Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-45848 November 9,1977

TOWERS ASSURANCE CORPORATION, petitioner, vs.ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:

This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary attachment.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P 58,400.

On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-appearance at the pre- trial, the Ong spouses were declared in default.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See

Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees.

Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.

We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which provides:

SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbound given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbound, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set aside. The lower court is directed to conduct a summary hearing on the surety's liability on its counterbound. No costs.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-33205 August 31, 1987

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners, vs.SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.

FERNAN, J.:

This is an appeal by certiorari involving purely questions of law from the decision rendered by respondent judge in Civil Case No. Q-12275 entitled "Social Security System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."

The antecedent facts, as stipulated by the parties during the trial, are as follows:

1. That on September 4, 1961, the plaintiff [herein respondent Social Security System] and the defendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio Lirag entered into a Purchase Agreement under which the plaintiff agreed to purchase from the said defendant preferred shares of stock worth ONE MILLION PESOS [P1,000,000.00] subject to the conditions set forth in such agreement;...

2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff, on January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE HUNDRED THOUSAND PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000 preferred shares with a par value of one hundred pesos [P10000] per share as evidenced by stock Certificate No. 128, ...

3. That further in pursuance of the Purchase Agreement of September 4, 1961, the plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE UNDRED THOUSAND PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000 preferred shares with a par value of one hundred pesos [P100.00] per share as evidenced by Stock Certificate No. 139, ...

4. That in accordance with paragraph 3 of the Purchase Agreement of September 4, 1961 which provides for the repurchase by the Lirag Textile Mills, Inc. of the shares of stock at regular intervals of one year beginning with the 4th year following the date of issue, Stock Certificates Nos. 128 and 139 were to be repurchased by the Lirag Textile Mills, Inc. thus:

CERT. No. AMOUNT DATE OF REDEMPTION

128 P100,000.00 February 14, 1965

100,000.00 February 14, 1966

100,000.00 February 14, 1967

100,000.00 February 14, 1968

100,000.00 February 14, 1969

139 P100,000.00 July 3, 1966

100,000.00 July 3,1967

100,000.00 July 3,1968

100,000.00 July 3, 1969

100,000.00 July 3,1970

5. That to guarantee the redemption of the stocks purchased by the plaintiff, the payment of dividends, as well as the other obligations of the Lirag Textile Mills, Inc., defendants Basilio L. Lirag signed the Purchase Agreement of September 4, 1961 not only as president of the defendant corporation, but also as surety so that should the Lirag Textile Mills, Inc. fail to perform any of its obligations in the said Purchase Agreement, the surety shall immediately pay to the vendee the amounts then outstanding pursuant to Condition No. 4, to wit:

To guarantee the redemption of the stocks herein purchased, the payment of the dividends, as well as other obligations of the VENDOR herein, the SURETY hereby binds himself jointly and severally liable with the VENDOR so that should the VENDOR fail to perform any of its obligations hereunder, the SURETY shall immediately pay to the VENDEE the amounts then outstanding. '

6. That defendant corporation failed to redeem certificates of Stock Nos. 128 and 139 by payment of the amounts mentioned in paragraph 4 above;

7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts and within the period set forth in paragraph 10 of the complaint;*

8. That letters of demands have been sent by the plaintiff to the defendant to redeem the foregoing stock certificates and pay the dividends set forth in paragraph 10 of the complaint, but the Lirag Textile Mills, Inc. has not made such redemption nor made such dividend payments;

9. That defendant Basilio L. Lirag likewise received letters of demand from the plaintiff requiring him to make good his obligation as surety;

10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends have been paid on said stock certificates;

11. That paragraph 5 of the Purchase Agreement provides that should the Lirag Textile Mills, Inc. fail to effect any of the redemptions stipulated therein, the entire obligation shall immediately become due and demandable and the Lirag Textile Mills, Inc., shall, furthermore, be liable to the plaintiff in an amount equivalent to twelve per cent [12%] of the amount then outstanding as liquidated damages;

12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing certificates of stock and pay dividends thereon were due to financial reverses, to wit:

[a] Unrestrained smuggling into the country of textiles from the United States and other countries;

[b] Unrestricted entry of supposed remmants which competed with textiles of domestic produce to the disadvantage and economic prejudice of the latter;

[c] Scarcity of money and the unavailability of financing facilities;

[d] Payment of interest on matured loans extended to defendant corporation;

[e] Construction of the Montalban plant of the defendant corporation financed largely through reparation benefits;

[f] Labor problems occasioned by the fact that the defendant company is financial (sic) unable to improve, in a substantial way, the economic plight of its workers as a result of which two costly strikes had occurred, one in 1965 and another in 1968; and

[g] The occurrence of a fire which destroyed more than 1 million worth of raw cotton, paralyzed operations partially, increased overhead costs and wiped out any expected profits that year;

13. That it has been the policy of the plaintiff to be represented in the board of directors of the corporation or entity which has obtained financial assistance from the System be it in terms of loans, mortgages or equity investments. Thus, pursuant to paragraph 6 of the Purchase Agreement of September 4, 1961 which provides as follows:

The VENDEE shall be allowed to have a representative in the Board of Directors of the VENDOR with the right to participate in the discussions and to vote therein;

14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each issued one common share of stock as a qualifying share to their election to the Board of Directors of the Lirag Textiles Mills, Inc.;

15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their respective tenure as member of the Board of Directors of the Lirag Textile Mills, Inc. attended the meetings of the said Board, received per diems for their attendance therein in the same manner and in the same amount as any other member of the Board of Directors, participated in the deliberations therein and freely exercised their right to vote in such meetings. However, the per diems received by the SSS representative do not go to the coffers of the System but personally to the representative in the said board of directors. 1

For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of the Purchase Agreement, the SSS filed an action for specific performance and damages before the then Court of First Instance of Rizal, Quezon City, praying that therein defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for [1] the entire obligation of P1M which became due and demandable upon defendants' failure to repurchase the stocks as scheduled; [21 dividends in the amount of P220,000.00; [31 liquidated damages in an amount equivalent to twelve percent (12%) of the amount then outstanding; [4] exemplary damages in the amount of P100,000.00 and [5] attorney's fees of P20,000.00.

Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint, but were denied the relief sought. Thus, they filed their answer with counterclaim, denying the existence of any obligation on their part to redeem the preferred stocks, on the ground that the SSS became and still is a preferred stockholder of the corporation so that redemption of the shares purchased depended upon the financial ability of said corporation. Insofar as defendant Basilio Lirag is concerned, it was alleged that his liability arises only if the corporation is liable and does not perform its obligations under the Purchase Agreement. They further contended that no liability on their part has arisen because of the financial condition of the corporation upon which such liability was made to depend, particularly the non-realization of any profit or

earned surplus. Thus, the other claims for dividends, liquidated damages and exemplary damages are allegedly without basis.

After entering into the Stipulation of Facts above-quoted, the parties filed their respective memoranda and submitted the case for decision.

The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS jointly and severally P1,000,000.00 plus legal interest until the said amount is fully paid; P220,000.00 representing the 8% per annum dividends on the preferred shares plus legal interest up to the time of actual payment; P146,400.00 as liquidated damages; and P10,000.00 as attorney's fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L. Lirag was dismissed.

Hence, this petition.

Petitioners assign the following errors:

1. The trial court erred in deciding that the Purchase Agreement is a debt instrument;

2. Respondent judge erred in holding petitioner corporation liable for the payment of the 8% preferred and cumulative dividends on the preferred shares since the purchase agreement provides that said dividends shall be paid from the net profits and earned surplus of petitioner corporation and respondent SSS has admitted that due to losses sustained since -1964, no dividends had been and can be declared by petitioner corporation;

3. Respondent judge erred in sentencing petitioners to pay P146,400.00 in liquidated damages;

4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by way of attorney's fees;

5. Respondent judge erred in sentencing petitioners to pay interest from the time of firing the complaint u to the time of full payment both on the P1,000,000.00 invested by respondent SSS in petitioner's corporation and on the P220,000.00 which the SSS claims as dividends due on its investments;

6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the P1,000,000.00 worth of preferred shares purchased by respondent SSS from petitioner corporation and the 8% cumulative dividend, it appearing that Lirag was merely a surety and not an insurer of the obligation;

7. Respondent judge erred in dismissing the counterclaim of petitioners.

The fundamental issue in this case is whether or not the Purchase Agreement entered into by petitioners and respondent SSS is a debt instrument.

Petitioners claim that respondent SSS merely became and still is a preferred stockholder of the petitioner corporation, the redemption of the shares purchased by said respondent being dependent upon the financial ability of petitioner corporation. Petitioner corporation, thus, has no obligation to redeem the preferred stocks.

On the other hand, respondent SSS claims that the Purchase Agreement is a debt instrument, imposing upon the petitioners the obligation to pay the amount owed, and creating as between them the relation of creditor and debtor, not that of a stockholder and a corporation.

We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt instrument. Its terms and conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective scheduled dates to be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability to do so. The unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined "as an obligation to pay money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they expressly or impliedly, agree to perform in the contract. 2

A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety.

As private respondent rightly contends, if the parties intended it [SSS] to be merely a stockholder of petitioner corporation, it would have been sufficient that Preferred Certificates Nos. 128 and 139 were issued in its name as the preferred certificates contained all the rights of a stockholder as well as certain obligations on the part of petitioner corporation. However, the parties did in fact execute the Purchase Agreement, at the same time that the petitioner corporation issued its preferred stock to the respondent SSS. The Purchase Agreement serves to define the rights and obligations of the parties and to establish firmly the liability of petitioners in case of breach of contract. The Certificates of Preferred Stock serve as additional evidence of the agreement between the parties, though the precise terms and conditions thereof must be read together with, and regarded as qualified by the terms and conditions of the Purchase Agreement.

