Credit Transactions Case Digest AY-2016 (Atty.

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CONTINUATION: ACCESSORY CONTRACTS OF CREDITS

Ruling:

E. ON FUTURE DEBTS

1. YES. The stipulations unequivocally reveal that the suretyship agreement in the
case at bar are continuing in nature. Petitioners do not deny this; in fact, they
candidly admitted it. Neither have they denied the fact that they had not revoked
the suretyship agreements.

DIO v.

CA

Facts:
In 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS),
thru its representative Uy Tiam, applied for and obtained credit accommodations
from the METROBANK . To secure the credit accommodations, Norberto Uy and
Jacinto Uy Dino executed a separate Continuing Suretyships in favor of Uy Tiam.
Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy
Dio agreed to be bound up to the aggregate sum of P800,000.00.
Uy Tiam paid the obligation under the letter of credit in 1977.
In 1978, UTEFS obtained another credit accommodation, which was likewise settled
before he applied and obtained in1979 in the sum of P815, 600. This sum covered
UTEFS purchase of fertilizers from Planters Product. Uy and Dino did not sign the
application for this credit and were not asked to execute suretyship or guarantee.
UTEFS executed a trust receipt whereby it agreed to deliver to Metrobank the goods
in the event of non-sale, and if sold, the proceeds will be delivered to Metrobank.
However, UTEFS did not comply with its obligation. As a result, Metrobank
demanded payment from UTEFS and the sureties, Uy & Dino.
The sureties refused to pay on the ground that the obligation for which they
executed the continuing suretyship agreement has been paid, and so their liability
was automatically extinguished.

Under the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not known at the time the guaranty is
executed. This is the basis for contracts denominated as continuing guaranty or
suretyship. A continuing guaranty is one which is not limited to a single transaction,
but which contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and
is generally intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one
which covers all transactions, including those arising in the future, which are within
the description or contemplation of the contract, of guaranty, until the expiration or
termination thereof. 10 A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from
time to time" the guaranty will be construed to be a continuing one.
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to
induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full force and effect until
the bank is notified of its revocation.

Issue:
xxx xxx xxx
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said
1979 obligations.

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant
bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters
Products, the continuing suretyships were in full force and effect. Hence, even if
sureties-appellees did not sign the "Commercial Letter of Credit and Application,
they are still liable as the credit accommodation (letter of credit/trust receipt) was
covered by the said suretyships. What makes them liable thereunder is the
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condition which provides that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal
obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they
as insurers of its obligation, are liable thereunder.
2. The limit of the petitioners respective liabilities must be determined from the
suretyship agreement each had signed. Indeed, the Continuing Suretyship
Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount
of their liability, at any given time, at P800,000.00 and P300,000.00, respectively.
The law is clear that a guarantor may bond himself for less, but not for more than
the principal debtor, both as regards the amount and the onerous nature of the
conditions. 18
In the case at bar, both agreements provide for liability for interest and expenses.
Even without such stipulations, the petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to
more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but
also all its accessories, including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged
decision has to be modified with respect to the extend of petitioners' liability. As
modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit only of their respective
Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with
the interest due thereon at the legal rate commencing from the date of the filing of
the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and costs.

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F. EXTINGUISHMENT

McCONN v. HARAGAN
Facts:
On June 30, 1955, there was a pending case entitled McConn v. Haragan which was
scheduled for hearing on September 16, 1955. The Bureau of Immigration advised
said court that defendant Paul Haragan had applied for an immigration clearance
and a re-entry permit to enable him to leave the Philippines for 15 days only and
requested information whether the court had any objection thereto. By an order
dated July 11, 1955, the court required Haragan to file a bond of P4,000 "to answer
for his return to the Philippines and the prosecution of his case against him, with
the understanding, that upon his failure to return, said bond will answer pro tanto
for any judgment that may be rendered against him". Thereupon, or on July 12,
1955, Haragan submitted a bond, subcribed by him and the Associated Insurance &
Surety Co., as principal and surety. Where there was no objection thereto, the court
issued an order granting formal leave in favor of Haragan.
WHEREAS, before the above-bounden PRINCIPAL could leave the
Philippines for Hongkong and Tokyo, Japan, the above-mentioned Court
has required him to post a Surety Bond, in the amount of PESOS FOUR
THOUSAND ONLY (P4,000.00) Philippine Currency, the guarantee that he
will return to the Philippines on or before September 16, 1955;
NOW, THEREFORE, for and in consideration of the above premises, the
PRINCIPAL and the SURETY, hereby bind themselves, jointly and severally,
in favor of the Republic of the Philippines, or its authorized representatives,
in the sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine
Currency, that the herein PRINCIPAL will return to the Philippines on or
before September 16, 1955 and that should he fail to do so, said bond will
answer pro tanto for any judgment that may be rendered against him.
On November 14, 1955, Counsel informed the court that Haragan had been unable
to return to the Philippines because the Philippine Consulate in Hongkong had
advised Haragan of a communication from our Department of Foreign Affairs
banning him from returning to the Philippines. In due course, thereafter, or on
February 19, 1959, the court rendered judgment, which sentenced Haragan to pay
to plaintiff the sum of P5,500, with 6% interest thereon from December 8, 1954,
until full payment, plus P1,000 as attorney's fees and costs. After this judgment had
become final and executory, plaintiff moved for the execution of the
aforementioned bond to satisfy said judgment against Haragan. The surety company
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objected thereto upon several grounds and, after due hearing, the lower court
issued an order dated October 13, 1959, releasing said company from liability under
the bond aforementioned and denying plaintiff's motion.
Issue: WON the Surety Company is liable to plaintiff under the bond, in view of the
failure of Haragan to return to the Philippines.
Ruling: NO
As the terms of the bond so state, it appears clearly that the bond will only answer
for the judgment which may be rendered against defendant, should he (defendant
Haragan) fail to return to the Philippines. In other words, if defendant Haragan
should return to the Philippines on or before September 16, 1955, said bond will
not answer for the judgment. It is now the contention of the Associated Insurance
that since it was the Republic of the Philippines (obligee under the bond) who
rendered the return of defendant Haragan to the Philippines impossible, said surety
company is thereby released from its obligation, and cites in support thereof
Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this
contention, the Court finds it tenable and well grounded, for as the surety company
has so well stated 'where the principal obligation (of returning to the Philippines)
has been extinguished by the action of the obligee, Philippine Government in
preventing such return, the accessory obligation of the surety is likewise
extinguished and the bond released of its liability.' Paraphrasing the last paragraph
of the bond in a negative way, it will read thus: 'should he (not) fail to do so, said
bond will (not) answer pro tanto for any judgment that may be rendered against
him.

