G.R. No. 171750 - United Pulp and Paper Co., Inc. vs. Acropolis Central Guaranty Corporation

Case Summary (G.R. No. 171750)

Factual Background: Attachment, Counter-Bond, and the Compromise Judgment

UPPC’s civil action aimed to collect P42,844,353.14 from Unibox and Ortega and to secure its claim through a writ of preliminary attachment, premised on allegations that defendants were on the verge of insolvency and were transferring assets in fraud of creditors. After UPPC posted an attachment bond, the RTC issued the writ on August 29, 2002, resulting in the attachment of properties and assets of Unibox and Ortega.

Unibox and Ortega moved for discharge of attachment on October 10, 2002, requesting permission to file a counter-bond in the same amount as UPPC’s claim. Although UPPC opposed the motion, the RTC granted it on October 25, 2002, conditioned on the filing of a counter-bond. Thereafter, on November 21, 2002, Acropolis issued the Defendants Bond for Dissolution of Attachment in P42,844,353.14 in favor of Unibox. UPPC later moved to discharge the counter-bond, alleging that Acropolis belonged to insurance companies whose licenses were subject to cancellation for failing to meet minimum capitalization requirements; the RTC denied the motion in its December 10, 2002 Order and admitted the counter-bond, ordering the sheriff to lift the attachment.

On September 29, 2003, Unibox, Ortega, and UPPC executed a compromise agreement acknowledging Unibox and Ortega’s obligation to UPPC in the amount of P35,089,544.00 as of August 31, 2003, inclusive of principal and accrued interest, payable according to an agreed schedule. The RTC approved the compromise and promulgated judgment on October 2, 2003. When Unibox and Ortega failed to pay the scheduled amounts for May and June 2004, UPPC sought execution. On July 30, 2004, the RTC granted the motion and, on August 4, 2004, issued a writ of execution.

Execution Attempts and the Demand for Surety Payment

After the sheriff proceeded with the writ of execution, it was discovered that Unibox had ceased business operations and that its assets had been foreclosed by its creditor bank. Bank responses to garnishment notices showed that Unibox and Ortega no longer had funds for garnishment. The sheriff also attempted to serve the writ at Ortega’s residence but was denied entry. In its November 4, 2008 Partial Return, the sheriff reported no satisfaction of the remaining unpaid balance.

Based on this return, UPPC filed a motion to require the surety to pay the counter-bond. On November 30, 2004, the RTC granted the motion and ordered Acropolis to comply with the counter-bond’s terms by paying UPPC the unpaid balance of P27,048,568.78, with interest of 12% per annum from default.

Acropolis’ Motion for Reconsideration and the CA Reversal

Acropolis moved for reconsideration on December 13, 2004, contending that it could not be made to pay because UPPC did not send it a demand for payment. It further argued that its obligation had been extinguished through novation arising from the compromise agreement executed by UPPC, Unibox, and Ortega, which, according to Acropolis, prejudiced it as surety because it was not a party to the compromise and it allegedly was not included in it.

The RTC denied the motion for reconsideration in an order dated February 22, 2005, for lack of merit and because it had been filed three days after the date set for the hearing on the motion. Acropolis then elevated the matter to the CA by petition for certiorari with a prayer for a temporary restraining order and preliminary injunction.

On November 17, 2005, the CA granted Acropolis’ petition. It reversed the RTC and absolved Acropolis from liability on the counter-attachment bond. The CA reasoned that: first, Acropolis allegedly complied with the three-day notice rule because the motion it filed was sent by registered mail on December 13, 2004, four days before the hearing set for December 17, 2004; second, UPPC allegedly failed to comply with the requirements under Section 17, Rule 57 of the Rules of Court for recovery from a surety on a counter-bond, specifically the requirements of demand, notice, and summary hearing; and third, UPPC’s omission of Acropolis from the compromise agreement was allegedly fatal to UPPC’s cause.

UPPC’s motion for reconsideration was denied in the CA’s March 1, 2006 Resolution, which led to UPPC’s petition to the Supreme Court.

Issues Raised by UPPC

UPPC anchored its petition on two principal issues. First, it argued that the CA erred in holding Acropolis not liable on the counter-attachment bond, because UPPC allegedly complied with the requisites for recovery against the surety, including demand and notice, and a hearing to determine liability under Section 17, Rule 57. Second, UPPC argued that the CA erred in finding grave abuse of discretion in the RTC’s denial of Acropolis’ motion for reconsideration, because the motion purportedly violated the three-day notice rule under Section 4, Rule 15 of the Rules of Court, and because Acropolis’ motion lacked substantial merit to warrant reversal.

