credit guaranty

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ASSET BUILDERS CORPORATION, Petitioner,

- versus -

STRONGHOLD INSURANCE COMPANY,INCORPORATED,

Respondent.

G.R. No. 187116

Present:

CARPIO, J., Chairperson, NACHURA,LEONARDO-DE CASTRO,* PERALTA, and

MENDOZA, JJ.

Promulgated:October 18, 2010

X --------------------------------------------------------------------------------------X

D E C I S I O N

MENDOZA, J .:

This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the February 27, 2009

Decision[1] of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering defendant Lucky Star to pay

petitioner Asset Builders Corporation the sum of P575,000.00 with damages, but absolving respondent Stronghold Insurance

Company, Incorporated (Stronghold) of any liability on its Surety Bond and Performance Bond.

THE FACTS

On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling & Construction

Corporation (Lucky Star) as part of the completion of its project to construct the ACG Commercial Complex on ―NHA

Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.‖[2] As can be gleaned from the ―Purchase Order,‖[3] Lucky Star was

to supply labor, materials, tools, and equipment including technical supervision to drill one (1) exploratory production well on the

project site. The total contract price for the said project was P1,150,000.00. The salient terms and conditions of said agreement are

as follows:

i. Lump sum price--------PHP1,150,000.00;

ii. 50% downpayment---upon submission of surety bond in an equivalent amount and performance bondequivalent to 30 % of contract amount;

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iii. Completion date-----60 calendar days;

iv. Penalty----2/10 of 1% of total contract amount for every day of delay;

v. Terms---50% down payment to be released after submission of bonds;

vi. Retention—Subject to 10% retention to be released after the project is accepted by the owner;

To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued two (2)

bonds in favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the sum

of P575,000.00[4] or the required downpayment for the drilling work. The full text of the surety bond is herein quoted:

KNOW ALL MEN BY THESE PRESENTS:

That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168 ACACIA St., Octagon IndustrialEstate Subd., Pasig City as principal, and STRONGHOLD INSURANCE COMPANY, INC., a corporation dulyorganized and existing under and by virtue of laws of the Philippines, as surety, are held and firmly bound unto ASSET BUILDERS CORPORATION to the sum of Pesos FIVE HUNDRED SEVENTY FIVE THOUSANDONLY (P575,000.00) Philippine Currency, for the payment of which, well and truly to be made, we bindourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these

presents.

THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:

To fully and faithfully guarantee the repayment to be done through deductions fromperiodic billings of the advance payment made or to be made by the Obligee to the Principal inconnection with the supply of labor, materials, tools and equipment including technical supervisionto drill one (1) exploratory production well located at NIA Ave. cor. Olalia St., Brgy. delaPaz, Antipolo City. This bond is callable on demand.

The liability of the surety company upon determination under this bond shall in no caseexceed the penal sum of PESOS: FIVE HUNDRED SEVENTY FIVE THOUSAND (P575,000.00)only, Philippine Currency.

WHEREAS, the Obligee requires said principal to give a good and sufficient bond in the above statedsum to secure the full and faithful performance on his part of said undertakings.

NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully observe andperform all and singular the aforesaid [co]-venants, conditions and agreements to the true intent and meaningthereof, then this obligation shall be null and void, otherwise to remain in full force and effect.

Liability of surety on this bond will expire on May 09, 2007 and said bond will be cancelled five DAYSafter its expiration, unless surety is notified of and existing obligations hereunder.

x x x[5]

With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May 09, 2006, it covers the sum

of P345,000.00.[6] Thus:

KNOW ALL MEN BY THESE PRESENTS:

That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Ind‘l., contractor, ofEstate, Sub., Pasig City Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. acorporation duly organized and existing under and by virtue of the laws of the Philippines, with head office atMakati, as Surety, are held and firmly bound unto the ASSET BUILDERS CORPORATION and to anyindividual, firm, partnership, corporation or association supplying the principal with labor or materials in thepenal sum of THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00), Philippine Currency, for thepayment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators,successors and assigns, jointly and severally, firmly by these presents.















The CONDITIONS OF THIS OBLIGATION are as follows;

WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contractwith the ASSET BUILDERS CORPORATION represented by _________________, to fully and faithfully.

Comply with the supply of labor, materials, tools and equipment including technical supervisionto drill one (1) exploratory production well located at NIA Ave. cor.Olalia St., Brgy. DelaPaz, Antipolo City. This bond is callable on demand.

WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum ofPESOS THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00) Philippine Currency, inclusive ofinterest, attorney‘s fee, and other damages, and shall not be liable for any advances of the obligee to theprincipal.

WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction ofobligations for materials used and labor employed upon the work;

NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings,covenants, terms, conditions, and agreements of said contract during the original term of said contract and anyextension thereof that may be granted by the obligee, with notice to the surety and during the life of anyguaranty required under the contract, and shall also perform well and truly and fulfill all the undertakings,covenants, terms, conditions, and agreements of any and all duly authorized modifications of said contract thatmay hereinafter be made, without notice to the surety except when such modifications increase the contractprice; and such principal contractor or his or its sub-contractors shall promptly make payment to any individual,

firm, partnership, corporation or association supplying the principal of its sub-contractors with labor andmaterials in the prosecution of the work provided for in the said contract, then, this obligation shall be null andvoid; otherwise it shall remain in full force and effect. Any extension of the period of time which may be grantedby the obligee to the contractor shall be considered as given, and any modifications of said contract shall beconsidered as authorized, with the express consent of the Surety.

The right of any individual, firm, partnership, corporation or association supplying the contractor withlabor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond,pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed. x x x

On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment, representing 50% of

the contract price.[7] Lucky Star, thereafter, commenced the drilling work. By July 18, 2006, just a few days before the agreed

completion date of 60 calendar days, Lucky Star managed to accomplish only ten (10) % of the drilling work. On the same date,

petitioner sent a demand letter to Lucky Star for the immediate completion of the drilling wor k [8] with a threat to cancel the

agreement and forfeit the bonds should it still fail to complete said project within the agreed period.

On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky Star .[9] Pertinent

portions of said notice read:

Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby made onyou of the rescission of the contract and accordingly demand is hereby made on you, within seven (7) daysfrom receipt hereof:

(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;

(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of delay, or a

total of PHP138,000.00;

(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;

(4) to pay PHP150,000.00 in other consequential damages;

(5) to pay exemplary damages in the amount of PHP150,000.00;

(6) to vacate the project site, together with all your men and equipment.















Should you refuse to comply with our demand within the above period, we shall be constrained to sueyou in court, in which event we shall demand payment of attorney‘s fees in the amount of at leastPHP100,000.0.

On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation under its bonds.[10]

Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint for

Rescission with Damages against both before the RTC[11] on November 21, 2006.

In its ―Answer (with Complusory Counterclaim and Cross-Claim),‖ dated January 24, 2007, Stronghold denied any liability

arguing that ABC had not shown any proof that it made an advance payment of 50% of the contract price of the project. It further

averred that ABC‘s rescission of its contract with Lucky Star virtually revoked the cl aims against the two bonds and absolved them

from further liability.[12]

Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and, thus, was declared in

default by the RTC in its Order dated August 24, 2007.[13]

On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold

from liability.[14] Relevant parts of the decision, including the decretal portion, read:

On the liability of defendant Stronghold Insurance, the Court rules on the negative.

The surety bond and performance bond executed by defendants Lucky Star and StrongholdInsurance are in the nature of accessory contracts which depend for its existence upon another contract. Thus,when the agreement (Exhibit ‗A‘) between the plaintiff and defendant Asset Builders was rescinded, the suretyand performance bond were automatically cancelled.

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff andagainst defendant Lucky Star Drilling & Construction, ordering the latter as follows:

1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal interestfrom the filing of the complaint;

2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;

3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;

4. to pay plaintiff in the amount of PHP 50,000.00 as attorney‘s fees;

5. to pay the costs of the suit.

Defendant Stronghold Insurance Company, Inc.‘s compulsory counterclaim and cross-claim aredismissed.[15]

Hence, this petition.

Petitioner ABC prays for the reversal of the challenged decision based on the following

GROUNDS

A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY withmanifest bias and grave abuse of discretion, CONTRARY toapplicable laws and established


























jurisprudence in declaring the “automatic CANCELLATION ” of respondent Stronghold’s Surety Bondand Performance Bond, because:

(a) Despite rescission, there exists a continuing VALID PRINCIPAL

OBLIGATION guaranteed by Respondent’s Bonds, arising out of theContractor’s DEFAULT and Non-performance .

(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondent’sbonds had already ACCRUED , automatically attached, and had become already DIRECT,

PRIMARY and ABSOLUTE, even before Petitioner’s legitimate exercise of its opt ion underArt. 1191 of the New Civil Code.

(c) Rescission does NOT AFFECT the liabilities of the Respondent Stronghold asits LIABILITIES on its subject bonds have alreadybecome INTERWOVEN and INSEPARABLE with the liabilities of its Principal, the ContractorLucky Star.