The rights given by the Purchase Agreement to respondent SSS are rights not enjoyed by ordinary stockholders. This fact could only lead to the conclusion made by the trial court that:

The aforementioned rights specially stipulated for the benefit of the plaintiff [respondent SSS] suggest eloquently an intention on the part of the plaintiff [respondent SSS] to facilitate a loan to the defendant corporation upon the latter's request. In order to afford protection to the plaintiff which otherwise is provided by means of collaterals, as the plaintiff exacts in its grants of loans in its ordinary transactions of this kind, as it is looked upon more as a lending institution rather than as an investing agency, the purchase agreement supplied these protective rights which would otherwise be furnished by collaterals to the loan. Thus, the membership in the board is to have a watchdog in the operation of the business of the corporation, so as to insure against mismanagement which may result in losses not entirely unavoidable since payment for purposes of redemption as well as the dividends is expressly stipulated to come from profits and/or surplus. Such a right is never exacted by an ordinary stockholder merely investing in the corporation. 3

Moreover, the Purchase Agreement provided that failure on the part of petitioner to repurchase the preferred shares on the scheduled due dates renders the entire obligation due and demandable, with petitioner in such eventuality liable to pay 12% of the then outstanding obligation as liquidated damages. These features of the Purchase Agreement, taken collectively, clearly show the intent of the parties to be bound therein as debtor and creditor, and not as corporation and stockholder.

Petitioners' contention that it is beyond the power and competence of petitioner corporation to redeem the preferred shares or pay the accrued dividends due to financial reverses can not serve as legal justification for their failure to perform under the Purchase Agreement. The Purchase Agreement constitutes the law between the parties and obligations arising ex contractu must be fulfilled in accordance with the stipulations. 4 Besides, it was precisely this eventuality that was sought to be avoided when respondent SSS required a surety for the obligation.

Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner corporation's default. As surety, Basilio L. Lirag is bound immediately to pay respondent SSS the amount then outstanding.

The obligation of a surety differs from that of a guarantor in that the surety insures the debt, whereas the guarantor merely insures solvency of the debtor; and the surety undertakes to pay if the principal does not pay, whereas a guarantor merely binds itself to pay if the principal is unable to pay. 5

On the liability of petitioners to pay 8% cumulative dividend, We agree with the observation of the lower court that the dividends stipulated by the parties served evidently as interests. 6 The amount thereof was fixed at 8% per annum and was not

made to depend upon or to fluctuate with the amount of profits or surplus realized, a clear indication that the parties intended to give a sure and fixed earnings on the principal loan. The fact that the dividends were supposed to be paid out of net profits and earned surplus, of which there were none, does not excuse petitioners from the payment thereof, again for the reason that the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends and other obligations then outstanding.

The award of the sum of P146,400.00 in liquidated damages representing 12% of the amount then outstanding is correct, considering that petitioners in the stipulation of facts admitted having failed to fulfill their obligations under the Purchase Agreement. The grant of liquidated damages in the amount stated is expressly provided for in the Purchase Agreement in case of contractual breach.

The pronouncement of the lower court for the payment of interests on both the unredeemed shares and unpaid dividends is also in order. Per stipulation of facts, petitioners did not deny the fact of non-payment of dividends nor their failure to purchase the preferred shares. Since these involve sums of money which are overdue, they are bound to earn legal interest from the time of demand, in this case, judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase Agreement. After his firm representation to "pay immediately to the VENDEE the amounts then outstanding" evidencing his commitment as SURETY, he is estopped from denying the same. His signature in the agreement carries with it the official imprimatur as petitioner corporation's president, in his personal capacity as majority stockholder, as surety and as solidary obligor. The essence of his obligation as surety is to pay immediately without qualification whatsoever if petitioner corporation does not pay. To have another interpretation of petitioner Lirag's liability as surety would violate the integrity of the Purchase Agreement as well as the clear and unmistakable intent of the parties to the same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto. Costs against petitioners.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

LIRAG TEXTILE MILLS, INC. VS. SSS153 SCRA 338

Facts:

SSS (respondent) and Lirag Textile Mills (Petitioner) entered into a Purchased Agreement which Respondent agreed to purchase preferred stocks of Petitioner worth P1 million subject to conditions:

o For Petitioner to repurchase the shares of stocks at a regular interval of one year and to pay dividends.

o Failure to redeem and pay the dividend, the entire obligation shall become due and demandable and it shall be liable for an amount equivalent to 12% of the amount then outstanding as liquidated damages.

Basilio Lirag (Basilio) as President of Lirag Textile Mills signed the Agreement as a surety to guarantee the redemption of the stocks, the payment of dividends and other obligations.

Pursuant to the Agreement, Respondent paid Petitioner P500,000 on two occasions and the latter issued 5,000 preferred stocks with a par value of P100 as evidenced by Stock Certificate Nos. 128 and 139.

After sending Respondent sent demand letters, Petitioner and Basilio still made no redemption nor made dividend payments.

Respondent filed an action for specific performance and damages against Petitioner:

Petitioner contends that there is no obligation on their part to redeem the stock certificates since Respondent is still a preferred stock holder of the company and such redemption is dependent upon the financial ability of the company.

On the part of Basilio, he contends that his liability only arises only if the company is liable and does not perform its obligations under the Agreement.

Issue:

1) Whether or not the Purchase Agreement entered into by the Parties is a debt instrument?

2) If so, Is Basilio liable as surety?

3) Whether or not Lirag is liable for the interest as liquidated damages?

Held: 1) YES, the Purchase Agreement is a debt instrument. The terms and conditions of

the Agreement show that parties intended the repurchase of preferred shares on the respective scheduled dates to be an absolute obligation, which does not depend on the financial ability of the corporation.

o This absolute obligation on the part of the Petitioner corporation is made manifest by the fact that a surety was required to see to it that the obligation is fulfilled in the event the principal debtor’s inability to do so.

o It cannot be said that SSS is a preferred stockholder. The rights given by the Purchase Agreement to SSS are not rights enjoyed by ordinary stockholders. Since there was a condition that failure to repurchase the stocks on the scheduled dates renders the entire obligation due and demandable with interest. These features clearly show that intent of the parties to be bound therein as debtor and creditor and not as a corporation and stockholder.

2) YES, Basilio is liable as surety. Thus it follows that he cannot deny liability for Lirag’s default. As surety, he is bound immediately to pay SSS the amount then outstanding.

3) The award of liquidated damages represented by 12% of the amount then outstanding is correct, considering that the petitioners in the stipulation of facts admitted having failed to fulfill their obligations under the Agreement. The grant of liquidated damages is expressly provided for the Purchase Agreement in case of contractual breach.

Since Lirag did not deny its failure to redeem the preferred shares and the non-payment of dividends which are overdue, they are bound to earn legal interest from the time of demand, in this case, judicial i.e. the time of filing the action.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. L-29139 November 15, 1974

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants, vs.ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-appellees.

Vicente C. Santos for plaintiffs-appellants.

Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.

Vicente M. Macabidang for defendant-appellee Esteban Piczon.

BARREDO, J.:p

Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have been duly paid, and the costs."

After issues were joined and at the end of the pre-trial held on August 22, 1967, the trial court issued the following order:

"When this case was called for pre-trial, plaintiffs and defendants through their lawyers, appeared and entered into the following agreement:

1. That defendants admit the due execution of Annexes "A" and "B" of the complaint;

2. That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for P12,500.00, the same to be paid on or before October 31, 1967 together with the interest that this court may determine.

That the issues in this case are legal ones namely:

(a) Will the payment of twelve per cent interest of P12,500.00 commence to run from August 6, 1964 when plaintiffs made the first demand or from August 29, 1956 when the obligation becomes due and demandable?

(b) Is defendant Esteban Piczon liable as a guarantor or a surety?

That the parties are hereby required to file their respective memorandum if they so desire on or before September 15, 1967 to discuss the legal issues and therewith the case will be considered submitted for decision.

WHEREFORE, the instant case is hereby considered submitted based on the aforesaid facts agreed upon and upon submission of the parties of their respective memorandum on or before September 15, 1967.

SO ORDERED. 1 (Record on Appeal pp. 28-30.)

Annex "A", the actionable document of appellants reads thus:

AGREEMENT OF LOAN

KNOW YE ALL MEN BY THESE PRESENTS:

That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of the corporation known as the "SOSING-LOBOS and CO., INC.," as controlling stockholder, and at the same time as guarantor for the same, do by these presents contract a loan of Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby acknowledged, from the "Piczon and Co., Inc." another corporation, the main offices of the two corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use the loan as surety cash deposit for registration with the Securities and Exchange Commission of the incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount with Twelve Per Cent (12%) interest per annum, commencing from the date of execution hereof, to the "Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and the Certificate of Incorporation issued by the aforesaid Commission.

IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th day of September, 1956.

The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged errors:

I THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY EXECUTED.

II THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS GUARANTOR ONLY AND NOT AS SURETY.

III THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN FAVOR OF THE PLAINTIFFS-APPELLANTS. (Appellants' Brief, pp. a to b.)

Appellants' first assignment of error is well taken. Instead of requiring appellees to pay interest at 12% only from August 6, 1964, the trial court should have adhered to the terms of the agreement which plainly provides that Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum commencing from the date of the execution hereof", Annex A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to commence from the execution of said document.

Appellees' contention that the reference in Article 2209 to delay incurred by the debtor which can serve as the basis for liability for interest is to that defined in Article 1169 of the Civil Code reading thus:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article cited by appellees (which was Article 1100 of the Old Civil Code read in relation to Art. 1101) is applicable only when the obligation is to do something other than the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely ruled that if the contract stipulates from what time interest will be counted, said stipulated time controls, and, therefore interest is payable from such time, and not from the date of the filing of the complaint (at p. 925). Were that not the law, there would be no basis for the provision of Article 2212 of the Civil Code providing that "(I)nterest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." Incidentally, appellants would have been entitled to the benefit of this article, had they not failed to plead the same in their complaint. Their prayer for it in their brief is much too late. Appellees had no opportunity to meet the issue squarely at the pre-trial.

