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SUPREME COURT
Manila
FIRST DIVISION
FERNANDEZ, J.:
This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R.
No. 38824-R promulgated on July 19, 1967 entitled "The Imperial Insurance, Inc.,
petitioner vs. Hon. Walfrido de los Angeles, Judge of the Court of First Instance of Rizal,
Branch IV, Quezon City, et al, respondents," the dispositive part of which reads:
SO ORDERED. 1
Civil Cases Nos. Q-5213 and 5214 were jointly tried and the decision
therein rendered was in favor of the plaintiffs. This decision was affirmed
by this Court on appeal in cases CA-G.R. NOS. 33783-R and 33784-R.
The decision of this Court, having become final, the records of the cases
were remanded to the Court of First Instance of Rizal, Quezon City
Branch, for execution of judgment.
Accordingly, on June 24, 1966, the Court below, presided by the herein
respondent Judge, Hon. Walfrido de los Angeles, issued the writs of
execution of judgment in said cases. However, on August 20, 1966, the
Provincial Sheriff of Bulacan returned the writs of execution' unsatisfied in
whole or in part'.
On January 19, 1967, the respondent Judge issued an order granting the
issuance of the writ of execution against the bonds riled by the petitioner
(Exhibit J, petition). 2
On January 25, 1967, the petitioner filed a petition for certiorari with prayer for for
preliminary injunction with the Court of Appeals to restrain the enforcement of the writ of
execution. 3
The petition was given due course and on January 30, 1967 a writ of preliminary
injunction was issued. 4 After the parties had submitted their respective pleadings and
memoranda in lieu of oral argument, the Court of Appeals rendered the decision now
under review.
The defendant, Felicisimo V. Reyes, in the abovementioned cases died during the
pendency of the trial. He was duly substituted by his surviving spouse, Emilia T. David,
an administratrix of his intestate estate. 5
The petitioner assigns as errors allegedly committed by the Court of Appeals the
following:
II
III
IV
Anent the first error, the petitioner contends that the Court of Appeals erred in holding
that the respondent judge could legally issue the writ of execution against the petitioner
as surety in a counterbond (bond to dissolve attachment) on the basis of an ex
parte motion for execution which was allegedly never served upon the surety nor set for
hearing. This contention is devoid of merit.
The counterbonds filed to lift the writs of attachment executed by the herein petitioner,
The Imperial Insurance, Inc., for and in behalf of the deceased defendant Felicisimo V.
Reyes in favor of the plaintiffs, private respondents herein Rosa V. Reyes and
Consolacion V. Reyes in Civil Case No. Q-5214 docketed with the Court of First
Instance of Rizal, Branch IV, Quezon City, are clearly the bonds contemplated under
Sec. 17, Rule 57 of the Rules of Court which provides:
Sec. 17. When execution returned unsatisfied, recovery had upon bond. If
the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbond given pursuant to the provisions of this rule
to secure the payment of the judgment shall become charged on such
counter-bond, 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.
This section allows the counterbond filed to lift an attachment to be charged only after
notice and summary hearing in the same action.
The records show that the notice and hearing requirement was substantially complied
with in the instant case.
Prior to the filing of the ex parte motion for a writ of execution, the respondents filed a
motion for recovery on the surety bonds where the petitioner was duly notified and the
said motion was heard on September 24, 1966. 7Moreover, on November 23, 1966 the
petitioner filed a motion for reconsideration of the order dated November 10, 1966
rendering judgment against the petitioner on its counter-bonds in the amount of
P60,000.00 in Civil Case No. Q-5213 and P40,000.00 in Civil Case No. Q-5214. 8 The
respondent judge set the hearing of the ex parte motion for writ of execution together
with the motion for reconsideration of the order dated November 10, 1966 on December
17, 1966 at 8:30 o'clock in the morning. 9 The petitioner received the notice of the said
hearing on December 9, 1966 as evidenced by Registry Return Receipt No.
40122. 10 On January 9, 1967, the respondent Judge issued an order denying the
motion for reconsideration dated November 23, 1966 for lack of merit. 11 in an order
dated January 19, 1967, the motion for writ of execution was granted by the respondent
judge. 12
It is thus clear from indubitable documents on record that the requirements of notice and
hearing had been satisfactorily complied with by the respondents. The first error
assigned is overruled.
The petitioner asserts that the Court of Appeals gravely erred in holding that the plaintiff
who obtained judgment against the defendant may legally choose "to go directly" after
the surety in a counterbond without prior exhaustion of the defendant's properties. This
contention is likewise not meritorious.
Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the
Rules of Court is an ordinary guaranty where the sureties assume a subsidiary liability,
the rule cannot apply to a counterbond where the surety bound itself "jointly and
severally" (in solidum) with the defendant as in the present case. The counterbond
executed by the deceased defendant Felicisimo V. Reyes, as principal, and the
petitioner, The Imperial Insurance, Inc., as solidary quarantor to lift the attachment in
Civil Case No. Q-5213 is in the following terms:
The counterbond executed by the same parties in Civil Case No. Q-5214, likewise
states.
Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the
principal, the deceased defendant Felicisimo V. Reyes. In accordance with Article 2059,
par. 2 of the Civil Code of the Philippines, 15excussion (previous exhaustion of the
property of the debtor) shall not take place "if he (the guarantor) has bound himself
solidarily with the debtor." Section 17, Rule 57 of the Rules of Court cannot be
construed that an "execution against the debtor be first returned unsatisfied even if the
bond were a solidary one, for a procedural rule may not amend the substantive law
expressed in the Civil Code, and further would nullify the express stipulation of the
parties that the surety's obligation should be solidary with that of the defendant." 16
Hence the petitioner cannot escape liability on its counter-bonds based on the second
error assigned.
As regards the third error, the petitioner submits that the Court of Appeals erred in not
holding that the order dated November 10, 1966 rendering judgment against the
counter-bonds, as well as the order dated January 9, 1967, denying the motion for
reconsideration thereof, and the order of the writ of execution dated January 19, 1967
are final and appealable in accordance with Sec. 2, Rule 41 of the Rec. Rules of Court.
This submission is also without merit.
To recover against the petitioner surety on its counter-bonds it is not necessary to file a
separate action. Recovery and execution may be had in the same Civil Cases Nos. Q-
5213 and Q-5214, as sanctioned by Sec. 17, Rule 57, of the Revised Rules of Court.
The decision in Civil Cases Nos. Q-5213 and Q-5214, having become final, the
respondent judo issued the writs of execution in said cases. On August 20, 1966, the
Provincial Sheriff of Bulacan returned the writs of execution "unsatisfied in whole or in
part." 17
Sec. 12, Rule 57 of the Revised Rules of Court 18 specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount
equal to the value of the property attached as determined by the judge"; and that upon
filing the counterbond "the property attached shall be delivered to the party making the
deposit or giving the counterbond or the person appearing in his behalf, the deposit or
counterbond standing in place of the property so released."
The counter-bonds merely stand in place of the properties so released. They are mere
replacements of the properties formerly attached, and just as the latter may be levied
upon after final judgment in the case in order to realize the amount adjudged so is the
liability of the counter sureties ascertainable after the judgment has become final. 19
The judgment having been rendered against the defendant, Felicisimo V. Reyes, the
counter-bonds given by him and the surety, The Imperial Insurance, Inc., under Sec. 12,
Rule 57 are made liable after execution was returned unsatisfied. Under the said rule, a
demand shall be made upon the surety to pay the plaintiff the amount due on the
judgment, and if no payment is so made, the amount may be recovered from such
surety after notice and hearing in the same action. A separate action against the
sureties is not necessary. 20
In the present case, the demand upon the petitioner surety was made with due notice
and hearing thereon when the private respondents filed the motion for recovery on the
surety bonds dated September 9, 1966 and to which the petitioner filed their opposition
dated September 24, 1966. 21
Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ
of execution must be returned unsatisfied, in whole or in part; (2) the plaintiff must
demand the amount due under the judgment from the surety or sureties, and (3) notice
and hearing of such demand although in a summary manner, complied with, the liability
of the petitioner automatically attaches.
In effect, the order dated November 10, 1966 rendering judgment against the counter-
bonds was a superfluity. The respondent judge could have issued immediately a writ of
execution against the petitioner surety upon demand.
Moreover, the finality and non-appealability of the order dated November 10, 1966 is
made certain and absolute with the issuance of the order of execution dated January
19, 1967 23 upon the filing of the ex parte motion for writ of execution 24 of which the
petitioner was duly notified by the respondent Judge and which was duly heard. 25 The
general rule is that an order of execution is not appealable, otherwise a case would
never end. The two exceptions 26 to this rule are: (1) where the order of execution varies
the tenor of the judgment; and (2) when the terms of the judgment are not very clear,
and there is room for interpretation. The case at bar does not fall under either exception.
There is no showing that the order of execution varies the tenor of the judgment in Civil
Cases Nos. Q-5213 and Q-5214, nor of the order dated November 10, 1966, but is in
fact, in consonance therewith and the terms of the judgment are clear and definite,
therefore, the general rule of non-appealability applies.
It is no longer necessary to discuss the fourth error assigned because of this Court's
finding that the liability expressly assumed by the petitioner on the counter-bonds is
solidary with the principal debtor, the deceased defendant, Felicisimo V. Reyes. As a
solidary guarantor, the petitioner, the Imperial Insurance, Inc., is liable to pay the
amount due on such counter-bonds should the creditors, private respondents herein,
choose to go directly after it. 27
Under the law and under their own terms, the counter-bonds are only conditioned upon
the rendition of the judgment. As held by this Court in the aforecited case of Luzon Steel
Corporation vs. Sia 28 "where under the rule and the bond the undertaking is to pay the
judgment, the liability of the surety or sureties attaches upon the rendition of the
judgment, and the issue of an execution and its return nulla bona is not, and should not
be a condition to the right to resort to the bond." Thus, it matters not whether the
Provincial Sheriff of Bulacan, in making the return of the writ of execution served or did
not serve a copy thereof with notice of attachment on the administratrix of the intestate
estate of Felicisimo V. Reyes and filed a copy of said writ with the office of the clerk of
court with notice in accordance with See. 7 (f), Rule 57 of the Revised Rules of Court.
