Credit Cases 2016

8/19/2019 Credit Cases 2016

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[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.

D E C I S I O N

LABRADOR, J.:

Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido A. Tan, presiding, dismissing the

complaint as against Plaridel Surety and Insurance Company.

Complaint is by Philippine National Bank against Macapanga Producers Inc. and Plaridel Surety and Insurance Co.

Principal allegations are:chanroblesvirtuallawlibrary On December 26, 1952, Luzon Sugar Company leased a sugar mil

located at Calumpit, Bulacan to Macapanga Producers beginning with the crop year 1952-53 at a minimum annua

royalty of P50,000, which shall be a lien on the sugar produced by the lessee and shall be paid before sale or removal of

sugar from warehouse (copy of lease contract attached as Annex A to the Complaint); chan roblesvirtualawlibraryon

December 26, 1952, Macapanga Producers, as principal, and Plaridel Surety & Insurance, as surety, executed and

delivered toPlaintiff a performance bond in the amount of P50,000 for the full and faithful compliance by Macapanga

Producers of all terms and conditions of the lease (copy of bond attached as Annex B to Complaint); chan

roblesvirtualawlibraryon December 21, 1953, Luzon Sugar assigned to Plaintiff the payment due from Macapanga

Producers in the sum of P50,000, representing royalty for the lease of the sugar mill for the crop year 1952-53 (deed of

assignment attached as Annex C to Complaint); chan roblesvirtualawlibraryPlaintiff notified Macapanga Producers and

Plaridel Surety & Insurance of said assignment; chan roblesvirtualawlibraryPlaintiff had demanded from Macapanga

Producers payment of said royalty of P50,000, but the latter has refused and refuses to make payment; chan

roblesvirtualawlibraryand Plaintiff also made demand on Plaridel Surety & Insurance for said payment, but the latter

refused and refuses to make payment.

Plaridel Surety & Insurance moved to dismiss the complaint for failure to state cause of action, alleging that it is a

guarantor and as such is responsible only if Macapanga Producers has no property or assets to pay its obligation as

lessee. Plaintiff opposed the motion calling attention to the provision of the performance bond in which Macapanga

Producers and Plaridel Surety & Insurance, the former as principal and the latter as surety, agreed to be held and firmly

bound unto Luzon Sugar in the penal sum of P50,000, “for the payment of which, w ell and truly be made, we bindourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally.” Plaintiff contended that

as Plaridel Surety & Insurance bound itself solidarily with Macapanga Producers, it became a surety in accordance with

Article 2047, par. 2 of the Civil Code.

The trial court dismissed the complaint against Plaridel Surety & Insurance and subsequently denied a motion to

reconsider the order of dismissal.

The action joining Plaridel Surety & Insurance as party Defendant is justified by the following provisions and

cases:chanroblesvirtuallawlibrary

“ART. 2047. cralaw

If a person binds himself solidarily with the principal debtor, the provisions of section 4, Charter 3, Title I of this Book

shall be observed. In such case the contract is called a suretyship.” (Civil Code.)

“The sureties on the superedeas bond given in this particular case, were jointly and severally liable with principal debtor

and that an execution might issue against their property concurrently with the execution against the property of the

principal.” (Molina vs. De la Riva, et al., 7 Phil., 345.)

“Article 1822, invoked by the Appellant , provides that ‘if the surety bound himself jointly with the principal debtor, the

provisions of section fourth, chapter third, title first of this book shall be observed,’ that is of book fourth of the Civi

Code. Section fourth of the chapter title, and book mentioned provides that ‘a creditor may sue any of the joint debto

or all of them simultaneously.’ (Art. 1144). In conformity with this provision, the sureties Pua Ti and Yap Chatco having

bound themselves in solidum (jointly and severally) with the principal debtor Pua Te Ching, the creditor, that is, the

Chinese Chamber of Commerce, may sue any of them or all of them simultaneously; chan roblesvirtualawlibrarywhich is


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what the Chinese Chamber of Commerce did in filing suit against the joint and several debtors.” (Chinese Chamber o

Commerce vs. Pua Te Ching, 16 Phil., 406.).

“As the principal debtor’s obligation’ is valid and has not been satisfied by his estate, and as theDefendant sureties

bound themselves solidarily, article 1144 of the Civil Code is applicable, which provides, as

follows:chanroblesvirtuallawlibrary

The creditor may sue any of the solidary debtors or all of them simultaneously. An action instituted against one shall not

be a bar to those which may be subsequently brought against the others, as long as the debt has not been entirely

satisfied. (Molina vs. De la Riva, 7 Phil., 345; chan roblesvirtualawlibraryChinese Chamber of Commerce vs. Pua Te Ching,16 Phil., 406; chan roblesvirtualawlibraryInchausti & Co. vs. Yulo, 34 Phil., 978.)” (Ferrer vs. Lopez and Santos, 56 Phil.

592.)

It is also argued on behalf of Plaridel Surety and Insurance that as it was not a party to the assignment, and same was

made without its consent, it is, therefore, discharged from its obligation. An assignment without knowledge or consent

of the surety is not a material alteration of the contract, sufficient to discharge the surety (Stearns Law of Suretyship,

Elder, fifth edition, p. 113.) 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. (Bank of P. I. vs. Albaladejo y Cia, 53 Phil., 141; chan roblesvirtualawlibraryBank of P. I. vs. Gooch, et al.