As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement is "guarantor."

Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of the agreement, Piczon necessarily must have bound himself as insurer.

As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the filing of the complaint can no longer be entertained, the same not having been made an issue in the pleadings in the court below. We do not believe that such a substantial matter can be deemed included in a general prayer for "any other relief just and equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in the enumeration of the issues to be resolved by the court.

PREMISES CONSIDERED, the judgment of the trial court is modified so as to make appellees liable for the stipulated interest of 12% per annum from September 28, 1956, instead of August 6, 1964. In all other respects, said judgment is affirmed. Costs against appellees.

G.R. No. L-49401 July 30, 1982RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs.HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents.Laurente C. Ilagan for petitioner.Victor A. Clapano for respondents.DE CASTRO, J.:

Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no cause of action as against private respondent.

After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation and motion was noted in the resolution of January 10, 1979. 2

It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase on discount, or to make any loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable, provided that the liability shall not exceed at any one time the aggregate principal sum of P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that he can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the comprehensive surety agreement, private respondent is liable because said agreement covers not merely the promissory note subject of the complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur with petitioner bank.

On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978 respondent court issued an order denying the said motion. 8

The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement, particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding themselves as solidary debtors of said corporation not only to existing obligations but to future ones. Respondent court said that corollary to that agreement must be another instrument evidencing the obligation in a form of a promissory note or any other evidence of indebtedness without which the said agreement serves no purpose; that since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not signed by private respondent, the latter can not be liable thereon.

Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court assigning the following as errors committed by respondent court:

1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons that 'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held liable on the note under the provisions of the comprehensive surety agreement of October 29, 1976; and/or

2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety Agreement towards the conclusion that respondent Chua is not liable on the promissory note because said note is not conformable to the Comprehensive Surety Agreement; and/or

3. That the respondent court erred in ordering that there is no cause of action against respondent Chua in the petitioner's complaint.

The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety agreement which petitioner and private respondent had earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover existing as well as future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement provides:

For and in consideration of any existing indebtedness to you of Davao Agricultural Industries Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called the "Borrower), and/or in order to induce, you in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at he request or for the account of the Borrower, either with or without security, and/or to purchase or discount or to make any loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to guarantee, and does hereby guarantee in joint and several capacity, the punctual payment at maturity to you of any and all such instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting an such instruments or other indebtedness or obligations hereinbefore referred to ..., provided, however, that the liability of the undersigned shag not exceed at any one time the aggregate principal sum of P100,000.00 ...

The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect until written notice shall have been received by you that it has been revoked by the undersigned, ... 9

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby

Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.

In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is reversed and set side. The case is remanded to the court of origin with instructions to set aside the motion to dismiss, and to require defendant Residoro Chua to answer the complaint after which the case shall proceed as provided by the Rules of Court. No costs.

RCBC v Arro

The surety agreement which was earlier signed by Enrique Go., Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code.

These cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

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

to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

Republic of the PhilippinesSUPREME COURT

Baguio City

SECOND DIVISION

 

G.R. No. 103066 April 25, 1996

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs.HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent International Corporate Bank certain sums of money, and the appellate court's resolution of October 17, 1989 denying petitioner's motion for reconsideration.

The facts are as follows:

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accomodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled "Continuing Surety Agreement" and dated December 1, 1978, whereby they bound themselves solidarily to pay Manilabank "obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or hereafter become indebted to the [Manilabank]." The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the surety, the first surety agreement being limited to US$333,830.00, while the second one is limited to US$334,087.00.

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration

of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed "the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified."

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic.

On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire insurance policy for the destruction of its properties.

In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital.

On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following Special Affirmative Defenses:

(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's liability is extinguished due to the accidental fire that destroyed its premises, which liability is covered by sufficient insurance assigned to plaintiff;

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now very much lesser than those stated in the complaint because of some payments made by the former;

(c) The complaint states no cause of action against WILLEX;

(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obliger;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial.

On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda.

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to pay to Interbank the following amounts:

(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per annumfrom August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of the said amount;

(b) Liquidated damages equivalent to 178 of the amount due; and

(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount due.

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its brief anymore.

On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court.

Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6, 1991:

The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial's motion for reception of evidence because the situation or situations in which we could exercise the power under BP 129 did not exist. Movant here has not presented any argument which would show otherwise.

Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of December 6, 1991 of the Court of Appeals.

Petitioner raises a number of issues.

[1] The main issue raised is whether under the "Continuing Guaranty" signed on April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to Manilabank.

As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In support of this contention Willex Plastic cites the following portion of the "Continuing Guaranty":

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter be specified.

The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was executed. In its complaint below, Interbank's predecessor-in-interest, Atrium Capital, alleged:

5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other defendant WPIC [Willex Plastic].

In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did so "for lack of knowledge or information of the same." But, at the hearing of the case on September 16, 1986, when asked by the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's counsel replied in the negative and manifested that "the plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor to the guarantee." 2

For its part Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified under cross examination by counsel for Willex Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila Banking Corporation." 3

It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. 4 At all events, Willex Plastic cannot now claim that its liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule. 5

Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation." 6

Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty." These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts. 7

Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. It can reasonably be assumed that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.

Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a "Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]."

[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. 8 Its contention is based on the fact that it is not a party either to the "Continuing Surety Agreement" or to the loan agreement between Manilabank and Interbank Industrial.

Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal." 9 In an analogous case, 10 this Court held:

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promissory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt applied so as to secure payments made by Interbank under the two "Continuing Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11 and Diño v. Court of Appeals 12 in support of its contention that a contract of suretyship or guaranty should be applied prospectively.

The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a contract of suretyship "is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated." There we found nothing in the contract to show that the paries intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the "Continuing Guaranty" clearly provided that the guaranty would cover "sumsobtained and/or to be obtained" by Inter-Resin Industrial from Interbank.

On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement. It was held that by its very nature a continuing suretyship contemplates a future course of dealing. "It is prospective in its operation and is generallyintended to provide security with respect to future transactions." By no means, however, was it meant in that case that in all instances a contrast of guaranty or suretyship should be prospective in application.

Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there 14 applies mutatis mutandis to the case at bar:

In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts.

In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond.

[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however:

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and Inter-Resin Industrial in favor of IUCP (now Interbank) reads:

If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s propertiesin the same manner as if all such liabilities constituted My/Our direct and primary obligations. (emphasis supplied)

This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under the same agreement:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt

and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter he specified.

[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make use of the same. On the otherhand, Willex Plastic rested its case without presenting evidence.

The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987.

On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for the last time" on April 2 and 30, 1987.

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order:

Considering that, as shown by the records, the Court had exerted every earnest effort to cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the assistance of the defendant Willex the defendant Inter-Resin Industrial is hereby deemed to have waived the right to present its evidence.

On the other hand, Willex Plastic announced it was resting its case without presenting any evidence.

Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing be postponed to August 11, 1987. The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on October 13, 1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987. However, Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly the hearing was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable.

Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was declared to have waived its evidence.

To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting evidence and requested instead for time to file a memorandum.

There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing that Inter-Resin Industrial has already paid its obligation to Interbank.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner.

SO ORDERED.

Regalado, Romero, Puno and Torres, Jr., JJ., concur.

WILLEX PLASTIC INDUSTRIES, CORPORATION, vs. CA and INTERNATIONAL CORPORATE BANK

Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled "Continuing Surety Agreement", whereby they bound themselves solidarily to pay Manilabank.

Thereafter, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guarantee "the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified."

Following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither

one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic.

Inter-Resin Industrial paid some of the amounts due. Willex Plastic denied the material allegations of the complaint. It argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial.

As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial.

Issue: Whether under the "Continuing Guaranty" signed on April 2, 1979, Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount by Interbank to Manilabank.

Held: Yes. Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was executed.

Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial.

Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation."

Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty.

Willex Plastic admitted that it was "to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a 'Continuing Guaranty' was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]."

Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal."

G.R. No. 80078 May 18, 1993ATOK FINANCE CORPORATION, petitioner, vs.COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.Syquia Law Offices for petitioner.Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did:

(1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor. The word"indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them, here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute

of limitations,or whether such indebtedness may be or otherwise become unenforceable. 1 (Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreement follow:

(2) This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor.

(3) The obligations hereunder are joint and several and independent of the obligations of the Principal. A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically waived or released by an instrument in writing executed by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship.

xxx xxx xxx 2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto;

(c). Each assigned Contract arises out of the sale of merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become, contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim;

(d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract;

(e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived;

(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contracts and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and

(h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue.

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a

memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED. 4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986.  5 Petitioner alleged that the writ of execution was served on private respondents. 6

However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case."

In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987:

(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of consideration without any evidence whatsoever [being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court. 8 (Emphasis in the original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for acontinuing suretyship to include obligations enumerated in paragraph 2 of the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt(Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement. 10(Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and

literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity of the additional bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship. This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts the amount of which is not yet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the

provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen thatthe surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guarantee may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. 13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.14

Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:

Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus:

(1) if there is a period (or length of time) agreed upon, then for such period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment — if debt was due at the time of the assignment

(b) one year from maturity — if debt was not yet due at the time of the assignment..

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984. Both dates were beyond the warranty period.

In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause ofaction. 15 (Emphasis supplied)

Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and . . .

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The

payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of such receivables.

WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

Atok Finance v CA; SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI

Atok and Sanyu Chemical entered into a Continuing Suretyship Agreement in favor of Atok Finance with the latter being the creditor and Sanyu Chemical and several stockholders as sureties. Sanyu Chemical, in consideration of receipt from Atok Finance of the amount of P105,000.00, assigned several receivables in favor of Atok. Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

Atok Finance commenced action against Sanyu Chemical, and the sureties before the RTC to collect the sum of P120,240.00. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

It is the contention of respondents that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract: first, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered 'future debt' as envisioned by this law.

Issue: 1. May a surety agreement, being an accessory contract, be effected to secure future (non-existing) debts? May the continuing suretyship agreement be declared null and void for alleged lack of consideration since there was still no pre-existing obligation for the surety to attach to?

2. Whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

Held: 1. Surety agreements may secure future debts. It is true that a guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not,

however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic.

The argument of respondents has been debunked in the cases of National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc. and in Rizal Commercial Banking Corporation v. Arro.

Atok Finance v CA

FACTS: On 27 July 1979, private respondents Sanyu Chemical Corporation as principal and Sanyu Trading Corporation along with individual private stockholders of Sanyu Chemical as sureties, executed a Continuing Suretyship Agreement in favor of Atok Finance as creditor.

In 1981, Sanyu Chemical assigned its trade receivables outstanding to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension of up to one hundred twenty (120) days without penalties.

In 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect a sum of money plus penalty charges starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

After trial the trial court rendered a decision in favor of Atok Finance. On appeal the CA reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance.

ISSUE: Whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it.

Whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

HELD: Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforced if not valid. So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered 'future debt' as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served as the principal obligation between the parties. Furthermore, the 'future debts' alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement."

A guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation." Moreover, Article 2053 of the Civil Code states that a guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured."

Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

As regards the second issue, the contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. It relied on Article 1629 of the Civil Code which provides: In case the assignor in good faith should have

made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity."

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant. Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured when the Deed of Assignment was executed.

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code is not material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege but rather ex contractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. The obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents.

The Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-20469             August 31, 1965

PEDRO C. PASTORAL, petitioner, vs.MUTUAL SECURITY INSURANCE CORPORATION and THE HONORABLE COURT OF APPEALS, respondents.

San Juan, Africa and Benedicto for petitioner.Vicente L. San Luis for respondents.

REYES, J.B.L., J.:

Petition by Pedro C. Pastoral for the review and reversal of a decision of the Court of Appeals (in its Case CA-G.R. No. 29180-R), that absolved the Mutual Security Insurance Corporation of its liability to the said petitioner, reversing the decision of the Court of First Instance of Manila.

The facts are stated by the Court of Appeals to be as follows:

It appears that on and from October 1, 1957, plaintiff Pedro C. Pastoral leased a crane to defendant Mapada & Company, Inc., at a monthly rental of P900.00, Exhibit A. The contract provides that if the crane be not returned 10 days after notice therefor, defendant will pay plaintiff P15,000, as the value of the crane. In compliance with paragraph 2(b) of Exhibit A, defendant on October 22, 1957, put up a surety bond, Exhibit B, in the total amount of P15,000 executed by appellant Mutual Security Insurance Corporation to fully and faithfully guarantee compliance by defendant of "all the conditions and obligations" under the lease contract. Upon request of defendant which was expecting some money from the construction contract with the government about the end of November, plaintiff deferred its collection of rentals for the months of October and November, 1957 until the beginning of December; but when no payment was made despite demands, plaintiff advised, and demanded payment from, the surety company on December 5, 1957, Exhibit C. Up to the date of the trial and despite numerous demands by plaintiff, defendant failed to pay any rental (except P2,000 in March, 1958 from the Bureau of Public Highways) nor to return the crane to plaintiff.

After trial, judgment was rendered in favor of plaintiff and against the defendants, ordering the latter solidarity to pay the plaintiff the sum of P7,700 as unpaid rentals up to and including the month of September, 1958 when the complaint was filed plus P900 as monthly rental from the month of October, 1958 until the crane is actually returned, or in default thereof to pay to plaintiff the sum of P15,000 for the crane, provided that the amount for which appellant Mutual Security Insurance Corporation shall be liable shall not exceed the sum of P15,000; and to pay the costs.

Only the surety company appealed, urging that the trial court erred in not holding that it was released from liability under the surety bond which had become null and void from the failure of plaintiff to report within five days to appellant the violation of the lease contract.

The Contract of Lease of Construction Equipment, Exhibit A, provides inter alia: "2. That the lessee obligates to pay a monthly rental of Nine Hundred Pesos (P900) Philippine Currency payable at the residence of the LESSOR ..."; while the surety bond, Exhibit B, after guaranteeing compliance with the lease contract provides: "Any violation of said contract will be reported to the herein Surety Company within (5) days, otherwise, this bond will be null and void."

Upon the facts above narrated, the Court of Appeals decided that Pastoral's failure to notify the surety of the principal's defaults between October 6-10 and November 6-10, 1957, and in notifying the surety only on December 5, 1957, constituted a violation of the conditions of the bond that exonerated the surety from liability.

Unable to obtain reconsideration of the decision, Pastoral resorted to this Court.

We find the appealed decision to be in error.

On the basis that Pastoral received a copy of the bond (containing the requirement to notify the surety of any default within 5 days) only on November 21, 1957 — and this date is not seriously disputed — Pastoral's obligation to notify it within five (5) days of the defaults in the payment of the first two monthly rentals, falling due in early October and early November, had become impossible of performance, so that compliance with the 5-day notice requirement had become excused for those two months. No reason is shown why Pastoral should anticipate that the surety would impose this condition when the lease contract merely required that lessee Mapada & Co., Inc. should furnish a surety bond. That Pastoral knew nothing about such a condition before November 21 is further emphasized by the fact that in late October or early November he agreed with Mapada & Co., Inc., to defer payment of the October and November rentals to the end of November.

By imposing on Pastoral the condition of notifying it within 5 days of default, the surety company made it necessary that Pastoral should accept the bond; and Pastoral could not do so before learning of it.

This Court has ruled that where the guaranty requires action by the creditor before the obligation becomes fixed, it is not binding until accepted (National Bank vs. Garcia, 47 Phil. 63; Texas Co. [Phil.] Inc. vs. Alonzo, 73 Phil. 90). The rule is grounded on common sense; otherwise, the debtor and the guarantor could easily defraud the creditor by inserting in the bond conditions that would render it nugatory.

The suretyship contract, therefore, was not perfected and was not binding on Pastoral until November 21, 1957, when he received copy thereof and tacitly accepted it. By then two defaults had already occurred (even disregarding the extension agreement of October 31, hereinafter discussed); and Pastoral was in no position to give notice of them within 5 days after default, as required by the bond, because the latest happened on November 5. The 5-day period to notify expired November 10, and Pastoral only learned of the existence of the condition on November 21. Ad impossibilia nemor tenetur. In fact, by not notifying Pastoral earlier, the surety must be deemed to have waived the condition as to rentals already due, since a condition is deemed fulfilled when the obligor voluntarily prevents its fulfillment (Civ. Code, Art. 1186).

The Court of Appeals held that Pastoral was duty-bound to know and secure copy of the surety contract within a reasonable time from its execution on October 22, 1957, and that not having done so, he was chargeable with its contents. We find no justification for this pronouncement. If anyone was obligated to notify Pastoral of the conditions attached to the bond, that one was the guarantor. Pastoral was not obligated to inquire, since his assent to the condition was necessary; and if no acceptable bond was forthcoming, he could always rescind the lease of the machinery to Mapada & Co., Inc., and recover his crane.

The Court of Appeals further held that the act of Pastoral in granting to the debtor on October 31, 1957 time up to the end of November, 1957 to pay the rentals that fell due on the first five days of October and November, without the surety's consent, constituted a material alteration that discharged the surety. We agree with appellant that this view is untenable. When Pastoral agreed on October 31 that the October and November rentals be paid at the end of November, he had not yet learned of them on November 21. On the latter date, the debtor was not yet in default, because the extension given had wiped out the previous failures to pay on October 5 and November 5. The first default after the bond had become effective in law (on November 21) occurred on the last day of November, and Pastoral gave notice thereof to the surety on the 5th day of December, within the five-day period prescribed by the bond.

A contract of guaranty or suretyship is only prospective, and not retroactive in operation (Socony Vacuum, Corp. vs. Miraflores, 67 Phil. 304; El Venceder vs.

Canlas, 44 Phil. 699; Asiastic Petroleum Co. vs. De Pio, 46 Phil. 167), unless a contrary intent is clearly shown. Consequently, Pastoral, was entitled to assume that the notice provided by the surety bond did not, and was not intended to include any defaults incurred prior to his acceptance. The surety, which drafted the bond, could have expressly provided, if it so chose, that the five-day notice therein provided should extend to the amounts of falling due on October 5 and November 5, but the surety failed to do so, and cannot blame Pastoral therefor.

The fault in the reasoning of the Court of Appeals lies in its assumption that the surety bond became effective immediately, without taking into account that the five-day notice provision required the creditor's assent to become effective and binding This assent could not be given before November 21, when Pastoral learned of the condition for the first time and tacitly agreed to it, as shown by his notice to the surety on December 5, that the principal debtor had defaulted.

It is worth stressing here that this Court has repeatedly decided (Pacific Tobacco Co. vs. Lorenzana and Visayan Surety, L-8086, October 31, 1957; Phil. Surety vs. Royal Oil Products, L-9981, Oct. 31, 1957; Atkins Kroll & Co. vs. Reyes, L-11936, April 30, 1959) that the rule holding sureties to be favorites of the law, and their contracts to be strictissimi juris, does not apply to compensated sureties, following United States Fidelity & Guaranty Co. vs. Golden Pressed & Fire Brick Co., 191 U.S. 416, 48 L. ed. 242:

We are familiar with the old rule of strict construction in favor of the surety, based upon the underlying principle that formerly parties became sureties, not for hire but as a matter of accommodation, usually lending their names through motives of friendship, and hence a surety obligation would be construed most strongly in their favor. But the rule "strictissimi juris" has no application to surety companies, organized for the purpose of conducting an indemnity business at established rates of compensation.

and which, it may be added, protect themselves against loss by exacting adequate counterbonds.

