CENTRAL SURETY and INSURANCE COMPANY

vs.
Hon. ALBERTO Q. UBAY
Facts: Ong Chi, doing business under the firm name "Tableria de Luxe sued Francisco Reyes, Jr.
for a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment
and upon filing 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 P
6,465.00; 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 hereby jointly
and severally, bind ourselves in the sum P 6,465.00, under the condition that in the case the
plantiff recovers judgment in the action the defendant will on demand redeliver the attached
property so released to the officer of the Court to be applied to the payment of the judgment or
in default thereof that the defendant and surety will on demand pay to the plaintiff the full
value of the property released." The writ of attachment was thereafter lifted and the jeep was
returned to Reyes.
City Court rendered judgment in favor of the Plaintiff and against the defendant, Court of First
Instance of Rizal but said court affirmed the judgment in toto.
After the sale of the jeep, Central. filed a motion to cancel the counterbond. Ong Chi not only
opposed the motion but he also asked that the surety company pay the deficiency on the
judgment in the amount of P5,730. 00. The motion for a deficiency judgment was 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 was denied which
accounts for the instant petition.
Issue: The issue is whether or not the petitioner surety is liable for the deficiency.
Ruling:
The petitioner urges a negative answer; it relies on the terms of the counterbond. Upon the other
hand, the private respondent 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 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 same action.

The stipulation in the counterbond executed by the petitioner is the law between the parties in
this case and not the provisions of the Rules of Court.
Under the counterbond, the petitioner surety company bound itself solidarily with the principal
obligor "in the sum of P 6,465.00 under the condition that in case the plaintiff recovers judgment
in the action, the defendant will, on demand, redeliver the attached property so released to the
officer of the court to be applied to the payment of the judgment or in default thereof that the
defendant 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 case
execution was issued against the principal obligor. The amount of P6,465.00 was merely to fix
the limit of the surety's liability in case the jeep could not be reached. In the instant case, the jeep
was made available for execution of the judgment by the surety. The surety had done its part; the
obligation of the bond had been discharged; the bond should be cancelled.

MANILA SURETY & FIDELITY CO

vs.
NOEMI ALMEDA
Facts: The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso
Esquillo, and doing business under the name and style of Almeda Trading, entered into a contract
with NAMARCO for the purchase of goods on credit, payable in 30 days from the dates of
deliveries thereof. As required by' the NAMARCO, a bond for P5,000.00, undertaken by the
Manila Surety & Fidelity Co. The agreement was later supplemented on 17 October 1962 and a
new bond for the same amount of 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 the NAMARCO;
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 nonpayment and agreed that the liability of the Surety shall be direct and immediate
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; and
5. 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.
On 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading the
settlement of its back accounts, allegedly amounted to P16,335.09. It appears, however, that
previous to this, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of
First Instance of Laguna and by order of said court of 6 April 1965, he was declared insolvent.
The Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila
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.
Defendant NAMARCO filed its answer denying the averments of the complaint and setting up,
as affirmative defenses, lack of cause of action and the court's want of jurisdiction. The court

rendered judgment sustaining NAMARCO's contention that the insolvency of the debtorprincipal did not discharge the surety's liability under the bond.
Issue: Whether a surety can avail itself of the relief, specifically afforded in Article 2071 of the
Civil Code and be released from its liability under the bonds, notwithstanding a prior declaration
of the insolvency of the debtor-principal in an insolvency proceeding.
Ruling: 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 nonpayment, 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. In short, 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.
Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein
appellant's resort to the courts to be released from the undertaking thus assumed would have
been appropriate. Nevertheless, the guarantor's action for release can only be exercised against
the principal debtor and not against the creditor, 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 action against the creditor for a
release of the guaranty, before payment of the credit, for a plain reason: the creditor is not
compellable to release the guaranty (which is a property right) against his will. For, the release of
the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore, either
a remission or a novation by subrogation, and either operation requires the creditor's assent for
its validity.

