GARCIA JR. V. CA respondent court reversed Judge Jesus M.

Elbinias and remanded the records of

the case for trial on the merits. Garcia then came to this Court in this petition for
DOCTRINE: Suretyship is a contractual relation resulting from an agreement review on certiorari, pleading the same arguments raised in the trial court
whereby one person, the surety, engages to be answerable for the debt, default
or miscarriage of another, known as the principal. The suretys obligation is not ISSUE: WON the surety agreement is valid
an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal.  HELD:

Nevertheless, although the contract of a surety is in essence secondary only to a The petitioner’s first ground is that, as found by the trial court, the surety
valid principal obligation, his liability to the creditor or promise of the principal agreement was invalid because no consideration had been paid to him by PISO
is said to be direct, primary and absolute; in other words, he is directly and for executing the contract and that the amount of the entire loan had been
equally bound with the principal.  received and enjoyed by WMC. He cites the following articles of the Civil Code
in support of his contention that lack of consideration was a personal defense
The surety therefore becomes liable for the debt or duty of another although he available to him as surety. The point is not well taken in view of the nature and
possesses no direct or personal interest over the obligations nor does he receive purpose of a surety agreement. Suretyship is a contractual relation resulting
any benefit therefrom. from an agreement whereby one person, the surety, engages to be answerable
for the debt, default or miscarriage of another, known as the principal. The
FACTS: peculiar nature of a surety agreement is that it is regarded as valid despite the
Western Minolco Corporation (WMC) obtained from the Philippine absence of any direct consideration received by the surety either from the
Investments Systems Organization (PISO) two loans for P2,500,000.00 and principal obligor or from the creditor. A contract of surety, like any other
P1,000,000.00 for which it issued the corresponding promissory notes payable contract, must generally be supported by a sufficient consideration. However,
on May 30, 1977. On the same date, Antonio Garcia and Ernest Kahn executed the consideration necessary to support a surety obligation need not pass directly
a surety agreement binding themselves jointly and severally for the payment of to the surety; a consideration moving to the principal alone will suffice. It has
the loan of P2,500,000.00 on due date. been held that if the delivery of the original contract is contemporaneous with
the delivery of the surety’s obligation, each contract becomes completed at the
Upon failure of WMC to pay after repeated demands, demand was made on same time, and the consideration which supports the principal contract likewise
Garcia pursuant to the surety agreement. Garcia also failed to pay. Hence, on supports the subsidiary one. (Faust v. Rodelheim, 77 NJL 740, 73 A 491;
April 5, 1983, Lasal Development Corporation (to which the credit had been Ballard v. Burton, 64 Vt 387, 24 A 769). And this is the kind of surety contract
assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional to which the rule of strict construction applies as opposed to a compensated
Trial Court of Makati. surety contract undertaken by surety corporations which are organized for the
purpose of conducting an indemnity business at established rates and
On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the compensation unlike an ordinary surety agreement where the surety binds his
complaint stated no cause of action; (b) the suit would result in unjust name through motives of friendship and accomodation.
enrichment of the plaintiff because he had not received any consideration from
PISO; (c) the surety agreement violated the doctrine of the limited liability of The surety’s obligation is not an original and direct one for the performance of
corporations; and (d) the principal obligation had been novated. his own act, but merely accessory or collateral to the obligation contracted by
the principal. Nevertheless, although the contract of a surety is in essence
After considering the arguments and evidence of the parties, the trial court secondary only to a valid principal obligation, his liability to the creditor or
granted the motion and dismissed the complaint on the ground that the surety promisee of the principal is said to be direct, primary and absolute; (Sykes v.
agreement was invalid for absence of consideration. Everett, 167 NC 600), in other words, he is directly and equally bound with the
principal. The surety therefore becomes liable for the debt or duty of another
The plaintiff moved for reconsideration and when this was denied elevated the although he possesses no direct or personal interest over the obligations nor
matter to the Court of Appeals. In a decision dated June 23, 1987, the does he receive any benefit therefrom.