The petitioner surety as solidary obligor is liable just the same.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
AVANCEÑA, J.:
By giving a bond in the sum of P9,663 executed by "Manila Compañia de Seguros," the
Universal Trading Company was allowed by the Insular Collector of Custom to withdraw
from the customhouse sundry goods imported by it and consigned through the bank of
the Philippine Islands. Subsequently, the Bank of the Philippine Islands claimed the
value of the goods, and the Insular Collector of Customs obligated the "Manila
Compañia de Seguros" to pay the sum of P9,663, the amount of the bond. Before
paying this amount to the Insular Collector of Customs, the "Manila Compañia de
Seguros" obtained from the Universal Trading Company and Tuason, Tuason & Co., a
solidary note for the sum of P9,663 executed by said companies in its favor. Before
signing said note, Tuason, Tuason & Co., in turn, caused the Universal Trading
Company and its president Antonio Machuca, personally, to sign a document (Exhibit
B), wherein they bound themselves solidarily to pay, reimburse, and refund to the
company all such sums or amounts of money as it, or its representative, may pay or
become bound to pay, upon its obligation with "Manila Compañia de Seguros," whether
or not it shall have actually paid such sum or sums or any part thereof. The Universal
Trading Company having been declared insolvent, "Manila Compañia de Seguros"
brought an action in the lower court against Tuason, Tuason & Co. to recover the value
of the note for P9,663 and obtained final judgment therein, which was affirmed by this
court on appeal, for the total sum of P12,197.27, which includes the value of the note
with interest thereon. 1 Subsequently, all the rights of Tuason, Tuason & Co. were
transferred to the plaintiff Tuason, Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this action to recover of Antonio Machuca the
sum of P12,197.27 which it was sentenced to pay in the case filed against it by "Manila
Compañia de Seguros," plus P3,000 attorney's fees, and P155.92 court's costs and
sheriff's fees, that is, a total of P15,353.19, together with P1,180.46 as interest upon the
sum of P15,353.19 at the rate of 10 per cent per annum from October 8, 1922, to July 8,
1923, and interest on the sum of P16,535.65 at the rate of 10 per cent from July 8,
1923, until this sum was paid, and, in addition the sum of P1,653.65 for attorney's fees
in this case. For its cause of action, the plaintiff alleges that it had paid "Manila
Compañia de Seguros" the sum of P12,197.27, the amount of the judgment against it.
The dispositive part of the judgment appealed from is as follows:itc-a1f
It appears from the evidence that what the plaintiff alleged to be a payment made to
"Manila Compañia de Seguros", for the satisfaction of the judgment rendered in favor of
the latter is the execution by Albina Tuason of a document Exhibit D in favor of "Manila
Compañia de Seguros." In this document Albina Tuason declares that she assumes and
makes hers the obligation to pay the amount of said judgment to "Manila Compañia de
Seguros" within one year and mortgages a property described in the document as
security for this obligation. This obligation of Albina Tuason was accepted by the
"Manila Compañia de Seguros," in the following terms: "I accept the foregoing security
executed by Miss Albina Tuason in favor of `Manila Compañia de Seguros.'" It, thus,
appears that the plaintiff has not in fact paid the amount of the judgment to "Manila
Compañia de Seguros." The action brought by the plaintiff is that which surety, who
pays the debt of the debtor, is entitled to bring to recover the amount thus paid (art.
1823, Civil Code). It is evidence that such a payment not having been made the alleged
cause of action does not exist.
The plaintiff company argues that, at all events, it is entitled to bring this action under
article 1843 of the Civil Code, which provides that the surety may, even before making
payment, bring action against the principal debtor. This contention of the plaintiff is
untenable. The present action, according to the terms of the complaint, is clearly based
on the fact of payment. It is true that, under article 1843, an action lies against the
principal debtor even before the surety pays the debt, but it clearly appears in the
complaint that this is not the action brought by the plaintiff. Moreover this article 1843
provided several cumulative remedies in favor of the surety, at his election, and the
surety who brings an action under this article must choose the remedy and apply for it
specifically. At any rate this article does not provide for the reimbursement of any
amount, as is sought by the plaintiff.lawphi1.net
But although the plaintiff has not as yet paid "Manila Compañia de Seguros" the amount
of the judgment against it, and even considering that this action cannot be held to come
under article 1843 of the Civil Code, yet the plaintiff is entitled to the relief sought in view
of the facts established by the evidence. The plaintiff became bound, by virtue of a final
judgment, to pay the value of the note executed by it in favor of "Manila Compañia de
Seguros." According to the document executed solidarily by the defendant and the
Universal Trading Company, the defendant bound himself to pay the plaintiff as soon as
the latter may have become bound and liable, whether or not it shall have actually paid.