45 Phil., 514; chan roblesvirtualawlibraryVisayan Distributors, Inc. vs. Flores, et al., 92 Phil., 145, 48 Off. Gaz., 4784; chan

roblesvirtualawlibraryDel Rosario vs. Nava, 95 Phil., 637, 50 Off. Gaz., 4189.)It is lastly contended that as Plaintiff or the lessor had a lien in the sugar produced, and failed to proceed against it or

enforce such lien, Plaridel Surety & Insurance was released thereby. There is no allegation to this effect in the complaint,

that lessor or Plaintiff ever had possession or control of the sugar, or ever waived or released the lien

thereon. Appellee cannot raise the issue in a motion to dismiss.

The order of dismissal is hereby reversed, and the Appellee ordered to answer the complaint, with costs.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.


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Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

GATEWAY ELECTRONICS G.R. No. 172041

CORPORATION and

GERONIMO B. DELOS REYES, JR.,

Petitioners, Present:

QUISUMBING, J., Chairperson,

- versus - AUSTRIA-MARTINEZ,*

CARPIO MORALES,

TINGA, and

VELASCO, JR., JJ.

ASIANBANK CORPORATION, Promulgated:

Respondent.

December 18, 2008

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

D E C I S I O N

VELASCO, JR., J.:

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

of Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution [2] of March 17, 2006 denying petitioners motion fo

reconsideration.

The Facts

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

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

Andrew delos Reyes its executive vice-president.

On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship fo

Gateway in favor of respondent Asianbank Corporation (Asianbank), pertinently providing:

I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x due and

punctual payment by the following individuals/companies/firms, hereinafter called the DEBTOR(S), of

such amounts whether due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLS

CORPORATION [PURCHASED LINE]

*US$3,000,000.00*OMNIBUS CREDIT LINE

owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as evidenced by all notes,

drafts, overdrafts and other [credit] obligations of every kind and nature contracted/incurred by said

DEBTOR(S) in favor of said CREDITOR.

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In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness herein

secured at maturity, I/WE jointly and severally agree and engage to the CREDITOR, its successors and

assigns, the prompt payment, x x x of such notes, drafts, overdrafts and other credit obligations on

which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR,

together with all interests, penalty and other bank charges as may accrue thereon x x x.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be

performed under any contracts evidencing indebtedness/obligations and any supplements,

amendments, changes or modifications made thereto, including but not limited to, the due and punctualpayment by the said DEBTOR(S).

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent

upon the pursuit by the CREDITOR x x x of whatever remedies it or they may have against the DEBTOR(S)

or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon

this suretyship, x x x and notwithstanding also that all obligations of the DEBTOR(S) to you outstanding

and unpaid at any time may exceed the aggregate principal sum hereinabove stated.[3]

Later developments saw Asianbank extending to Gateway several export packing loans in the total aggregate

amount of USD 1,700,883.48. This loan package was later consolidated with Dollar Promissory Note (PN) No. FCD-0599-

2749[4] for the amount of USD 1,700,883.48 and secured by a chattel mortgage over Gateways equipment for USD 2

million.

Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateways request,

Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity of three of

Gateways officers, among them Andrew.

On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank checks for the amounts

of USD 40,000 and USD 20,000, respectively, as payment for its arrearages and interests for the periods June 30 and July

30, 1999; but both checks were dishonored for insufficiency of funds. Asianbanks demands for payment made uponGateway and its sureties went unheeded. As of November 23, 1999, Gateways obligation to Asianbank, inclusive of

principal, interest, and penalties, totaled USD 2,235,452.17.

Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati City a complaint for a

sum of money against Gateway, Geronimo, and Andrew. The complaint, as later amended, was eventually raffled to

Branch 60 of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank Corporation v. Gateway Electronics

Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.

In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the

steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts toward

recovery.

Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the

PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did not include PN No. FCD

0599-2749, the payment of which was extended several times without his consent.

Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his

signature on it, was signed without his wifes consent and should, thus, be considered as a mere continuing offer. Like

Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch as he too

never consented to the repeated loan maturity date extensions given by Asianbank to Gateway.

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The [CA] erred in holding that the repeated extensions granted by respondent Asianbank to GEC

without notice to and the express consent of petitioner GBR did not discharge petitioner GBR from his

liabilities as surety GEC in that:

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

extinguishes the guaranty.

B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as too comprehensive and all

encompassing as to amount to absurdity.

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

from his obligations as surety of GEC.

IV

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

and sustains injury as a result thereof, the bank is deemed to have assumed the risk and no right of

payment accrues to the latter against any party to the transaction. By repeatedly extending the period

for the payment of GECs obligations and granting GEC other loans after the suretyship agreement

despite GECs default and in failing to foreclose the chattel mortgage constituted as security for GECs

loan contrary to normal banking practices, Asianbank failed to exercise reasonable caution for its own

protection and assumed the risk of non-payment through its own acts, and thus has no right to proceed

against petitioner GBR as surety for the payment of GECs loans.