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installments at the rate of P400 a month commencing thirty days after December 11,
1931, with five days grace monthly until complete payment of said sum. On that
same date the Philippine Theatrical Enterprises, Inc., assigned all its right and
interest in that contract to the Radio Corporation of the Philippines.
There was an accelerating clause in the contract in case the vendee-mortgagor fails
to make any of the payments, the whole amount remaining unpaid under the
mortgage shall immediately become due and payable and this mortgage on the
property mentioned as well as the Luzon Surety Bond may be foreclosed by the
vendor-mortgagee.
On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as
attorney-in-fact of the Radio Corporation of the Philippines wrote a letter to the
principal debtor Jesus R. Roa, saying that it have no objection to the extension of
payment requested by the latter for the Feb-April installment.
Lower Court Ruling: CFI Manila ruled in favor of Radio Corp. against defendants.

Defendants shall pay solidarily to the plaintiff. Upon failure, the chattel
described in the second cause of action shall be sold at public auction to
be applied to the satisfaction of the amount of this judgment.

Issue: WON the extension granted by the plaintiff, without the consent of the
guarantors, the herein appellants, extinguishes the latters liability not only as to the
installments due at that time, as held by the trial court, but also as to the whole
amount of their obligation

Legal Basis:
The debtor in obligation to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor. (Article 1266, Civil
Code of the Philippines.).
Art. 2076. The obligation of the guarantor is extinguished at the same time as that
of the debtor, and for the same causes as all other obligations.

RADIO CORP. v. ROA

Facts:
The defendant Jesus R. Roa became indebted to the Philippine Theatrical
Enterprises, Inc., in the sum of P28,400 payable in seventy-one equal monthly

Ruling: YES, the whole amount.

The stipulation in the contract under consideration, copied in the case of Villa vs.
Garcia Bosque, is to the effect that upon failure to pay any installment when due
the other installments ipso facto become due and payable. In view of the fact that
under the express provision of the contract, the whole unpaid balance
automatically becomes due and payable upon failure to pay one installment, the act
of the plaintiff in extending the payment of the installment corresponding to
February, 1932, to April, 1932, without the consent of the guarantors, constituted in
fact an extension of the payment of the whole amount of the indebtedness, as by
that extension the plaintiff could not have filed an action for the collection of the
whole amount until after April, 1932. Therefore appellants' contention that after
default of the payment of one installment the act of the herein creditor in extending
the time of payment discharges them as guarantors in conformity with articles 1851
and 1852 of the Civil Code is correct.
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Art. 2079. An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself
constitute any extention of time referred to herein. (1851a)
xxx xxx xxx
The rule stated is quite independent of the event, and the fact that the principal is
insolvent or that the extension granted promised to be beneficial to the surety
would give no right to the creditor to change the terms of the contract without the
knowledge or consent of the surety. The creditor must be in such a situation that
when the surety comes to be substituted in his place by paying the debt, he may
have an immediate right of action against the principal. The suspension of the right
to sue for a month, or even a day, is as effectual to release the surety as a year or
two years.
Art. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated to the
rights, mortgages, and preference of the latter. (1852)

----------Plaintiff's contention that the enforcement of the accelerating clause is potestative

on the part of the obligee, and not self-executing, is clearly untenable from a simple
reading of the clause copied above. What is potestative on the part of the obligee is
the foreclosure of the mortgage and not the accelerating clause.

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the city treasurer.

They alleged that they are an insurance company and is covered by republic
act 2264 which prohibits citites from taxing insurance companies.

Respondent, contends that the petitioner is not covered by the said act
because it is a surety company and not an insurance company.

Issue: WON petitioner is liable to pay

an annual licensed fee

Held:
The plaintiff is not liable to pay the 300 imposed as an annual licensed fee.

As evidence by the certificate of authority issued by the insurance commissioner,

and is (a) engaged in the business of insurance, (b) is an insurance company
within the intendment section 2(j) of the local autonomy act. Furthermore,
American jurisprudence supports that contracts made by a surety company are
conrtracts of insurance, and the making them is an insurance business.

B. ON FUTURE DEBTS
2. SURETY

Atok Finance corp. v CA

A. NATURE

Facts:

Luzon Surety Co, Inc.

v The City of Bacolod

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.

Facts:
Petioner filed a complaint assailing the ordinance of the city of Bacolod which
required it to pay an annual licencsed fee of 300 and for a mayors permit of P20 to

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
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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.

Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses,
Pablito Bermundo and Leopoldo Halili to collect a sum of money plus penalty
charges starting from 1 September 1983.

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before the principal obligation intended to be secured by it is born.

In this case, the respondent was able to enter into a series of transaction with the
petitioner because of the said agreement, and there was no need to execute
another contract for each financing or credit accommodation extended to the
principal debtor.

RCBC vs Arro
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. They 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.

Issue:

FACTS:
Residoro Chua and Enrique Go, Sr. jointly executed a comprehensive surety
agreement to guaranty any existing or future obligation of Davao Agricultural
Industries Corporation (DAICOR) with petitioner bank. Thereafter, a promissory
note in the amount of P100,000.00 was issued in favor of petitioner bank which
was signed solely by Enrique Go, Sr. in his personal capacity and in behalf of
DAICOR. When despite repeated demands the note was not fully paid, petitioner
bank filed a complaint against Daicor, respondent Chua and Enrique Go, Sr. The trial
court, sustaining the private respondent, dismissed the complaint on the ground
that it states no cause of action as against him since he did not sign the subject
promissory note, which is a necessary corollary to the comprehensive surety
agreement as evidence of indebtedness, and without which the said agreement
served no purpose. Hence, this petition.

