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G.R. No. 210542. February 24, 2016.*

 
ROSALINA CARODAN, petitioner, vs. CHINA BANKING
CORPORATION, respondent.

Civil Law; Loans; Loan transactions in banking institutions usually

entail the execution of loan documents, typically a promissory note, covered
by a real estate mortgage and/or a surety agreement.—Loan transactions in
banking institutions usually entail the execution of loan documents,
typically a promissory note, covered by a real estate mortgage and/or a
surety agreement. In the instant case, petitioner Rosalina admitted that she
was a party to these loan documents although she vehemently insisted that
she had received nothing from the proceeds of the loan. Meanwhile,
respondent bank offered in evidence the Promissory Note, the Real Estate
Mortgage and the Surety Agreement signed by the parties.
Same; Same; Accommodation Mortgage; The validity of an
accommodation mortgage is allowed under Article 2085 of the New Civil
Code which provides that (t)hird persons who are not parties to the
principal obligation may secure the latter by pledging or mortgaging their
own property.—We find that Rosalina is liable as an accommodation
mortgagor. In Belo v. PNB, 353 SCRA 359 (2001), we had the occasion to
declare: An accommodation mortgage is not necessarily void simply
because the accommodation mortgagor did not benefit from the same. The
validity of an accommodation mortgage is allowed under Article 2085 of the
New Civil Code which 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.
Same; Same; “Suretyship” and “Guaranty,” Distinguished.—A
contract of suretyship (second paragraph of Article 2047) has been
juxtaposed against a contract of guaranty (first paragraph of Article 2047) as
follows: A surety is an insurer of the debt, whereas a guar-

 
 

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antor is an insurer of the solvency of the debtor. A suretyship is an

undertaking that the debt shall be paid; a guaranty, an undertaking that the
debtor shall pay. Stated differently, a surety promises to pay the principal’s
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. A guarantor, on the
other hand, does not contract that the principal will pay, but simply that he is
able to do so. In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor.
Foreclosure of Mortgage; 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.—A mortgage is simply a
security for, and not a satisfaction of indebtedness. 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.
We have already recognized this rule: While Act No. 3135, as amended,
does not discuss the mortgagee’s right to recover the deficiency, neither does
it contain any provision expressly or impliedly prohibiting recovery. If the
legislature had intended to deny the creditor the right to sue for any
deficiency resulting from the foreclosure of a security given to guarantee an
obligation, the law would expressly so provide. Absent such a provision in
Act No. 3135, as amended, the creditor is not precluded from taking action
to recover any unpaid balance on the principal obligation simply because he
chose to extrajudicially foreclose the real estate mortgage.

PETITION for review on certiorari of the decision and resolution of

the Court of Appeals, Ninth Division, Manila.
The facts are stated in the opinion of the Court.
  Reynaldo A. Deray for petitioner.
  Lim, Vigilia, Alcala, Dumlao, Alameda & Casiding for
respondent.

 
 

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SERENO, CJ.:
 
This is a Petition for Review on Certiorari1 seeking to set aside
the Decision2 dated 9 July 2013 and the Resolution3 dated 29
November 2013 rendered by the Court of Appeals (CA), Ninth
Division, Manila, in C.A.-G.R. CV No. 95835. The CA denied
petitioner’s appeal assailing the Decision4 dated 23 June 2010 issued

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by the Regional Trial Court (RTC) of Tuguegarao City, Branch 2, in

Civil Case No. 5692.
 