WHEREFORE, the decision of the Court of Appeals is reversed, and that of the Court of First Instance of Manila is upheld and confirmed. Respondent-appellee Mutual Security Insurance Corporation shall pay the costs in all instances.

Bengzon, C.J., Concepcion, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Bautista Angelo, J., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner, vs.INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with

interest at 6% per annum beginning September 15, 1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts

which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom

and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Millsought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even

if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:

Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection.

Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls underfraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. ChiANACLETO R. CHI 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may

not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay untilafter petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the

guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURTG.R. No. 74886 December 8, 1992, 216 scra 257

--presentment for payment

FACTS: Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan. To effect payment for said machineries, Philippine Rayon Mills opened a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank through its correspondent in Japan. Two of these drafts were accepted by Philippine Rayon Mills while the others were not. Petitioner instituted an action for the recovery of the sum of money it paid to Nissho as Philippine Rayon Mills was not able to pay its obligations arising from the letter of credit. Respondent court ruled that with regard to the ten drafts which were not presented and accepted, no valid demand for payment can be made. Petitioner however claims that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon.

ISSUE:

Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon.

RULING:

In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. There was in fact no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The said section provides that presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. L-46658 May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner, vs.HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.

The Chief Legal Counsel for petitioner.

Ortille Law Office for private respondent.

FERNAN, C.J.:p

In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 1 of the Court of First Instance of Rizal, Branch XXI, respectively granting private respondent Tayabas Cement Company, Inc.'s application for a writ of preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon City and Negros Occidental and denying petitioner's motion for reconsideration thereof.

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). 2 As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land covered by Transfer Certificate of Title No. 55323 of the Register of Deeds of Quezon City known as the La Vista property.

Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment.

Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed the following documents to secure this loan accommodation: Surety Agreement dated August 5, 1964 3 and Covenant dated August 6, 1964. 4

The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings. Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. 5

In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured by a real estate mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under Act 3138, as amended by Act 4118 and under Presidential Decree No. 385 of the real estate mortgage over the properties known as the La Vista property covered by TCT No. 55323. 6 PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties located at Isabela, Negros Occidental and covered by OCT No. RT 1615.

The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB was the highest bidder with a bid price of P1,000,001.00. However, when said property was about to be awarded to PNB, the representative of the mortgagor-spouses objected and demanded from the PNB the difference between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal account. It was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred only to the personal account of the mortgagor spouses without reference to the account of TCC.

To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's Office to proceed with the sale of the subject real properties to satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of interest, commission charges and other expenses owed by said spouses as sureties of TCC. 7 Said petition was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.

On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution finding that the questions raised by the parties required the

reception and evaluation of evidence, hence, proper for adjudication by the courts of law. Since said questions were prejudicial to the holding of the foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale unless and until there be a court ruling on the aforementioned issues." 8

Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition for mandamus 9against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 in order to satisfy both the personal obligation of the spouses Arroyo as well as their liabilities as sureties of TCC. 10

On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate of Sale. 11

Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance of Rizal, Pasig, Branch XXI acomplaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession of the imported machinery and equipment. 13

On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order 14 and on March 4, 1977, granted a writ of preliminary injunction. 15 PNB's motion for reconsideration was denied, hence this petition.

Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a) that it contravenes P.D. No. 385 which prohibits the issuance of a restraining order against a government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 thereof; b) that the writ countermands a final decision of a co-equal and coordinate court; c) that the writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and, d) private respondent TCC has not shown any clear legal right or necessity to the relief of preliminary injunction.

Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar, firstly because no foreclosure proceedings have been instituted against it by PNB and secondly, because its account under the L/C has been fully satisfied with the repossession of the imported machinery and equipment by PNB.

The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has been extinguished by the repossession of PNB of the imported cement plant machinery and equipment.

We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. 16 In the case of Vintola vs. Insular Bank of Asia and America 17 wherein the same argument was advanced by the Vintolas as entrustees of imported seashells under a trust receipt transaction, we said:

Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as, through no fault of their own, they were unable to dispose of the seashells, and that they have relinquished possession thereof to the IBAA, as owner of the goods, by depositing them with the Court.

The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt.

xxx xxx xxx

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. As defined in our laws:

(h) "Security interest" means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only.

xxx xxx xxx

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a security

title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor.

xxx xxx xxx

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in question does not affect IBAA's right to recover the advances it had made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. 18

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. 19 Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. 20 As aforesaid, the repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.

Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. 21 As sureties, the Arroyo spouses are primarily liable as original promissors and are bound immediately to pay the creditor the amount outstanding. 22

Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions like herein petitioner PNB are required to foreclose on the collaterals and/or securities for any loan, credit or accommodation whenever the arrearages on such account amount to at least twenty percent (20%) of the total

outstanding obligations, including interests and charges, as appearing in the books of account of the financial institution concerned. 23 It is further provided therein that "no restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties . . ." 24

It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in compliance with the mandate of P.D. 385. This being the case, the respondent judge acted in excess of his jurisdiction in issuing the injunction specifically proscribed under said decree.

Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the order of a co-equal and coordinate court. Since Branch V of the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of mortgage over the La Vista property and rendered judgment in relation thereto, then it retained jurisdiction to the exclusion of all other coordinate courts over its judgment, including all incidents relative to the control and conduct of its ministerial officers, namely the sheriff thereof. 25 The foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with Branch XXI of the same CFI, but instead should have first sought relief by proper motion and application from the former court which had exclusive jurisdiction over the foreclosure proceeding. 26

This doctrine of non-interference is premised on the principle that a judgment of a court of competent jurisdiction may not be opened, modified or vacated by any court of concurrent jurisdiction. 27

Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can only enforce their writs of injunction within their respective designated territories. 28

WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against private respondent.

Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

PHILIPPINE NATIONAL BANK vs. PINEDAG.R. No. L-46658 May 13, 1991

Facts:

The Arroyo Spouses obtained a loan of P580K from PNB to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of Tayabas Cement Company, Inc. (TCC). As security for said loan, the spouses executed a real estate mortgage over a parcel of land known as the La Vista property.

TCC filed with petitioner bank an application and agreement for the establishment of an 8 year deferred letter of credit (L/C) for $7M in favor of Toyo Menka Kaisha to cover the importation of a cement plant machinery and equipment. Upon approval of the application and opening of an L/C by PNB in favor of Toyo Menka Kaisha for the account of TCC, the Arroyo spouses executed a surety agreement. The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha made the corresponding drawings against the L/C as scheduled.

TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings. Thus, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. PNB foreclosed the real estate mortgages executed by the spouses Arroyo in TCC’s favor. PNB contends that the sale of La Vista was made to satisfy not only the amount owed by the spouses on their personal loan but also the amount of expenses owed by said spouses as sureties of TCC. The Arroyos oppose the foreclosure, contending primarily that repossession of the imported machinery and equipment by PNB amounted to dacion en pago that extinguished their obligation as surety to TCC.

Issue:

WON the repossession of the machinery was tantamount to a dacion en pago that absolved Arroyo spouses as surety? NO.

Held:

There was no dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. The repossession of the machinery and equipment in question was merely to secure the payment of TCC’s loan obligation and not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.

PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. PNB’s possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC’s loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself.

The transfer of ownership to extinguish a pre-existing obligation is the essence in dation in payment, therefore it is not a consensual contract, but a real contract and novates the original debt relationship into a consummated sale.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 33174 July 4, 1991

PHILIPPINE NATIONAL BANK, petitioner, vs.THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON SURETY CO., INC., and ESTANISLAO E. DEPUSOY, trading under the style of E.E. DEPUSOY CONSTRUCTION, respondents.

Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar T. Basa and Roland A. Niedo for petitioner.

Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon Surety Co., Inc.

F.M. Ejercito for respondent E.E. Depusoy Construction.

DAVIDE, JR., J.:

Before Us is a petition for the review on certiorari of the decision of the Court of Appeals promulgated on 12 December 1970 in CA-G.R. No. 36615-R 1 affirming, with modification, the decision of the then Court of First Instance (now Regional Trial Court) of Manila, Branch VII, dated 30 September 1959 in Civil Case No. 35163 2 an action for collection of sum of money filed by petitioner against private respondents. The dispositive portion of the trial court's decision reads:

IN VIEW WHEREOF:

1. The case against Luzon Surety Co. is dismissed but its counterclaim is also dismissed for lack of sufficient merit;

2. Defendant Estanislao Depusoy is condemned to pay unto the Philippine National Bank the respective sums as principal of P35,000.00, P30,000.00, P10,000.00, and P25,000.00 together with the interests as outlined in the statement of account set forth in the body of this decision. No pronouncements as to costs.

SO ORDERED. 3

The dispositive portion of the decision of respondent Court of Appeals reads:

WHEREFORE, with the modification that the defendant Depusoy shall pay 10% interest on the amount of the judgment, the decision of the trial court is hereby affirmed in all other respects. Without pronouncement as to costs. 4

However, immediately preceding this is a paragraph reading:

We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not appear to be unreasonable, the stipulations of the parties should be given effect.