B. With the Lower Court’s completely erroneous ruling on the liabilities of Respondent’sbonds, the Lower Court equal ly ERRED with manifest bias and grave abuse, in its FAILURE to complywith the “duty of court” to make a finding of “unreasonable denial or withholding” by RespondentStronghold or Petitioner’s claims and impose upon the Respondent the penalties provided for underSection 241 and 244 of the Insurance Code.[16]

Essentially, the primary issue is whether or not respondent insurance company, as surety, can be held liable under its

bonds.

The Court rules in the affirmative.

Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its favor surety and

performance bonds. The contents of the said contracts clearly establish that the parties entered into a surety agreement as defined

under Article 2047 of the New Civil Code. Thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill theobligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,

Title I of this Book shall be observed. In such case the contract is called a suretyship . [Emphasis supplied]

As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking

makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a

surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although

it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom . [17] Let it be stressed that

notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular

party to the undertaking.[18]

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,[19] reiterating the ruling in Garcia v. Court of

Appeals,[20]

expounds on the nature of the surety‘s liability: X x x. The surety‘s obligation is not an original and direct one for the performance of his own act, but

merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contractof a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promiseeof the principal is said to be direct, primary and absolute; in other words, he is directly and equallybound with the principal.

Suretyship, in essence, contains two types of relationship – the principal relationship between the obligee (petitioner) and

the obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky Star) and the surety (respondent). In























this arrangement, the obligee accepts the surety‘s solidary undertaking to pay if the ob ligor does not pay. Such acceptance,

however, does not change in any material way the obligee‘s relationship with the principal obligor. Neither does it make the surety

an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in

the principal contract. The surety‘s role arises only upon the obligor‘s default, at which time, it can be directly held liable by the

obligee for payment as a solidary obligor .[21]

In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite petitioner‘s

demand for completion, it was already in delay. Due to this default, Lucky Star‘s liability attached and, as a necessary

consequence, respondent‘s liability under the surety agreement arose.

Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the P575,000.00

downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky Star for the repayment of

the said amount to petitioner. The clause, ―this bond is callable on demand,‖ strongly speaks of respondent‘s primary and d irect

responsibility to the petitioner.

Accordingly, after liability has attached to the principal, the obligee or, in this case, the petit ioner, can exercise the right to

proceed against Lucky Star or respondent or both. Article 1216 of the New Civil Code states:The creditor may proceed against any one of the solidary debtors or some or all of them

simultaneously. The demand made against one of them shall not be an obstacle to those which maysubsequently be directed against the others, so long as the debt has not been fully collected.

Contrary to the trial court‘s ruling, respondent insurance company was not automatically released from any liability when

petitioner resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the

liability of the surety arising from the surety contracts comes to life upon the solidary obligor‘s default. It should be emphasized that

petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the

project. Without a doubt, Lucky Star‘s unsatisfactory progress in the drilling work and its failure to complete it in due time amount to

non-performance of its obligation.

In fine, respondent should be answerable to petitioner on account of Lucky Star‘s non-performance of its obligation as

guaranteed by the performance bond.

Finally, Article 1217 [22] of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal co-

debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to reimbursement from Lucky

Star for the amount it may be required to pay petitioner arising from its bonds.

WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City, Branch 71,

is AFFIRMED with MODIFICATION. Respondent Stronghold Insurance is hereby declared jointly and severally liable with Lucky

Star for the payment of P575,000.00 and the payment of P345,000.00 on the basis of its performance bond.











GATEWAY ELECTRONICS G.R. No. 172041 CORPORATION and GERONIMO B. DELOS REYES, JR.,

Petitioners, Present:

QUISUMBING, J., Chairperson,- versus - AUSTRIA-MARTINEZ,*

CARPIO MORALES,

TINGA, andVELASCO, JR., JJ.

ASIANBANK CORPORATION, Promulgated:Respondent.

December 18, 2008x-----------------------------------------------------------------------------------------x

D E C I S I O N

VELASCO, JR., J .:

This petition for review under Rule 45 seeks to nullify and set aside the Decision[1] dated October 28, 2005 of the Court of

Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution[2]

of March 17, 2006 denying petitioners‘ motion for reconsideration.

The Facts

Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-

conductor business. During the period material, petitioner Geronimo B. delos Reyes, Jr. was its president and one Andrew delos

Reyes its executive vice-president.

On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in favor

of respondent Asianbank Corporation (Asianbank), pertinently providing:

I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x due andpunctual payment by the following individuals/companies/firms, hereinafter called the DEBTOR(S), of suchamounts whether due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLSCORPORATION [PURCHASED LINE]

*US$3,000,000.00*OMNIBUSCREDIT LINE

owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as evidenced by all notes,drafts, overdrafts and other [credit] obligations of every kind and nature contracted/incurred by said DEBTOR(S)in favor of said CREDITOR.

In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness hereinsecured at maturity, I/WE jointly and severally agree and engage to the CREDITOR, its successors andassigns, the prompt payment, x x x of such notes, drafts, overdrafts and other credit obligations on which theDEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together with allinterests, penalty and other bank charges as may accrue thereon x x x.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to beperformed under any contracts evidencing indebtedness/obligations and any supplements, amendments,changes or modifications made thereto, including but not limited to, the due and punctual payment by the saidDEBTOR(S).

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After due hearing, the RTC rendered judgment dated October 7, 2003[5] in favor of Gateway, the dispositive portion of

which states:

WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants GatewayElectronics Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and severally liable to pay

the plaintiff the following:

a) The sum of $2,235,452.17 United States Currency with interest to be added on at the prevailing marketrate over a given thirty day London Interbank Offered Rate (LIBOR) plus a spread of 5.5358 percent or tenand [45,455/100,000] percent per annum for the first 35 days and every thirty days beginning November23, 1999 until fully paid;

b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully paid;c) attorney‘s fees of twenty percent (20%) of the total amount due and unpaid; andd) costs of the suit.

SO ORDERED.

Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed as CA-G.R. CV No.

80734. Following the filing of its and Geronimo‘s joint appellants‘ brief, Gateway filed on November 10, 2004 a petition for voluntary

insolvency[6]

with the RTC in Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04, in which Asianbank was listed in the

attached Schedule of Obligations as one of the creditors. On March 16, 2005, Metrobank, as successor-in-interest of Asianbank, via

a Notice of Creditor‘s Claim, prayed that it be allowed to participate in the Gateways‘s creditors‘ meeting.

In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City RTC. In time, Gateway and Geronimo

interposed a motion for reconsideration. This was followed by a Supplemental Motion for Reconsideration dated January 20, 2006,

stating that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued an Order dated December 2, 2004, declaring Gateway

insolvent and directing all its creditors to appear before the court on a certain date for the purpose of choosing among themselves

the assignee of Gateway‘s estate which the court‘s sheriff has meanwhile placed in custodia legis.[7] Gateway and Geronimo thus

prayed that the assailed decision of the Makati City RTC be set aside, the insolvency court having acquired exclusive jurisdiction

over the properties of Gateway by virtue of Section 60 of Act No. 1956, without prejudice to Asianbank pursuing its claim in the

insolvency proceedings.

In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration and its supplement.

Hence, Gateway and Geronimo filed this petition anchored on the following grounds:

I

The [CA] erred in disregarding the established rule that an action commenced by a creditor against a judicially declared insolvent for the recovery of his claim should be dismissed and referred to the insolvencycourt. Where, therefore, as in this case, petitioner GEC [referring to Gateway] has been declared insolvent x xx, respondent Asianbank‘s claim for the payment of GEC‘s loans should be ventilated before the insolvencycourt x x x.

IIThe [CA] erred in admitting as evidence the Deed of Surety purportedly signed by petitioner GBR

[referring to Geronimo] despite the unexplained failure of respondent Asianbank to present the originals of theDeed of Surety during the trial.

III















The [CA] erred in holding that the repeated extensions granted by respondent Asianbank to GECwithout notice to and the express consent of petitioner GBR did not discharge petitioner GBR from his liabilitiesas surety GEC in that:

A. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes theguaranty.

B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as ―too comprehensive and allencompassing as to amount to absurdity.‖

C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from exercising his rightof subrogation under Article 2080 of the Civil Code. As such, petitioner GBR should be released from hisobligations as surety of GEC.

IVIt is a well-settled rule that when a bank deviates from normal banking practice in a transaction and

sustains injury as a result thereof, the bank is deemed to have assumed the risk and no right of paymentaccrues to the latter against any party to the transaction. By repeatedly extending the period for the payment ofGEC‘s obligations and granting GEC other loans after the suretyship agreement despite GEC‘s default and infailing to foreclose the chattel mortgage constituted as security for GEC‘s loan contrary to normal bankingpractices, Asianbank failed to exercise reasonable caution for its own protection and assumed the risk of non-payment through its own acts, and thus has no right to proceed against petitioner GBR as surety for thepayment of GEC‘s loans.