Whether the individual private respondents may be held solidarily liable with Sanyu
Chemical under the provisions of the Continuing Suretyship Agreement.
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.

Held:

ISSUE:
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.

Yes, they can be held solidarily held liable with sanyo under the provision of
continuing suretyship agreement.
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. Furthermore, there is no theoretical or
doctrinal difficulty in saying that the suretyship agreement itself is valid and binding

RULING:
The Supreme Court held that DAICOR being liable on the promissory note, private
respondent was likewise liable thereon even if he did not sign it, since under the
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subsisting comprehensive surety agreement, he jointly bound himself to guaranty

existing and future obligations of DAICOR subject only to the condition that their
obligation will not at any one time exceed 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.
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.

C. LIABILITY
Pacific Banking Corp. v. IAC and Regala
Facts:
Petitioner Pacific Banking Corp. filed a case for collection of sum of money against
Respondent Roberto Regala. Petitioner Pacific argued that Roberto Regala is a
guarantor of his wife, Celia Regala. Celia Regala obtained from the Petitioner the
issuance and use of Pacificard credit card. As a Pacificard holder, she had purchased
goods and/or services on credit under her Pacificard, for which the Petitioner
advanced the cost amounting to P92,803.98 at the time of the filing of the
complaint but Celia Regala failed to settle her account for the purchases made.
Respondent Roberto Regala, as the guarantor, also refused to pay to Petitioner.
In his defense, Respondent Roberto Regala argued that his liability would be limited
to P2,000.00 per month as stipulated in the "Guarantor's Understanding."
Issue:
Whether or not Respondent Roberto Regala, as the guarantor, is liable for the total
amount of P92,803.98 despite the stipulation in the "Guarantor's Understanding"

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that his liability would be limited to P2,000.00 per month

Ruling:
Respondent Roberto Regala, as the guarantor, is liable for the total amount of
P92,803.98.
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a
contract of guaranty where the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor only in case the latter should fail to do so, in a
contract of suretyship, the surety binds himself solidarily with the principal debtor
(Art. 2047, Civil Code of the Philippines).
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself
for less, but not for more than the principal debtor, both as regards the amount and
the onerous nature of the conditions. It is likewise not disputed by the parties that
the credit limit granted to Celia Regala was P2,000.00 per month and that Celia
Regala succeeded in using the card beyond the original period of its effectivity,
October 29, 1979.
We do not agree however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself
up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any
"discharge in case of any change or novation of the terms and conditions in
connection with the issuance of the Pacificard credit card."Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear under the
"Guarantor's Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the
liabilities of the said Celia Syjuco Regala have been fully satisfied
or paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the
undertaking of future changes in the terms and conditions governing the issuance
of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be
bound as a surety. As in guaranty, a surety may secure additional and future debts
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of the principal debtor the amount of which is not yet known (see Article 2053,
supra).

Vizconde vs IAC
FACTS:
Perlas called Vizconde and asked her to sell an 8 carat diamond ring on a
commission for P85k
Vizconde later returned the ring. Afterwards, Vizconde called on Perlas and
claimed that there was a sure buyer for the ring, Pilar Pagulayan
Pagulayan gave a post-dated check; Perlas and Vizconde signed a receipt
(Exh. A)
The check was dishonoured. After 9 days, Pagulayan paid Perlas P5k
against the value of the ring and gave 3 Certificates of Title to guarantee
delivery of the balance of such value (Exh D)
Perlas filed a complaint against Pagulayan and Vizconde for estafa.
TC and CA Vizconde and Pagulayan had assumed a joint agency in favour
of Perlas for the sale of the latters ring, which rendered them criminally
liable, upon failure to return the ring or deliver its agreed value, under Art
315, par 1(b) of the Revised Penal Code
SOL GEN disagreed; Vizconde cant be convicted of estafa based on the
Exhibits presented
ISSUE: Whether Vizconde was considered as agent of Perlas or mere guarantor of
obligation of Pagulayan?
HELD: Mere guarantor
Nothing in the language of the receipt, Exh A, or in the proven
circumstances attending its execution can logically be considered as
evidencing the creation of an agency between Perlas, as principal, and
Vizconde as agent, for the sale of the formers ring.
If any agency was established, it was one between Perlas and Pagulayan
only, this being the logical conclusion from the use of the singular I in
said clause, in conjunction with the fact that the part of the receipt in
which the clause appears bears only the signature of Pagulayan.
To warrant anything more than a mere conjecture that the receipt also
constituted Vizconde the agent of Perlas for the same purpose of selling
the ring, the cited clause should at least have used the plural we, or the

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text of the receipt containing that clause should also have carried
Vizcondes signature.
The joint and several undertaking assumed by Vizconde in a separate
writing below the main body of the receipt, Exhibit A, merely guaranteed
the civil obligationPagulayan to pay Perlas the value of the ring in the
event of her (Pagulayans) failure to return said article.
What is clear from Exh A is that the ring was entrusted to Pagulayan to be
sold on commission; there is no mention therein that it was
simultaneously delivered to and received by Vizconde for the same
purpose or, therefore, that Vizconde was constituted, or agreed to act as,
agent jointly with Pagulayan for the sale of the ring.
What Vizconde solely undertook was to guarantee the obligation of
Pagulayan to return the ring or deliver its value; and that guarantee
created only a civil obligation, without more, upon default of the principal.
Thus, the theory that by standing as surety for Pagulayan, Vizconde
assumed an obligation more than merely civil in character, and staked her
very liberty on Pagulayan's fidelity to her trust is utterly unacceptable; it
strikes at the very essence of guaranty (or suretyship) as creating purely
civil obligations on the part of the guarantor or surety.
Upon the evidence, Vizconde was a mere guarantor, a solidary one to be
sure, of the obligation assumed by Pagulayan to complainant Perlas for the
return of the latters ring or the delivery of its value. Whatever liability was
incurred by Pagulayan for defaulting on such obligation and this is not
inquired into that of Vizconde consequent upon such default was merely
civil, not criminal.