The Antecedent Facts
 
The records reveal that on 6 June 2000, China Banking Barbara, Rebecca, Rosalina
Corporation (China Bank) instituted a Complaint5 for a sum of PN jointly and severally pay
money against Barbara Perez (Barbara), Rebecca Perez-Viloria 2.8M
(Rebecca), Rosalina Carodan (Rosalina) and Madeline Carodan Executed a REM over
(Madeline). China Bank claimed that on 15 January 1998, Barbara property in the name of
Rosalina
and Rebecca, for value received, executed and delivered Promissory
Note No. TLS-98/0076 to respondent bank under which they
promised therein to jointly and severally pay the amount of P2.8
million.7 China Bank further claimed that as security for the
payment of the loan, Barbara, Rebecca and Rosalina also executed a
Real Estate Mortgage8 over a property registered in the name of
Rosalina and covered by Transfer Certificate Title (TCT) No. T-
10216.9 Re-

_______________

1  Rollo, pp. 9-23.

2  Id., at pp. 37-47; penned by Associate Justice Socorro B. Inting and concurred
in by Associate Justices Jose C. Reyes, Jr. and Mario V. Lopez.
3  Id., at pp. 24-25.
4  Id., at pp. 49-62; penned by Judge Vilma T. Pauig.
5  Records, pp. 1-17.
6  Id., at pp. 8-9.
7  Id., at p. 2.
8  Id., at pp. 10-12.
9  Id., at p. 3.

 
 

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Surety Agreement in favour of
CB made by Barbara and
spondent alleged that a Surety Agreement10 in favor of China Rebecca as principals and
Rosalina and her niece as
Bank as creditor was also executed by Barbara and Rebecca as sureties
principals and Rosalina and her niece Madeline as sureties. Through
- warranted the payment of
that agreement, the principals and sureties warranted the payment of the 2.8 M including interests,
the loan obligation amounting to P2.8 million including interests, penalties, costs, expenses,
penalties, costs, expenses, and attorney’s fees.11 and attorney’s fees
Barbara and Rebecca failed to pay their loan obligation despite Foreclosed but only 1.5M was
repeated demands from China Bank. Their failure to pay prompted the sale - ordered court for the
deficiency
the bank institute extrajudicial foreclosure proceedings on the
mortgaged property on 26 November 1999.12 From the extrajudicial
sale, it realized only P1.5 million as evidenced by a Certificate of
Sale.13 This amount, when applied to the total outstanding loan
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obligation of P1,865,345.77, would still leave a deficiency of

P365,345.77. For that reason, the bank prayed that the court order
the payment of the deficiency amount with interest at 12% per
annum computed from 13 January 2000; attorney’s fees equal to
10% of the deficiency amount; and litigation expenses and costs of
suit.14
Barbara and Rebecca filed their Answer. They interposed the Barbara and Rebecca oral
agreement with Madeline and
defense that although they both stood as principal borrowers, they Rosalina that they would
had entered into an oral agreement with Madeline and Rosalina. equally split the obligation to
pay
Under that agreement which was witnessed by China Bank’s loan
officer and branch manager, 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.15 Barbara and Rebecca used as
security their real properties covered by TCT Nos. T-93177, T-
93176, T-93174,

_______________

10  Id., at pp. 13-14.

11  Id.
12  Id., at pp. 94-96.
13  Id., at pp. 15-16.
14  Id., at pp. 4-5.
15  Id., at p. 29.

 
 

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T-93167, T-93169, T-93170, T-93171 and T-93172; while Rosalina

and Madeline used for the same purpose the former’s property
covered by TCT No. T-10216.16
Barbara and Rebecca further alleged that while Rosalina and Barbara and Rebecca asked
CB to compute loan which
Madeline obtained their share of P1.4 million of the loan amount, they paid 1.5M so CB
the latter two never complied with their obligation to pay interest. It released the mortgage over
was only Rebecca’s account with China Bank that was automatically their properties
debited in the total amount of P1,002,735.54.17 Barbara and Rebecca
asked China Bank for the computation of their total obligation, for
which they paid P1.5 million aside from the interest payments, and
respondent bank thereafter released the Real Estate Mortgage over
their properties.18
By way of cross-claim, Barbara and Rebecca asked Rosalina and
Madeline to pay half of P1,002,735.54 as interest payments, as well
as the deficiency amount plus 12% interest per annum and attorney’s
fees, the total amount of which pertained to the loan obligation of
the latter two.19 By way of counterclaim, Barbara and Rebecca also
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asked China Bank to pay P1 million as moral damages, P500,000 as

exemplary damages, plus attorney’s fees and costs of suit.20
China Bank filed its Reply and Answer to Counterclaim
clarifying that it was suing Barbara and Rebecca as debtors under
the Promissory Note and as principals in the Surety Agreement, as
well as Rosalina and Madeline as sureties in the Surety
Agreement.21 It claimed that equal sharing of the proceeds of the
loan was “a bat at misrepresentation” and “a self-serving
prevarication,” because what was clearly written on the note was
that Rebecca and Barbara were the principal