VIn Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the precise relief

to give, the court will ―balance the equities‖ or the respective interests of the parties and take into account the

relative hardship that one relief or another may occasion to them. Upon a balancing of interests of bothpetitioner GBR and respondent Asianbank, greater and irreparable harm and injury would be suffered bypetitioner GBR than respondent Asianbank if the assailed Decision and Resolution of the [CA] would be upheldx x x. This Honorable Court x x x should thus exercise its equity jurisdiction in the instant case to the end that itmay render complete justice to both parties and declare petitioner GBR as released and discharged from anyliability in respect of respondent Asianbank‘s claims.

[8]

The Ruling of the Court

Gateway May Be Discharged from Liability But Not Geronimo

Gateway, having been declared insolvent, argues that jurisdiction over all claims against all of its properties and assets

properly pertains to the insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956,[9] as amended, or

the Insolvency Law , any pending action against its properties and assets must be dismissed, the claimant relegated to the

insolvency proceedings for the claimant‘s relief.

The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched, the

issuance of an order declaring the petitioner insolvent after the insolvency court finds the corresponding petition for insolvency to be

meritorious shall stay all pending civil actions against the petitioner‘ s property. For reference, said Sec. 18, setting forth the effects

and contents of a voluntary insolvency order ,[10] pertinently provides:

Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x shall makean order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition isfiled to take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds,vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor and all his real andpersonal property, estate and effects x x x. Said order shall further forbid the payment to the creditor of anydebts due to him and the delivery to the debtor, or to any person for him, of any property belonging to him, andthe transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors tochoose an assignee of the estate. Said order shall [be published] x x x. Upon the granting of said order, allcivil proceedings pending against the said insolvent shall be stayed. When a receiver is appointed, or anassignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the















case may be all the property, assets, and belongings of the insolvent which have come into his possession x xx. (Emphasis supplied.)

Complementing Sec. 18 which appropriately comes into play ―upon the granting of [the] order‖ of insolvency is the

succeeding Sec. 60 which properly applies to the period ―after the commencement of proceedings in insolvency.‖ The two

provisions may be harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions against the property of

the petitioner are not ipso facto stayed, but the insolvent may apply with the court in which the actions are pending for a stay of the

actions against the insolvent‘s property. If the court grants such application, pending civil actions against the petitioner‘s property

shall be stayed; otherwise, they shall continue. Once an order of insolvency nevertheless issues, all civil proceedings against the

petitioner‘s property are, by statutor y command, automatically stayed. Sec. 60 is reproduced below:

SECTION 60. Creditors proving claims cannot sue; Stay of action.—No creditor, proving his debt orclaim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived allright of action and suit against him, and all proceedings already commenced, or any unsatisfied judgmentalready obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor‘sdischarge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be,

dismissed, and such unsatisfied judgments satisfied of record: Provided, x x x. A creditor proving his debt orclaim shall not be held to have waived his right of action or suit against the debtor when a discharge has havebeen refused or the proceedings have been determined to the without a discharge. No creditor whose debt isprovable under this Act shall be allowed, after the commencement of proceedings in insolvency, toprosecute to final judgment any action therefor against the debtor until the question of the debtor’sdischarge shall have been determined, and any such suit proceeding shall, upon the application of thedebtor or of any creditor, or the assignee, be stayed to await the determination of the court on thequestion of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave ofthe court in insolvency, may proceed to judgment for purpose of ascertaining the amount due, whichamount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayedaforesaid. (Emphasis supplied.)

Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order of December 2,

2004 had the effect of automatically staying the civil action for a sum of money filed by Asianbank against Gateway. In net effect, the

proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim against Gateway was concerned, was, or ought

to have been, suspended after December 2, 2004, Asianbank having been duly notified of and in fact was a participant in the

insolvency proceedings. The Court of course takes stock of the proviso in Sec. 60 of Act No. 1956 which in a way provided the CA

with a justifying tool to continue and to proceed to judgment in CA-G.R. CV No. 80734, but only for the purpose of ascertaining the

amount due from Gateway. At any event, on the postulate that jurisdiction over the properties of the insolvent-declared Gateway lies

with the insolvency court, execution of the CA insolvency judgment against Gateway can only be pursued before the insolvency

court. Asianbank, no less, tends to agree to this conclusion when it stated: ―[E]ven it if is assumed that the declaration of insolvency

of petitioner Gateway can be taken cognizance of, such fact does relieve petitioner Geronimo and/or Andrew delos Reyes from

performing their obligations based on the Deeds of Suretyship x x x.‖[11]

Geronimo, however, is a different story.







Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of Geronimo as a

surety, adding that claims against a surety may proceed independently from that against the principal debtor. Pursuing the point,

Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to evade liability.

Geronimo counters with the argument that his liability as a surety cannot be separated from Gateway‘s liability. As surety,

he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency, suggesting that if

Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved.

Geronimo‘s above contention is untenable.

Suretyship is covered by Article 2047 of the Civil Code, which states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the

principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,Title I of this Book shall be observed. In such case the contract is called a suretyship.

The Court‘s disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. Asuretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay theprincipal‘s debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding againstthe principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself toperform if the principal does not, without regard to his ability to do so. x x x In other words, a suretyundertakes directly for the payment and is so responsible at once if the principal debtor makes default xx x.

x x x x

A creditor’s right to proceed against the surety exists independently of his right to proceedagainst the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of thesolidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint andseveral, the creditor has the right to proceed even against the surety alone . Since, generally, it is notnecessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms ofthe contract, the obligation of the surety is the same as that of the principal, then soon as the principal is indefault, the surety is likewise in default, and may be sued immediately and before any proceedings are hadagainst the principal. Perforce, x x x a surety is primarily liable, and with the rule that his proper remedy is topay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statuteand in the absence of any agreement limiting the application of the security, require the creditor or obligee,before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularlywhere both principal and surety are equally bound.[12]

Clearly, Asianbank‘s right to collect payment for the full amount from Geronimo, as surety, exists independently of its right

against Gateway as principal debtor ;[13] it could thus proceed against one of them or file separate actions against them to recover

the principal debt covered by the deed on suretyship, subject to the rule prohibiting double recovery from the same cause. [14] This

legal postulate becomes all the more cogent in case of an insolvency situation where, as here, the insolvency court is bereft of

jurisdiction over the sureties of the principal debtor. As Asianbank aptly points out, a suit against the surety, insofar as the surety‘s

solidary liability is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The same















principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation proceeding before the

Securities and Exchange Commission (SEC). As we held in Commercial Banking Corporation v. CA, a surety of the distressed

corporation can be sued separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state

of suspension of payment.[15]

Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is contextually more onerous and

burdensome, precluded as he is from seeking recourse against the insolvent corporation. From this premise, Geronimo claims that

since Gateway cannot, owing to the order of insolvency, be made to pay its obligation, he, too, being just a surety, cannot also be

made to pay, obviously having in mind Art. 2054 of the Civil Code, as follows: A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the

amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of thedebtor.

The Court is not convinced. The above article enunciates the rule that the obligation of a guarantor may be less, but

cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be stretched to mean that a

guarantor or surety is freed from liability as such guarantor or surety in the event the principal debtor becomes insolvent or is unable

to pay the obligation. This interpretation would defeat the very essence of a suretyship contract which, by definition, refers to an

agreement whereunder one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as

the principal.[16] Geronimo‘s position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and

must be rejected.

The CA Did Not Err in Admitting the Deed of Suretyship as Evidence

Going to the next ground, Geronimo maintains that the CA erred in admitting the Deed of Suretyship purportedly signed by

him, given that Asianbank failed to present its original copy.

This contention is bereft of merit.

As may be noted, paragraph 6 of Asianbank‘s complaint alleged the following:

6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were executed bydefendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached as Annexes ―B‖ and ―C,‖respectively, are photocopies of the Deeds of Suretyship executed by defendants Geronimo B. De Los Reyes,Jr. and Andrew S. De Los Reyes. Subsequently, a chattel mortgage over defendant Gateway‘s equipment for$2 million, United States currency, was executed.[17]

Geronimo traversed in his answer the foregoing allegation in the following wi se: ―2.5. Paragraph 6 is denied, subject to the

special and affirmative defenses and allegations hereinafter set forth.‖















The ensuing special and affirmative defenses were raised in Gateway‘s answer:

15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not given herconsent thereto. Accordingly, the security created by the suretyship shall be construed only as a continuingoffer on the part of [Geronimo] and plaintiff and may only be perfected as a binding contract upon acceptance

by Mrs. Delos Reyes. x x x

17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the suretyshipagreement, there is no showing that he has consented to the repeated extensions made by plaintiff in favor ofGEC or to a waiver of notice of such extensions. It should be pointed out that Mr. Geronimo delos Reyesexecuted the suretyship agreement in his personal capacity and not in his capacity as Chairman of the Board ofGEC. His consent, insofar as the continuing application of the suretyship agreement to GEC‘s obligations inview of the repeated extension extended by plaintiff [is concerned], is therefore necessary. Obviously, plaintiffcannot now hold him liable as a surety to GEC‘s obligations.[18]

The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit or defense is predicated on a

written document, thus:

Sec. 7. Action or defense based on document.—Whenever an action or defense is based upon a

written instrument or document, the substance of such instrument or document shall be set forth in the pleading,and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemedto be a part of the pleading, or said copy may with like effect be set forth in the pleading.