GENERAL INSURANCE and SURETY CORPORATION vs. REPUBLIC OF THE

PHILIPPINES and CENTRAL LUZON EDUCATIONAL FOUNDATION, INC.
FACTS:
On May 15, 1954, the Central Luzon Educational Foundation, Inc., and
the General Insurance and Surety Corporation posted in favor of the Department of
Education a bond:
to guarantee the adequate and efficient administration of school or college (Sison
& Aruego Colleges, of Urdaneta, Pangasinan) and the observance of all regulations
prescribed by the Secretary of Education and compliance with all obligations,
including the payment of the salaries of all its teachers and employees, past,
present, and future, and the payment of all other obligations incurred by, or in
behalf of said school.
Here, Sison and Aruego Colleges operated by private respondent, as
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principal and the GENERAL INSURANCE AND SURETY CORPORATION , as surety,

are held end firmly bound, jointly and firmly, unto the Department of Education of
the Republic of the Philippines in the sum of TEN THOUSAND PESOS (P10,000.00)
Philippine currency , jointly and severally that said institution of learning had
defaulted in any of the foregoing particulars, this bond may immediately thereafter
be declared forfeited, and to give the Department of Education at least sixty (60)
days notice of the intended withdrawal or cancellation of this bond LIABILITY
of Surety under this bond will expire on June 15, 1955, unless sooner revoked.
On the same day, the Central Luzon Educational Foundation, Inc., Teofilo
Sison and Jose M. Aruego executed an indemnity agreement binding themselves
jointly and severally to indemnify the surety to all sums and amounts of money
which the COMPANY or its representatives shall or may pay or cause to be paid or
become liable to pay, on account of or arising from the execution of the bond.
On June 25, 1954, the surety advised the Secretary of Education that it was
withdrawing and cancelling its bond. It appears that on the date of execution of the
bond, the Foundation was indebted to two of its teachers for salaries namely
Remedios Laoag and H.B Arandia in sum amounting to a total of P 1505.64.
Upon refusal of answering their demand, Solicitor General filed a
complaint for the forfeiture of the bond on July 11, 1956. In due to surety the
Foundation and prayed that the complaint be dismissed and that it be indemnified
by the Foundation of any amount it might be required to pay the Government, plus
attorney's fees.
The Foundation denied their allegations and contends that they have no
basis for the action and that the bond was illegal and the government has no
capacity to sue.
The surety also filed their 3rd party complaint on the basis of the indemnity
agreement. Sison and Aruego claimed that the indemnity agreement has ceased to
b of force and effect upon the cancellation and withdrawal of the bond.
CFI: rendered judgment holding the principal and the surety jointly and severally
liable to the Government in the sum of P10,000, until fully paid and ordering the
principal to reimburse the surety whatever amount it may be compelled to pay to
the Government by reason of the judgment.
CA: Modified. Ordering Central Luzon Educational Foundation, Inc.,
and General Insurance and Surety Corporation to pay jointly and severally
the Republic of the Philippines, the sum of P10,000.00, plus costs and legal interests
from July 11, 1956 until fully paid; Ordering Central Luzon Educational Foundation,
Inc., Teofilo Sison and Jose M. Aruego to reimburse, jointly and severally,
the General Insurance and Surety Corporation of all amounts it may be forced to
pay the Republic of the Philippines by virtue of this judgment, plus costs and P2,000

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for counsel's fees.

Hence this petition.

ISSUE:
1.

WON the surety is no longer liable on its bond on August 24, 1054
(60-day notice of cancelation and withdrawal ended) or at the latest,
June 15, 1955 based on the agreement.

HELD:
The condition of the bond was violated and so the surety became liable for the
penalty provided for therein. Regardless may be the amount of salaries due the
teachers.
Wherein, by the terms of the bond, the surety guaranteed to the Government
"compliance (by the Foundation) with all obligations, including the payment of the
salaries of its teachers and employees, past, present and future, and the payment of
all other obligations incurred by, or in behalf of said school."
But there is nothing in these cases that supports the proposition that the liability of
a surety for obligations arising during the life of a bond ceases upon the expiration
of the bond. (Jollye vs. Barcelon and Luzon Surety Co., Inc.,)
The right of the Government to collect on the bond arose while the bond was in
force, because, as earlier noted, even before the execution of the bond, the
principal had already been in debt to its teachers.
Note: several cases were cited expressly provided in their agreement the period
of liability of the surety..
In the present case, there is no provision that the bond will be cancelled unless
the surety is notified of any claim and so no condition precedent has to be complied
with by the Government before it can bring an action.
The 60-day notice is also not a period of prescription of action. The provision merely
means that the surety can withdraw as in fact it did in this case even before
June 15, 1955 provided it gave notice of its intention to do so at least 60 days in
advance.
Under Article 1311 of the Civil Code, since teachers of Sison and Aruego Colleges
are not parties to the bond, "the bond is not effective and binding upon the obligors
(principal and surety) as far as it guarantees payment of the 'past salaries' of the
teachers of said school."
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Also, this is not an action filed by the teachers against the surety. This is an action
brought by the Government, of which the Department of Education is an
instrumentality, to hold the surety liable on its bond for the same has been violated
when the principal failed to comply "with all obligations, including the payment of
salaries of its teachers, past, present and future."
There is nothing against public policy in forfeiting the bond for the full amount. The
bond is penal in nature.
Article 1226 of the Code states that in obligation with a penal clause, the penalty
shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary, and the party to whom
payment is to be made is entitled to recover the sum stipulated without need of
proving damages because one of the primary purposes of a penalty clause is to
avoid such necessity. The mere non-performance of the principal obligation gives
rise to the right to the penalty.
The rule under Article 2079 which states that, An extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the guaranty. . . .",
cannot be applied in this case, the extension was not granted by the DepEd or
Government but by the teachers. As already stated, the creditors on the bond are
not the teachers but the Department of Education or the Government.
Article 2054 states that