As carefully summarized by the Court of Appeals, the relevant facts in this case are as follows:

On August 6, 1955, Estanislao Depusoy, doing business under the name of E.E. Depusoy Construction, and the Republic of the Philippines, represented by the Director of Public Works, entered into a building contract, Exhibit 2-Luzon, for the construction of the GSIS building at Arroceros Street, Manila, Depusoy to furnish all materials, labor, plans, and supplies needed in the construction. Depusoy applied for credit accommodation with the plaintiff. This was approved by the Board of Directors in various resolutions subject to the conditions that he would assign all payments to be received from the Bureau of Public Works of the GSIS to the bank, furnish a surety bond, and the surety to deposit P10,000.00 to the plaintiff. The total accommodation granted to Depusoy was P100,000.00. This was later extended by another P10,000.00 and P25,000.00, but in no case should the loan exceed P100,000.00, Exhibits K-1, K-2, K-3 and K-4. In compliance with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from the GSIS as follows:

That I, Estanislao Depusoy, of legal age, Filipino, married to Lourdes G. Gonzales, doing business under the style of E. E. San Beda Subdivision, Manila, for and in consideration of certain loans, overdrafts or other credit accommodations to be granted by the PHILIPPINE NATIONAL BANK, Manila, have assigned, transferred and conveyed and by these presents do hereby

assign, transfer and convey unto the said PHILIPPINE NATIONAL BANK, its successors and assigns all payment to be received from my contract with the Bureau of Public Works, Republic of the Philippines date (sic) August 6, 1955.

By virtue of this assignment it is hereby understood that the assignor hereby acknowledges the monies, sums or payments due from the Bureau of Public Works, Republic of the Philippines, and which are hereby assigned to the PHILIPPINE NATIONAL BANK as monies, sums and payments belonging to the PHILIPPINE NATIONAL BANK, and that any act or misappropriation or conversion which the assignor or the latter's representatives may commit with respect to the said sums, monies and payments will subject the assignor or the latter's representatives to the criminal liabilities imposed by the Penal Code and such other damages which the Civil Code provides.

It is further understood that the PHILIPPINE NATIONAL BANK can collect and receive any and all sums, monies and payments above-mentioned from the Bureau of Public Works, Republic of the Philippines, and for that matter said bank is hereby authorized to indorse for deposit or for encashment any and all checks, treasury warrants, money orders, drafts and other kinds of negotiable instruments that might be issued in connection with the payment herein assigned.

This assignment shall be irrevocable subject to the terms and conditions of the promissory notes, overdrafts and any other kind of documents which the PHILIPPINE NATIONAL BANK have (sic) required or may require the assignor to execute to evidence the above-mentioned obligation.

Luzon thereafter executed two surety bonds, one for the sum of P40,000.00 Exhibit D, and the other for P60,000.00, Exhibit E. Exhibit its D and E, except for the amount, are expressed in the same words as follows:

That we, E. E. DEPUSOY CONSTRUCTION CO., of 32 2nd Street, San Beda Subdv., Manila, as principal and LUZON SURETY COMPANY, INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held and firmly bound unto the PHILIPPINE NATIONAL BANK of Manila in the sum of SIXTY THOUSAND PESOS ONLY (P60,000.00), Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our

heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents:

The conditions of the obligation are as follows:

WHEREAS, the above bounden principal, on the . . . . day of September, 1956 in consideration of a certain loan of (P60,000.00) executed a Deed of Assignment in favor of the Philippine National Bank on all payments to be received by him from the Bureau of Public Works in connection with a contract dated August 6, 1956.

WHEREAS, said PHILIPPINE NATIONAL BANK, requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said Agreement.

NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreement stipulated in said Agreement then, this obligation shall be null and void; otherwise, it shall remain in full force and effect.

The liability of LUZON SURETY COMPANY, INC., under this bond will expire January 31, 1957. Furthermore, it is hereby agreed and understood that the LUZON SURETY COMPANY, INC. will not be liable for any claim not discovered and presented to the company within THREE (3) months from the expiration of this bond and that the obligee hereby waives his right to file any court action against the surety after the termination of the period of the three months above mentioned.

With the consent of Luzon, the bond was extended for another 6 months from January 31, 1957.

Under the credit accommodation granted by the plaintiff bank, Depusoy obtained several amounts from the bank. On January 14, 1957, Depusoy received P50,000.00 from the bank which he promised to pay in installments on the dates therein indicated, Exhibit A. On January 17, 1957, he received another P50,000.00 under the same conditions as the promissory note Exhibit A, except with respect to the time of payment. Under this arrangement all payments made by the GSIS were payable to the Philippine National Bank. The treasury warrants or checks, however, were not sent directly to the plaintiff. They were received by Depusoy, who in turn delivered them to the plaintiff

bank. The plaintiff then applied the money thus received, first, to the payment of the amount due on the promissory notes at the time of the receipt of the treasury warrants or checks, and the balance was credited to the current account of Depusoy with the plaintiff bank. A total of P1,309,461.89 were (sic) paid by the GSIS to the plaintiff bank for the account of Estanislao Depusoy, Exhibit 1-Luzon. Of this amount, P246,408.91 were (sic) paid according to Exhibit 1 for the importation of construction materials, and P1,063,408.91 were (sic) received by the Loans and Discounts Department of the plaintiff bank. This amount was disposed off by the plaintiffs Loans & Discounts Department as follows:

a) P795,976.64 were (sic) credited to the current account of Depusoy with the plaintiff;

b) P20,000.00 were (sic) credited to the plaintiffs Foreign Department;

c) P2,552.94 were (sic) credited to the payment of interest; and

d) P210,000.00 were (sic) applied to the principal of indebtedness. (Exh. N-1).

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime in September, 1957, the Bureau of Public Works rescinded its contract with Depusoy. No further amounts were thereafter paid by the GSIS to the plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest, is over P100,000.00. Demands for payment were made upon Depusoy and Luzon, and as no payment was made, . . . 5

herein petitioner filed with the trial court a complaint (Civil Case No. 35163) against Estanislao Depusoy and private respondent Luzon Surety Co. Inc. (LSCI).

After trial on the merits, the trial court rendered a decision the dispositive portion of which is above adverted to.

In dismissing the case as against LSCI, the trial court ruled that the surety bonds it issued, Exhs. "D" and "E";

. . . guaranteed only the faithful performance of the deed of assignments, Exhibit C, and nothing else. That the bonds were extended by the letters Exhs. E and I did not change their conditions. . . . 6

Petitioner appealed from said decision to the Court of Appeals, (C.A.-G.R. No. 6615-R) relying on the following assigned errors:

I

The trial court erred in holding that defendant-appellee Luzon Surety Company, Inc. "guaranteed only the faithful performance of the deed of assignment, Exh. "C", and nothing else"; in holding the defense of the appellee Luzon Surety Company, Inc., that there has been no breach of the terms and conditions of the bonds Exhs. "D" and "E"; in finding that the "bonds" can only be therefore understood to guarantee that the payment due from the GSIS to Depusoy would be delivered unto the bank.

II

The trial court erred in not finding that the bonds (Exhs. "D" and "E") should be read jointly with the resolutions approving the loan (Exhs. "K" to "K-5"), the promissory notes and the deed of assignment in the determination of the true intent of the parties in the execution of the bonds which are the basis of the liability of the defendant-appellee Luzon Surety Company, Inc., in not considering resolutions Exhs. "K" to "K-5"; promissory notes Exhs. "B", "G", and "H" and the deed of assignment, Exh. "C" as integral parts of the surety bonds Exhs. "D" and "E" as therein incorporated by reference in said surety bonds as such necessarily bound the appellee Luzon Surety Company to their terms.

III

The trial court erred in not construing the terms of the bonds in favor of the plaintiff-appellant PNB and against the defendant-appellee Luzon Surety Company, Inc.

IV

The lower court erred in not holding that the bonds Exhs. "D" and "E" and letters of extension Exhs. "F" and "I" were compensated

surety agreements executed as required by PNB board resolution Exhs. "K" to "K-5" for the purpose of securing the payment to the PNB of the amount advanced by the said bank to the appellee Estanislao Depusoy to finance the construction of the GSIS building subject to the construction contract Exh. "2-Luzon" or Exh. "O-PNB"; in not finding that Exhs. "F" and "I" are indubitable proofs that defendant-appellee Luzon Surety Company, Inc., is liable for the repayment of the P100,000.00 loan and the additional accommodations granted to the defendant-appellee Estanislao Depusoy; and in not finding and holding that Exhs. "D" and "E" in the sense that they have been extended so as to secure new accommodations aside from the original obligation mentioned in said bonds.

V

The trial court erred in finding that all payments due from the GSIS construction to Depusoy were actually delivered unto the bank; and in not finding that Depusoy made diversions from these amounts for which the surety should be bound to answer under the terms of its bonds.

VI

The trial court erred in not finding that when appellee Depusoy incurred breach (sic) in his construction contract with the Bureau of Public Works said default on the part of the principal in his contract resulted in a consequent breach of his undertaking under the deed of assignment; and that consequently any breach in the undertaking of the principal in said deed of assignment communicated liability to the surety; in not finding likewise that breach on the part of the appellee Depusoy in his undertaking under the promissory notes meant breach of the terms of the deed of assignment which incorporated said promissory notes and that this breach in the deed of assignment communicated liability to the surety under the terms of the bonds; and that trial court (sic) erred in not finding that there was a breach of the bonds due to the failure of the appellee Luzon Surety Company, Inc. to see to it that the full amount of P1,309,461.89 remitted by the GSIS to the PNB was actually received by the PNB; in not finding that the PNB did not receive all the amounts still due to the said institutions as remitted by the GSIS under the terms of the deed of assignment.

VII

The trial court erred in not sentencing defendant-appellee Estanislao Depusoy to pay the attorney's fees equivalent to 10% of the amounts due and the costs of the suit.

VIII

The trial court erred in not admitting in the evidence proof of the amount actually received by the foreign department of the PNB and the letter of the GSIS to the PNB as part of the rebuttal evidence of the defendant-appellee (see evidences (sic) offered as part of the record on appeal for purposes of review).