V

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

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

account the relative hardship that one relief or another may occasion to them. Upon a balancing of

interests of both petitioner GBR and respondent Asianbank, greater and irreparable harm and injury

would be suffered by petitioner GBR than respondent Asianbank if the assailed Decision and Resolution

of the [CA] would be upheld x x x. This Honorable Court x x x should thus exercise its equity jurisdiction

in the instant case to the end that it may render complete justice to both parties and declare petitioner

GBR as released and discharged from any liability in respect of respondent Asianbanks claims.[8]

The Ruling of the Court

Gateway May Be Discharged from Liability But Not Geronimo

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

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

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

relegated to the insolvency proceedings for the claimants relief.

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

the issuance of an order declaring the petitioner insolvent after the insolvency court finds the corresponding petition forinsolvency to be meritorious shall stay all pending civil actions against the petitioners property. For reference, said Sec

18, setting forth the effects and contents of a voluntary insolvency order,[10] pertinently provides:

Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x shall

make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in

which the petition is filed to take possession of, and safely keep, until the appointment of a receiver or

assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the

debtor and all his real and personal property, estate and effects x x x. Said order shall further forbid the

payment to the creditor of any debts due to him and the delivery to the debtor, or to any person for

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him, of any property belonging to him, and the transfer of any property by him, and shall further

appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order

shall [be published] x x x. Upon the granting of said order, all civil proceedings pending against the said

insolvent shall be stayed.When a receiver is appointed, or an assignee chosen, as provided in this Act,

the sheriff shall thereupon deliver to such receiver or assignee, as the case may be all the property,

assets, and belongings of the insolvent which have come into his possession x x x. (Emphasis supplied.)

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

succeeding Sec. 60 which properly applies to the period after the commencement of proceedings in insolvency. The twoprovisions may be harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions against the

property of the petitioner are not ipso facto stayed, but the insolvent may apply with the court in which the actions are

pending for a stay of the actions against the insolvents property. If the court grants such application, pending civi

actions against the petitioners property shall be stayed; otherwise, they shall continue. Once an order of insolvency

nevertheless issues, all civil proceedings against the petitioners property are, by statutory command, automatically

stayed. Sec. 60 is reproduced below:

SECTION 60. Creditors proving claims cannot sue; Stay of action.No creditor, proving his debt

or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have

waived all right of action and suit against him, and all proceedings already commenced, or any

unsatisfied judgment already obtained thereon, shall be deemed to be discharged and surrendered

thereby; and after the debtors discharge, upon proper application and proof to the court having

jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments satisfied of record:

Provided, x x x. A creditor proving his debt or claim shall not be held to have waived his right of action or

suit against the debtor when a discharge has have been refused or the proceedings have been

determined to the without a discharge. No creditor whose debt is provable under this Act shall be

allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any

action therefor against the debtor until the question of the debtors discharge shall have been

determined, and any such suit proceeding shall, upon the application of the debtor or of any creditor,

or the assignee, be stayed to await the determination of the court on the question of

discharge: Provided, Thatif the amount due the creditor is in dispute, the suit, by leave of the court in

insolvency, may proceed to judgment for purpose of ascertaining the amount due , which amount,

when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed aforesaid.

(Emphasis supplied.)

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

of December 2, 2004 had the effect of automatically staying the civil action for a sum of money filed by Asianbank

against Gateway. In net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim

against Gateway was concerned, was, or ought to have been, suspended after December 2, 2004, Asianbank having

been duly notified of and in fact was a participant in the insolvency proceedings. The Court of course takes stock of the

proviso in Sec. 60 of Act No. 1956 which in a way provided the CA with a justifying tool to continue and to proceed to

judgment in CA-G.R. CV No. 80734, but only for the purpose of ascertaining the amount due from Gateway. At any

event, on the postulate that jurisdiction over the properties of the insolvent-declared Gateway lies with the insolvency

court, execution of the CA insolvency judgment against Gateway can only be pursued before the insolvency courtAsianbank, no less, tends to agree to this conclusion when it stated: [E]ven it if is assumed that the declaration of

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

delos Reyes from performing their obligations based on the Deeds of Suretyship x x x.[11]

Geronimo, however, is a different story.

Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability o

Geronimo as a surety, adding that claims against a surety may proceed independently from that against the principa

debtor. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to

evade liability.

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Geronimo counters with the argument that his liability as a surety cannot be separated from Gateways liability

As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency

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

Geronimos above contention is untenable.