Sec. 8. How to contest such documents.—When an action or defense is founded upon a writteninstrument, copied in or attached to the corresponding pleading as provided in the preceding section, thegenuineness and due execution of the instrument shall be deemed admitted unless the adverse party,under oath, specifically denies them, and sets forth what he claims to be the facts; but the requirement ofan oath does not apply when the adverse party does not appear to be a party to the instrument or whencompliance with an order for an inspection of the original instrument is refused. (Emphasis supplied.)

Given the above perspective, Asianbank, by attaching a photocopy of the Deed of Suretyship to its underlying complaint,

hewed to the requirements of the above twin provisions. Asianbank, thus, effectively alleged the due execution and genuineness of

the said deed. From that point, Geronimo, if he intended to contest the surety deed, should have specifically denied the due

execution and genuineness of the deed in the manner provided by Sec. 10, Rule 8 of the Rules of Court, thus:

Sec. 10. Specific denial.—A defendant must specify each material allegation of fact the truth ofwhich he does not admit and, whenever practicable, shall set forth the substance of the matters uponwhich he relies to support his denial. Where a defendant desires to deny only a part of an averment, he shallspecify so much of it as is true and material and shall deny only the remainder. Where a defendant is withoutknowledge or information sufficient to form a belief as to the truth of a material averment made in the complaint,he shall so state, and this shall have the effect of a denial. (Emphasis supplied.)

In the instant case, Geronimo should have categorically stated that he did not execute the Deed of Suretyship and that the

signature appearing on it was not his or was falsified. His Answer does not, however, contain any such statement. Necessarily then,

Geronimo had not specifically denied, and, thus, is deemed to have admitted, the genuineness and due execution of the deed in

question. In this regard, Sec. 11, Rule 8 of the Rules of Court states:

Sec. 11. Allegations not specifically denied deemed admitted.—Material averment in the complaint,other than those as to the amount of unliquidated damages, shall be deemed admitted when not specificallydenied. x x x







Owing to Geronimo‘s virtual admission of the genuineness and due execution of the deed of suretyship, Asianbank,

contrary to the view of Gateway and Geronimo, need not present the original of the deed during the hearings of the case. Sec. 4,

Rule 129 of the Rules says so:Sec. 4. Judicial admissions.—An admission, verbal or written, made by the party in the course

of the proceedings in the same case, does not require proof. The admission may be contradicted only by

showing that it was made through palpable mistake or that no such admission was made. (Emphasis supplied.)

Geronimo Is Liable for PN No. FCD-0599-2749

under His Deed of Suretyship

This brings us to the third ground which involves the issue of the coverage of the suretyship. Preliminarily, an overview on

the process of taking out loans should first be made. Generally, especially for large loans, banks first approve a line or facility out of

which a client may avail itself of loans in the form of promissory notes without need of further processing and/or approval every time

a draw down is made. In the instant case, Asianbank approved in favor of Gateway the PhP 10 million-Domestic Bills Purchased

Line and the USD 3 million-Omnibus Credit Line. Asianbank approved these credit lines which were covered by a chattel mortgage

as well as the deeds of suretyship, such that loans extended from these lines would already be secured and pre-approved. In other

words, these facilities are not financial obligations yet. Asianbank did not yet lend out any money to Gateway with the approval of

these lines. The loan transaction occurred or the principal obligation, as secured by a surety agreement, was born after the

execution of loan documents, such as PN No. FCD-0599-2749.

Geronimo now excepts from the ruling that the deed of suretyship he executed covered PN No. FCD-0599-2749 which

embodied several export packing loans issued by Asianbank to Gateway. He claims that the deed only secured the PhP 10 million-

Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo describes as absurd the notion that a deed of

suretyship would secure a loan obligation contracted three (3) years after the execution of the surety deed.

Geronimo‘s thesis that the deed in question cannot be accorded prospective application is erroneous. To be sure, the

provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.) v. Court of Appeals,[19] the

Court, citing cases, defined and upheld the validity of a continuing suretyship in this wise:

―x x x Of course, a surety is not bound under any particular principal obligation untilthat principal obligation is born. But there is no theoretical or doctrinal difficulty inherent insaying that the suretyship agreement itself is valid and binding even before the principalobligation intended to be secured thereby is born, any more than there would be in sayingthat obligations which are subject to a condition precedent are valid and binding before theoccurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplacein present day financial and commercial practice. A bank or financing companywhich anticipates entering into a series of credit transactions with a particularcompany, commonly requires the projected principal debtor to execute a continuingsurety agreement along with its sureties. By executing such an agreement, theprincipal places itself in a position to enter into the projected series of transactionswith its creditor; with such suretyship agreement, there would be no need to executea separate surety contract or bond for each financing or credit accommodationextended to the principal debtor.”

[20]











In Diño vs. Court of Appeals,[21] we again had occasion to discourse on continuingguaranty/suretyship thus:

―x x x A continuing guaranty is one which is not limited to a single transaction, butwhich contemplates a future course of dealing, covering a series of transactions, generallyfor an indefinite time or until revoked. It is prospective in its operation and is generallyintended to provide security with respect to future transactions within certain limits, andcontemplates a succession of liabilities, for which, as they accrue, the guarantor becomes

liable. Otherwise stated, a continuing guaranty is one which covers all transactions,including those arising in the future, which are within the description or contemplation of thecontract, of guaranty, until the expiration or termination thereof. A guaranty shall beconstrued as continuing when by the terms thereof it is evident that the object is to give astanding credit to the principal debtor to be used from time to time either indefinitely or untila certain period x x x.

In other jurisdictions, it has been held that the use of particular words andexpressions such as payment of ‗any debt,‘ ‗any indebtedness,‘ ‗any deficiency,‘ or ‗anysum,‘ or the guaranty of ‗any transaction‘ or money to be furnished the principal debtor ‗atany time,‘ or ‗on such time‘ that the principal debtor may require, have been construed toindicate a continuing guaranty.‖ (Emphasis supplied.)

By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan

transactions, they are, to borrow from Diño, as cited above, ―within the description or contemplation of the contract of

guaranty.‖ The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the express terms of the deed, he

warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line, as evidenced

by:

x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted ormay hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank chargesas may accrue thereon and all expenses which may be incurred by the latter in collecting any or all suchinstruments.[22]

Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the Domestic Bills

Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan.

Geronimo‘s application of Garcia v. Court of Appeals, a case covering two separate loans, denominated as SWAP

Loan and Export Loan, is quite misplaced. There, the Court ruled that the continuing suretyship only covered the SWAP Loan as it

was only this loan that was referred to in the continuing suretyship. The Court wrote in Garcia:

Particular attention must be paid to the statement appearing on the face of the Indemnity [Suretyship] Agreement x x x “evidenced by those certain loan documents dated April 20, 1982” x x x. From thisstatement, it is clear that the Indemnity Agreement refers only to the loan document of April 20, 1982 which isthe SWAP loan. It did not include the EXPORT loan. Hence, petitioner cannot be held answerable for theEXPORT loan.[23] (Emphasis supplied.)

The Indemnity Agreement in Garcia specifically identified loan documents evidencing obligations of the debtor that the

agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed did not limit itself to a specific

loan document to the exclusion of another. The suretyship document merely mentioned the Domestic Bills Purchased Line and

Omnibus Credit Line as evidenced by ―all notes, drafts x x x contracted/incurred by [Gateway] in favor of [Asianbank]. ‖[24] As

explained earlier, such credit facilities are not loans by themselves. Thus, the Deed of Suretyship was intended to secure future

loans for which these facilities were opened in the first place.



















Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line referred to in the Deed of

Suretyship as covering the export packing credit loans Asianbank extended to Gateway. We agree with this factual determination.

By the very use of the term ―omnibus,‖ and in practice, an omnibus credit line refers to a credit facility whence a borrower may avail

of various kinds of credit loans. Defined as such, an omnibus line is broad enough to refer to or cover an export packing credit loan.

Geronimo‘s allegation that an export packing credit loan is separate and distinct from an omnibus credit line is but a bare

and self-serving assertion bereft of any factual or legal basis. One who alleges something must prove it: a mere allegation is not

evidence.[25] Geronimo has not discharged his burden of proof. His contention cannot be given any weight.

As a final and major ground for his release as surety, Geronimo alleges that Asianbank repeatedly extended the maturity

dates of the obligations of Gateway without his knowledge and consent. Pressing this point, he avers that, contrary to the findings of

the CA, he did not waive his right to notice of extensions of Gateway‘s obligations.

Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is embedded in

surety document itself, built in the ensuing provision:

In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtednessherein secured at maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors andassigns, the prompt payment, without demand or notice from said CREDITOR of such notes, drafts,overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafterbecome indebted to the CREDITOR, together with all interests, penalty and other bank charges as mayaccrue thereon and all expenses which may be incurred by the latter in collecting any or all suchinstruments.[26] (Emphasis supplied.)

In light of the above provision, Geronimo verily waived his right to notice of the maturity of notes, drafts, overdraft, and

other credit obligations for which Gateway shall become indebted. This waiver necessarily includes new agreements resulting from

the novation of previous agreements due to changes in their maturity dates.

