Machetti v. Hospicio de San Jose [G.R. No. L-16666, April 10, 1922] OSTRAND, J.

FACTS:
On July 17, 1916, Romulo Machetti, through a written agreement, constructed a building on Calle Rosario for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required. Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was, declared insolvent. Hospicio de San Jose filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti. The motion was granted. Hospicio then filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the CFI rendered judgment against Fidelity.

ISSUE: W/N the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, can be validly converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case.
W/N Hospicio can go straight against the guarantor Fidelity for the claim of sum of money without first exhausting the estate of Machetti.

HELD:
While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case. On the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate

consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.

Severino v Severino [G.R. No. 34642, September 24, 1931] STREET, J.

FACTS: Melecio Severino upon his death, left considerable properties. To end litigation among heirs, a compromise was effected where defendant Guillermo (son of MS) took over the property of deceased and agreed to pay installment of 100K to plaintiff (wife of MS) payable first in 40K cash upon execution of document in 3 equal installments. Enrique Echauz became guarantor. Upon failure to pay the balance, plaintiff filed and action against the defendant and Echauz. Enchauz contends that he received nothing from affixing his signature in the document and the contract lacked the consideration as to him. ISSUE: WON there is a consideration for the guaranty? HELD: The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the contract was lacking in consideration as to him. The guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is neither necessary that guarantor or surety should receive any part of the benefit, if such there be accruing to his principal. Thus, judgment affirmed.

Case: MANILA SURETY & FIDELITY CO., INC., vs. NOEMI ALMEDA, doing business under the name and style of ALMEDATRADING, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION,Date: July 31, 1970Ponente: REYESPlace: MANILA Facts: Noemi Almeda, doing business under the name and style of Almeda Trading, entered into a contract with the National MarketingCorporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates of deliveries As required by' theNAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc. was posted by the purchaser to secure thelatter's faithful compliance with the terms of the contract. The agreement was later supplemented and a new bond for the same amountof P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. was given in favor of the NAMARCO The bonds uniformly contained the following provisions:2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon demand, pay said account immediately to theNAMARCO;3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, such excess up to twenty(20%) per cent of said amount shall also be deemed secured by this Bond;4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that the liability of the Surety shall be direct andimmediate and not contingent upon the exhaustion by the NAMARCO of whatever remedies it may have against the Principal and same shall be valid and continuous until the obligation so guaranteed is paid in full; and5. The Surety also waives its right to be notified of any extension of the terms of payment which the NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the account, that such extension shall not extinguish the guaranty unless the same is made against the express wish of the Surety. The marketing firm demanded from the purchaser Almeda Trading the settlement of its back accounts which, allegedly amounted to P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO however, previous to this, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First Instance of Laguna and by order of said court he was declared insolvent.Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case against the spouses Noemi Almeda and Generoso Esquillo, and the NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The action was based on the allegation that the defendant spouses had become insolvent and that defendant NAMARCO had rescinded its agreement with them and had already demanded payment of the outstanding accounts of the couple. The court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-principal did not discharge the surety's liability under the bond. Issue: WON the insolvency of a debtor-principal does not release the surety from its obligation to the creditor under the bond. Held: YES Ratio:

There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety company assumed to make immediate payment to said firm of any due and unsettled accounts of the debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. Appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself.The guarantor's action for release can only be exercised against the principal debtor and not against the creditor Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts tobe released from the undertaking thus assumed would have been appropriate. Nevertheless, , as is apparent from the precise terms of the legal provision. "The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid, may proceed against the principal debtor ------------------ to obtain a release from the guaranty ---------------." The juridical rule grants no cause of actionagainst the creditor for a release of the guaranty, before payment of the credit, for a plain reason: the creditor is not compellable torelease the guaranty (which is a property right) against his will. For, the release of the guarantor imports an extinction of his obligationto the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor's assentfor its validity (See Article 1270 and Article 1301). Especially should this be the case where the principal debtor has become insolvent,for the purpose of a guaranty is exactly to protect the creditor against such a contingency. In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the insolvency proceeding. Butappellant can not utilize this fact in support of its petition for release from the assumed undertaking. For one thing, it is almost acertainty that creditor NAMARCO can not secure full satisfaction of its credit out of the debtor's properties brought into the insolvencyproceeding. Considering that under the contract of suretyship, which remains valid and subsisting, the entire obligation may even bedemanded directly against the surety itself, the creditor's act in resorting first to the properties of the insolvent debtor is to the surety'sadvantage.

Rizal Commercial Banking Corporation, petitioner, vs. Hon. Jose P. Arro, Judge of the Court of First Instance of Davao, and Residoro Chua, respondents. Date:31 July 1982 Ponente:De Castro,J .Facts: Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensivesurety agreement to guaranty, above all, any existing or future indebtedness of Davao Agricultural Industries Corporation (Daicor), and/or induce the bank at anytime or from time to time to make loans or advances or to extend