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FACTS: 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 P58,400 plus litigation expenses
and attorney's fees (Civil Case No. 4930).
He asked for a writ of preliminary attachment and 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 a counterbond in the amount of
P58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong
spouses and Towers Assurance Corporation bound themselves to pay solidarily to
See Hong the sum of P58,400.
Ong Spouses failed to appearduring pre-trial, they were declared in default.
The lower court ordered the spouse and the surety to pay solidarily See Hong the
sum of P58,400 plus P10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. Ororama Supermart filed a
motion for execution. It was granted by the lower court. The writ of execution was
issued
against
the
judgment
debtors
and
their
surety.
The,
Towers Assurance Corporation filed the instant petition for certiorari where it assails
the decision and writ of execution.
ISSUE: WON surety is liable absence of showing that it was given opportunity to
be heard.

"A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions.
"Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor."
It is about the penal nature of the bond would suffice to dispose of this claim. The
condition of the bond was violated and so the surety became liable for the penalty
provided for therein.

TOWERS ASSURANCE CORPORATION vs. ORORAMA SUPERMART

Case: liability of a surety in a counterbond for the lifting of a writ of preliminary
attachment

HELD:
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 the Rules of Court which provides:
"SEC. 17. When execution returned unsatisfied, recovers 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 counterbond, 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 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
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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) 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. The writ of is set aside. The lower court is directed
to conduct a summary hearing on the surety's liability on its counterbond. No costs.

Umali vs Court of Appeals

189 SCRA 529 [GR No. 89561 September 13, 1990]

Facts: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Mur Vda. de
Castillo. The Castillo family is the owners of parcel of land located in Lucena City
which was given as security for a loan from the development Bank of the Philippines
(DBP).
For their failure to pay the amortization, foreclosure of the said property was
about to be initiated. This problem was made known to Santiago Rivera, who
proposed to them the conversion into subdivision of the four parcels of land
adjacent to the mortgaged property to raise the necessary fund. The idea was
accepted by the Castillo family and to carry out the project, a memorandum of
agreement was executed by and between Slobec Realty and Development Inc.
represented by its president Santiago Rivera and Castillo family.
In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum
of P70,000 immediately after the execution of the agreement and to pay additional
amount of P40,000 after the property has been converted into a subdivision. Rivera,
with agreement approached Mr. Modesto Cervantes, president of defendant
Bormaheco and proposed to purchase from Bormaheco two tractors model D7 and
D8 subsequently a sales agreement was executed on December 28, 1970.
On January 3, 1971, Slobec, through Rivera, executed in favor of Bormaheco a

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chattel mortgage over the said equipment as security for the payment of the
aforesaid balance of P180,000. As further security of the aforementioned unpaid
balance, Slobec obtained from insurance corporation of the Philippines a security
bond, with Insurance Corporation of the Philippines (ICP) as surety and Slobec as
principal, in favor of Bormaheco, as borne out of by Exhibit 8. The aforesaid surety
bond was in turn secured by an agreement of counter-guaranty with real estate
mortgage executed by Rivera as President of Slobec and Mauricia Mur Vda. de
Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta
Castillo and Leovina Castillo Jalbuena as mortgagors and insurance corporation of
the Philippines as mortgagee.
In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the
amount of P180,000. In giving the bond, ICP required that the Castillos mortgage to
them the properties in question, namely, four parcels of land covered by TCT in the
name of the aforementioned mortgagors, namely TCT no. 13114, 13115, 13116, and
13117 all of the Register of Deeds of Lucena City. Slobec, represented by Rivera
received from Bormaheco the subject matter of the said Sales Agreement, namely,
the aforementioned tractor Caterpillar Model D-7, evidenced by invoice.
Meanwhile, for violation of the terms and conditions of the counter-guaranty
agreement, the properties of the Castillos were foreclosed by ICP as the highest
bidder with a bid of P285,212, a certificate of sale was issued by the provincial
sheriff of Lucena City and TCT over the subject parcels of land were issued.
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery
Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said
conveyance. PM Parts transferred unto itself the titles over the lots in dispute so
that said parcels of land. On September 29, 1976, the heirs of the late Felipe Castillo,
particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of
the properties in question filed an action for annulment of title before the then
Court of First Instance of Quezon. They contended that all the aforementioned
transactions starting with the Agreement of Counter-Guaranty with Real Estate
Mortgage, Certificate of Sale and the Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of ,as well as the Deed of Saleare void for being entered
into in fraud. Defendants controverted the complaint and alleged plaintiffs are
estopped or precluded from asserting the matters set forth in the Complaint.
The court a qou rendered decision declaring the transaction involving the parcels of
land null and void and to pay the plaintiffs severally.
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Issue:
Whether or not the foreclosure is proper so as to apply the doctrine of piercing the
veil of corporate entity.
WON ICP is relieved from liability.
Held:
The transactions are fraudulent and void. In addition, the alleged failure of Rivera
to pay the consideration agreed upon in the Sales Agreement, which clearly
constitutes a breach of the contract, cannot be availed of by the guilty party to
justify and support an action for the declaration of nullity of the contract. Equity
and fair play dictates that one who commits a breach of his contract may not seek
refuge under the protective mantle of the law. There is absolute simulation, which
renders the contract null and void, when the parties do not intend to be bound at
all by the same.
Given that, ICP has in its favor the legal presumption that it had indemnified
Bormaheco by reason of Slobec's default in the payment of its obligation under the
Sales Agreement, especially because Bormaheco consented to ICPs foreclosure of
the mortgage. ICP had the right to proceed at once to the foreclosure of the
mortgage as mandated by the provisions of Art. 2071 Civil Code for these further
reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec's obligation
becomes demandable by reason of the expiration of the period of payment; and its
authorization to foreclose the mortgage upon Slobec's default, which resulted in the
accrual of ICPS liability to Bormaheco. Agreement of Counter-Guaranty with Real
Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real estate
mortgage in the event of 'non-payment or non-liquidation of the entire
indebtedness or fraction thereof upon maturity as stipulated in the contract'. This is
a valid and binding stipulation in the absence of showing that it is contrary to law,
morals, good customs, public order or public policy. (Art. 1306, New Civil Code).
In the Agreement:
The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND
will expire Twelve (I 2) months from date hereof.. The surety bond was dated
October 24, 1970. However, an annotation on the upper part thereof states: "NOTE:
EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971."