IX

The trial court erred in relying exclusively for its decision on the relation of facts presented by the appellee-Luzon Surety Company; disregarding evidences (sic) presented by the PNB consist of documentary evidences (sic) disclosing patent facts appearing on the face of said documents and that consequently the decision is not based on the real facts and law of the case; and consequently dismissing the case against the Luzon Surety.7

In due course the Court of Appeals rendered the decision adverted to above. In disposing of the assigned errors, it patiently examined and analyzed the facts and made an extensive, exhaustive and well-reasoned disquisition thereon which We deem necessary to quote:

The assignment of error maybe (sic) reduced into one single question, — what is the obligation of Luzon under the surety bonds, or, stated otherwise, what obligation had been guaranteed by Luzon under the terms of the surety bonds? It is the contention of the plaintiff that the surety bonds, Exhibits D and E, guaranteed the payment of the loans or the debt of Depusoy to the plaintiff to the extent of P100,000.00. Luzon, however, contends that what it guaranteed was the performance of Depusoy of his obligation under the Deed of Assignment, Exhibit C, and not other agreements between Depusoy and the bank. This contention was upheld by the lower court. This, we believe is the correct construction of the surety bonds. Under the surety bonds, Depusoy and Luzon bound themselves to the plaintiff in the sum of P100,000.00. It recited that the principal, Depusoy, and Luzon bound themselves jointly and severally to the PNB under the following conditions: that "in consideration of a certain loan,

Depusoy executed a Deed of Assignment in favor of the PNB on all payments to be received by him from the Bureau of Public Works in connection with a contract of August 6, 1956"; that the PNB required the principal to give a good and sufficient bond to secure the full and faithful performance on his part of said agreement; and that, "if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions, and agreements stipulated in said agreement, this obligation shall be null and void". Now, what are the undertakings, covenants, terms, conditions, and agreements stipulated in the said agreement or Deed of Assignment? The undertakings of the principal Depusoy, under the Deed of Assignment, Exhibit C, were to assign, transfer, and convey to the plaintiff bank all payments to be received by Depusoy from the Bureau of Public Works; that Depusoy acknowledged that such sums assigned and received by the plaintiff would belong to the PNB, and if any conversion should be made by the assignor or his representative, he would be criminally liable; that the PNB could collect and receive all sums and monies, and payments, and the bank was authorized to endorse for deposit or for encashment all checks or money orders, or negotiable instruments that it might receive in connection with the assignment. Nowhere in the Deed of Assignment nor in the bonds did Luzon guarantee that Depusoy would pay his indebtedness to the plaintiff and that upon Depusoy's default, Luzon would be liable. When the terms of the agreement are clear, there can be no room for construction. If the intention of the parties, and particularly of Luzon, was to guarantee the payment of the debt of Depusoy to the plaintiff, the bonds would have recited in its preamble that the principal was indebted to the PNB and that the PNB required the principal to give a good and sufficient bond to secure the faithful performance on his part of the terms of the promissory notes. Instead of doing so, it recited that in consideration of a certain loan, the principal had executed a Deed of Assignment. The recital of the loan in the amount of P40,000.00, Exhibit D and P60,000.00, Exhibit E, is merely a statement of the cause or consideration of the Deed of Assignment and not a statement of the obligation. The Deed of Assignment necessarily was executed for a consideration, otherwise, it would be null and void. The obligation recited in the surety bonds, Exhibits D and E, is not the loan, but the Deed of Assignment; and that precisely was what was guaranteed by Luzon in the bonds, Exhibits D and E, as shown by the following:

1) Contrary to the usual practice of the plaintiff, Luzon did not sign the promissory notes, Exhibits A and B;

2) Although the resolutions of the Board of Directors required that the surety should make a deposit of P10,000.00, Luzon did not

make such a deposit, the verbal testimony of Delfin Santiago, Manager of the Loans and Discounts Department, to the contrary notwithstanding. The documentary evidence was submitted to prove that was the fact;

3) Delfin Santiago finally admitted that what was guaranteed was not the loan but the Deed of Assignment.

Delfin Santiago testified as follows:

Q Did you inform the Luzon Surety Company, Inc. of your actuation on this fact, that is in your giving Mr. Depusoy portions of the payments made by the GSIS to the Philippine National Bank pursuant to the Deed of Assignment?

A No, because I understand that the Luzon Surety Company, Inc. stands as surety on that assignment on which the full payment of the contract is assigned to the payments. (TSN, p. 54)

xxx xxx xxx

Q Usually Mr. Santiago, it is the practice of the Philippine National Bank in cases where a surety company guarantees the account of the borrower, the Philippine National Bank requires the surety company to sign the promissory note as a co-maker, is it not?

A In case the condition is approved, the surety I remember very well, the last accommodation given to Mr. Depusoy . . . that was the condition, but the Luzon Surety Company, Inc. did not want to sign, so at the request of the Luzon Surety Company, Inc. and Mr. Depusoy, the approved accommodation was modified in such a way as only to the surety bond.

ATTY. NERI: If Your Honor please. We object to the question, it was not covered by the direct examination.

COURT: Answer.

A Well, apparently that was the intention because you decided to sign jointly and severally the promissory note.

Q And because that was our intention the Philippine National Bank agreed to that desire of Luzon Surety Company, Inc. by

issuing only a similar surety bond and not signing as co-maker, and jointly and severally on the promissory note?

ATTY. NERI: Objection Your Honor, the contract is the best evidence.

COURT: Answer.

A As usual, as at the beginning, we take it that your bonding the Deed of Assignment is the understanding that all payments for the whole contract will go to us. (TSN, pp. 55-57, July 21, 1958)

xxx xxx xxx

Q Did you read the terms of the bond?

A Yes, sir, that's right.

Q And you further noted in the bond it merely guaranteed the deed of assignment, is that correct? of Mr. Depusoy?

A Yes, sir.

ATTY. CRUZ: And not this particular loan, is it not?

ATTY. NERI: We refer to the document, Your Honor.

COURT: Sustained.

(TSN, pp. 9-10, June 26, 1959)

xxx xxx xxx

ATTY. NERI: Now, Mr. Depusoy in his testimony stated that when you received these amounts from the GSIS and issued credit memos . . . in favor of Mr. Depusoy, you did not notify the Luzon Surety Company, Inc. of the fact of the issuance of this (sic) credit memos in favor of Mr. Depusoy will you state to this Honorable Court the reason why is that you did not give notice to the Luzon Surety Company, Inc.?

A I did not notify the Luzon Surety Company, Inc. of this transaction because the bond filed by the Luzon Surety Company, Inc., but the terms of the bond filed by Luzon Surety Company is that they understand the transaction of Mr. Depusoy with the Philippine National Bank.

COURT: They understand the transaction to be. . .

WITNESS: . . . The nature of the transaction with Mr. Depusoy in the sense that as we . . . as appearing in this bond Exhibit D . . . all payments to be received by him from the Bureau of Public Works in connection with the contract to secure the full and faithfully performance on his part of the said agreement, the agreement referred to is the assignment of payment in connection with the contract of Mr. Depusoy with the GSIS.

(TSN, pp. 27-29 June 1, 1959)

In support of his contention that the surety bond was intended to guarantee the loan, the appellant gave the following grounds or reasons:

1) The resolution of the Board of Directors of the plaintiff approving the loan or credit accommodation to Depusoy required that Depusoy should put up a bond executed by the Luzon Surety Company, Inc., Exhibits K-3, K-4 and K-5. The resolutions of the Board of Directors were unilateral acts of the plaintiff and were conditions imposed upon the debtor, Depusoy, Luzon was not a party to these resolutions and under the rule of res inter alios acta, they cannot bind or prejudice Luzon in the absence of evidence that the terms of the resolutions had been brought to the attention of Luzon and that it had acceded thereto. All that the bond stated is that the PNB required the principal to give a good and sufficient bond. There can be no other consideration for the execution of the bonds other than stated thereon in the absence of allegation that they did not express the true intention of the parties.

2) Appellant contends that the promissory notes and the building contract mentioned in the Deed of Assignment became part and parcel of the Deed of Assignment under the principle of incorporation by reference. We agree that the Deed of Assignment became part and parcel of the bond, but to say that all promissory notes, overdrafts, and any other kind of documents which the PNB might require the assignor to execute to evidence the aforementioned obligation were also incorporated by

reference to the surety bond and became obligation of Luzon is to include in the assignment, covenants and obligations beyond the contemplation of the parties. The appellant relies on the last paragraph of the Deed of Assignment which reads: "This assignment shall be irrevocable and subject to the terms and conditions of the promissory notes, overdrafts, and any other kind of document which the PNB can require or may require the assignor to execute to evidence the above-mentioned obligation".