 and Aurelio F. Tablante, likewise executed a Continuing Suretyship Agreement
SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF in which said corporation "jointly and severally unconditionally" guaranteed the
INTEREST, SUCH BEING MERELY A COLLATERAL AGREEMENT "full, faithful and prompt payment and discharge of any and all indebtedness" of
BETWEEN THE CREDITOR AND THE PRINCIPAL DEBTOR. — As for Fortune Motors Corporation to BA Finance Corporation.
the compounded interest, we apply by analogy the case of Bank of the
Philippine Islands v. Gooch and Redfern, (45 Phil. 514) which was affirmed in Fortune Motors Corporation thereafter executed trust receipts covering the
the later case of the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. motor vehicles delivered to it by CARCO under which it agreed to remit to the
141). In the said cases, the respective sureties claimed that since the creditor Entruster (CARCO) the proceeds of any sale and immediately surrender the
changed the rate of interest in the principal obligation without their knowledge remaining unsold vehicles. ). The drafts and trust receipts were assigned to
or consent, they were relieved from liability under their contract. It was held, plaintiff-appellant, under Deeds of Assignment executed by CARCO.
however, that the change in the rate of interest was merely a collateral Upon failure of the defendant-appellant Fortune Motors Corporation to pay the
agreement between the creditor bank and the principal debtor that did not affect amounts due under the drafts and to remit the proceeds of motor vehicles sold or
the surety. When the debtor promised to pay the extra rate of interest on demand to return those remaining unsold in accordance with the terms of the trust
of the plaintiff, the liability he assumed was his alone and was separate and receipt agreements, BA Finance Corporation sent demand letter to Edgar C.
apart from the original contract. His agreement to pay the additional rate of Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan Lumber
interest was an additional burden upon him and him only. That obligation in no Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C.
way affected the original contract of the surety, whose liability remained Baltazar (Folder of Exhibits, pp. 29-37). Since the defendants-appellants failed
unchanged. to settle their outstanding account with plaintiff-appellant, the latter filed on
December 22, 1983 a complaint for a sum of money with prayer for preliminary
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), attachment, with the Regional Trial Court of Manila.
PALAWAN LUMBER MANUFACTURING CORPORATION V. BA
FINANCE CORPORATION ISSUE: WON respondent BAFC has a valid cause of action for a sum of money
following the drafts and trust receipts transactions.
DOCTRINE: The law uses the word "may" in granting to the entruster the
right to cancel the trust and take possession of the goods. Consequently, the HELD: As an entruster, respondent BAFC must first demand the return of the
entrustee has the discretion to avail of such right or seek any alternative action, unsold vehicles from Fortune Motors Corporation, pursuant to the terms of the
such as a third party claim or a separate civil action which it deems best to trust receipts. Having failed to do so, petitioners had no cause of action
protect its right, at any time upon default or failure of the entrustee to comply whatsoever against Fortune Motors Corporation and the action for collection of
with any of the terms and conditions of the trust agreement sum of money was, therefore, premature.
A trust receipt is a security transaction intended to aid in financing importers
FACTS: and retail dealers who do not have sufficient funds or resources to finance the
On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors importation or purchase of merchandise, and who may not be able to acquire
Corporation, executed in favor of plaintiff-appellant a Continuing Suretyship credit except through utilization, as collateral, of the merchandise imported or
Agreement, in which he "jointly and severally unconditionally" guaranteed the purchased.9 In the event of default by the entrustee on his obligations under the
"full, faithful and prompt payment and discharge of any and all indebtedness" of trust receipt agreement, it is not absolutely necessary that the entruster cancel
Fortune Motors Corporation to BA Finance Corporation. On February 3, 1983, the trust and take possession of the goods to be able to enforce his rights
Palawan Lumber Manufacturing Corporation represented by Joseph L.G. Chua, thereunder.
George D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor
of plaintiff-appellant a Continuing Suretyship Agreement in which, said
corporation "jointly and severally unconditionally" guaranteed the "full, faithful
and prompt payment and discharge of any and all indebtedness of Fortune
Motors Corporation to BA Finance Corporation (Folder of Exhibits, pp. 19-20).
On the same date, South City Homes, Inc. represented by Edgar C. Rodrigueza