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

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

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

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

3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

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

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the

debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety

promises to pay the principals debt if the principal will not pay, while a guarantor agrees that the

creditor, after proceeding against the principal, may proceed against the guarantor if the principal is

unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to

do so. x x x In other words, a surety undertakes directly for the payment and is so responsible at once

if the principal debtor makes default x x x.

x x x x

A creditors right to proceed against the surety exists independently of his right to proceed

against the principal. 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 . 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 as 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. Perforce, x x x 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.[12]

Clearly, Asianbanks right to collect payment for the full amount from Geronimo, as surety, exists independentlyof its right against Gateway as principal debtor;[13] it could thus proceed against one of them or file separate actions

against them to recover the principal debt covered by the deed on suretyship, subject to the rule prohibiting double

recovery from the same cause.[14] This legal postulate becomes all the more cogent in case of an insolvency situation

where, as here, the insolvency court is bereft of jurisdiction over the sureties of the principal debtor. As Asianbank aptly

points out, a suit against the surety, insofar as the suretys solidary liability is concerned, is not affected by an insolvency

proceeding instituted by or against the principal debtor. The same principle holds true with respect to the surety of a

corporation in distress which is subject of a rehabilitation proceeding before the Securities and Exchange Commission

(SEC). As we held in Commercial Banking Corporation v. CA, a surety of the distressed corporation can be sued

separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state of suspension

of payment.[15]

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obligations in view of the repeated extension extended by plaintiff [is concerned], is therefore

necessary. Obviously, plaintiff cannot now hold him liable as a surety to GECs obligations.[18]

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

written document, thus:

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

written instrument or document, the substance of such instrument or document shall be set forth in thepleading, and the original or a copy thereof shall be attached to the pleading as an exhibit , which shall

be deemed to be a part of the pleading, or said copy may with like effect be set forth in the pleading.

Sec. 8. How to contest such documents.When an action or defense is founded upon a written

instrument, copied in or attached to the corresponding pleading as provided in the preceding

section, the genuineness and due execution of the instrument shall be deemed admitted unless the

adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts ; but

the requirement of an oath does not apply when the adverse party does not appear to be a party to the

instrument or when compliance with an order for an inspection of the original instrument is

refused. (Emphasis supplied.)

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

complaint, hewed to the requirements of the above twin provisions. Asianbank, thus, effectively alleged the due

execution and genuineness of the said deed. From that point, Geronimo, if he intended to contest the surety deed,

should have specifically denied the due execution and genuineness of the deed in the manner provided by Sec. 10, Rule

8 of the Rules of Court, thus:

Sec. 10. Specific denial.A defendant must specify each material allegation of fact the truth of

which he does not admit and, whenever practicable, shall set forth the substance of the matters upon

which he relies to support his denial. Where a defendant desires to deny only a part of an averment, he

shall specify so much of it as is true and material and shall deny only the remainder. Where a defendant

is without knowledge or information sufficient to form a belief as to the truth of a material avermentmade in the complaint, he shall so state, and this shall have the effect of a denial. (Emphasis supplied.)

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

and that the signature appearing on it was not his or was falsified. His Answer does not, however, contain any such

statement. Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to have admitted, the

genuineness and due execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules of Court states:

Sec. 11. Allegations not specifically denied deemed admitted.Material averment in the

complaint, other than those as to the amount of unliquidated damages, shall be deemed admitted when

not specifically denied. x x x

Owing to Geronimos virtual admission of the genuineness and due execution of the deed of suretyship,

Asianbank, contrary to the view of Gateway and Geronimo, need not present the original of the deed during the

hearings of the case. Sec. 4, Rule 129 of the Rules says so:

Sec. 4. Judicial admissions.An admission, verbal or written, made by the party in the course of

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

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

supplied.)

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

under His Deed of Suretyship

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

overview on the process of taking out loans should first be made. Generally, especially for large loans, banks first

approve a line or facility out of which a client may avail itself of loans in the form of promissory notes without need of

further processing and/or approval every time a draw down is made. In the instant case, Asianbank approved in favor of

Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Asianbank

approved these credit lines which were covered by a chattel mortgage as well as the deeds of suretyship, such that loansextended from these lines would already be secured and pre-approved. In other words, these facilities are not financia

obligations yet. Asianbank did not yet lend out any money to Gateway with the approval of these lines. The loan

transaction occurred or the principal obligation, as secured by a surety agreement, was born after the execution of loan

documents, such as PN No. FCD-0599-2749.

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

which embodied several export packing loans issued by Asianbank to Gateway. He claims that the deed only secured the

PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo describes as absurd

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

surety deed.

Geronimos thesis that the deed in question cannot be accorded prospective application is erroneous. To be sure

the provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.) v. Court of

Appeals,[19] the Court, citing cases, defined and upheld the validity of a continuing suretyship in this wise:

x x x Of course, a surety is not bound under any particular principal obligation until

that principal obligation is born. But there is no theoretical or doctrinal difficulty

inherent in saying that the suretyship agreement itself is valid and binding even before

the principal obligation intended to be secured thereby is born, any more than there

would be in saying that obligations which are subject to a condition precedent are valid

and binding before the occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace inpresent day financial and commercial practice. A bank or financing company which

anticipates entering into a series of credit transactions with a particular company,

commonly requires the projected principal debtor to execute a continuing surety

agreement along with its sureties. By executing such an agreement, the principal

places itself in a position to enter into the projected series of transactions with its

creditor; with such suretyship agreement, there would be no need to execute a

separate surety contract or bond for each financing or credit accommodation

extended to the principal debtor.[20]

In Dio vs. Court of Appeals,[21] we again had occasion to discourse on continuing

guaranty/suretyship thus:

x x x 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. 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.

A guaranty shall be construed as continuing when by the terms thereof it is evident that

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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 x x x.

