNB owed MSFC no duty to collect any sum from the
principal debtor.