Excellent Quality Apparel, Inc. vs. Visayan Surety & Insurance Corporation

A surety on a counter-bond posted to secure the withdrawal of a cash deposit made to discharge a writ of attachment is liable under Section 17, Rule 57 of the Rules of Civil Procedure, which permits recovery upon demand and summary hearing after the judgment becomes executory, and is not subject to the pre-finality notice requirement of Section 20, Rule 57 which governs attachment bonds securing unliquidated damages.

Excellent Quality Apparel, Inc. (petitioner) contracted with Multi-Rich Builders for the construction of a garment factory within the Cavite Philippine Economic Zone Authority in 1996. The construction was completed in November 1996. Win Multi-Rich Builders, Inc. (the corporate successor to Multi-Rich) subsequently filed a collection suit with prayer for preliminary attachment against petitioner in 2004. The Regional Trial Court issued a writ of attachment supported by a bond from Visayan Surety & Insurance Corporation. Petitioner deposited cash to discharge the attachment, but the RTC ordered the release of this deposit to Win Multi-Rich in exchange for a surety bond from Far Eastern Surety & Insurance Co., Inc. (FESICO), which Win Multi-Rich obtained before trial commenced. In prior proceedings (G.R. No. 175048), the Supreme Court ordered Win Multi-Rich to return the garnished funds, but when petitioner sought execution against the sureties after the decision became final, the RTC and Court of Appeals denied relief based on procedural technicalities.

• The Construction Contract and Dispute: On March 26, 1996, petitioner Excellent Quality Apparel, Inc., represented by Max L.F. Ying and Alfiero R. Orden, entered into a construction contract with Multi-Rich Builders (later incorporated as Win Multi-Rich Builders, Inc. on February 20, 1997) for the construction of a garment factory in Cavite. The contract included an arbitration clause and was to be completed within five months.
• The Attachment Proceedings: On January 26, 2004, Win Multi-Rich filed a complaint for sum of money and damages against petitioner, praying for a writ of preliminary attachment alleging that Ying was about to abscond and petitioner had impending closure. Win Multi-Rich posted a bond of P8,634,448.20 issued by Visayan Surety & Insurance Corporation. The RTC issued the writ on February 2, 2004.
• Discharge of Attachment and Release of Funds: To prevent enforcement of the writ, petitioner issued Equitable PCI Bank Check No. 160149 dated February 16, 2004, for P8,634,448.20 payable to the RTC Clerk of Court. On April 29, 2004, the RTC ordered the deposit of the garnished funds with the Clerk of Court. Win Multi-Rich then moved to release the cash deposit to it, which the RTC granted on May 3, 2004. Win Multi-Rich posted Surety Bond No. 10198 issued by FESICO for P9,000,000.00 to secure the withdrawal and received the funds on May 7, 2004, before trial began.
• Prior Supreme Court Decision: In G.R. No. 175048, the Supreme Court held that Win Multi-Rich was not a real party in interest, that the RTC lacked jurisdiction due to the arbitration clause, and that Win Multi-Rich could not retain the garnished amount. The Court ordered the return of P8,634,448.20 with 12% interest per annum. The decision became final and executory on June 2, 2009.
• Execution Proceedings: On June 26, 2009, petitioner moved for execution against Win Multi-Rich and, in case of refusal, against Visayan Surety and FESICO under their respective bonds. The RTC initially granted execution (October 19, 2009) but granted the sureties' motion for reconsideration (January 15, 2010), lifting execution against them on the ground that petitioner failed to file a motion for judgment on the attachment bond before finality of judgment, thereby violating the sureties' right to due process.

• Due Process and Liability of Sureties: Petitioner contended that execution against the surety companies would not violate their right to due process because the Supreme Court in G.R. No. 175048 had already ruled that Win Multi-Rich could not retain the wrongfully garnished amount. If Win Multi-Rich failed to return the funds, the sureties must be held liable under their bonds.
• Application of Section 20, Rule 57: Petitioner argued that it had sufficiently incorporated an application for damages in its Answer with Compulsory Counterclaim filed before the RTC, alleging at least P3,000,000.00 in actual damages from the improper attachment and praying for the return of the check issued to discharge the attachment.
• Nature of FESICO's Bond: Petitioner maintained that FESICO's surety bond was not covered by Section 20, Rule 57 because it did not pertain to the writ of attachment itself, but to the withdrawal of the cash deposit, and thus different rules applied.

• Visayan Surety's Position: Visayan Surety argued that no application for damages was filed before the Supreme Court in G.R. No. 175048, and there was no occasion to direct the RTC to hear and decide the claim for damages, constituting a violation of its right to due process. It emphasized that Section 20, Rule 57 mandates that an application for damages must be filed before the judgment becomes final and executory.
• FESICO's Position: FESICO contended that petitioner failed to comply with Section 20, Rule 57 because the hearing on the motion for execution was conducted after the decision in G.R. No. 175048 had become final and executory. It also argued that petitioner failed to implead the surety respondents as parties in G.R. No. 175048.

• Notice to Surety Under Section 20, Rule 57: Whether petitioner complied with the requirement of giving due notice to Visayan Surety on the application for damages before the judgment became final and executory.
• Applicability of Section 17 vs. Section 20, Rule 57: Whether FESICO's surety bond securing the withdrawal of the cash deposit is governed by Section 20, Rule 57 (requiring notice before finality) or Section 17, Rule 57 (allowing recovery after finality).
• Due Process in Execution Against Sureties: Whether execution against the surety companies would violate their right to due process.