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It is basic that liability on a bond is contractual in nature and is ordinarily restricted

to the obligation expressly assumed therein. We have repeatedly held that the
extent of a surety's liability is determined only by the clause of the contract of
suretyship as well as the conditions stated in the bond. It cannot be extended by
implication beyond the terms the contract. Fundamental likewise is the rule that,
except where required by the provisions of the contract, a demand or notice of
default is not required to fix the surety's liability. Hence, where the contract of
suretyship stipulates that notice of the principal's default be given to the surety,
generally the failure to comply with the condition will prevent recovery from the
surety, when failure to comply with the condition will not extinguish the surety's
liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there
is excuse or provision in the suretyship contract exempting the surety for liability
therefor, or where the surety already has knowledge or is chargeable with
knowledge of the default.
The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's
supposed default released ICP from liability under its surety bond. Consequently,
ICP could not validly foreclose that real estate mortgage executed by petitioners in
its favor since it never incurred any liability under the surety bond. It cannot claim
exemption from the required written notice since its case does not fall under any of
the exceptions hereinbefore enumerated.
The liability of a surety is measured by the terms of his contract, and, while he is
liable to the full extent thereof, such liability is strictly limited to that assumed by its
terms. While ordinarily the termination of a surety's liability is governed by the
provisions of the contract of suretyship, where the obligation of a surety is, under
the terms of the bond, to terminate at a specified time, his obligation cannot be
enlarged by an unauthorized extension thereof. This is an exception to the general
rule that the obligation of the surety continues for the same period as that of the
principal debtor
It has been held that where The guarantor holds property of the principal as
collateral surety for his personal indemnity, to which he may resort only after
payment by himself, until he has paid something as such guarantor neither he nor
the creditor can resort to such collaterals.
The default of Slobec during this period cannot be a valid basis for the exercise of
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the right to foreclose by ICP since its surety contract had already been terminated.
Besides, the liability of ICP was extinguished when Bormaheco failed to file a
written claim against it within thirty (30) days from the expiration of the surety
bond. Consequently, the foreclosure of the mortgage, after the expiration of the
surety bond under which ICP as surety has not incurred any liability, should be
declared null and void.
ADDITIONAL
ENTITY

DISCUSSION: DOCTRINE OF PIERCING THE VEIL OF CORPORATE

Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exists, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders of the corporation will be considered as
the corporation, that is, liability will attach directly to the officers and stockholders.
The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, on when it is made as a
shield to confuse the legitimate issues or where a corporation is the mere alter ego
or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
In the case at bar, petitioners seek to pierce the veil of corporate entity of
Bormaheco, ICP and PM parts, alleging that these corporations employed fraud in
causing the foreclosure and subsequent sale of the real properties belonging to
petitioners while we do not discount the possibility of existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked by
petitioners in granting the relief sought. It is our considered opinion that piercing
the veil of corporate entity is not the proper remedy in order that the foreclosure
proceeding may be declared a nullity under the circumstances obtaining in the legal
case at bar.
The mere fact, therefore, that the business of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights.

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E. EXTINGUISHMENT
G.R. No. L-30937. January 21, 1987
PHILIPPINE NATIONAL BANK, petitioner, vs. THE HONORABLE COURT OF
APPEALS and the PHILIPPINE PHOENIX SURETY AND INSURANCE,
INC.,respondents.

Facts: Marino Rubin obtained a sugar crop loan from petitioner PNB in the
amount of P40, 200.00. The loan was secured by a chattel mortgage executed by
Rubin as debtor- mortgagor and Jose Campos as mortgagor. As an additional
security, the Philippine Phoenix Surety and Insurance (Phoenix for brevity) issued
Surety bond for P10,000.00 in favor of the petitioner bank and that the liability of
Phoenix was good only for 1 year from the date thereof, unless within 10 days from
its expiration, the surety is notified of any existing obligations.
Three months later, PNB increased the loan from P40,200 to P56,800 without the
knowledge and consent of private respondent Phoenix.
When Rubin failed to liquidate the said loan, PNB demanded from Phoenix the
payment of loan, it being a surety of Rubin up to the stated amount of P10,000.00.
Phoenix denied the liability. Hence the petition.

Issue: WON Phoenix is liable to PNB as surety of Rubin.

Ruling:
No, Phoenix is not liable anymore to PNB as his liability towards Rubin has already
been extinguished.
SC ruled that "A material alteration of the principal contract, effected by the
creditor and principal debtor without the knowledge and consent of the surety,
completely discharges the surety from all liability in the contract of suretyship."
In the case at bar, the increase in the indebtedness from P40,200.00 to P56,800.00
is material and prejudicial to private respondent Phoenix. While the liability of
private respondent under the bond is limited to P10,000.00, the increase in the
amount of the debt proportionally decreased the probability of the principal debtor
being able to liquidate the debt; thus, increasing the risk undertaken by the surety
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to answer for the failure of the debtor to pay.

extinguished.

Thus, the discharge of private respondent Phoenix from liability under Surety Bond
No. 88 is correct.

Ruling:

G.R. No. L-8349. May 23, 1956

PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs.

MACAPANGA PRODUCERS INC., defendant. PLARIDEL SURETY AND

INSURANCE CO., defendant-appellee.