_______________

16  Id., at p. 30.
17  Id.
18  Id., at p. 31.
19  Id.
20  Id., at p. 32.
21  Id., at pp. 35-36.

 
 

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debtors.22 It reiterated that the two were liable for the full
payment of the principal amount plus the agreed interest, charges,
penalties and attorney’s fees, with recourse to reimbursement from
Rosalina and Madeline.23
China Bank also disputed the claim of Rebecca and Barbara that
upon their payment to the bank of P1.5 million, the Real Estate
Mortgage over their properties was cancelled. Their claim was
disputed because, even after their payment of P1.5 million, Rebecca
and Barbara were still indebted in the amount of P1.3 million
exclusive of interest, charges, penalties and other legitimate fees.24 CB says the cancellation of the
Furthermore, respondent stated that if there was a cancellation of mortgage was for separate loans
- Rebecca and Barbara were still
mortgage, it referred to other mortgages securing other separate loan considered as principals of the
obligations of Barbara and Rebecca; more particularly, that of loan
Barbara.25
Rosalina filed her Answer with Counterclaim and Crossclaim.26
She alleged that on 2 July 1997, she and Barbara executed (1) a Real
Estate Mortgage covering Rosalina’s lot and ancestral house, as well
as Barbara’s eight residential apartments, annotated as an
encumbrance at the back of the TCTs corresponding to the
properties as evidenced by the Annexes to the Answer; and (2) a
Surety Agreement to secure the credit facility granted by the bank to
Barbara and Rebecca up to the principal amount of P2.8 million.27
Rosalina further stated that the execution of the contracts was “made
in consideration of the long-time friendship” between Barbara and
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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.”28

_______________

22  Id., at p. 37.
23  Id., at p. 38.
24  Id., at p. 39.
25  Id.
26  Id., at pp. 173-231.
27  Id., at pp. 174-175.
28  Id., at p. 154.

 
 

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Rosalina acknowledged that on 15 January 1998, Barbara and Rosalina: cancellation of

Rebecca executed a Promissory Note for the purpose of evidencing a Mortgage over Barbara’s and
Rebecca’s properties unjustly
loan charged against the loan facility secured by the mortgage.29 She caused her property to absorb
averred, though, that when Barbara and Rebecca paid half of the the singular risk of foreclosure
loan under the Promissory Note, the properties of Barbara covered Did not receive any pecuniary
by the mortgage were released by the bank from liability. The benefit
cancellation of the mortgage lien was effected by an instrument
dated 27 May 1999 and reflected on the TCTs evidenced by the
Annexes to the Answer.30
This cancellation, according to Rosalina, illegally and unjustly
caused her property to absorb the singular risk of foreclosure.31 The
result, according to her, was the extinguishment of the indivisible
obligation contained in the mortgage pursuant to Article 121632 of
the Civil Code.33
Rosalina further averred that when the bank instituted the
foreclosure proceedings, it misrepresented that her property was the
only one that was covered by the mortgage; omitted from the
schedule of mortgaged properties those of Barbara; and
misrepresented that “the terms and condition of the aforesaid
mortgage have never been changed or modified whether tacitly or
expressly, by any agreement made after the execution thereof.”34
Finally, Rosalina stated that she had made demands on Barbara
and Rebecca to cause the rectification of the illegal and unjust
deprivation of her property in payment of the

_______________

29  Id., at p. 175.
30  Id., at pp. 176-177.
31  Id., at p. 177.
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32  Art. 1216. The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected. (1144a)
33  Records, p. 177.
34  Id.