• Notice to Visayan Surety: The claim for damages against Visayan Surety must fail. Although petitioner incorporated an application for damages in its Answer with Compulsory Counterclaim filed before the RTC, thereby satisfying the first two requisites of Section 20, Rule 57 (filing in the same case and before finality), the records revealed that Visayan Surety was not furnished copies of pleadings, motions, or judgments regarding the application for damages. Notice was only given when petitioner filed the motion for execution on June 29, 2009, after the judgment in G.R. No. 175048 had become final and executory on June 2, 2009. Due notice to the surety before finality is indispensable to afford the surety an opportunity to be heard on the reality and reasonableness of the damages.
• FESICO's Liability Under Section 17, Rule 57: FESICO is liable under its surety bond. The bond posted to secure the withdrawal of petitioner's cash deposit constituted a counter-bond under Section 12, Rule 57, not an attachment bond under Section 20. Section 17, Rule 57 governs recovery upon counter-bonds, which requires only demand, notice, and summary hearing after the judgment becomes executory. Unlike Section 20 which covers unliquidated damages requiring determination before finality, Section 17 covers liquidated damages where the judgment has already determined the amount due. Here, the requirements of Section 17 were satisfied: petitioner filed a motion for execution with notice to FESICO, a hearing was held on August 7, 2009 with FESICO's counsel present, and FESICO was given opportunity to submit comments. FESICO is solidarily liable with its principal Win Multi-Rich.

• Requisites for Claiming Damages Against Attachment Bond (Section 20, Rule 57): To claim damages against an attachment bond under Section 20, Rule 57, the applicant must: (1) file the application in the same case where the bond was issued; (2) file before the entry of judgment (specifically before trial, before appeal is perfected, or before the judgment becomes executory); and (3) afford the surety due notice and hearing before the finality of judgment. The purpose is to prevent multiplicity of suits and allow the surety to contest the reality and reasonableness of unliquidated damages.
• Distinction Between Attachment Bonds and Counter-Bonds: Section 20, Rule 57 applies to attachment bonds and requires notice and hearing before finality because the damages sought are unliquidated and must be determined by the court. Section 17, Rule 57 applies to counter-bonds given to secure the payment of judgment and permits notice and hearing after the judgment becomes executory because the damages are liquidated (the judgment amount having been fixed).
• Premature Release of Attached Property: The chief purpose of preliminary attachment is to secure a contingent lien on the defendant's property until the plaintiff obtains a judgment. Under no circumstance may garnished funds or attached properties under the custody of the court be released to the attaching party before the promulgation of judgment. Cash deposits or counter-bonds posted to discharge attachment stand in place of the attached property and secure the payment of any judgment the attaching party may recover.

• "The chief purpose of the remedy of attachment is to secure a contingent lien on defendant's property until plaintiff can, by appropriate proceedings, obtain a judgment and have such property applied to its satisfaction..."
• "Under no circumstance, whatsoever, can the garnished funds or attached properties, under the custody of the sheriff or the clerk of court, be released to the attaching party before the promulgation of judgment."
• "Due notice to the adverse party and its surety setting forth the facts supporting the applicant's right to damages and the amount thereof under the bond is indispensable. The surety should be given an opportunity to be heard as to the reality or reasonableness of the damages resulting from the wrongful issuance of the writ."
• "Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts."

• Malayan Insurance, Inc. v. Salas, 179 Phil. 201 (1979) — Discussed the history of Section 20, Rule 57 as a revised version of Section 20, Rule 59 of the 1940 Rules of Court.
• Paramount Insurance Corp. v. Court of Appeals, 369 Phil. 641 (1999) — Cited for the proposition that an application for damages may be incorporated in the answer with compulsory counterclaim, provided the sureties are properly notified.
• Advent Capital and Finance Corp. v. Young, 670 Phil. 538 (2011) — Distinguished as a case where the application for damages was filed after the dismissal order had attained finality, hence not allowed.
• People Surety and Insurance Co. v. Court of Appeals, 126 Phil. 840 (1967) — Established that a court has no jurisdiction to entertain proceedings seeking to hold a surety liable where the surety has not been given notice of the proceedings for damages and the judgment has already become final.
• Plaridel Surety & Insurance Co. v. De Los Angeles, 133 Phil. 543 (1968) — Held that notification to the surety made after the judgment had become final did not cure the tardiness of the claim.
• Visayan Surety and Insurance Corp. v. Pascual, 85 Phil. 779 (1950) — Abandoned precedent that allowed application for damages without notice to surety; superseded by explicit provision of Section 20, Rule 57.

• Section 20, Rule 57, Rules of Court — Governs claims for damages on account of improper, irregular, or excessive attachment, requiring application before finality with due notice to the surety.
• Section 17, Rule 57, Rules of Court — Governs recovery upon counter-bonds, allowing the surety to be charged and bound to pay the judgment obligee upon demand after notice and summary hearing once the judgment has become executory.
• Section 12, Rule 57, Rules of Court — Provides for the discharge of attachment upon giving a counter-bond or cash deposit equal to the amount fixed in the order of attachment, which shall secure the payment of any judgment the attaching party may recover.
• Section 4, Rule 57, Rules of Court — States the condition of the applicant's bond for attachment, requiring the applicant to pay all costs and damages the adverse party may sustain by reason of the attachment if the court finally adjudges the applicant was not entitled thereto.

Antonio T. Carpio (Chairperson), Lucas P. Bersamin, Mariano C. Del Castillo, Marvic M.V.F. Leonen