In other jurisdictions, it has been held that the use of particular words and expressions

such as payment of any debt, any indebtedness, any deficiency, or any sum, or the

guaranty of any transaction or money to be furnished the principal debtor at any time,

or on such time that the principal debtor may require, have been construed to indicate a

continuing guaranty. (Emphasis supplied.)

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

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

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

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

Line, as evidenced by:

x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted

or may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank

charges as may accrue thereon and all expenses which may be incurred by the latter in collecting any or

all such instruments.[22]

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

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

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

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

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

Particular attention must be paid to the statement appearing on the face of the Indemnity [Suretyship]

Agreement x x x evidenced by those certain loan documents dated April 20, 1982 x x x. From this

statement, it is clear that the Indemnity Agreement refers only to the loan document of April 20, 1982which is the SWAP loan. It did not include the EXPORT loan. Hence, petitioner cannot be held

answerable for the EXPORT loan.[23] (Emphasis supplied.)

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

that the agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed did not

limit itself to a specific loan document to the exclusion of another. The suretyship document merely mentioned the

Domestic Bills Purchased Line and Omnibus Credit Line as evidenced by all notes, drafts x x x contracted/incurred by

[Gateway] in favor of [Asianbank].[24] As explained earlier, such credit facilities are not loans by themselves. Thus, the

Deed of Suretyship was intended to secure future loans for which these facilities were opened in the first place.

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

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

determination. By the very use of the term omnibus, and in practice, an omnibus credit line refers to a credit facility

whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus line is broad enough to refer

to or cover an export packing credit loan.

Geronimos allegation that an export packing credit loan is separate and distinct from an omnibus credit line is

but a bare and self-serving assertion bereft of any factual or legal basis. One who alleges something must prove it: a

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

weight.

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

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

contrary to the findings of the CA, he did not waive his right to notice of extensions of Gateways obligations.

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

embedded in surety document itself, built in the ensuing provision:

In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtednessherein secured at maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors

and assigns, the prompt payment, without demand or notice from said CREDITOR of such notes, drafts,

overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may

hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank

charges as may accrue thereon and all expenses which may be incurred by the latter in collecting any or

all such instruments.[26] (Emphasis supplied.)

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

overdraft, and other credit obligations for which Gateway shall become indebted. This waiver necessarily includes new

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

Additionally, Geronimos lament about losing his right to subrogation is erroneous. He argues that by virtue of

the order of insolvency issued by the insolvency court, title and right to possession to all the properties and assets of

Gateway were vested upon Gateways assignee in accordance with Sec. 32 of the Insolvency Law .

The transfer of Gateways property to the insolvency assignee, if this be the case, does not negate Geronimos

right of subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that he may

only recover a portion of the amount he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does

not, however, render ineffectual, let alone invalidate, his suretyship.

Geronimos other arguments to escape liability are puerile and really partake more of a plea for liberality. They

need not detain us long. In gist, Geronimo argues: first , that he is a gratuitous surety of Gateway; second , Asianbank

deviated from normal banking practice, such as when it extended the period for payment of Gateways obligation andwhen it opted not to foreclose the chattel mortgage constituted as guarantee of Gateways loan obligation; and third

implementing the appealed CAs decision would cause him great harm and injury.

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

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

Corporation, the surety is liable for the debt of another although the surety possesses no direct or personal interest over

the obligation nor does the surety receive any benefit from it.[27]

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

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

primarily in the business of extending loans and earn income from their lending operations by way of service andinterest charges. This is why Asianbank opted to give Gateway ample opportunity to pay its obligations instead of

foreclosing the chattel mortgage and in the process holding on to assets of which the bank has really no direct use.

The following excerpts from Palmares are in point:

We agree with respondent corporation that its mere failure to immediately sue petitioner on

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 creditors rights vis--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 principals request or without it, and whether it is yielded by the creditor through sympathy

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or from an inclination to favor the principal x x x. The neglect of the creditor to sue the principal at the

time the debt falls due does not discharge the surety, even if such delay continues until the principal

becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the

creditors mere statement that the creditor will not look to the surety, or that he need not trouble

himself. The consequences of the delay, such as the subsequent insolvency of the principal,

or the fact

that the remedies against the principal may be lost by lapse of time, are immaterial.[28]

The Courts Equity Jurisdiction Finds No Application to the Instant Case

Geronimo urges the Court to release and discharge him from any liability arising from Asianbanks claims if what he

terms as complete justice is to be served. He cites, as supporting reference, Agcaoili v. GSIS,[29] presenting in the same

breath the following arguments: first , the Deed of Suretyship is a gratuitous contract from which he did not

benefit; second , Asianbank assured him that the deed would not be enforced against him; third , the enforcement of the

judgment of the CA would reduce Geronimo and his family to a life of penury; and fourth, Geronimo would be unable to

exercise his right of subrogation, Gateway having already been declared as insolvent.

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

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

need to further belabor any of them.

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

His misfortune is but the result of the implementation of abona fide contract he freely executed, the terms of which he

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

offensive to public policy or good customs if he be allowed to go back on his undertaking under the surety contract. The

Court cannot be a party to the contracts impairment and relieve a surety from the effects of an unwise but nonetheless

a valid surety contract.