 
 

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indemnity. Allegedly, Barbara and Rebecca simply ignored her

demands, so, she prayed that the two be held solidarily liable for the
total amount of damages and for the deficiency judgment sought in
this Complaint.35
China Bank filed its Reply and Answer to Counterclaim.36 It
alleged that the issue of whether Rosalina obtained material benefit
from the loan was not material, since she had voluntarily and
willingly encumbered her property;37 that the indivisibility of
mortgage does not apply to the case at bar, since Article 208938 of
the Civil Code presupposes several heirs, a condition that is not
present in this case;39 that nothing short of payment of the debt or an
express release would operate to discharge a mortgage;40 and that, as
surety, Rosalina was equally liable as principal debtor to pay the
deficiency obligation in the sum of P365,345.77.41 The bank also
filed its Comment/Opposition42 to the Entry of Appearance of

_______________

35  Id., at p. 178.
36  Id., at pp. 238-248.
37  Id., at pp. 240-241.
38  Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors-in-interest of the debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor’s heir who received his share of the debt return the pledge
or cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is expected the case in which, there being several things
given in mortgage or pledge, each one of them guarantees only a determinate portion
of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied. (1860)
39  Records, p. 243.
40  Id., at p. 244.
41  Id., at p. 245.
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42  Id., at pp. 249-254.

 
 

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Atty. Edwin V. Pascua as counsel for Rosalina. It said that Atty.

Pascua had once been its retained lawyer pursuant to a Retainer
Agreement dated 5 September 1997.43 Because of its Opposition,
Rosalina was subsequently represented by Atty. Reynaldo A. Deray.
All the parties submitted their Pre-Trial Briefs with the exception
of Madeline, whose case had been archived by the RTC upon motion
of China Bank for the court’s failure to acquire jurisdiction over her
person. The issues of the case were thereafter limited to the
following: (1) whether the defendants were jointly and severally
liable to pay the deficiency claim; (2) whether the surety was still
liable to the bank despite the release of the mortgage of the principal
borrower; (3) whether there was a previous agreement among the
defendants that Barbara and Rebecca would receive half and
Rosalina and Madeline, the other half; and (4) whether respondent
bank still had a cause of action against the surety after the mortgage
of the principal borrower had been released by the bank.44

The Ruling of the RTC

 
The RTC ruled that although no sufficient proof was adduced to
show that Rosalina had obtained any pecuniary benefit from the loan
agreement between Rebecca and Barbara and China Bank, the
mortgage between Rosalina and China Bank was still valid.45 The
trial court declared that respondent bank had therefore lawfully
foreclosed the mortgage over the property of Rosalina, even if she
was a mere accommodation mortgagor.46 The RTC also declared
Rosalina’s claim to be without merit and without basis in law and
jurisprudence. She claimed that because the Real Estate Mortgage

_______________

43  Id., at p. 250.
44  Id., at p. 389.
45  Id., at p. 614.
46  Id.

 
 

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Carodan vs. China Bank Corporation

covering her property was a single and indivisible contract, China

Bank’s act of releasing the principal debtors’ properties resulted in
the extinguishment of the obligation.47 The trial court held that the
creditor had the right to proceed against any one of the solidary
debtors, or some or all of them simultaneously; and that a creditor’s
right to proceed against the surety exists independently of the
creditor’s right to proceed against the principal.48
Finally, the RTC 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. Interest was set at the rate of 12% per annum
from 13 January 2000 until full payment. Rebecca and Barbara were
also ordered to reimburse Rosalina for the amount of the deficiency
payment charged against her including interests thereon.49
 
The Ruling of the CA
 
Rosalina filed a timely Notice of Appeal and imputed error to the
trial court in finding her, together with Rebecca and Barbara, jointly
and severally liable to pay the deficiency claim; in finding that she
was still liable as surety even if the bank had already released the
collateral of the principal borrower; and in not annulling the
foreclosure sale of the property, not reconveying the property to her,
and not awarding her damages as prayed for in her counterclaim.
She said that these were done by the court despite the fact that China
Bank had deliberately and maliciously released the properties of the
principal borrowers, thereby exposing her property to risk.50