It is indisputable that the plaintiff became bound and liable by a final judgment to pay
the value of the note to "Manila Compañia de Seguros."
The defendant also contends that the document executed by Albina Tuason in favor of
"Manila Compañia de Seguros" assuming and making hers the obligation of Tuason,
Tuason & Co., was a novation of the contract by substitution of the debtor, and relieved
Tuason, Tuason & Co. from all obligation in favor of "Manila Compañia de Seguros." As
to this, it is enough to say that if this was what Albina Tuason contemplated in signing
the document, evidently it was not what "Manila Compañia de Seguros" accepted. As
above stated, "Manila Compañia de Seguros" accepted this document only as
additional security for its credit and not as a novation of the contract.
Our conclusion is that the plaintiff has the right to recover of the defendant the sum of
P9,663, the value of the note executed by the plaintiff in favor of "Manila Compañia de
Seguros" which the plaintiff is under obligation to pay by virtue of final judgment. We do
not believe, however, that the defendant must pay the plaintiff the expenses incurred by
it in the litigation between it and "Manila Compañia de Seguros." That litigation was
originated by the plaintiff having failed to fulfill its obligation with "Manila Compañia de
Seguros," and it cannot charge the defendant with expenses which it was compelled to
make by reason of its own fault. It is entitled, however, to the expenses incurred by it in
this action brought against the defendant, which are fixed at P1,653.65 as attorney's
fees.
The judgment appealed from is modified, and the defendant is sentenced to pay the
plaintiff the sum of P9,663, with interest thereon at the rate of 10 per cent per annum
from July 19, 1923, when the complaint was filed until full payment thereof, plus the sum
of P1,653.65 for attorney's fees, without special pronouncement as to costs. So
ordered.
[G.R. No. 138544. October 3, 2000]
DECISION
PANGANIBAN, J.:
The Case
This is the main principle used in denying the present Petition for Review under
Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of
the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which
reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability
to pay any amount stated in the judgment.
Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners
Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court
(RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank
& Trust Company the sum of P39,129,124.73 representing the balance of the loan as of
May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00
as attorneys fees and litigation expenses and to pay the costs.
SO ORDERED.
The Facts
The antecedent material and relevant facts are that defendant-appellant Sta. Ines
Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a
Timber License Agreement issued by the Department of Environment and Natural
Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta.
Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos
(P8,000,000.00) to assist the latter in meeting the additional capitalization requirements
of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at
200% of the lines plus JSS of Rodolfo M. Cuenca.
5. The bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-
mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980
(Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As
additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca
executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be indebted to the bank x x x by
virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of
the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line
with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No.
TD/TLS-3599-81 for said amount (Exhibit C).
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6)
other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree
[h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos
(P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85,
DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to
cover the amounts of the abovementioned additional loans against the credit line.
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-
appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf.
P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et
Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion
of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank
(cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol.
II, p. 33 to 34).
Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security
Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate
amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00),
Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches
of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second
tranche (the Second Loan) to be applied in the manner and for the purpose stipulated
hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness)
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred
[f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-
SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus,
SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after
trial on the merits in a decision by the court a quo, x x x from which [Respondent]
Cuenca appealed.
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the bank to
Sta. Ines.Accordingly, such novation extinguished the Indemnity Agreement, by which
Cuenca, who was then the Board chairman and president of Sta. Ines, had bound
himself solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been executed without
notice to, much less consent from, Cuenca who at the time was no longer a stockholder
of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified
that the credit accommodation was for a total amount of P8 million, and that its expiry
date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans
obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without the
consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished
the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta.
Ines decided to materially alter or modify the principal obligation after the expiry date of
the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues
We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of appeal,
that doctrine should be applied reasonably, rather than literally. The right to appeal,
where it exists, is an important and valuable right. Public policy would be better served
by according the appellate court an effective opportunity to review the decision of the
trial court on the merits, rather than by aborting the right to appeal by a literal application
of the procedural rules relating to pro forma motions for reconsideration.
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service
and filing of pleadings and other papers shall be done personally. Except with respect to
papers emanating from the court, a resort to other modes must be accompanied by a
written explanation why the service or filing was not done personally. A violation of this
Rule may be cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the
aforecited rule was mandatory, and that only when personal service or filing is not
practicable may resort to other modes be had, which must then be accompanied by a
written explanation as to why personal service or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in
time and distance.[14] This explanation sufficiently shows that personal service was not
practicable. In any event, we find no adequate reason to reject the contention of
petitioner and thereby deprive it of the opportunity to fully argue its cause.
ART. 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other.
Novation of a contract is never presumed. It has been held that [i]n the absence of
an express agreement, novation takes place only when the old and the new obligations
are incompatible on every point.[15] Indeed, the following requisites must be established:
(1) there is a previous valid obligation; (2) the parties concerned agree to a new
contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms of the 1989 Contract
were not more onerous.[17] Since the original credit accomodation was not extinguished,
it concludes that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the 1980
credit accomodation.This is evident from its explicit provision to liquidate the principal
and the interest of the earlier indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness)
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan
Agreement were used to pay-off the original indebtedness serves to strengthen this
ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8
million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for
payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative
covenants not found in the earlier obligation. As an example of a positive covenant, Sta.