It is argued that under this stipulation, Luzon guaranteed the payment of the promissory notes which are the subject of this action and also the building contract between Depusoy, its principal, and the Bureau of Public Works. This is a very far-fetched construction. This paragraph does not impose any obligation upon Depusoy. All that was required of Depusoy was to execute such documents which might be required by the PNB to evidence the Deed of Assignment. The words of the phrase "subject to" are words of qualification and not of contract (Cox vs. Vat 149, 110 pp. 96-148 CCH 147) and means subject to, meaning under the control, power or dominion or subordinate to and not being words of contract imposing upon defendant no contractual obligation (40 Words & Phrases 386-389). What was evidently intended is the Deed of Assignment when it stated "subject to the terms and conditions of the promissory notes and overdrafts" was that any amount received by the PNB would be applied to the payment of the promissory notes and overdrafts in accordance with their terms and conditions as they fell due because the Deed of Assignment was executed not for the purpose of making the PNB the owner of all the monies received from the GSIS, but as a security for the payment of the debt of Depusoy arising from the credit accommodation granted to him by the appellant. And that this was the intention is evident from the fact that upon receipt of the treasury warrants and checks from the GSIS, the appellant applied the same to the payment of the debt of Depusoy which was due with interest and the remainder was credited to Depusoy's current account. This balance was subject to the free disposal of Depusoy. Hence, out of the over P1 million received by the Loans & Discounts Department of the appellant, almost P800,000.00 were credited to the current account of Depusoy and only a little over P200,000.00 was applied to his debt. Appellant contends that since in the Deed of Assignment, Depusoy undertook to assign, transfer, and convey to PNB all payments to be received by him from his contract with the Bureau of Public Works, Luzon had thereby guaranteed the faithful performance by Depusoy of his building contract with the Bureau of Public Works, and Depusoy having defaulted in his building contract by reason of which the Bureau of Public Works rescinded the building contract, the PNB did not receive from the

GSIS the full contract price of over P2 million. This indeed is a very far-fetched construction of the contract. What was transferred or assigned by Depusoy to the PNB were all payments to be received by him under the contract with the Bureau of Public Works. Necessarily, what was to be received by Depusoy depends upon his performance under the contract. As long as he faithfully performed the contract, he would receive from the GSIS the amount due him. From the moment he defaulted and failed to comply with the terms of the contract, he would receive nothing and he could not assign what he did not have. To argue that under the terms of the Deed of Assignment, Luzon also guaranteed the faithful performance of the building contract of Depusoy with the Bureau of Public Works is fanciful and wishful thinking.

3) Appellant also contends that under Exhibits F and I, it can be seen that what was really intended to be guaranteed by the surety agreement was the payment of the loan. We quote Exhibits F and I.

Relative to our above-captioned bonds in the amount of P40,000.00 dated May 28, 1956 and September 24, 1956, respectively, please be advised that same is hereby extended for a further period of six (6) months from January 31, 1957. All other terms and conditions of our above-mentioned bonds shall remain the same except the period of expiration herein above mentioned. These bonds also cover the new accommodation given our Principal.

Relative to the above numbered bonds, in the amount of P40,000.00 and P60,000.00 dated May 28, 1956 and September 24, 1956, respectively, the account secured thereby having been reduced by virtue of payments made by our principal, which, according to him has but a balance of P75,000.00 we have the honor to inform you that we are agreeable to the extension of further credit to our principal to the extent of the amount of the said bonds, under the same terms and conditions thereof.

At first glance, from the statement in Exhibit F, which reads: "This bond also covers the new accommodation given our principal", and in Exhibit I, that "we are agreeable to the extension of further credit to or principal to the extent of the amount of the said bond", it would appear that Luzon was referring to the obligation of Depusoy to pay the loan. But particular attention must be paid to the statement in Exhibit F that "all of the terms and conditions of our above-mentioned bonds shall remain the same except the period of expiration herein below mentioned". What was really

agreed by Luzon was the extension of the duration of the surety bond, for under the terms of the bonds they expired six months from their respective dates. Any statement in Exhibit I that may be construed as referring to the debt of Depusoy was made only by an Asst. Manager who evidently was not familiar with the terms of the surety bond. It must be noted that the surety bond was executed by CS Rodriguez, General Manager. Moreover, it cannot prevail over the testimony of Delfin Santiago, Manager of the Loans & Discounts Department, that what was guaranteed by the surety bond was the Deed of Assignment.

It is also contended that if what was intended to be guaranteed by Luzon is the Deed of Assignment, the surety bond guaranteed nothing, because with the execution of the Deed of Assignment, nothing thereafter remained to be done. This is not true, for the terms of the Deed of Assignment, Depusoy authorized the PNB to receive all monies due from the Bureau of Public Works and to endorse for deposit all instruments of credit that might be issued in connection with the payments therein assigned. Under this stipulation, Luzon guaranteed that all the monies due Depusoy under his building contract with the Bureau of Public Works should be paid to the PNB. It is true that all the checks and warrants issued by the GSIS were to be made payable to the PNB. But under the arrangement between the PNB, GSIS, and the Bureau of Public Works, and Depusoy, it was Depusoy who received the warrants or checks either from the Bureau of Public Works or from the GSIS, and Depusoy delivered the same to the PNB. The PNB did not take the trouble of going to the GSIS or the Bureau of Public Works to get the checks. One reason because the PNB did not know when any amount would be due. There is nothing then that could prevent an arrangement thereafter between Depusoy and the GSIS, or the Bureau of Public Works to make the checks payable to Depusoy, and Depusoy from forging the signature of the PNB and appropriating the money. This would be a violation of the Deed of Assignment for which Luzon would be liable.

It is not disputed that no payment was made directly to Depusoy after the Deed of Assignment. All amounts due to Depusoy were paid to the PNB for the account of Depusoy. It is true that in accordance with Exhibit M, only P1,063,408.91 were received by the Loans and Discounts Department of the plaintiff bank, and that of the total amount of P1,309,461.89 paid by the GSIS, P246,062.98 were paid for the importation of construction materials. As to the so-called 10% retention fund, there is no evidence that the Bureau of Public Works had retained any amount. In any case what was assigned was "all payments to be received" under the building contract, and the 10% retention was

not to be received by Depusoy until certain conditions had been met.

In its eight assignment of error, the appellant contends that the lower court in not admitting proof of the amount actually received by the PNB and the letter of the GSIS, Exhibit Q (sic). Aside from the purely technical reason for their rejection, their admission cannot affect the result. Exhibit Q is a letter of the General Manager of the GSIS to plaintiff advising plaintiff of the rescission of the building contract. Exhibits Q, P, P-1 and P-2 are statements of the amounts received by plaintiff's foreign department. There is no evidence that the GSIS had paid any amount to Depusoy in violation of the Deed of Assignment. Not a single cent had been received directly by Depusoy from the GSIS or the Bureau of Public Works.

xxx xxx xxx

We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not appear to be unreasonable, the stipulation of the parties should be given effect. 8

Its motion for reconsideration 9 having been denied by the respondent Court of Appeals in its resolution of 1 February 1971, 10 petitioner filed the instant petition on 3 March 1971 asserting therein that:

. . . the Decision and the Resolution of respondent COURT (Annexes A and B) are both not in accord with the evidence, the law, and jurisprudence on the matter.

I. THE SURETY BONDS COVER THE PRINCIPAL LOANS, THE SURETY THEREBY BECOMING LIABLE UPON DEFAULT OF THE LATTER.

II. EVEN ASSUMING ARGUENDO THAT THE BONDS SECURE ONLY THE DEED OF ASSIGNMENT, STILL THE SURETY IS LIABLE FOR FAILURE OF THE PRINCIPAL TO COMPLY WITH THE TERMS OF SUCH DEED.

III. THE DISPOSITIVE PORTION OF THE DECISION SHOULD BE AMENDED TO THE END THAT PRIVATE RESPONDENT

RESPONDENTS BE ADJUDGED LIABLE FOR ATTORNEY'S FEES. 11

In support of its petition, petitioner practically summoned the same arguments which it relied upon before the Court of Appeals.

On 3 March 1971 private respondent filed a motion to dismiss the petition 12 on the following grounds:

1. That the petition is without merit;

2. That the question raised therein are too unsubstantial to require consideration; and

3. That the question raised are factual.

In the resolution of 8 March 1971 this Court dismissed the petition for being factual and for lack of merit; 13however, upon motion for reconsideration 14 this Court reconsidered the resolution and gave due course to the petition. 15 The petitioner was then required to submit its Brief, 16 which it complied with on 12 July 1971 . 17Private respondent LSCI filed its brief on 10 August 1971. 18 Private respondent Depusoy did not file any.

Except for the third assigned error, We find no merit in this petition. The issues raised are factual.

The findings of facts of the Court of Appeals can withstand the most incisive scrutiny. They are sufficiently supported by the evidence on record and the conclusions drawn therefrom do not justify a departure from the deeply rooted and well settled doctrine that findings of facts of the Court of Appeals are conclusive on this Court,19 considering that the recognized exceptions thereto 20 do not come to the rescue of petitioner.

We are in full accord with the conclusion of the trial court and the Court of Appeals that the bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy of his obligation under the Deed of Assignment and not to guarantee the payment of the loans or the debt of Depusoy to petitioner to the extent of P100,000.00. The language of the bonds is clear, explicit and unequivocal. It leaves no room for interpretation. Article 1370 of the Civil Code provides:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

Besides, even if there had been any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. As concretely put in Article 2055 of the Civil Code, "A guaranty is not presumed, it must be expressed and cannot extend to more than what is stipulated therein."

In the recent case of Umali, et al. vs. Court of Appeals, et al., 21 We reiterated the unrippled rule that the liability of the surety is measured by the terms of the contract, and, while he is liable to the full extent thereof, such liability is strictly limited to that assumed by its terms. 22

In La Insular vs. Machuca Go Tanco, et al., supra., this Court held:

It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligations of the surety cannot be extended by implication beyond its specified limits.

Article 1827 of the Civil Code so discloses (Uy Aloc vs. Cho Jan Ling, 27 Phil. Rep., 427); and with this doctrine the common law is accordant. As was said by Justice Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed., 189):

Nothing can be clearer, both upon principles and authority, than the doctrine that the liability of a surety is not to be extended, by implication, beyond the terms of his contract. To the extent and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther.

As earlier adverted to, there is merit in the third assigned error. The paragraph immediately preceding the decretal portion of the decision of respondent Court of Appeals reads as follows:

We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not appear to be unreasonable, the stipulation of the parties should be given effect.

The dispositive portion of the questioned decision should then be modified in the sense that the "10% interest" indicated therein should be considered and understood as and for attorney's fees.

WHEREFORE, with the above modification, the Decision of the Court of Appeals of 12 December 1970 in CA-G.R.No. 36615-R is AFFIRMED, with costs against petitioner.