Additionally, Geronimo‘s lament about losing his right to subrogation is erroneous. He argues that by virtue of the order of

insolvency issued by the insolvency court, title and right to possession to all the properties and assets of Gateway were vested upon

Gateway‘s assignee in accordance with Sec. 32 of the Insolvency Law .

The transfer of Gateway‘s property to the insolvency assignee, if this be the case, does not negate Geronimo‘s right of

subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that he may only recover a portion

of the amount he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does not, however, render ineffectual, let

alone invalidate, his suretyship.











Geronimo‘s other arguments to escape liability are puerile and really partake more of a plea for liberality. They need not

detain us long. In gist, Geronimo argues: first , that he is a gratuitous surety of Gateway; second , Asianbank deviated from normal

banking practice, such as when it extended the period for payment of Gateway‘s obligation and when it opted not to foreclose the

chattel mortgage constituted as guarantee of Gateway‘s loan obligation; and third , implementing the appealed CA‘s decision would

cause him great harm and injury.

Anent the first argument, suffice it to state that Geronimo was then the president of Gateway and, as such, was benefited,

albeit perhaps indirectly, by the loan thus granted by Asianbank. And as we said in Security Pacific Assurance Corporation, the

surety is liable for the debt of another although the surety possesses no direct or personal interest over the obligation nor does the

surety receive any benefit from it.[27]

Whether or not Asianbank really deviated from normal banking practice by extending the period for Gateway to comply

with its loan obligation or by not going after the chattel mortgage adverted to is really of no moment. Banks are primarily in the

business of extending loans and earn income from their lending operations by way of service and interest charges. This is why

Asianbank opted to give Gateway ample opportunity to pay its obligations instead of foreclosing the chattel mortgage and in the

process holding on to assets of which the bank has really no direct use.

The following excerpts from Palmares are in point:

We agree with respondent corporation that its mere failure to immediately sue petitioner on herobligation does not release her from liability. Where a creditor refrains from proceeding against the principal, thesurety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor‘srights vis-à-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such

gratuitous indulgence of the principal does not discharge the surety whether given at the principal‘s request orwithout it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principalx x x. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety,even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultantinjury, a surety is not discharged by the creditor‘s mere statement that the creditor will not look to the surety,

orthat he need not trouble himself.The consequences of the delay, such as the subsequent insolvency of theprincipal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.[28]

The Court’s Equity Jurisdiction

Finds No Application to the Instant Case

Geronimo urges the Court to release and discharge him from any liability arising from Asianbank‘s claims if what he terms as

―complete justice‖ is to be served. He cites, as supporting refer ence, Agcaoili v. GSIS,[29]

presenting in the same breath the following

arguments: first , the Deed of Suretyship is a gratuitous contract from which he did not benefit; second , Asianbank assured him that

the deed would not be enforced against him; third , the enforcement of the judgment of the CA would reduce Geronimo and his

family to a life of penury; and fourth, Geronimo would be unable to exercise his right of subrogation, Gateway having already been

declared as insolvent.















The first and last arguments have already been addressed and found to be without merit. The second argument is a matter of

defense which has remained unproved and even belied by Asianbank by its filing of the complaint. We see no need to further

belabor any of them.

As regards the third allegation, suffice it to state that the predicament Geronimo finds himself in is his very own doing. His

misfortune is but the result of the implementation of a bona fide contract he freely executed, the terms of which he is presumed to

have thoroughly examined. He was not at all compelled to act as surety; he had a choice. It may be more offensive to public policy

or good customs if he be allowed to go back on his undertaking under the surety contract. The Court cannot be a party to the

contract‘s impairment and relieve a surety from the effects of an unwise but nonetheless a valid surety contract.

WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October 28, 2005 of the CA and its

March 17, 2006 Resolution in CA-G.R. CV No. 80734 are hereby AFFIRMED with the modification that any claim of Asianbank or its

successor-in-interest against Gateway, if any, arising from the judgment in this suit shall be pursued before the RTC, Branch 22 in

Imus, Cavite as the insolvency court.

Costs against petitioners.

SO ORDERED.



Escaño v. Ortigas, Jr.526 SCRA 26 (June 29, 2007)

Facts: On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into a loanagreement with Falcon Minerals, Inc. (Falcon)amounting to $320,000.00 subject to terms and conditions.[“Nagpautang ang PDCP sa Falcon ng $320K

]On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George A. Scholey, and George T. Scholeyexecuted an Assumption ofSolidary Liability ―to assume in [their] individual capacity, solidary liability with[Falcon] for due and punctual payment‖of the loan contracted by Falcon with PDCP. Two (2) separate guaranties were executed to guarantee payment of the same loan byother stockholdersand officers of Falcon, acting in their personal and individual capacities. One guaranty was executed byEscaño, Silos, Silverio,Inductivo and Rodriguez. Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Matti. Contractswereexecuted whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceasedGeorge T. Scholey assigned their shares ofstock in Falcon to Escaño, Silos and Matti. An Undertakingdated June 11, 1982 was executed by the concerned parties, namely: with Escaño,Silos and Matti as―SURETIES‖ and Ortigas, Inductivo and Scholeys as ―OBLIGORS‖Falcon eventually availed of the sum of$178,655.59 from the credit line extended by PDCP. It would alsoexecute a Deed of Chattel Mortgage over its personalproperties to further secure the loan. However,Falcon subsequently defaulted in its payments. After PDCP foreclosed on thechattel mortgage, thereremained a subsisting deficiency of Php 5,031,004.07 which falcon did not satisfy despitedemand.

Issue: Whether the obligation to repay is solidary, as contended by respondent and the lower courts, ormerely joint as argued by petitioners.

Held/Ruling: In case, there is a concurrence of two or more creditors or of two or more debtors in one and thesame obligation,

Article 1207 of the Civil Code states that among them, ―[t]here is a solidary liability onlywhenthe obl igation expressly so states, or when the law or the nature of the obl igationrequiressolidarity.‖ Article 1210 supplies further caution against the broad interpretation of solidarityby providing:―The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity ofitself im ply indivisibil ity.‖ These Civil Code provisions establish that in case of concurrenceof two or morecreditors or of two or more debtors in one and the same obligation, and in the absence of expressandindubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. Itthus becomes incumbent upon the party alleging that the obligation is indeed solidary in characterto prove such fact with apreponderance of evidence.Note that Article 2047 itself specifically calls for the application of the provisions on jointands o l i d a r y o b l i g a t i o n s t o s u r e t y s h i p c o n t r a c t s . A r t i c l e 1 2 1 7 o f t h e C i v i l C o d e t h u s c om e s i n t o p l a y , recognizing the right of reimbursement from a co-debtor (the principal debtor, in case ofsuretyship) infavor of the one who paid (

i.e., the surety).[However, a significant distinction still lies between a joint andseveral debtor, on one hand, and a surety on the other.Solidarity signifies that the creditor can compelany one of the joint and several debtors or the surety alone to answer for the entirety ofthe principal debt. The difference lies in the respective faculties of the joint and several debtor and thesurety to seekreimbursement for the sums they paid out to the creditor. In the case of joint and several debtors,

Article1217 makes plain that the solidary debtor who effected the payment to the creditor ―may claim from hisco-debtorsonly the share which corresponds to each, with the interest for the payment alreadymade.‖ Such solidary debtor will not be able to recover from the co-debtors the fullamount already paid tothe creditor, because the right to recovery extends only to the proportional share of the other co-debtors,and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even asthe surety is solidarily boundwith the principal debtor to the creditor, the surety who does pay the creditorhas the right to recover the full amount paid, and not just anyproportional share, from the principal debtoror debtors. Such right to full reimbursement falls within the other rights, actions and benefits whichpertainto the surety by reason of the subsidiary obligation assumed by the surety



BANK OF COMMERCE and STEPHEN Z. TAALA, Petitioners,

- versus -

Spouses ANDRES and ELIZA FLORES,

Respondents.

G.R. No. 174006

Present:

CARPIO, J., Chairperson,

NACHURA,

PERALTA,

ABAD, andMENDOZA, JJ.

Promulgated:

December 8, 2010

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J .:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Decision[1] dated February 28,

2006 and the Resolution[2] dated August 9, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 80362.











The facts of the case are as follows:

Respondents filed a case for specific performance against petitioners before the Regional Trial Court (RTC) of Quezon City, docketed as

Civil Case No. Q-98-35425. Respondents are the registered owners of a condominium unit in Embassy Garden Homes, West Triangle, Quezon

City, registered under Condominium Certificate of Title (CCT) No. 2130,[3] issued by the Register of Deeds of Quezon City.[4]

On October 22, 1993, respondents borrowed money from petitioner bank in the amount of Nine Hundred Thousand Pesos (P900,000.00).

Respondents executed a Real Estate Mortgage[5] over the condominium unit as collateral, and the same was annotated at the back of CCT No.

2130.