Ines undertook from time to time and upon request by the Lender, [to] perform such
further acts and/or execute and deliver such additional documents and writings as may
be necessary or proper to effectively carry out the provisions and purposes of this Loan
Agreement.[23] Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it participate in any
merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was necessarily
extinguished also, pursuant to Article 1296 of the Civil Code, which provides:
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
the P8 million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness.Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility. Hence,
his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of
the Civil Code, which specifically states that [a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an
earlier case,[26] the Court explained the rationale of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the suretys consent would deprive the surety of his right to pay
the creditor and to be immediately subrogated to the creditors remedies against the
principal debtor upon the maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period.
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that
it was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate courts reliance on that document, contending that it was not a binding
agreement because it was not signed by the parties. It adds that it was merely for its
internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing
the accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the
Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to
assist SIMC in meeting the additional capitalization requirements for its logging
operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10
November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8
million credit accommodation as contained in the very document it presented to the
courts. Indeed, it cannot take advantage of that document by agreeing to be bound only
by those portions that are favorable to it, while denying those that are disadvantageous.
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest
Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in
consideration of the credit accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a
commercial bank duly organized and existing under and by virtue of the laws of the
Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the
BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ----
hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon,
evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and
delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly
and severally with the CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the CLIENT may be
indebted to the BANK under and by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendment, conversions
and revivals of the aforesaid credit accommodation(s), as well as of the amount or
amounts of such other obligations that the CLIENT may owe the BANK, whether direct
or indirect, principal or secondary, as appears in the accounts, books and records of the
BANK, plus interest and expenses arising from any agreement or agreements that may
have heretofore been made, or may hereafter be executed by and between the parties
thereto, including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of
all the terms and conditions contained in the aforesaid credit accommodation(s), all of
which are incorporated herein and made part hereof by reference.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8 million
limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license
to modify the nature and scope of the original credit accommodation, without informing
or getting the consent of respondent who was solidarily liable. Taking the banks
submission to the extreme, respondent (or his successors) would be liable for loans
even amounting to, say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and extensions
thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what
is stipulated. It is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety.[31] Likewise, the Court has ruled that it is a
well-settled legal principle that if there is any doubt on the terms and conditions of the
surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous
contracts are construed against the party who caused the ambiguity. [32] In the absence
of an unequivocal provision that respondent waived his right to be notified of or to give
consent to any alteration of the credit accommodation, we cannot sustain petitioners
view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that
the bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:
5. The Bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original loan
accommodation.[34] Following the banks reasoning, such modification would not be valid
as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom
no notice need be given. The latters liability would thus be more burdensome than that
of the former. Such untenable theory is contrary to the principle that a surety cannot
assume an obligation more onerous than that of the principal.[35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in
which the Court sustained a stipulation whereby the surety consented to be bound not
only for the specified period, but to any extension thereafter made, an extension x x x
that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is
hereby further agreed that in case of any extension of renewal of the bond, we equally
bind ourselves to the Company under the same terms and conditions as herein
provided without the necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be notified of any renewal or
extension of the bond which may be granted under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the alleged basis
of respondents waiver is vague and uncertain. It confers no clear authorization on the
bank or Sta. Ines to modify or extend the original obligation without the consent of the
surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety
does not authorize the bank to extend the scope of the principal obligation
inordinately.[37] In Dino v. CA,[38] the Court held that a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or
termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed P8
million, and (2) that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on or before
the aforementioned expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans, purportedly
under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could
not have guaranteed the 1989 Loan Agreement, which was executed after November
30, 1981 and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable
for the loan obtained after the payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the
surety Agreement specifically provided that each suretyship is a continuing one which
shall remain in full force and effect until this bank is notified of its revocation. Since the
bank had not been notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents
liability was confined to the 1980 credit accommodation, the amount and the expiry date
of which were set down in the Credit Approval Memorandum.
It is a common banking practice to require the JSS (joint and solidary signature) of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations.There are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate properties under the veil of
separate corporate personality,would extend to the personal assets of the
surety. Second, such surety would be compelled to ensure that the loan would be used
for the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in
1980 when the credit accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still agree to act as surety in
the 1989 Loan Agreement, because at that time, he was no longer an officer or a
stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind himself further to a
bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the bank
and bad faith on that of the principal debtor. Since that Loan Agreement constituted a
new indebtedness, the old loan having been already liquidated, the spirit of fair play
should have impelled Sta. Ines to ask somebody else to act as a surety for the new
loan.