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No, the obligation of Plaridel Surety to PNB was not extinguished.

SC ruled that an assignment without knowledge or consent of the surety

is not a material alteration of the contract, which is sufficient to discharge
the surety.

Because under the law, for a suretys obligation to be extinguished it

must consist of a material alteration of the contract.

Facts:

Luzon Sugar Company leased a sugar mill to Macapanga Producers

(Macapanga for brevity). On December 26, 1952, Macapanga as principals
and Plaridel Surety & Insurance (Plaridel for brevity), executed and
delivered to plaintiff a performance bond in the amount of P50,000.00 for
the full and faithful compliance by Macapanga of all terms and conditions
of the lease.

On December 21, 1953, Luzon Sugar assigned to PNB (plaintiff) the

payment due from Macapanga in the amount of P50,000.00 representing
the royalty for the lease of the sugar mill for the crop year 1952- 1953.

There is, besides, no allegation in the complaint, or provision in the deed of

assignment, or any change therein that makes the obligation of Plaridel
Surety & Insurance more onerous than that stated in the performance
bond. Such assignment did not, therefore, release the Plaridel Surety &
Insurance from its obligation under the surety bond.

B. REAL GUARANTY
II. SUBJECT MATTER
G.R. No. 48941. May 6, 1946.

PNB then notified Macapanga and Plaridel of such assignment. PNB

demanded payment from Macapanga and Plaridel however, both refuses
to make payment. Hence, the petition.

Plaridel Surety contended that as it was not a party to the assignment and
such was made without its consent, it is, therefore, discharged from its
obligation.

Issue: Whether or not, the obligation of Plaridel Surety has already been

NORBERTO L. DILAG, as administrator of the intestate estate of Laureano

Marquez, petitioner,

vs. THE LEGAL HEIRS OF FORTUNATO RESURRECCION ET AL., respondents.

Facts: Laureano Marquez (Marquez for brevity) was indebted to Fortunato

Resurreccion (Fortunato) in the sum of P5,000 as the balance of the
purchase price which Marquez brought from Fortunato. Fortunato in turn
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was also indebted to the Luzon Surety Company in the same amount by
which it wa secured by a mortgage on 3 parcels of land, and one of which
was the one bought by Marquez.

Marquez later on agreed to pay Fortunatos indebtedness of P5,000 to the

Luzon Surety Company to satisfy his own indebtedness to Fortunato. By
which, Marquez obligated himself to indemnify Fortunato for all the
damages he may suffer in case the parcels of land mortgaged to the Luzon
Surety are sold at public auction.

Subsequently, Marquez failed to pay the indebtedness of Fortunato to the

Luzon Surety and as a result thereof, Luzon Surety foreclosed judicially the
mortgaged executed in its favor by Fortunato. Hence, the respondents files
a case against Marquez.

The court decided favorably to the Fortunato, who had died in the
meantime and who is now represented by the herein respondents.

Hence, the petitioner questions the validity of the real mortgage

constituted by Fortunato in favor of Luzon Surety.

Issue: WON there was a valid mortgage.

Ruling:

NO. There was no valid mortgage.

SC ruled that In the first place, Laureano Marquez could not legally mortgage any
property he did not yet own (see paragraph 2, article 1857, Civil Code). In the
second place, in order that a mortgage may be validly constituted the
instrument by which it is created must be recorded in the registry of deeds
(article 1875, id.); and so far as the additional five parcels of land are concerned,
the registration of Exhibit A did not affect and could not have affected them
because they were not specifically described therein.

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Because in the case at bar, those five parcels are said to have been
acquired by Laureano Marquez subsequent to the execution of Exhibit A. In
the fifth clause of said document Laureano Marquez stipulated that
inasmuch as the five parcels of land described in the fourth clause were
not sufficient to cover all his obligations in favor of Fortunato Resurreccion,
he also constituted a mortgage in favor of the latter and his assignees on
any other property he then might have and on those he might acquire in
the future.

The contention of the respondents that after the institution of the present
action, notice of lis pendens was filed in the registry of deeds affecting the
said five additional parcels of land, merely serves to emphasize the fact
that there was no mortgage thereon; otherwise there would have been no
necessity for any notice of lis pendens.

PEOPLES BANK Vs DAHICAN LUMBER

May 16, 1967
SUBJECT MATTER
: Chattel mortgage-subject matter: machinery
Facts:
Dahican lumber company (DAMCO) obtained several loans amounting to
250,000pesos from Peoples bank (BANK) and together with DALCO, another loan
amounting to$250,000 from Export-Import bank secured by five promissory notes
through peoples bank. In both loans, DAMCO executed and registered respective
mortgages with inclusion of after acquired properties. DAMCO and DALCO failed to
satisfy the fifth promissory note in favor of Export bank so Peoples bank paid it and
subsequently filed an action for the foreclosure of the mortgaged properties of
DAMCO including the after acquired machinery, equipment and spare parts upon
the latter's failure to fulfill its obligation.

Peoples bank asserted that the after acquired machinery and equipment of DAMCO
are subject to the deed of mortgage executed by DAMCO. Hence, these can be
included in the foreclosure proceedings.

DALCO argued that the mortgages were void as regards the after acquired
properties because they were not registered in accordance with the chattel
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mortgage law. Moreover, provision of the fourth paragraph of each of said

mortgages did not automatically make subject to such mortgages the "after
acquired properties", the only meaning thereof being that the mortgagor was
willing to constitute a lien over such properties.

immoral, its obvious purpose being to maintain, to the extent allowed by

circumstances, the original value of the properties given as security. Indeed, if such
properties were of the nature already referred to, it would be poor judgment on
the part of the creditor who does not see to it that a similar provision is included in
the contract.

ISSUES: Whether the after acquired machinery and equipment of DAMCO are
included as subject of the Real Estate mortgage, thus can be foreclosed.

Tayaban, Vanessa B.