On October 3, 1995, respondents again borrowed One Million One Hundred Thousand Pesos (P1,100,000.00) from petitioner bank, which

was also secured by a mortgage over the same property annotated at the back of CCT No. 2130.[6]

On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos and 54 centavos (P1,011,555.54), as

evidenced by Official Receipt No. 147741[7] issued by petitioner bank. On the face of the receipt, it was written that the payment was “in full

payment of the loan and interest.” Respondents then asked petitioner bank to cancel the mortgage annotations on CCT No. 2130 since the loans

secured by the real estate mortgage were already paid in full. However, the bank refused to cancel the same and demanded payment of Four

Million Six Hundred Thirty-Three Thousand Nine Hundred Sixteen Pesos and Sixty-Seven Centavos (P 4,633,916.67), representing the

outstanding obligation of respondents as of February 27, 1998. Respondents requested for an accounting which would explain how the said

amount was arrived at. However, instead of heeding respondents’ request, petitioner bank applied for extra-judicial foreclosure of the mortgages

over the condominium unit. The public auction sale was scheduled on September 4, 1998. Petitioner Stephen Z. Taala, a notary public, was

tasked to preside over the auction sale.[8]

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and auction sale of the property. They averred

that the loans secured by the property had already been paid in full. Furthermore, they claimed that the Notice of Auction Sale by Notary

Public[9] failed to comply with the provisions of Act No. 3135, as amended by Act No. 4118, requiring the publication and posting of the notice of

auction sale in at least three (3) public places in Quezon City.[10] Respondents likewise prayed for the payment of moral and exemplary damages,

and attorney’s fees, and for the issuance of a temporary restraining order and/or writ of preliminary injunction to enjoin th e extra-judicial

foreclosure sale of the property.[11]

On October 23, 1998, the RTC granted respondents’ prayer for issuance of a writ of preliminary injunction, restraining petitioner bank

from foreclosing on the mortgage.[12]

Petitioner bank admitted that there were only two (2) mortgage loans annotated at the back of CCT No. 2130, but denied that respondents

had already fully settled their outstanding obligations with the bank .[13] It averred that several credit lines were granted to respondent Andres

Flores by petitioner bank that were secured by promissory notes executed by him, and which were either increased or extended from time to time.















































The loan that was paid on January 2, 1996, in the amount of P1,011,555.54, was only one of his loans with the bank. There were remaining loans

already due and demandable, and had not been paid by respondents despite repeated demands by petitioner bank. The remaining loans, although

not availed of at the same time, were similarly secured by the subject real estate mortgage as provided in the continuing guaranty agreement

therein.[14]

Petitioner bank alleged that respondents requested and were granted an increase in their Bills Discounted Line from Nine Hundred

Thousand Pesos (P900,000.00) to Two Million Pesos (P2,000,000.00), which was secured by the same real estate mortgage on CCT No. 2130.

However, the subject condominium unit commanded only a market value of One Million Seven Hundred Twenty-Three Thousand Six Hundred

Pesos (P1,723,600.00), and a loan value of Nine Hundred Fifty-Nine Thousand Six Hundred Sixteen Pesos (P959,616.00). Since the market value

of the condominium unit was lower than the combined loans, the parties agreed to fix the amount of the real estate mortgage atP1,100,000.00.

Moreover, petitioner bank stressed that under the terms of the two real estate mortgages, future loans of respondents were also covered.[15]

On December 4, 2002, the RTC rendered a resolution,

[16]

the fallo of which reads:

FROM THE FOREGOING MILIEU, the present case for specific performance with damages and injunction filed by plaintiffs, Sps. Andres and Eliza Flores against defendants, Bank of Commerce and Stephen Z. Taala, is hereby

DISMISSED. Likewise, the counterclaim filed by defendants, Bank of Commerce and Stephen Z. Taala against plaintiffs,

Sps. Andres and Eliza Flores is DISMISSED for insufficiency of evidence.

SO ORDERED.[17]

In denying respondents’ complaint for specific performance, the RTC ratiocinated that respondents’ right of action hinged mai nly on

the veracity of their claim that they faithfully complied with their loan obligations and had fully paid them in January 1996. The RTC stated that

the evidence submitted by petitioner bank, specifically the promissory notes and statement of account dated February 27, 1998, negated this

contention. The RTC declared that respondents incurred other debts from petitioner bank, which must be paid first before they could be absolved

of liability, and, consequently, demand the release of the mortgage. The RTC also struck down respondents’ assertion that petitioner bank did not

comply with the posting and publication requirements under Act No. 3135, as amended.

Respondents filed a motion for reconsideration, which was, however, denied by the RTC in a decision[18] dated August 8, 2003.

Aggrieved, respondents appealed to the CA.

Meanwhile, on March 25, 2004, the auction sale of the subject property was conducted, and petitioner bank was awarded the property,

as the highest bidder.

On February 28, 2006, the CA rendered a Decision[19] reversing the decision and the resolution of the RTC. The dispositive portion of

the CA Decision reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED; the challenged Decision dated December4, 2002, is REVERSED and SET ASIDE; and a new one entered:



























(a) ordering the cancellation of the real estate mortgage annotations on the dorsal side of

CCT No. 2130 of the Registry of Deeds of Quezon City;

(b) ordering appellee Bank to issue a corresponding release of mortgages to plaintiffs-

appellants’ CCT No. 2130;

(c) declaring null and void the challenged extra-judicial foreclosure and public auction

sale held on March 25, 2004 together with the Certificate of Sale dated April 14, 2004 issued in

favor of appellee Bank; and,

(d) appellees’ counterclaims are ordered dismissed, for lack of sufficient basis theref or.

No costs.

SO ORDERED.[20]

The CA ratiocinated that the principal obligation or loan was already extinguished by the full payment thereof. Consequently, the real

estate mortgages securing the principal obligation were also extinguished. A real estate mortgage, being an accessory contract, cannot survive

without the principal obligation it secures. The CA also noted that the two mortgages were individually annotated at the back of CCT No. 2130.

Thus, the CA opined that the individual annotations clearly indicated that the said mortgages were not meant to serve as a continuing guaranty for

any future loan that respondents would obtain from petitioner bank.

Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued a Resolution[21] denying the same.

Hence, the instant petition.

The sole issue for resolution is whether the real estate mortgage over the subject condominium unit is a continuing guaranty for the future

loans of respondent spouses despite the full payment of the principal loans annotated on the title of the subject property.

We resolve this issue in the affirmative.

The contested portion of the Deed of Real Estate Mortgage dated October 22, 1993 for the principal obligation of P900,000.00 and of the

second one dated October 3, 1995 for the sum of P1,100,000.00, uniformly read:

WITNESSETH: That

for and in consideration of the credit accommodations granted by the MORTGAGEE [Bank of Commerce] to the

MORTGAGOR [Andres Flores] and/or _____________________ hereby initially fixed at

_____________________________PESOS: (P____________), Philippine Currency, and as security for the payment of

the same, on demand or at maturity as the case may be, be the interest accruing thereon, the cost of collecting thesame, the cost of keeping the mortgaged property(ies), of all amounts now owed or hereafter owing by the

MORTGAGOR to the MORTGAGEE under this or separate instruments and agreements, or in respect of any bill,

note, check, draft accepted, paid or discounted, or advances made and all other obligations to every kind already

incurred or which may hereafter be incurred, for the use or accommodation of the MORTGAGOR, as well as the

faithful performance of the terms and conditions of this mortgage and of the separate instruments and/or

documents under which credits have been or may hereafter be advanced by the MORTGAGEE to the

MORTGAGOR, including their renewals, extensions and substitutions, any and all of which separate instruments

and/or documents and their renewals, extensions and substitutions are hereunto incorporated and made integral

parts hereof , the MORTGAGOR [Andres Flores] has transferred and conveyed, as by these presents it/he does herebytransfer and convey, by way of First Mortgage, to the MORTGAGEE [Bank of Commerce], its successors and assigns, all

its/ his rights, title and interest to that parcel(s) of land, together with all the buildings and improvements now existing or











which may hereafter be erected or constructed thereon, including all other rights or benefits annexed to or inherent therein

now existing or which may hereafter exist, situated in Embassy Garden Homes, Quezon City, Philippines, and more particularly described in Original/Transfer Certificate(s) of Title No. CCT No. 2130 of the Registry of Deeds [of] Quezon

City, as follows:

CCT No. 2130

Unit No. L-2, located on Building L, consisting of Ninety Five point Twenty (95.20) Square Meters,

more of less, with Parking Space No. L-2.[22]

It is petitioner bank’s contention that the said undertaking, stipulated in the Deed of Real Estate Mortgage dated October 22 , 1993 and

October 3, 1995, is a continuing guaranty meant to secure future debts or credit accommodations granted by petitioner bank in favor

of respondents. On the other hand, respondents posit that, since they have already paid the loans secured by the real estate mortgages, the

mortgage should not be foreclosed because it does not include future debts of the spouses or debts not annotated at the back of CCT No. 2130.