In the same vein, a little prudence should have impelled the bank to insist on the
JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory
attempt at credit investigation would have revealed that respondent was no longer
connected with the corporation at the time. As it is, the bank is now relying on an
unclear Indemnity Agreement in order to collect an obligation that could have been
secured by a fairly obtained surety. For its defeat in this litigation, the bank has only
itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity
Agreement, which had been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioners submission that respondent waived his
right to be notified of, or to give consent to, any modification or extension of the 1980
credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained
before the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the
loan, is such undertaking of the former deemed to be that of a surety as an insurer of
the debt, or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before
May 12, 1990, with compounded interest at the rate of 6% per annum to be computed
every 30 days from the date thereof.1 On four occasions after the execution of the
promissory note and even after the loan matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No
payments were made after the last payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint3 against petitioner Palmares as the lone
party-defendant, to the exclusion of the principal debtors, allegedly by reason of
the insolvency of the latter.
During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages
should be; (2) whether the liability of the defendant (herein petitioner) is primary
or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor
with a subsidiary liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the
pleadings filed and the memoranda to be submitted by them. On November 26,
1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment
dismissing the complaint without prejudice to the filing of a separate action for a
sum of money against the spouses Osmeña and Merlyn Azarraga who are
primarily liable on the instrument.6 This was based on the findings of the court a
quo that the filing of the complaint against herein petitioner Estrella Palmares, to
the exclusion of the Azarraga spouses, amounted to a discharge of a prior party;
that the offer made by petitioner to pay the obligation is considered a valid tender
of payment sufficient to discharge a person's secondary liability on the
instrument; as co-maker, is only secondarily liable on the instrument; and that
the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court,
and rendered judgment declaring herein petitioner Palmares liable to pay
respondent corporation:
2. The sum equivalent to the stipulated penalty of three percent (3%) per
month, of the outstanding balance;
Contrary to the findings of the trial court, respondent appellate court declared
that petitioner Palmares is a surety since she bound herself to be jointly and
severally or solidarily liable with the principal debtors, the Azarraga spouses,
when she signed as a co-maker. As such, petitioner is primarily liable on the note
and hence may be sued by the creditor corporation for the entire obligation. It
also adverted to the fact that petitioner admitted her liability in her Answer
although she claims that the Azarraga spouses should have been impleaded.
Respondent court ordered the imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the
promissory note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to reject it
entirely; if he adheres, he gives his consent.
A. The Court of Appeals erred in ruling that Palmares acted as surety and is
therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do
not establish Palmares' solidary liability.
The basis of petitioner Palmares' liability under the promissory note is expressed
in this wise:
Petitioner contends that the provisions of the second and third paragraph are
conflicting in that while the second paragraph seems to define her liability as that
of a surety which is joint and solidary with the principal maker, on the other hand,
under the third paragraph her liability is actually that of a mere guarantor because
she bound herself to fulfill the obligation only in case the principal debtor should
fail to do so, which is the essence of a contract of guaranty. More simply stated,
although the second paragraph says that she is liable as a surety, the third
paragraph defines the nature of her liability as that of a guarantor. According to
petitioner, these are two conflicting provisions in the promissory note and the
rule is that clauses in the contract should be interpreted in relation to one another
and not by parts. In other words, the second paragraph should not be taken in
isolation, but should be read in relation to the third paragraph.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan
because the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings
filed by private respondent before the trial court. And, while petitioner may have
admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her or
the principal debtors in default for the simple reason that the latter subsequently
made a partial payment on the loan in September, 1991, a fact which was never
controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the
amount of P2,745,483.39 in favor of private respondent when, in truth and in fact,
the outstanding balance of the loan is only P13,700.00. Where the interest
charged on the loan is exorbitant, iniquitous or unconscionable, and the
obligation has been partially complied with, the court may equitably reduce the
penalty10 on grounds of substantial justice. More importantly, respondent
corporation never refuted petitioner's allegation that immediately after the loan
matured, she informed said respondent of her desire to settle the obligation. The
court should, therefore, mitigate the damages to be paid since petitioner has
shown a sincere desire for a compromise.11
At the outset, let it here be stressed that even assuming arguendo that the
promissory note executed between the parties is a contract of adhesion, it has
been the consistent holding of the Court that contracts of adhesion are not
invalid per se and that on numerous occasions the binding effects thereof have
been upheld. The peculiar nature of such contracts necessitate a close scrutiny
of the factual milieu to which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably against the
drafter thereof when justified in light of the operative facts and surrounding
circumstances.12 The factual scenario obtaining in the case before us warrants a
liberal application of the rule in favor of respondent corporation.
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case
the contract is called a suretyship.