RULING:

Luzon Lumber and Hardware Company

Vs

Judgment rendered in favor of Plaintiff Peoples bank. The after acquired machinery
and equipment are included in the executed mortgages. It is not disputed in the
case at bar that the "after acquired properties were purchased by DALCO in
connection with, and for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those already existing in
the premises on July 13, 1950.

In Law, therefore, they must be deemed to have been immobilized, with the result
that the real estate mortgages involved herein which were registered as such did
not have to be registered a second time as chattel mortgages in order to bind the
"after acquired properties" and affect third parties. Under the fourth paragraph of
both deeds of mortgage, it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises that
is, its lumber concession "shall immediately be and become subject to the lien" of
both mortgages in the same manner and to the same extent as if already included
therein at the time of their execution. As the language thus used leaves no room
for doubt as to the intention of the parties.
We see no useful purpose in discussing the matter extensively. Suffice it to say that
the stipulation referred to is common, and
We might say logical, in all cases where the properties given as collateral are
perishable or subject to inevitable wear and tear or were intended to be sold, or to
be used thus becoming subject to the inevitable wear and tear but with the
understanding express or implied that they shall be replaced with others to be
thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor

Manuel Quimbao

Facts:
Spouses Quiambao, owners of 3 lots in the province of Tarlac which was mortgaged
on July 20, 1948 in favor of the Rehabilitation Finance Corporation for the payment
of loan which was to be spent for the construction of 2 buildings in the said
mortgaged property. The mortgage was registered on September 13th of the same
year. Upon the violation of the terms the RFC foreclosed the mortgage and declared
the latter as the highest bidder in the auction sale.
On the other hand the construction materials used in the edification of the two
building was bought on credit from the plaintiff Luzon Lumber and Hardware Co,
the materials were furnished between Oct 1948 and March 1949.
The CIF rendered a judgment ordering the RFC o pay to plaintiff the proceeds of
the sale of the buildings. The court further held that the credit of the plaintiff
enjoyed preference over the mortgage credit of the RFC in of point of time, because
the mortgage lien of the RFC vested only after the construction of the two buildings
while the lien of the plaintiff vested immediately at the moment it furnished the
materials.

ISSUE:
WON the furnishing of lumber and building materials by the plaintiff for the
construction of the two buildings falls under refection credit.

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HELD:
Under our Jurisprudence, the term or phrases refection credits used or employed in
the old civil code refers to the lien of one furnishing building materials used in a
building or construction whether old or new, it is also provided for and included in
the old civil code, said lien (refection credit) is not a right granted for the first time
under the new civil code particularly article 2242 in the same contemplation of art.
2253 in the sense that the provisions of the new civil code should govern it although
the acts or events which gave rise thereto may have occurred under the old civil
code; that the deed of mortgage herein having been recorded in 1948 and the
building materials having been furnished in 1948 and 1949, that is to say, before the
promulgation of the new civil code in 1950, the preference of credits or liens has to
be governed by the old Civil Code, and when the mortgage is made to include new
or future improvements on registered land, said lien attaches and vests not at the
time said improvements are constructed but on the date of the recording and
registration of the deed of mortgage.
The appealed decision from is modified by dismissing the complaint as against the
defendant appellant RFC, with costs.
Ajax Marketing and Development Corporation Vs CA

Bartiquin

Batomalaque

Jumao-as

Mantos

Virtudazo

the original partners and three additional incorporators. Ajax obtained from the
same Bank another loan which is also secured by another REM executed by the
same mortgagor in favor of the same mortgagee which is the bank over the same
realty property which was also annotated.
In December 1980, the 3 loan was consolidated into one and the AJAX executed a
Promissory note.

ISSUE:
WON there had been a novation occured when their 3 loans, which are all secured
by the same real estate property were consolidated into a single loan under
Promissory Note, thereby extinguishing their monetary obligations and releasing
the mortgaged property from liability.

HELD:
The well-settled rule is that novation is never presumed, which it must be in express
agreement or by acts of equal import.

This a case for the review or certiorari regarding the decision of the CA in affirming
the trial courts judgment.

FACTS:
Ylang-ylang Company, a partnership, obtained a loan in from the Metropolian Bank
and Trust Company, and to secure payment, spouses Marcial See and Lilian Tan
constituted a REM in favor of the bank over their property in Paco, Manila.
Subsequently, the partnership had changed its nae to Ajax Marketing Company
without changing its composition, it also obtained a loan from the same bank, and
again secured by the same mortgagor with the same mortgagee over the same
property.
On February 19, 1979, the Partnership Ajax was converted into a corporation, with

Thus an objective novation it is imperative that the new obligattion expressly

declare that the old obligation is thereby extingished, or that the new obligation be
on evey point incompatible with the new one. A subjective novation by a change in
the person of the debtor it is necessary that the old debtor be released expressly
from the obligation and the third person or new debtor assumes his place in the
relation.

There was no change in the object of the prior obligations. The consolidation of the
three loans contrary to petitioners contntion, did not release the mortgaged real
estate property from any liability because the mortgage annotations in all remained
uncancelled, thus it indicates the continuance of the real estate mortgages. Neither
can it be contended that there was a change, or substitution in the persons of either
the creditor (bank) or more specifically the debtors (petitioners) upon the
consolidation of the loans. The conversion of Ajax from partnership to corporation
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Bartiquin

Batomalaque

Jumao-as

Mantos

Virtudazo

does not indicate that they were expressly released from their oligations, did not
make the petitioner, a third person or new debtor within the context of a subjective
novation.

It cannot also be held that the extra judicial foreclosure was invalid. An action to
foreclose a mortgage is usually limited to the amount mentioned in the mortgage,
but where n the four corners of the mortgage contracts. the intent of the
contracting parties is manifest that the mortgaged property shall also answer for
future loans or advancements then the same is not improper as it is valid and
binding between the parties.
In the case, the mortgages were one in providing that the mortgaged real estate
property shall also secure future advancements or loans, as well as renewals or
extensions of the same.

The decision appealed from is hereby affirmed.

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