_______________

47  Id., at p. 615.
48  Id.
49  Id., at p. 617.
50  Rollo, pp. 97-98.

 
 

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The CA found the appeal bereft of merit.51 It qualified Rosalina

as 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.52

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As for the deficiency, the CA cited BPI Family Savings Bank, Inc. v.
Avenido.53 The Supreme Court had ruled therein that the creditor
was 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.54 The CA ultimately affirmed the RTC Decision in toto55
and denied the Motion for Reconsideration.56 Hence, this Petition.
Before this Court, petitioner Rosalina now imputes error to the
CA’s affirmance of the RTC Decision. She says that the CA Decision
was not in accord with law and jurisprudence in holding that
petitioner, jointly and severally with Barbara and Rebecca, was
liable to pay China Bank’s deficiency claim after the bank’s release
of the collateral of the principal debtors. Respondent bank’s alleged
act of exposing Rosalina’s property to the risk of foreclosure despite
the indivisible character of the Real Estate Mortgage supposedly
violated Article 2089 of the New Civil Code.57
China Bank filed its Comment58 claiming that all the grounds
cited by petitioner were “mere reiterations, repetitions, or rehashed
grounds and arguments raised in the Appellant’s Brief x x x which
were exhaustively passed upon and

_______________

51  Id., at p. 44.
52  Id., at pp. 44-45.
53  G.R. No. 175816, 7 December 2011, 661 SCRA 758.
54  Rollo, p. 46.
55  Id., at p. 47.
56  Id., at p. 24.
57  Id., at p. 14.
58  Id., at pp. 172-185.

 
 

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considered by the CA in its Decision”;59 and that the petition “is

wanting of any new, substantial and meritorious grounds that would
justify the reversal of the CA Decision affirming the RTC
decision.”60
 
The Issue
 
The sole issue to be resolved by this Court is whether petitioner
Rosalina is liable jointly and severally with Barbara and Rebecca for
the payment of respondent China Bank’s claims.
 
The Ruling of this Court
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Loan transactions in banking institutions usually entail the
execution of loan documents, typically a promissory note, covered
by a real estate mortgage and/or a surety agreement.61 In the instant
case, petitioner Rosalina admitted that she was a party to these loan
documents although she vehemently insisted that she had received
nothing from the proceeds of the loan.62 Meanwhile, respondent
bank offered in evidence the Promissory Note, the Real Estate
Mortgage and the Surety Agreement signed by the parties.
We find that Rosalina is liable as an accommodation mortgagor.
In Belo v. PNB,63 we had the occasion to declare:

An accommodation mortgage is not necessarily void

simply because the accommodation mortgagor did not benefit
from the same. The validity of an accommodation

_______________

59  Id., at p. 174.
60  Id., at p. 179.
61   Gateway Electronics Corporation v. Asianbank Corporation, 395 Phil. 353;
574 SCRA 698 (2008).
62  Records, pp. 174-175; p. 154
63  405 Phil. 851; 353 SCRA 359 (2001).

 
 

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mortgage is allowed under Article 2085 of the New Civil

Code which 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.64
 
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.
 

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A contract of suretyship (second paragraph of Article 2047) has

been juxtaposed against a contract of guaranty (first paragraph of
Article 2047) as follows:
 
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; a guaranty, an undertaking that the debtor
shall pay. Stated differently, a surety promises to pay the principal’s
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. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to

_______________

64  Id., at p. 371.

 
 

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do so. In other words, a surety undertakes directly for the

payment and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to pay if, by the use
of due diligence, the debt cannot be made out of the principal
debtor.65 (Citations omitted)
 
In Inciong, Jr. v. CA,66 we elucidated further in this wise:
 
While a guarantor may bind himself solidarily with the
principal debtor, the liability of a guarantor is different from
that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor, and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
while a solidary codebtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I,
Book IV of the Civil Code.
Section 4, Chapter 3, Title I, Book IV of the Civil Code
states the law on joint and several obligations. Under Art.
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1207 thereof, when there are two or more debtors in one and
the same obligation, the presumption is that the obligation is
joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarity liability
only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires.67
(Citations omitted)

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65  Palmares v. Court of Appeals, 351 Phil. 664, 680-681; 288 SCRA 422, 435-
436 (1998).
66  327 Phil. 364; 257 SCRA 578 (1996).
67  Id., at p. 373; pp. 587-588.