Her pretension that the terms "jointly and severally or solidarily liable" contained
in the second paragraph of her contract are technical and legal terms which could
not be easily understood by an ordinary layman like her is diametrically opposed
to her manifestation in the contract that she "fully understood the contents" of
the promissory note and that she is "fully aware" of her solidary liability with the
principal maker. Petitioner admits that she voluntarily affixed her signature
thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only
by her own uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so under a misapprehension or in
ignorance of their legal effect, or as to the legal effect of the undertaking.15 The
rule that ignorance of the contents of an instrument does not ordinarily affect the
liability of one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is ordinarily no reason
for relieving her of liability.16
Petitioner would like to make capital of the fact that although she obligated
herself to be jointly and severally liable with the principal maker, her liability is
deemed restricted by the provisions of the third paragraph of her contract
wherein she agreed "that M.B. Lending Corporation may demand payment of the
above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in
the payment of the note," which makes her contract one of guaranty and not
suretyship. The purported discordance is more apparent than real.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship
contract merely elucidated on and made more specific the obligation of petitioner
as generally defined in the second paragraph thereof. Resultantly, the theory
advanced by petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
The alleged failure of respondent corporation to prove the fact of demand on the
principal debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual requirement, it is not
necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account.36 The underlying principle therefor is that a suretyship is a direct
contract to pay the debt of another. A surety is liable as much as his principal is
liable, and absolutely liable as soon as default is made, without any demand upon
the principal whatsoever or any notice of default.37 As an original promisor and
debtor from the beginning, he is held ordinarily to know every default of his
principal.38
Petitioner questions the propriety of the filing of a complaint solely against her to
the exclusion of the principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan. What petitioner is trying to imply is that
the creditor, herein respondent corporation, should have proceeded first against
the principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right
to proceed against the principal.39 Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of the contract, the
obligation of the surety is the same that of the principal, then soon as the
principal is in default, the surety is likewise in default, and may be sued
immediately and before any proceedings are had against the principal. 41 Perforce,
in accordance with the rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with the rule that his proper remedy is
to pay the debt and pursue the principal for reimbursement, the surety cannot at
law, unless permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to immediately sue
petitioner on her obligation does not release her from liability. Where a creditor
refrains from proceeding against the principal, the surety is not exonerated. In
other words, mere want of diligence or forbearance does not affect the creditor's
rights vis-a-vis the surety, unless the surety requires him by appropriate notice to
sue on the obligation. Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principal's request or without it, and
whether it is yielded by the creditor through sympathy or from an inclination to
favor the principal, or is only the result of passiveness. The neglect of the
creditor to sue the principal at the time the debt falls due does not discharge the
surety, even if such delay continues until the principal becomes insolvent. 43 And,
in the absence of proof of resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will not look to the surety,44 or that he
need not trouble himself.45 The consequences of the delay, such as the
subsequent insolvency of the principal,46 or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial.47
The raison d'être for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time.48 At any rate, if the surety is
dissatisfied with the degree of activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would
release the surety.50 In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an
enforceable agreement between the principal and the creditor, and that it was
made without the consent of the surety or with a reservation of rights with
respect to him. The contract must be one which precludes the creditor from, or at
least hinders him in, enforcing the principal contract within the period during
which he could otherwise have enforced it, and which precludes the surety from
paying the debt.51
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time
within which to comply with their obligation did not effectively absolve here in
petitioner from the consequences of her undertaking. Besides, the burden is on
the surety, herein petitioner, to show that she has been discharged by some act
of the creditor,52 herein respondent corporation, failing in which we cannot grant
the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the
interests and penalty charges on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes
that respondent corporation intentionally delayed the collection of the loan in
order that the interests and penalty charges would accumulate. The statement,
likewise traversed by said respondent, is misleading.
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same
upon its maturity. I received a telephone call from Mr. Augusto Banusing of
MB Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña
Azarraga. At the same time, I offered to pay MB Lending the outstanding
balance of the principal obligation should he fail to collect from Merlyn and
Osmeña Azarraga. Mr. Banusing advised me not to worry because he will
try to collect first from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr.
Banusing who reminded that the loan of Merlyn and Osmeña Azarraga,
together with interest and penalties thereon, has not been paid. Since I had
no available funds at that time, I offered to pay MB Lending by delivering to
them a parcel of land which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint
filed against me by MB Lending before the RTC-Iloilo. After learning that a
complaint was filed against me, I instructed Sheila Gatia to go to MB
Lending and reiterate my first offer to pay the outstanding balance of the
principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to
Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my
offer to pay the outstanding balance of the principal obligation loan (sic) of
Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed
Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number
of circumstances which conjointly inveigh against her aforesaid theory.
3. After the complaint was filed against her, petitioner reiterated her offer to pay
the outstanding balance of the obligation in the amount of P30,000.00 but the
same was likewise rejected. Again, respondent corporation cannot be blamed for
refusing the amount being offered because it fell way below the amount it had
computed, based on the stipulated interests and penalty charges, as owing and
due from herein petitioner. A debt shall not be understood to have been paid
unless the thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.56 In other words, the prestation must
be fulfilled completely. A person entering into a contract has a right to insist on
its performance in all particulars.57
This notwithstanding, however, we find and so hold that the penalty charge of 3%
per month and attorney's fees equivalent to 25% of the total amount due are
highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case.
Article 1229 of the Civil Code provides that the court shall equitably reduce the
penalty when the principal obligation has been partly or irregularly complied with
by the debtor. And, even if there has been no performance, the penalty may also
be reduced if it is iniquitous or leonine.