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

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

Asianbank or its successor-in-interest against Gateway, if any, arising from the judgment in this suit shall be pursued

before the RTC, Branch 22 in Imus, Cavite as the insolvency court.

Costs against petitioners.SO ORDERED.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-8086 October 31, 1957

PACIFIC TOBACCO CORPORATION, plaintiff-appellee,vs.

RICARDO D. LORENZANA and VISAYAN SURETY & INSURANCE CORPORATION, defendants.

VISAYAN SURETY & INSURANCE CORPORATION, cross claimant and third party plaintiff-appellant,

vs.

RICARDO D. LORENZANA, cross defendant,

CALIXTO C. LORENZANA, JOSE M. LORENZANA and BENIGNO GUTIERREZ, third party defendants.

Sycip, Quisumbing, Solicitor Salazar & Associates for appellee.

Enrico I. de la Cruz for appellant.

Edgar C. Melia for cross-defendant and appellee.

FELIX, J .:

The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at Grace Park, Caloocan, Rizal,

engaged in the business of manufacturing and distributing cigarettes, cigars and other tobacco products.

On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement, the pertinent provisions of

which as follows:

WITNESSETH: That

WHEREAS, the Company manufactures cigarette, cigars, and other tobacco products which it desires to sell and

distribute throughout the Philippines; .

WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell and distribute the said products of the COMPANY in

the territory of Manila and Rizal Province under the terms and conditions herein below set forth;

NOW, THEREFORE for and in consideration of the premises herein contained, the parties hereto have agreed

and covenanted, as follows:

1. The DISTRIBUTOR shall sell and distribute solely the cigarettes, cigars and other tobacco products of the

COMPANY in the abovementioned territory;

2. The Company shall, from time to time, deliver to the DISTRIBUTOR, for sale, cigarettes and other tobacco

products, provided that the balance of the account of the DISTRIBUTOR with the COMPANY shall not at any time

exceed THREE THOUSAND ONLY PESOS (3,000.00);

3. All accounts of the Distributor with the Company shall be due and payable in the office of the latter within

thirty (30) days from and after the date of the sales invoice issued by the COMPANY;

xxx xxx xxx.


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8. The DISTRIBUTOR shall only sell the products of the COMPANY and in case he sells the products of other

persons or firms, the COMPANY shall be at l iberty to terminate this contract;

9. The DISTRIBUTOR binds himself for the COMPANY not less than TWENTY THOUSAND ONLY ——— PESOS

(P20,000.00) worth of cigarettes and other Tobacco products every month and should be fail to meet this quota,

the COMPANY shall have the opinion to terminate this contract upon twenty (20) day's notice;

xxx xxx xxx.

11. To guarantee the faithful performance on his part of the terms and conditions of this contract, the

DISTRIBUTOR shall post a surety bond in favor of the COMPANY in the amount of EIGHT THOUSAND ONLY ——

— PESOS (P8,000.00 signed by him and a reputable surety company acceptable to the COMPANY, THREE

THOUSAND PESOS (P3,000.00) of which bond shall answer for the faithful settlement of the account of the

DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the return of the aforementioned

truck to the COMPANY in the same condition that the DISTRIBUTOR received it , . . . (Exhibit A).

In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of P3,000 with the Visayan

Surety and Insurance Corporation, as surety to guarantee the faithful fulfillment of the principal's (Lorenzana's) part in

the contract with the Pacific Tobacco Corporation, which was "to sell and distribute the latter's cigarettes, cigar and

other tobacco products subject to the terms and conditions stipulated in the said contract" (Exhibit B).

The record shows that on various occasions in 1952, The Philippine Tobacco Corporation delivered to Lorenzana for

distribution cigarettes, cigars, and other tobacco products amounting to P15,645.64, but out of this amount the latters

paid and was only credited with P13,559.33, leaving a balance of P2,086.31. Upon demand by the corporation.

Lorenzana proposed to settle his pending obligation by giving P100 a month, which amount was later reduced to P25, to

which arrangement the company apparently agreed and Lorenzana actually made installments amounting to P250

(Exhibit G-6). As he failed to make any further payment, the Philippine Tobacco Corporation filed a complaint with the

Court of First Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety and

Insurance Corporation for the recovery of the sum of P2,086.31, with legal interest thereon from the date of filing of the

complaint until fully paid; attorney's fees in the amount of P5000.00; costs, and for such other remedy as may be

deemed just and equitable in the premises.

Defendant Visayan Surety and Insurance Corporation answered this complaint, which it latter modified with leave of

Court by filing an amended answer with cross-claim against Ricardo D. Lorenzana and third party complaint against

Calixto D. Lorenzana, Jose Lorenzana and Benigno C. Gutierrez, denying the material allegations of the complaint and

setting up the affirmative defense that the bond could not be held liable for damages and attorney's fees; that plaintiff

Philippine Tobacco Corporation was bared from presenting this action against the surety due to laches, waiver of claim

and estoppel. It was thus prayed that the complaint be dismissed as against said defendant; in the event that the surety

would be sentenced to pay the plaintiff, that a simultaneous order be issued ordering the cross-defendant and the third-

party defendants to pay the surety, jointly and severally, for whatever amount the latter may be required to satisfy, with

interest thereon at 12 per cent per annum from the date of payment until it was fully reimbursed; that the said cross-

defendant and third-party defendants be ordered to pay the surety, jointly and severally, in accordance with the

indemnity bond executed by them as counter-guarantors, 20 per cent of the amount involved as attorney's fees, andcosts.