credit to saidDaicor, provided that the liability shall not exceed ay any time Php100,000.00. A promissory note for Php100,000.00 (for additional capital to the charcoal buy andsell and the activated carbon importation business) was issued in favor of petitionerRCBC payable a month after execution. This was signed by Go in his personalcapacity and in behalf of Daicor. Respondent Chua did not sign in said promissorynote. As the note was not paid despite demands, RCBC filed a complaint for a sum of money against Daicor, Go and Chua. The complaint against Chua was dismissed upon his motion, alleging that thecomplaint states no cause of action against him as he was not a signatory to the noteand hence he cannot be held liable. This was so despite RCBCs opposition, invokingthe comprehensive surety agreement which it holds to cover not just the note inquestion but also every other indebtedness that Daicor may incur from petitioner bank. RCBC moved for reconsideration of the dismissal but to no avail. Hence, this petition. Issue: WON respondent Chua may be held liable with Go and Daicor under the promissorynote, even if he was not a signatory to it, in light of the provisions of thecomprehensive surety agreement wherein he bound himself with Go and Daicor, assolidary debtors, to pay existing and future debts of said corporation. Held: Yes, he may be held liable. Order dismissing the complaint against respondent Chuareversed and set aside. Case remanded to court of origin with instruction to set asidemotion to dismiss and to require defendant Chua to answer the complaint. Ratio:The comprehensive surety agreement executed by Chua and Go, as president andgeneral manager, respectively, of Daicor, was to cover existing as well as futureobligations which Daicor may incur with RCBC. This was only subject to the provisothat their liability shall not exceed at any one time the aggregate principal amount of Php100,000.00. (Par.1 of said agreement). The agreement was executed to induce petitioner Bank to grant any application for aloan Daicor would request for. According to said agreement, the guaranty iscontinuing and shall remain in full force or effect until the bank is notified of itstermination. During the time the loan under the promissory note was incurred, the agreement wasstill in full force and effect and is thus covered by the latter agreement. Thus, even if Chua did not sign the promissory note, he is still liable by virtue of the suretyagreement. The only condition necessary for him to be liable under the agreementwas that Daicor is or may become liable as maker, endorser, acceptor or otherwise. The comprehensive surety agreement signed by Go and Chua was as an accessoryobligation dependent upon the principal obligation, i.e., the loan obtained by Daicoras evidenced by the promissory note. The surety agreement unequivocally shows that it was executed to guarantee futuredebts that may be incurred by Daicor with petitioner, as allowed under NCC Art.2053. A guaranty may also be given as security for future debts, the amount of which isnot yet known; there can be no claim against the guarantor until the debt isliquidated. A conditional obligation may also be secured.

CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner, vs. Hon. ALBERTO Q.UBAY as Judge of the Court of First Instance of Rizal, Caloocan City, Branch XXXII andONG CHI, doing business under the Firm Name. "TABLERIA DE LUXE," respondents. Ong Chi, doing business under the firm name "Tableria de Luxe", sued Francisco Reyes, Jr. for asum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment and uponfiling a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed in custodia legis.Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of P6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The condition of the counterbond is that "in consideration of the dissolution of said attachment, [Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby jointly and severally, bindourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY FIVE ONLY (P6,465.00) PhilippineCurrency, under the condition that in the case the plaintiff recovers judgment in the action thedefendant will on demand redeliver the attached property so released to the officer of the Court tobe applied to the payment of the judgment or in default thereof that the defendant and surety willon demand pay to the plaintiff the full value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted and the jeep was returned to Reyes.In the course of time, the City Court rendered judgment as follows:"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,ordering said defendant to pay plaintiff the sum of P6,964.18, with legal interests thereon from thedate of the filing of this complaint until fully paid, plus the sum of P500.00, as and by way of attorney's fees, and the costs of the suit." (Id., p. 14.) Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the judgment in toto. Upon finality of the judgment, a writ of execution was issuedagainst Reyes. The jeep which was the object of the attachment was sold by the sheriff forP4,000.00 and the amount was credited against the judgment in partial satisfaction thereof. Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel thecounterbond. Ong Chi not only opposed the motion but he also asked that the surety company paythe deficiency on the judgment in the amount of P5,730.00 (P9,730.00 as of the filing of themotion, less P4,000.00 the proceeds of the sale of the jeep). The motion for a deficiency judgmentwas opposed by the surety on the ground that it had fulfilled the condition of the counterbond.Despite the opposition, the court ordered the surety to pay. A motion for reconsideration wasdenied which accounts for the instant petition. The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner urges anegative answer; it relies on the terms of the counterbond. Upon the other hand, the privaterespondent claims that an affirmative answer is proper, he relies on Section 17 of Rule 57, Rules of Court which stipulates thus:"SEC. 17.When execution returned unsatisfied, recovery had upon bond. If the execution bereturned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuantto the provisions of this rule to secure the payment of the judgment shall become charged on suchcounterbond, 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 summaryhearing in the same action." The petition is highly impressed with merit. The stipulation in the counterbond executed by the petitioner is the law between the parties in thiscase and not the provisions of the Rules of Court. Under the counterbond, the petitioner surety company bound itself solidarily with the principalobligor "in the sum of P6,465.00 under the condition that in case the plaintiff recovers judgment inthe action, the defendant will, on demand, redeliver the attached property so released to theofficer of the court to be applied to the payment of the judgment or in default thereof that thedefendant and surety will, on demand, pay to the plaintiff the full value of the property released." The main obligation of the surety was to redeliver the jeep so that it could be sold in caseexecution was issued against the principal obligor. The amount of P6,465.00 was merely to fix thelimit of the surety's liability in case the jeep could not be reached. In the instant case, the jeep wasmade available for execution of the judgment by the surety. The surety had done its part; theobligation of the bond had been discharged; the bond should be cancelled. The impropriety of the orders of the respondent judge is made more manifest by still anot hercircumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on theassumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00, thesurety can be held liable at most for P2,465.00. But the respondent judge ordered the surety topay

P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is axiomatic that theobligation of a surety cannot extend beyond what is stipulated. WHEREFORE, the petition is granted; the questioned orders of the respondent judge are hereby setaside and in lieu thereof another is entered cancelling the petitioner's counterbond, with costsagainst the private respondent.SO ORDERED.