GUARANTY & SURETYSHIP

Petitioner: ROSALINA CARODAN

vs.
Respondents: CHINA BANKING CORPORATION
G.R. No. 210542 February 24, 2016 SERENO, C.J

Provisions/Concepts/Doctrines and How Applied to the Case

A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.

FACTS
● On 15 January 1998, Barbara and Rebecca, for value received, executed and delivered
Promissory Note 6 to the respondent bank under which they promised therein to jointly and
severally pay the amount of P2.8 million.
● As security for the payment of the loan, Barbara, Rebecca, and Rosalina also executed a
Real Estate Mortgage over a property registered in the name of Rosalina.
● A Surety Agreement in favor of China Bank as a creditor was also executed by Barbara and
Rebecca as principals and Rosalina and her niece Madeline as sureties.
● Barbara and Rebecca failed to pay their loan obligation despite repeated demands from China
Bank. Their failure to pay prompted the bank institute extrajudicial foreclosure proceedings on
the mortgaged property which realized only P1.5 million as evidenced by a Certificate of Sale
leaving a deficiency of P365,345.77.
● For that reason, the bank prayed that the court order the payment of the deficiency amount.

● Barbara and Rebecca filed their Answer alleging that they had entered into an oral agreement
with Madeline and Rosalina whereby it was agreed upon that they would equally split both
the proceeds of the loan and the corresponding obligation and interest pertaining thereto, and
they would secure the loan with the properties belonging to them. However, while Rosalina
and Madeline obtained their share of P1.4 million of the loan amount, they never complied with
their obligation to pay interest. As such, by way of crossclaim, they pray that Rosalina and
Madeline be ordered to pay the deficiency amount.
● Rosalina filed her Answer with Counterclaim and Crossclaim alleging that the execution of the
contracts (the Real Estate Mortgage & the Surety Agreement) were "made in consideration of
the long-time friendship" between Barbara and Rebecca, and Madeline, and that "no monetary
or material consideration whatsoever passed between [Barbara and Rebecca], on the one
hand, and [Rosalina], on the other hand.

RTC: Held that Rosalina was a surety who had assumed or undertaken a principal debtor's
responsibility or obligation. As such, she was supposed to be principally liable for the payment of
the debt in case the principal debtors did not pay, regardless of their financial capacity to do so.
As such, it ordered Rebecca, Barbara and Rosalina to be jointly and severally liable to China Bank
for the deficiency between the acquisition cost of the foreclosed real estate property and the
outstanding loan obligation of Barbara and Rebecca at the time of the foreclosure sale.

CA: Affirmed the RTC Decision in toto.

ISSUE/S (relevant to the syllabus)
WN petitioner Rosalina is liable jointly and severally with Barbara and Rebecca for the payment of
respondent China Bank's claims. YES
RULING (include how the law was applied)
We find that Rosalina is liable as an accommodation mortgagor. Article 2085 of the New Civil
Code provides that:

(t)hird persons who are not parties to the principal obligation may secure the latter by pledging
or mortgaging their own property. An accommodation mortgagor, ordinarily, is not himself a
recipient of the loan, otherwise that would be contrary to his designation as such.

Apart from being an accommodation mortgagor, Rosalina is also a surety, defined under Article
2047 of the Civil Code in this wise:

Art. 2047. By guaranty a person, called a 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.

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common
to both. However, under our civil law, they may be distinguished thus:

CONTRACT OF SURETY CONTRACT OF GUARANTY

-A surety is usually bound with his principal - is the guarantor's own separate
by the same instrument, executed at the undertaking, in which the principal does not
same time, and on the same consideration; join.

- is an original promissor and debtor from -usually entered into before or after that of
the beginning, and is held, ordinarily, to the principal, and is often supported on a
know every default of his principal. separate consideration from that supporting
the contract of the principal;

-will not be discharged, either by the mere

indulgence of the creditor to the principal, or - original contract of his principal is not his
by want of notice of the default of the contract, and he is not bound to take notice
principal, no matter how much he may be of its non performance;
injured thereby
- often discharged by the mere indulgence
of the creditor to the principal, and is
usually not liable unless notified of the
default of the principal.

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay is the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.

When Rosalina affixed her signature to the Real Estate Mortgage as mortgagor and to the Surety
Agreement as surety which covered the loan transaction represented by the Promissory Note, she
thereby bound herself to be liable to China Bank in case the principal debtors, Barbara and
Rebecca, failed to pay. She consequently became liable to respondent bank for the payment of
the debt of Barbara and Rebecca when the latter two actually did not pay.

China Bank, on the other hand, had a right to proceed after either the principal debtors or the
surety when the debt became due. It had a right to foreclose the mortgage involving Rosalina's
property to answer for the loan. The proceeds from the extrajudicial foreclosure, however, did not
satisfy the entire obligation. For this reason, respondent bank instituted the present Complaint
against Barbara and Rebecca as principals and Rosalina as surety.

DISPOSITIVE

WHEREFORE, premises considered, the assailed CA Decision and Resolution finding Rosalina
Carodan jointly and severally liable with Barbara Perez and Rebecca Perez-Viloria for the
deficiency amount are AFFIRMED WITH MODIFICATIONS. Rebecca, Barbara and Rosalina are
held jointly and severally liable to China Bank for the deficiency amount of P365,345.77 and
interest thereon at the rates of 12% per annum from 13 January 2000 until 30 June 2013 and 6%
per annum from 1 July 2013 until full payment; and that Rebecca and Barbara are also ordered to
reimburse Rosalina for the amount charged against her including interests thereon.
SO ORDERED

ADDITIONAL NOTES

A mortgage is simply a security for, and not a satisfaction of indebtedness. 69 If the proceeds of
the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the
mortgagee is entitled to claim the deficiency from the debtor. The creditor, respondent China Bank
in this Petition, is therefore not precluded, from recovering any unpaid balance on the principal
obligation if the extrajudicial foreclosure sale of the property, subject of the Real Estate Mortgage,
would result in a deficiency.