The Court’s Ruling on Demand, Notice, and Summary Hearing Under Rule 57

The Supreme Court held that UPPC satisfied the twin requirements under Section 17, Rule 57: demand made upon the surety, and notice and summary hearing on the same action after the judgment became executory.

The Court examined Section 17, Rule 57, which provides that once judgment becomes executory, a surety on a counter-bond becomes bound to pay the judgment obligee upon demand, and may be proceeded against for recovery after notice and summary hearing in the same action. The Court stressed that, by its text, liability was triggered by (1) demand upon the surety and (2) the required notice and summary hearing.

On demand, the Court rejected Acropolis’ claim that it received no demand for payment. The Court explained that the Court had consistently ruled that the filing of a complaint constitutes a judicial demand, and that therefore the filing by UPPC of the motion to order the surety to pay the amount due already constituted a demand upon Acropolis consistent with the terms of the bond. Since Acropolis had bound itself to secure payment of any judgment UPPC might recover against Unibox and Ortega, UPPC’s motion was treated as an appropriate demand.

On notice and hearing, the Court found that the records demonstrated that Acropolis was duly notified and personally served a copy of UPPC’s motion. The Court noted that UPPC filed the motion on November 11, 2004 and it was set for hearing on November 19, 2004. Personal service was shown. When the hearing was reset to November 30, 2004, the minutes reflected that only UPPC’s counsel appeared; nevertheless, the Court treated the opportunity to defend as existing because Acropolis had been properly notified and personally served. It ruled that Acropolis could not later invoke alleged lack of notice and hearing when both requirements had been met, and when it chose not to appear.

The Court’s Ruling on Novation: The Compromise Agreement Did Not Extinguish the Surety’s Obligation

The Court also rejected Acropolis’ principal substantive defense: that the compromise agreement between UPPC and the principal debtors constituted novation that released Acropolis from liability.

The Court emphasized that the undertaking in the counter-bond was clear and without ambiguity. The bond expressly provided that, in consideration of the dissolution of the attachment, Unibox as principal and Acropolis as surety “hereby jointly and severally bind ourselves” in P42,844,353.14 in favor of the plaintiff “to secure the payment of any judgment that the plaintiff may recover against the defendants in this action.” The Court treated this as a voluntary assumption by Acropolis to answer for any judgment UPPC might obtain against the defendants in the collection case, and it viewed the bond as replacing the attached properties that had been released upon filing of the counter-bond.

From that premise, the Court held it would be unjust to allow Acropolis to evade liability after UPPC obtained a favorable judgment and after Acropolis had replaced the attached properties with its counter-bond to secure UPPC’s recovery. The Court treated this as not novel, invoking its earlier discussion in Luzon Steel Corporation v. Sia on the nature of counter-bonds issued to discharge levies on attachment. There, the Court had explained that whether a judgment was rendered after trial or upon compromise, the judgment could be made effective against the property released from attachment; since the counter-bond stood in place of that property, there was no reason the judgment could not likewise be effective against the counter-bond regardless of how the judgment was obtained.

Applying the same reasoning, the Court held that the compromise judgment did not discharge Acropolis. The Court further addressed the argument on novation by requiring the strict standard under Article 1292 of the Civil Code: for novation to extinguish an obligation, the new obligation must be declared in unequivocal terms or the old and new obligations must be incompatible in all points. The Court found no incompatibility between the compromise agreement and the counter-bond. It ruled that novation could not be presumed and required clear proof of incompatibility or an express intent to novate, as explained in Dungo v. Lopena. The Court concluded that nothing in the compromise agreement indicated that Acropolis was released from its obligation to pay UPPC after UPPC obtained a judgment.

The “Three-Day Notice Rule” Discussion and Substantial Compliance

Although the Court’s dispositions on demand and novation already warranted relief to UPPC, it additionally clarified the CA’s and RTC’s handling of the three-day notice rule. The Court held that the three-day notice requirement under Section 4, Rule 15 was not a hard and fast rule and could admit substantial compliance.

The Court explained that the rule required written motions to be set for hearing such that notice is served in

Case Syllabus (G.R. No. 171750)

United Pulp and Paper Co., Inc. (UPPC) sought review under Rule 45 to annul the Court of Appeals (CA) rulings in CA-G.R. SP No. 89135 absolving Acropolis Central Guaranty Corporation (Acropolis) from liability under a counter-bond for dissolution of attachment.
Acropolis was the surety on the counter-bond issued to secure the dissolution of the writ of preliminary attachment earlier levied against Unibox Packaging Corporation (Unibox) and Vicente Ortega (Ortega).
The dispute required the Court to pass upon the procedural requisites for proceeding against a counter-surety and the substantive effect of a compromise agreement on the surety’s obligation.