 
 

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Further discussion on the same legal concept proceeded thusly:

 
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. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does
not pay the debt.
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: A surety
is usually bound with his principal by the same instrument,
executed at the same time, and on the same consideration. He
is an original promissor and debtor from the beginning, and is
held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of
notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of
guaranty is the guarantor’s own separate undertaking, in
which the principal does not join. It is usually entered into
before or after that of the principal, and is often supported on
a separate consideration from that supporting the contract of
the principal. The original contract of his principal is not his
contract, and he is not bound to take notice of its
nonperformance. He is 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.

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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 if 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.68 (Citations
omitted)

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68  E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 614-615; 290 SCRA 1, 6-7
(1998).

 
 

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Carodan vs. China Bank Corporation

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.
mortgage security and not a
A mortgage is simply a security for, and not a satisfaction of satisfaction of indebtedness
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.70 We have already
recognized this rule:
 
While Act No. 3135, as amended, does not discuss the
mortgagee’s right to recover the deficiency, neither does it
contain any provision expressly or impliedly prohibiting
recovery. If the legislature had intended to deny the creditor
the right to sue for any deficiency resulting from the
foreclosure of a security given to guarantee an obligation, the
law would expressly so provide. Absent such a provision in
Act No. 3135, as amended, the creditor is not precluded from
taking action to recover any unpaid bal-

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_______________

69  Suico Rattan & Buri Interiors, Inc. v. Court of Appeals, G.R. No. 138145, 15
June 2006, 490 SCRA 560.
70  Supra note 38.

 
 
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Carodan vs. China Bank Corporation

ance on the principal obligation simply because he chose to

extrajudicially foreclose the real estate mortgage.71
 
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.
Rosalina protests her liability for the deficiency. She claims that Indivisibility of mortgage
China Bank cancelled the mortgage lien and released the principal violated when cancelled
mortgage lien and release and
borrowers from liability. She contends that this act violated Article principal borrowers from
2089 of the Civil Code on the indivisibility of mortgage and liability
ultimately discharged her from liability as a surety.
We disagree.
A resort to the terms of the Surety Agreement can easily settle
the question of whether Rosalina should still be held liable. The
agreement expressly contains the following stipulation:
 
The Surety(ies) expressly waive all rights to demand for
payment and notice of nonpayment and protest, and agree
that the securities of every kind that are now and may
hereafter be left with the Creditor its successors, indorsees or
assigns as collateral to any evidence of debt or obligation, or
upon which a lien may exist therefor, may be substituted,
withdrawn or surrendered at any time, and the time for the
payment of such obligations extended, without notice to or
consent by the Surety(ies) x x x.72 (Emphases supplied)

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71   BPI v. Reyes, 680 Phil. 718, 725; 664 SCRA 700, 707 (2012), citing BPI
Family Savings Bank, Inc. v. Avenido, supra note 53.
72  Records, pp. 13-14.

 
 

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196 SUPREME COURT REPORTS ANNOTATED