Upon the matter of penalty interest, we agree with the Court of Appeals that
the economic impact of the penalty interest of three percent (3 %) per
month on total amount due but unpaid should be equitably reduced. The
purpose for which the penalty interest is intended — that is, to punish the
obligor — will have been sufficiently served by the effects of compounded
interest. Under the exceptional circumstances in the case at bar, e.g., the
original amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties'
promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether.59
Finally, with respect to the award of attorney's fees, this Court has previously
ruled that even with an agreement thereon between the parties, the court may
nevertheless reduce such attorney's fees fixed in the contract when the amount
thereof appears to be unconscionable or unreasonable.60 To that end, it is not
even necessary to show, as in other contracts, that it is contrary to morals or
public policy.61 The grant of attorney's fees equivalent to 25% of the total amount
due is, in our opinion, unreasonable and immoderate, considering the minimal
unpaid amount involved and the extent of the work involved in this simple action
for collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case. 62
SO ORDERED.
[G.R. No. 117660. December 18, 2000]
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON.
COURT OF APPEALS and REGENT SAVINGS and LOAN BANK,
INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision [1] dated October 17, 1994 of the
Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent
bank against herein petitioners. In the decision of the Court of Appeals, petitioners were
ordered to pay respondent bank, as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of the
said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby
authorizes the VENDOR to obtain a loan from Summa Savings and Loan
Association with office address at Valenzuela, Metro Manila, being
represented herein by its President, Mr. Jaime Cario and referred to
hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon at such
rate as the VENDEE and the Financier may agree, which amount shall cover
the ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be
paid upon signing of the Memorandum of Agreement, plus 18% interest on
the balance of two million pesos stipulated upon in Item No. 1(c) of the said
agreement; provided however, that said loan shall be made for and in the
name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to
the VENDOR; however, the VENDEE hereby undertakes to pay the full
amount of the said loan to the Financier on such terms and conditions
agreed upon by the Financier and the VENDOR, it being understood that
while the loan will be secured from and in the name of the VENDOR, the
VENDEE will be the one liable to pay the entire proceeds thereof including
interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory
notes,[6] payable to the respondent bank. Thereafter, the bank released the proceeds of
the loan to petitioners. However, petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de
Jesus, endorsed the subject promissory notes to the banks counsel for collection. The
bank gave petitioners opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show
up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of
Manila for Collection of Sums of money. The corresponding case histories are illustrated
in the table below:
Date of Amount Payment Payment
Loan Due Extension
Date Dates
Civil Case
86-37374 P78,212.29 Nov. 10, Feb. 8,
August 12, 1982 1983
1982 May 9,
1983
Aug. 7,
1983
Civil Case
86-37388 P632,911.39 Jan. 15, May 16,
July 19, 1983 1983
1982 Aug. 14,
1983
Civil Case
86-37543 P510,000.00 March June 11,
September 13, 1983 1983
14, 1982 Sept. 9,
P494,936.71 1983
March
October 1, 30, 1983 June 28,
1982 1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of novation and insisted there was a
valid substitution of debtor. They alleged that the addendum specifically states that
although the promissory notes were in their names, Wonderland shall be responsible for
the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its obligation
under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did not
materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn,
ibid). Hence, Wonderland is not answerable. And since the loans obtained under the
four promissory notes (Exhs. A, C, G, and E) have not been paid, despite opportunities
given by plaintiff to defendants to make payments, it stands to reason that defendants
are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed to file a
third-party complaint against Wonderland, which shows the weakness of its stand that
Wonderland is answerable to make said payments.[7]
Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed
by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each
party is the cause or consideration for the obligation or promise by the other. The
vendee is obliged to pay the price, while the vendor must deliver actual possession of
the land. In the instant case the original plan was that the initial payments would be paid
in cash. Subsequently, the parties (with the participation of respondent bank) executed
an addendum providing instead, that the petitioners would secure a loan in the name of
Agro Conglomerates Inc. for the total amount of the initial payments, while the
settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to
some other person and is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew (the signatory) to be an
accommodation party.[8] He has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation party being the
surety.[9] Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other duty
to the obligee, who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform.[10] The suretys liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in other words, he
is directly and equally bound with the principal.[11] And the creditor may proceed against
any one of the solidary debtors.[12]
We do not give credence to petitioners assertion that, as provided by the
addendum, their obligation to pay the promissory notes was novated by substitution of a
new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein
do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. [13] In order that a
novation can take place, the concurrence of the following requisites [14] are
indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound
the petitioners to pay, were executed after the addendum. The addendum modified the
contract of sale, not the stipulations in the promissory notes which pertain to the surety
contract. At this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners.Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed,[15] it must be clearly and unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that,
if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not materialize. But it
was admitted that petitioners received the proceeds of the promissory notes obtained
from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just
or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary party.[18] But respondent appellate
court did not err in holding that petitioners are duty-bound under the law to pay the
claims of respondent bank from whom they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the
Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.