Parties and Procedural Posture

UPPC filed a civil action for collection and obtained a writ of preliminary attachment at the Regional Trial Court of Makati, Branch 148 (RTC).
Unibox and Ortega moved for the discharge of attachment, and the RTC ordered dissolution upon posting of a counter-bond.
Acropolis posted the Defendants Bond for Dissolution of Attachment in favor of UPPC as surety.
After the compromise-based judgment remained unpaid, UPPC moved to order surety to pay the unpaid balance, and the RTC granted the motion.
Acropolis filed a manifestation and very urgent motion for reconsideration, which the RTC denied.
Acropolis then filed a petition for certiorari before the CA, which granted the petition and relieved Acropolis from liability.
The CA denied UPPC’s motion for reconsideration, prompting UPPC’s Rule 45 petition before the Supreme Court.

Key Factual Allegations

On May 14, 2002, UPPC filed a civil case for collection of P42,844,353.14 against Unibox and Ortega in RTC Makati, Branch 148, and sought a writ of preliminary attachment on the ground that defendants were allegedly on the verge of insolvency and were transferring assets in fraud of creditors.
On August 29, 2002, the RTC issued the writ of attachment after UPPC posted a bond of the same amount as its claim.
Pursuant to the writ, properties and assets of Unibox and Ortega were attached.
On October 10, 2002, Unibox and Ortega moved for discharge of attachment, requesting permission to file a counter-bond in the amount of P42,844,353.14, and they sought discharge upon posting of that bond.
On October 25, 2002, the RTC granted the motion and allowed discharge subject to filing of a counter-bond.
On November 21, 2002, Acropolis issued the Defendants Bond for Dissolution of Attachment in the amount of P42,844,353.14 in favor of Unibox.
UPPC later assailed the counter-bond, alleging that Acropolis was among the insurance companies whose licenses were set to be cancelled for failure to meet minimum capitalization requirements.
On December 10, 2002, the RTC denied UPPC’s motion to discharge the counter-bond and approved and admitted Acropolis’s counter-bond, ordering the sheriff to lift the attachment.
On September 29, 2003, UPPC, Unibox, and Ortega executed a compromise agreement acknowledging an obligation of P35,089,544.00 (inclusive of principal and accrued interest) payable according to a scheduled plan.
On October 2, 2003, the RTC promulgated a judgment approving the compromise agreement.
After default, UPPC filed a motion for execution, and on August 4, 2004, the RTC issued a writ of execution.
During execution, it was discovered that Unibox had already ceased operations and its assets had been foreclosed by its creditor bank.
Bank responses to garnishment notices showed no funds available for garnishment by Unibox and Ortega.
The sheriff also faced difficulty serving the writ on Ortega, and the sheriff’s Partial Return dated November 4, 2008 reported no satisfaction of the remaining unpaid balance.
Based on that return, UPPC filed a motion to order surety to pay amount of counter-bond against Acropolis.
On November 30, 2004, the RTC ordered Acropolis to pay P27,048,568.78 with 12% interest per annum from default under the counter-bond.
On December 13, 2004, Acropolis argued that it could not be compelled absent a demand from UPPC and that its obligation was allegedly discharged by novation through the compromise agreement executed by UPPC and the principal debtors.
The CA later reversed on grounds that included supposed noncompliance with procedural requirements, and on the alleged effect of the compromise on the surety.

Statutory Framework

The Court relied on Section 17, Rule 57 of the Rules of Court governing recovery upon the counter-bond.
Section 17, Rule 57 provides that once the judgment becomes executory, the surety on a counter-bond becomes charged on the bond and bound to pay the judgment obligee upon demand, with recovery after notice and summary hearing on the same action.
The Court also considered Section 4, Rule 15 of the Rules of Court, which generally requires service of notice of the hearing of a written motion at least three (3) days before the hearing date, subject to the court’s power to set a shorter notice for good cause.
The Court used Article 1292 of the Civil Code on novation, which requires unequivocal declaration or incompatibility between the old and new obligations to extinguish one by substitution.
The Court treated the compromise agreement and its effect on the surety under the lens of novation and the extent of the surety’s undertaking as stated in the bond.

Issues Presented

The case required determination of whether UPPC failed to make the required demand and notice on Acropolis before seeking execution against the surety under the counter-bond.
The case also required determination of whether the compromise agreement executed between UPPC, Unibox, and Ortega operated as novation that releas