Carodan vs. China Bank Corporation

We therefore find no merit in Rosalina’s protestations in this

petition. As provided by the quoted clause in the contract, she not
only waived the rights to demand payment and to receive notice of
nonpayment and protest, but she also expressly agreed that the time
for payment may be extended. More significantly, she agreed that
the securities may be “substituted, withdrawn or surrendered at any
time” without her consent or without notice to her. That China Bank
indeed surrendered the properties of the principal debtors was
precisely within the ambit of this provision in the contract. Rosalina
cannot now contest that act in light of her express agreement to that
stipulation.
There have been similar cases in which this Court was tasked to Act or omission of creditor
Express stipulation
rule on whether a surety can be discharged from liability due to an Waived rights to demand
act or omission of the creditor. A review of these rulings reveals payment and receive notice
though, that in the absence of an express stipulation, the surety was Securities may be substituted,
withdraw, or surrendered at any
discharged from liability if the act of the creditor was such as would time
be declared negligent or constitutive of a material alteration of the
contract. On the other hand, in the presence of an express stipulation
in the surety agreement allowing these acts, the surety was not
considered discharged and was decreed to be bound by the
stipulations.
In PNB v. Manila Surety & Fidelity Co., Inc.,73 the Court En
Banc declared the surety discharged from liability on account of the
creditor’s negligence. In that case, the creditor failed to collect the
amounts due to the debtor contrary to the former’s duty to make
collections as holder of an exclusive and irrevocable power of
attorney. The negligence of the creditor allowed the assigned funds
to be exhausted without notice to the surety and ultimately resulted
in depriving the latter of any possibility of recourse against that
security.

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73  122 Phil. 106; 14 SCRA 776 (1965).

 
 

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Carodan vs. China Bank Corporation

Also, in PNB v. Luzon Surety Co., Inc.,74 the Court hinted at the
possibility of the surety’s discharge from liability. It was recognized
in that case that in this jurisdiction, alteration can be a ground for
release. The Court clarified, though, that this principle can only be
successfully invoked on the condition that the alteration is material.
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Failure to comply with this requisite means that the surety cannot be
freed from liability. Applying this doctrine in that case, the Court
ruled that the alterations in the form of increases in the credit line
with the full consent of the surety did not suffice to release the
surety.
Meanwhile, in Palmares v. CA,75 the Court ruled:
 
It may not be amiss to add that leniency shown to a debtor
in default, by delay permitted by the creditor without change
in the time when the debt might be demanded, does not
constitute an extension of the time of payment, which would
release the surety. In order to constitute an extension
discharging the surety, it should appear that the extension of
the time was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it
was made without the consent of the surety or with the
reservation of rights with respect to him. The contract must be
one which precludes the creditor from, or at least hinders him
in, enforcing the principal contract with the period during
which he could otherwise have enforced it, and which
precludes the surety from paying the debt. (Citations omitted)
 
In E. Zobel, Inc. v. CA, et al.,76 the Court upheld the validity of
the provision on the continuing guaranty — which we had earlier
interpreted as a surety consistent with its contents and intention of
the parties. The Court upheld the validity of the provision despite the
insistence of the surety that he

_______________

74  160-A Phil. 854; 68 SCRA 207 (1975).

75  Supra note 65 at pp. 686-687; p. 442.
76  Supra note 68.

 
 

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Carodan vs. China Bank Corporation

should be released from liability due to the failure of the creditor

to register the mortgage. In particular, the Court decreed:
 
SOLIDBANK’s failure to register the chattel mortgage did
not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound
itself to the contract irrespective of the existence of any
collateral. It even released SOLIDBANK from any fault or
negligence that may impair the contract. The pertinent
portions of the contract so provides:
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the undersigned (petitioner) who hereby agrees to be

and remain bound upon this guaranty, irrespective of the
existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application,
renewal or extension, and notwithstanding also that all
obligations of the Borrower to you outstanding and
unpaid at any time(s) may exceed the aggregate
principal sum herein above prescribed.
This is a Continuing Guaranty and shall remain in
force and effect until written notice shall have been
received by you that it has been revoked by the
undersigned, but any such notice shall not be released
the undersigned from any liability as to any instruments,
loans, advances or other obligations hereby guaranteed,
which may be held by you, or in which you may have
any interest, at the time of the receipt of such notice. No
act or omission of any kind on your part in the premises
shall in any event affect or impair this guaranty, nor
shall same be affected by any change which may arise
by reason of the death of the undersigned, of any
partner(s) of the undersigned, or of the Borrower, or of
the accession to any such partnership of any one or
more new partners.77

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77  Id., at pp. 618-619; pp. 10-11.