A continuing guaranty is a recognized exception to the rule that an action to foreclose a mortgage must be limited to the amount mentioned

in the mortgage contract.[23]Under Article 2053 of the Civil Code, a guaranty may be given to secure even future debts, the amount of which may

not be known at the time the guaranty is executed. This is the basis for contracts denominated as a continuing guaranty or suretyship. A

continuing guaranty is not limited to a single transaction, but contemplates a future course of dealing, covering a series of transactions, generally

for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future

transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. In other

words, a continuing guaranty is one that covers all transactions, including those arising in the future, which are within the description or

contemplation of the contract of guaranty, until the expiration or termination thereof .[24]

A guaranty shall be construed as continuing when, by the terms thereof, it is evident that the object is to give a standing credit to the

principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly

reserved. In other jurisdictions, it has been held that the use of particular words and expressions, such as payment of "any debt," "any

indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time" or

"on such time" that the principal debtor may require, has been construed to indicate a continuing guaranty.[25]



















In the instant case, the language of the real estate mortgage unambiguously reveals that the security provided in the real estate

mortgage is continuing in nature. Thus, it was intended as security for the payment of the loans annotated at the back of CCT No. 2130, and as

security for all amounts that respondents may owe petitioner bank. It is well settled that mortgages given to secure future advance or loans are

valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may

stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[26]

A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the

mortgage until the full amounts of the advancements are paid.[27] Respondents’ full payment of the loans annotated on the title of the property

shall not effect the release of the mortgage because, by the express terms of the mortgage, it was meant to secure all future debts of the spouses

and such debts had been obtained and remain unpaid. Unless full payment is made by the spouses of all the amounts that they have incurred from

petitioner bank, the property is burdened by the mortgage.

WHEREFORE, in view of the foregoing, the Decision dated February 28, 2006 and the Resolution dated August 9, 2006 of the Court of

Appeals in CA-G.R. CV No. 80362 are hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court dated December 4, 2002

is hereby REINSTATED.











SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,vs.SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION, KENNETH NG LI and MA. VICTORIA NGLI, respondents.

BELLOSILLO, J .:

RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit facility worth P10 million in favor ofrespondent First Business Paper Corporation (FBPC). The terms and conditions of the agreement as well as the checklist ofdocuments necessary to open the credit line were stipulated in a "letter-advise" of the Bank dated 16 May 1993 addressed to FBPCand to its President, respondent Kenneth Ng Li.1 The "letter-advise"2 was effective upon "compliance with the documentaryrequirements."3

The documents essential for the credit facility and submitted for this purpose were the (a) Board Resolution or excerpts of the Boardof Directors Meeting, duly ratified by a Notary Public, authorizing the loan and security arrangement as well as designating theofficers to negotiate and sign for FBPC specifically stating authority to mortgage, pledge and/or assign the properties of thecorporation; (b) agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li.4 The spouses Luis Toh and VickyTan Toh were then Chairman of the Board and Vice-President, respectively, of FBPC, while respondent-spouses Kenneth Ng Li andMa. Victoria Ng Li were President and General Manager, respectively, of the same corporation.5

It is not disputed that the credit facility as well as its terms and conditions was not cancelled or terminated, and that there was noprior notice of such fact as required in the "letter-advise," if any was done.

On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-spouses Luis Toh and Vicky Tan Toh andrespondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the required Continuing Guaranty, which was embodied in apublic document prepared solely by respondent Bank.6 The terms of the instrument defined the contract arising therefrom as asurety agreement and provided for the solidary liability of the signatories thereto for and in consideration of "loans or advances" and"credit in any other manner to, or at the request or for the account" of FBPC.

The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which thesureties may be liable, stating that the credit facility "covers any and all existing indebtedness of, and such other loans and creditfacilities which may hereafter be granted to FIRST BUSINESS PAPER CORPORATION." The surety also contained a defacto acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteedby petitioners and respondents. So as to strengthen this security, the Continuing Guaranty waived rights of the sureties againstdelay or absence of notice or demand on the part of respondent Bank, and gave future consent to the Bank's action to "extend orchange the time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility or any part thereofin such manner and upon such terms as the Bank may deem proper without notice to or further assent from the sureties.

The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the written revocation thereof withnotice to the Bank that may be executed by the sureties.

On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of credit.7 On 17 November 1993 FBPCopened thirteen (13) letters of credit and obtained loans totaling P15,227,510.00.8 As the letters of credit were secured, FBPCthrough its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over thegoods allegedly purchased from the proceeds of the loans.9

On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li hadfraudulently departed from their conjugal home.10 On 14 January 1994 the Bank served a demand letter upon FBPC and petitionerLuis Toh invoking the acceleration clause11 in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaidoverdue accounts on the letters of credit plus interests and penalties within twenty-four (24) hours from receipt thereof.12 The Bankalso invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh who were the only parties knownto be within national jurisdiction to answer as sureties for the credit facility of FBPC.13

On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application for a writ of preliminaryattachment against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh, docketed asCivil Case No. 64047 of RTC-Br. 161, Pasig City.14 Alias summonses were served upon FBPC and spouses Luis Toh and Vicky TanToh but not upon Kenneth Ng Li and Ma. Victoria Ng Li who had apparently absconded.15

Meanwhile, with the implementation of the writ of preliminary attachment resulting in the impounding of purported properties ofFBPC, the trial court was deluged with third-party claims contesting the propriety of the attachment.16In the end, the Bankrelinquished possession of all the attached properties to the third-party claimants except for two (2) insignificant items as it allegedlycould barely cope with the yearly premiums on the attachment bonds.17



Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they admitted being part of FBPC fromits incorporation on 29 August 1991, which was then known as "MNL Paper, Inc.," until its corporate name was changed to "Firs tBusiness Paper Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh was designated as one of the authorizedcorporate signatories for transactions in relation to FBPC's checking account with respondent Bank.19 Meanwhile, for failing to file ananswer, respondent FBPC was declared in default.20

Petitioner-spouses however could not be certain whether to deny or admit the due execution and authenticity of the ContinuingGuaranty.21 They could only allege that they were made to sign papers in blank and the Continuing Guaranty could have been one

of them.

Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously executed the surety on 10 May1993, the date appearing on its face22 since beginning March of that year they had already divested their shares in FBPC andassigned them in favor of respondent Kenneth Ng Li although the deeds of assignment were notarized only on 14 June1993.23 Petitioners also contended that through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was removed as anauthorized signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and Redentor Padilla forall the transactions of FBPC with respondent Bank.24 They even resigned from their respective positions in FBPC as reflected in the12 June 1993 Secretary's Certificate submitted to the Securities and Exchange Commission25 as petitioner Luis Toh was succeededas Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan Toh as Vice-President.26

Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li their exclusion from theseveral surety agreements they had entered into with different banks, i.e., Hongkong and Shanghai Bank, China BankingCorporation, Far East Bank and Trust Company, and herein respondent Bank.27 As a matter of record, these other banks executed

written surety agreements that showed respondent Kenneth Ng Li as the only surety o f FBPC's indebtedness.

28

On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent FBPC liable to pay respondentSolid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum from finality ofthe Decision until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Bank.29 Thecourt a quo found that pet itioners "voluntarily affixed their signature[s]" on the Continuing Guaranty and were thus "at some givenpoint in time willing to be liable under those forms,"30although it held that petitioners were not bound by the surety contract since theletters of credit it was supposed to secure were opened long after petitioners had ceased to be part of FBPC.31

The trial court described the Continuing Guaranty as effective only while petitioner-spouses were stockholders and officers of FBPCsince respondent Bank compelled petitioners to underwrite FBPC's indebtedness as sureties without the requisite investigation oftheir personal solvency and capability to undertake such risk.32 The lower court also believed that the Bank knew of petitioners'divestment of their shares in FBPC and their subsequent resignation as officers thereof as these facts were obvious from thenumerous public documents that detailed the changes and substitutions in the l ist of authorized signatories for transactions betweenFBPC and the Bank, including the many trust receipts being signed by persons other than petitioners,33 as well as the designation ofnew FBPC officers which came to the notice of the Bank's Vice-President Jose Chan Jr. and other officers.34

On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.35

On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as CA-G.R. CV No.55957.36 Petitioner-spouses did not move for reconsideration nor appeal the finding of the trial court that they voluntarily executedthe Continuing Guaranty.

The appellate court modified the Decision of the trial court and held that by signing the Continuing Guaranty, petitioner-spousesbecame solidarily liable with FBPC to pay respondent Bank the amount of P10,539,758.68 as principal with twelve percent (12%)interest per annum from finality of the judgment until completely paid.37 The Court of Appeals ratiocinated that the provisions of thesurety agreement did not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman ofthe Board and Vice-President, respectively, of FBPC only."38 Hence, the court a quo deduced, "[a]bsent any such indication, it waserror for the trial court to have presumed that the appellees indeed signed the same not in their personal capacities."39 The appellatecourt also ruled that as petitioners failed to execute any written revocation of the Continuing Guaranty with notice to respondentBank, the instrument remained in full force and effect when the letters of credit were availed of by respondent FBPC.40

Finally, the Court of Appeals rejected petitioners' argument that there were "material alterations" in the provisions of the "letter-advise," i.e., that only domestic letters of credit were opened when the credit facility was for importation of papers and othermaterials, and that marginal deposits were not paid, contrary to the requirements stated in the "letter-advise."41 The simple responseof the appellate court to this challenge was, first, the "letter-advise" itself authorized the issuance of domestic letters of credit, andsecond, the several waivers extended by petitioners in the Continuing Guaranty, which included changing the time and manner ofpayment of the indebtedness, justified the action of respondent Bank not to charge marginal deposits.42

Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's comment, filed alengthy Reply with Motion for Oral Argument .