In his answer dated December 1, 1953, Ricardo D. Lorenzana denied the allegation of the complaint that he refused or

failed to pay the plaintiff, the true fact being that he had tendered to plaintiff certain sums in accordance with their

verbal agreement which allowed him to settle his obligation in installments until the entire amount was fully satisfied;

set up the defense that the agreement, Annex "A", was partially modified when plaintiffs agreed and allowed him to sell

the tobacco products not only in the City of Manila and Rizal province but throughout the island of Luzon; that in virtue

of such modification, he sold plaintiff's products in places as far as the northern provinces; the most of defendant's

transactions in these provinces were on credit basis; that on August 2, 1952, when defendant arrived from his trip from

the Ilocos regions, plaintiff terminated his services on the ground that the corporation was losing without giving him an


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advance notice of 30 days in accordance with the agreement; that as plaintiff took the delivery truck which he was using

in the distribution of plaintiff's products he was prevented from going back to the provinces to collect from his

customers their accounts; that he made several payments in small amounts to settle remaining obligation which were

accepted, but in November, 1953, plaintiff refused to receive the same. Lorenzana claimed that because of plaintiff's

failure to notify him in advance that his services were terminated, he incurred and was incurring transportation

expenses in order to collect the accounts of hid former customers. He, therefore, prayed that the complaint be

dismissed and plaintiff be ordered to pay the amount that he incurred as transportation expenses. The third-party

defendants likewise filed their answer practically admitting all the averments of the third-party complaint except the

claim for 20 per cent of the amount involved as attorney's fees, on the ground that it was excessive and that they shouldnot be held liable for the payment of the pending obligation of Lorenzana.

At the hearing defendant Lorenzana failed to appear and to adduce in support of his defense inspite of the fact that he

was duly notified. After hearing and after the other parts had filed their respective memoranda, the Court rendered

judgment dated May 12, 1954, finding that although on one occasion plaintiff shipped cigarettes to defendant

Lorenzana addressed at San Fernando, La Union (Exhibit C-18), this fact alone would not release the surety from liability,

for there was nothing in the contract Exhibit A that expressly prohibited defendant Lorenzana from selling cigarettes

outside Manila and Rizal. The lower Court opined that what was guaranteed by the Visayan Surety and Insurance

Corporation was the faithful delivery by defendant Lorenzana of the price of the cigarettes to plaintiff within the time

fixed in the contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety no injury, said

deviation will not relieve the surety from its liability under the bond. The court thus ordered defendants Ricardo D.

Lorenzana and the Visayan Surety and Insurance Corporation to pay, jointly and severally, to the plaintiff Pacific Tobacco

Corporation the sum of P2,086.31, with legal interest from the date of the filing of the complaint, plus P500 as attorney's

fees and costs. On the strength of the indemnity bond (Exhibit "2") executed by the third-party defendants Calixto D.

Lorenzana, Jose M. Lorenzana and Benigno C. Gutierrez as counter-guarantors, they together with Ricardo D. Lorenzana,

were ordered to indemnify the Visayan Surety and Insurance Corporation for the amount which the latter would actually

pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment himself and another sum of P500

as attorney's fees.

After the motion filed by the surety for the reconsideration of said division was denied, said defendant brought the

matter to this Court on appeal ascribing to the lower Court the commission of several errors. But stripping them of

unnecessaries and reducing the same to bare essentials, the only question at issue in the case at bar is whether the

delivery by the company of its products to defendant Lorenzana in a place other than that mentioned in the agreementconstitutes an alteration of said agreement that would release the surety from its liability under the bond.

It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana, c/o of Mrs. Justo de Leon

at San Fernando, Pampanga. Defendant surety tried to capitalize on this single act but it failed to present evidence that

these goods were actually sold and distributed in said places. It would have been possible for the distributor to take a

sojourn in that place and the company, knowing where he could be reached, sent the merchandise to him. Defendant

Lorenzana also alleged in his answer that plaintiff allowed him to sell the latter's products even as far as the northern

provinces but this defendant was not able to substantiate such claim due to his failure to appear and testify to his effect

at the trial, despite the fact that he was duly represented by counsel. But even granting arguendo that the merchandise

thus delivered and presumably received at San Fernando, La Union, was actually sold and distributed therein, this may

not be considered as a deviation from the territory to be covered by the agent or distributor was not prohibited by theagreement itself, nor does the record show that such expansion of the territory was due to instructions from the

plaintiff. While it is true that that contract (Exhibit A) states that the distributor is willing to sell and distribute the

products of the company in Manila and Rizal, specification serves more as a manifestation that Lorenzana entered into

the agreement with the understanding that his sphere of activity would be for these places. But certainly nowhere in the

same agreement appears a restriction against the acceptance of additional territories, if he so desired.

Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco products that

were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place. To adopt this line of reasoning

would be to harness a pliant argument to suit appellant's purpose. The agreement required the distributor to post a

bond for P8,000, "P3,000 of which bond shall answer for the faithful settlement of the account of the distributor with


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the Company." The bond put up by Lorenzana in the amount of P3,000, undertaken by the Visayan Surety and Insurance

Corporation, therefore, was only to secure the prompt and faithful payment of the accounts of the distributor to the

company. The mention of Manila and Rizal in said agreement was designed more as a declaration or identification of

these places wherein the distributor was expressly authorized and assigned to sell the cigar, cigarettes and tobacco

products of the plaintiff, which is no obstacle to the distributor's acceptance or taking motu proprio of additional

territories in order to better to fulfill his obligation to sell monthly for the Company not less than P20,000 worth of

cigarettes and other tobacco products and could by no means alter his liability to turn over the to the company

payments therefor, and that is precisely his obligation secured by the bond.

Appellant maintaining that the alleged modification of the agreement released the surety from its liability, invokes the

rule of strictissimi juris under which, it is claimed, surety bonds must be strictly construed and cannot be extended

beyond their terms. Although We might acknowledge that a surety is a favorite of the law and his contract strictissimi

juris, this rule has no bearing on the case at bar. Anyway, it commonly refers to an accommodation surety and should

not be extended to favor a compensated surety, as is appellant in the instant case. The rationale of this doctrine is

reasonable; an accommodation surety acts without motive of pecuniary gain and, hence, should be protected against

unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot be said of

a compensated corporate surety which is a business association organized for the purpose of assuming classified risks in

large numbers, for profit and on an impersonal basis through the medium of standardized written contractual forms

drawn by its own representatives with the primary aim of protecting its own interests (See Stearn's The Law of

Suretyship, 4th ed., 402-403). American courts in refusing to apply this rule on compensated sureties have expressed

themselves in varying language. Sometimes it is said that a corporate compensated surety is not entitled to the benefit

of the rule of strictissimi juris (U.S. vs. Gao, F. Pawling & Co. 297 F. 65); or that the contract is to be construed against the

surety and in favor of the promise (Consolidated Indem. & Ins. Co. vs. State, 184 Ark. 581, 43 S.W. [2d] 240); or that the

contract is like one of the insurance, hence one or the other of the above rules is to be applied (Lassetter vs. Backer, 26

Ariz. 224, 224 P. 810; Md. Cas. Co. vs. Dunlap, 68 F. [2d] 289), and it was even said:

The law does not have the same solicitude for corporations engaged in giving indemnity bonds for profit as it

does for individual surety who voluntarily undertakes to answer for the obligations of another. Although calling

themselves sureties, such corporations are in fact insurers, and in determining their rights and liabilities the

rules peculiar to suretyship do not apply (Metropolitan Casualty Insurance Co. vs. United Brick & Tile Co. [1934],

29 P. [2d] 771).

Even assuming, however, for the sake of argument that the delivery of merchandise at a place other than that appearing

in the contract constitutes an alteration of the same, it is a material deviation that would release the surety from its

liability?.

A material alteration of a contract is such a change in the terms of the agreement as either imposes some new

obligation on the party promising or takes away some obligation already imposed. A change in the form of the contract

which does not affect one or the other of these results is immaterial, and will not discharge the surety (Stearn's The Law

of Suretyship, 4th ed., p.98). To be material an alteration must change the legal effect of the original contract (New

Amsterdam Casualty Co. vs. W.T. Taylor Const. Co., 12 F. [2d] 972).

It cannot be denied that the obligation of the principal remained the same — to settle his accounts to the company atthe specified time. The addition or diminution of the territories covered by his previous assignment will not alter or

affect that duty to make payments on time. Apart from the fact that the alteration in the instant case, if there was any,

is not material as to relieve the surety from its liability under the bond, there is not even an iota to proof that such

deviation caused the surety any loss or injury or that such delivery caused the distributor's failure to pay his accounts.

The weight of authority is to the effect that:

A corporation engaged in the business of suretyship for profit cannot successfully defend a suit merely by

showing a change in the contract, whether beneficial or otherwise, as is the rule in ordinary suretyship, but most

prove that the change is material and prejudicial (City of Philadelphia vs. Ray., 266 Pa. 345; 109 Alt. 689).


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It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an individual surety, is not applied

in case of compensated sureties; and that where a bonding company, for a monetary consideration, has insured

against failure of performance of a contract, it must show that it has suffered some injury by reason of

departure from the strict terms of contract, before it can for that reason be discharged from its liability (Pickens

County vs. National Surety Co. 13 F. [2d] 758 [C.C.A.] 4th, 1926).

A departure from the terms of the contract will not have the effect of discharging a compensated surety unless

it appears that such departure has resulted in injury, loss or prejudice to the surety (Chapman vs. Hoage, 296

U.S. 526).

It has been said that to allow compensated surety companies to collect and retrain premiums for their services,

graded according to the nature and extent of the risk, and then to repudiate their obligations on slight pretexts

which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise

and just rules designed for the protection of voluntary sureties (M. H. Waller Realty Co. vs. American Surety Co.,

60 Utah, 435).

Wherefore, the decision appealed from is hereby affirmed, with costs against appellant. It is so ordered.

Credit Cases 2016

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