ASSOCIATED INSURANCE & SURETY CO., INC.

vs.
BACOLOD-MURCIA MILLING CO., INC., ET AL.
Facts: The complaint alleges that defendants Sixto R. Ruiz obtained two crop loans in the
aggregate amount of P11,626.00 from defendant Bacolod-Murcia Milling Co., Inc., subject to the
condition that he shall post surety bonds to guarantee the payment of 25% of said crop loans; that
in compliance with said condition, plaintiff, executed in favor of the milling corporation two
surety bonds in the aggregate amount of P2,956.50 for the purpose above-mentioned; that said
bonds were executed subject to the following conditions:
(1) the creditor shall apply the share of the debtor in the harvest of the crops for which the loans
were granted to the liquidation of said loans and no part thereof shall be applied to other
indebtedness until the loans have been fully liquidated;
(2) the creditor shall not grant any additional loan to the debtor in excess of the latter's share in
the crops covered by the bonds without the prior written consent of the surety; and
(3) the liability of the surety will terminate upon complete payment of the indebtedness
guaranteed by the bonds;
That defendant milling company failed to comply with conditions 1 and 2 mentioned above
when it granted to the debtor loans in excess of the latter's share in the harvest of the crops
covered by the bonds without the written consent of plaintiff, and when it failed to notify
plaintiff of the amount the debtor has actually availed himself of the crop loans obtained by him,
thereby depriving plaintiff of its right to be apprised of the loan actually obtained, this notice
being necessary to enable plaintiff to take steps to protect its interest; and that in view of the
violations of the conditions above-mentioned, plaintiff is deemed to have been relieved of its
liability under the bonds.
As an alternative cause of action, also alleges that defendant Sixto R. Ruiz, as debtor, and
defendant Raymundo D. Dizon, as surety, executed an indemnity agreement in favor of plaintiff
to indemnify the latter for executed the two surety bonds in favor of the milling company
mentioned in the preceding paragraph; that defendant milling company notified plaintiff that the
debtor has an standing account with said defendant in the amount of P15,285.72 and demanded
that it pay its share thereof in the amount of P2,956.50 as agreed upon in the surety bonds, and
that in the event plaintiff is compelled pay to the defendant milling company said amount of
P2,956.50, plaintiff would have a valid cause of action against debtor and his surety for the
recovery of said amount under the provisions of the indemnity agreement.
Issue: WON there is no allegation in the complaint that the plaintiff, as a surety, has paid the
obligation it guaranteed, or has been required to pay the same by said defendant. And
grantingarguendo that the allegations in the complaint regarding breach of the conditions of the

surety bonds are true, the same would only be matters of defense which plaintiff could put up
should it be made to pay its obligation under the bonds of defendant milling company.
Ruling: The reasons advanced for the dismissal of the case are that plaintiff, being a surety of
the debtor who obtained two crops loan from the milling company, has not yet incurred any
plaintiff under its bonds because the complaint contains no allegations that it has voluntarily paid
the obligation or has been made to pay the same to the company in accordance with the terms of
the bonds. It is contended that the allegations of the complaint concerning breach of the principal
conditions of the bonds on the part of defendant milling company are mere matters of defense
which plaintiff could put up when demand for payment is made upon it by the milling company.
With this we disagree. The purpose of the action is not dispute the validity of any demand for
payment that may have been made upon plaintiff by defendant company on the strength of its
liability under the bonds but rather to ask for its release from its liability under the bonds for
certain breach of its conditions committed by the milling company, and it is for the reason that
the action was brought against the milling company. It is true that, as an alternative action, the
debtor and the other surety were also included to exact liability from them under the indemnity
agreement, but that is an action distinct and separate from that alleged against the milling
company and as such it cannot in any way affect the relation of the latter to the plaintiff. We find
therefore immaterial or unnecessary to allege in the complaint that plaintiff has either paid or
been required to pay its obligation under the bonds by the creditor considering the nature of the
main cause of action. It is sufficient if it alleges therein, as it actually does, that conditions agreed
upon in the bonds had been violated. We therefore conclude that the complaint states a valid
cause of action insofar as the milling company is concerned.