43 On 2 July 2002 reconsideration of the Decision was denied on the ground that nonew matter was raised to warrant the reversal or modification thereof.44 Hence, this Petition for Review.



Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due process when it did not grant theirmotion for reconsideration and without "bother[ing] to consider [their] Reply with Motion for Oral Argument ." They maintain that theContinuing Guaranty is not legally valid and binding against them for having been executed long after they had withdrawn fromFBPC. Lastly, they claim that the surety agreement has been extinguished by the material alterations thereof and of the "letter-advise" which were allegedly brought about by (a) the provision of an acceleration clause in the trust receipts; (b) the flight of theirco-sureties, respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit facility despite the non-payment ofmarginal deposits in an amount beyond the credit limit of P10 million pesos; (d) the inordinate delay of the Bank in demanding thepayment of the indebtedness; (e) the presence of ghost deliveries and fictitious purchases using the Bank's letters of credit and trust

receipts; (f) the extension of the due dates of the letters of credit without the required 25% partial payment per extension; (g) theapproval of another letter of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaultedon their previous obligations; and, (h) the unmistakable pattern of fraud.

Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have passed upon all points raised bypetitioners' Reply with Motion for Oral Argument as this pleading formed part of the records of the appellate court. It also debunksthe claim of petitioners that they were inexperienced and ignorant parties who were taken advantage of in the Continuing Guarantysince petitioners are astute businessmen who are very familiar with the "ins" and "outs" of banking practice. The Bank further arguesthat the notarization of the Continuing Guaranty discredits the uncorroborated assertions against the authenticity and due executionthereof, and that the Decision of the trial court in the civil case finding the surety agreement to be valid and binding is now res judicata for failure of petitioners to appeal therefrom. As a final point, the Bank refers to the various waivers made by petitioner-spouses in the Continuing Guaranty to justify the extension of the due dates of the letters of credit.

To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived them of their right to due process when thecourt a quo did not address specifically and explicitly their Reply with Motion for Oral Argument . While the Resolution of theappellate court of 2 July 2002 made no mention thereof in disposing of their arguments on reconsideration, it is presumed that "all

matters within an issue raised in a case were laid before the court and passed upon it."45 In the absence of evidence to the contrary,we must rule that the court a quo discharged its task properly. Moreover, a reading of the assailed Resolution clearly makesreference to a "careful review of the records," which undeniably includes the Reply with Motion for Oral Argument , hence there is noreason for petitioners to asseverate otherwise.

This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document thatenjoys the presumption of authenticity and due execution. Although petitioners as appellees may raise issues that have not beenassigned as errors by respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound by theconsistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" onthe surety agreement and were thus "at some given point in time willing to be liable under those forms."46 In the absence of clear,convincing and more than preponderant evidence to the contrary, our ruling cannot be otherwise.

Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were corporate officers and stockholdersof FBPC. Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or eventuality. In fact theobligations assumed by them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of

the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees and assigns," and thattheir commitment "shall remain in full force and effect until written notice shall have been received by [the Bank] that it has beenrevoked by the undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal from FBPC, theycould have simply terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowedtherein.47 In Garcia v. Court of Appeals[48] we ruled –

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that hesigned the same not in representation of WMC or as its president but in his personal capacity. He is therefore personallybound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt.While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for thecorporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of thecorporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we also hold respondentBank to its representations in the "letter-advise" of 16 May 1993. Particularly, as to the extension of the due dates of the letters ofcredit, we cannot exclude from the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-

advise." Fairness and justice dictate our doing so, for the Bank itself liberally applies the provisions of cognate agreementswhenever convenient to enforce its contractual rights, such as, when it harnessed a provision in the trust receipts executed byrespondent FBPC to declare its entire indebtedness as due and demandable and thereafter to exact payment thereof frompetitioners as sureties.49 In the same manner, we cannot disregard the provisions of the "letter-advise" in sizing up the panoply ofcommercial obligations between the parties herein.

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its]discretion x x x extend or change the t ime payment," this provision even if understood as a waiver is confined per se to the grant ofan extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority ofthe Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise."



Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonethelesscomply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three(3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. Thisreading of the Continuing Guaranty is consistent with Philippine National Bank v. Court of Appeals

50 that any doubt on the terms andconditions of the surety agreement should be resolved in favor of the surety.

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any kind on [the Bank's] part inthe premises shall in any event affect or impair this guaranty"51 must also be read "strictissimi juris" for the reason that petitioners

are only accommodation sureties, i.e., they received nothing out of the security contract they signed.52 Thus said, the acts oromissions of the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to those occurring "in thepremises," or those that have been the subject of the waiver in the Continuing Guaranty, and stretch to no other. Stated otherwise,an extension of the period for enforcing the indebtedness does not by itself bring about the discharge of the sureties unless the extratime is not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient settlement of the marginaldeposit and the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 ofthe Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof, hisaccountability is strictly limited to that assumed by its terms.

It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were irrevocably extended forninety (90) days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of fifteen percent (15%)and the twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginaldeposit and security for every thirty (30) - day extension specified in the "letter-advise" were not set aside or abrogated nor wasthere any prior notice of such fact, if any was done.

Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account officer and manager ofrespondent Bank and its lone witness in the civil case –

Q: You extended it even if there was no marginal deposit?

A: Yes.

Q: And even if partial payment is less than 25%?

A: Yes x x x x

Q: You have repeatedly extended despite the insufficiency partial payment requirement?

A: I would say yes.53

The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising theprivilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibitedunder Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantorextinguishes the guaranty." This act of the Bank is not mere failure or delay on its part to demand payment after the debt hasbecome due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer or put off,54 but comprisesconscious, separate and binding agreements to extend the due date, as was admitted by the Bank itself –

Q: How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?

A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December 13, 1993 butthey made partial payment that is why we extended it.

Q: The question to you now is how much was paid? How much is supposed to be paid on September 14, 1993 on

the basis of the original amount of P1,655,675.13?

A: Whenever this obligation becomes due and demandable except when you roll it over so there is novation there onthe original obligations55 (underscoring supplied ).

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their obligations as sureties ofrespondent FBPC under Art. 2079 of the Civil Code.

Further, we note several suspicious circumstances that militate against the enforcement of the Continuing Guaranty against theaccommodation sureties. Firstly, the guaranty was executed more than thirty (30) days from the original acceptance period asrequired in the "letter-advise." Thereafter, barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC



were replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC ensued in the month of June 1993, whichthe Bank did not investigate although such were made known to it.

By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in favor of the Bank when thesedocuments ought to have added more security to the indebtedness of FBPC. The Bank has in fact no information whether the trustreceipts were indeed used for the purpose for which they were obtained.56To be sure, the goods subject of the trust receipts werenot entirely lost since the security officer of respondent Bank who conducted surveillance of FBPC even had the chance to interceptthe surreptitious transfer of the items under trust: "We saw two (2) delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out

of the compound x x x [which were] taking out the last supplies stored in the compound."57 In addition, the attached properties ofFBPC, except for two (2) of them, were perfunctorily abandoned by respondent Bank although the bonds therefor were considerablyreduced by the trial court.58

The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of the Civil Code,59 or at the veryleast, mitigate the liability of the surety up to the value of the property or lien released –

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes charged with theduty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of thissecurity as a primary resource for the payment of a debt, will discharge the surety to the extent of the value of the propertyor lien released x x x x [for] there immediately arises a trust relation between the parties, and the creditor as trustee isbound to account to the surety for the value of the security in his hands.60

For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and forfeiture of thefifteen percent (15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the "letter-advise." These

payments are unmistakably additional securities intended to protect both respondent Bank and the sureties in the event that theprincipal debtor FBPC becomes insolvent during the extension period. Compliance with these requisites was not waived bypetitioners in the Continuing Guaranty. For this unwarranted exercise of discretion, respondent Bank bears the loss; due to itsunauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties underthe Continuing Guaranty.

Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the marginaldeposit and the twenty-five percent (25%) requirement results in the material alteration of the principal contract, i.e., the "letter-advise," and consequently releases the surety.61 This inference was admitted by the Bank through the testimony of its lone witnessthat "[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is novation there on theoriginal obligations." As has been said, "if the suretyship contract was made upon the condition that the principal shall furnish thecreditor additional security, and the security being furnished under these conditions is afterwards released by the creditor, the suretyis wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of themain contract."62

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh andVicky Tan Toh, holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to paySolid Bank Corporation the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum until fully paid, andits Resolution of 2 July 2002 denying reconsideration thereof are REVERSED and SET ASIDE.

The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank Corporation v. First BusinessPaper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First Business Paper Corporation liableto pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fullypaid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid Bank Corporation isREINSTATED and AFFIRMED. No costs.

SO ORDERED.

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