 
 

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Another illustrative case is Gateway Electronics Corporation v.

Asianbank,78 in which the surety similarly asked for his discharge
from liability. He invoked the creditor’s repeated extensions of
maturity dates to the principal debtor’s request, without the surety’s
knowledge and consent. Still, this Court ruled:
 
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/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, without demand or notice from
said CREDITOR of such notes, drafts, overdrafts and
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other credit obligations on which the DEBTOR(S) may

now be indebted or may hereafter become indebted to
the CREDITOR, together with interest, 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.79

On Rosalina’s argument that the release of the mortgage violates

the indivisibility of mortgage as enunciated in Article 208980 of the
Civil Code, Peoples Bank and Trust Company v. Tambunting, et al.81
is most instructive. In that case, the surety likewise argued that he
should be discharged from liability. He alleged that the creditor had
extended the time of payment and released the shares pledged by the
principal

_______________

78  Supra note 61.

79  Id., at p. 377; p. 719.
80  Rollo, p. 47.
81  149 Phil. 169; 42 SCRA 119 (1971).

 
 

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Carodan vs. China Bank Corporation

debtors without his consent. The Court En Banc found his

argument unpersuasive and decreed:
 
1. It is thus obvious that the contract of absolute guaranty
executed by appellant Santana is the measure of rights and
duties. As it is with him, so it is with the plaintiff bank. What
was therein stipulated had to be complied with by both parties.
Nor could appellant have any valid cause for complaint. He
had given his word; he must live up to it. Once the validity of
its terms is conceded, he cannot be indulged in his unilateral
determination to disregard his commitment. A promise to
which the law accords binding force must be fulfilled. It is as
simple as that. So the Civil Code explicitly requires:
“Obligations arising from contracts have the force of law
between the contracting parties and should be complied with
in good faith.”
2. It could have been different if there were no such
contract of absolute guaranty to which appellant was a party
under the aforesaid Article 2080. He would have been freed
from the obligation as a result of plaintiff releasing to the
Tambuntings without his consent the 135 shares of the
International Sports Development Corporation pledged to
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plaintiff bank to secure the overdraft line. For thereby

subrogation became meaningless. Such a provision is intended
for the benefit of a surety. That was a right he could avail of.
He is not precluded however from waiving it. That was what
appellant did precisely when he agreed to the contract of
absolute guaranty. Again the law is clear. A right may be
waived unless it would be contrary to law, public order, public
policy, morals or good customs. There is no occasion here for
the exceptions coming into play x x x82
 
While we rule that Rosalina, along with the principal debtors,
Barbara and Rebecca, is still liable as a surety for the deficiency
amount, we modify the RTC’s imposition of interest rate at 12% per
annum, which the CA subsequently affirmed.

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82  Id., at pp. 174-175; pp. 122-124.

 
 

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We must modify the rates according to prevailing jurisprudence.

Hence, the 12% legal interest should be imposed on the deficiency
amount from 13 January 2000 until 30 June 2013 and 6% legal
interest from 1 July 2013 until full payment.
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.83
SO ORDERED.

Leonardo-De Castro, Bersamin, Perlas-Bernabe and

Caguioa, JJ., concur.

Judgment and resolution affirmed with modifications.

Notes.—The extent of a surety’s liability is determined by the

language of the suretyship contract or bond itself. It cannot be
extended by implication, beyond the terms of the contract. (First

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Lepanto-Taisho Insurance Corporation vs. Chevron Philippines,

Inc., 663 SCRA 309 [2012])
A mortgage that provides for a dragnet clause is in the nature of a
continuing guaranty and constitutes an exception to the rule than an
action to foreclose a mortgage must be limited to the amount
mentioned in the mortgage contract. (Philippine Charity
Sweepstakes Office [PCSO] vs. New Dagupan Metro Gas
Corporation, 676 SCRA 156 [2012])
 
 
——o0o——

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83  Rollo, p. 617.

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