MANILA SURETY & FIDELITY Co., INC.
, This is an appeal from the ruling of the Court of First
plaintiff-appellant, vs. NOEMI ALMEDA, doing
business under the name and style of ALMEDA
TRADING,GENEROSO ESQUILLO and
NATIONAL MARKETING CORPORATION,
defendants-appellees.
Surety; Release of surety; Where debtor is declared
insolvent, surety cannot sue for release of guaranty
against creditor.Under the Civil Code, with the
debtors insolvency having been judicially recognized,
the suretys resort to the courts to be released from the
undertaking thus assumed is proper. Nevertheless, the
guarantors action for release can only be exercised
against the principal debtor and not against the creditor,
as is apparent from the precise terms of the provision.
The juridical rule grants no cause of action against the
creditor for a release of the guaranty, before payment of
the credit, for a plain reason: the creditor is not
compellable to release the guaranty (which is a property
right) against his will. For, the release of the guarantor
imports an extinction of his obligation to the creditor; it
connotes, therefore, either a remission or a novation by
subrogation, and either operation requires the creditors
assent for its validity (See Article 1270 and Article
1301). Especially should this be the case where the
principal debtor has become insolvent, for the purpose
of a guaranty is exactly to protect the creditor against
such a contingency.
Same; Remedy of guaranty where debtor is declared
insolvent.Where a debtor is judicially declared
insolvent, the remedy of the guarantor would be to file
a contingent claim in the insolvency proceeding, if his
rights as such guarantor or surety are not to be barred by
the subsequent discharge of the insolvent debtor from
all his liabilities.
Insolvency Act; Discharge of debtor from his liabilities
in the insolvency proceedings does not relieve liability
of guarantor.The fact that the debtor-principal may
be discharged from all his outstanding obligations in the
insolvency case would not benefit the surety, as to
relieve it of its liability under the surety agreement. That
is so provided in Section 68 of the Insolvency Act. At
least, the surety would be answerable only for whatever
amount may remain not covered or unsatisfied by the
disposition of the insolvents properties, with the right
to go against debtor-principal after it has made the
necessary payment to the creditor.
APPEAL from a decision of the Court of First Instance
of Manila. Montesa, J.
The facts are stated in the opinion of the Court.
De Santos & Delfino for plaintiff-appellant.
Government Corporate Counsel Leopoldo M.
Abellera and Trial Attorney Arsenio J. Mepale for
defendant-appellee National Marketing Corporation.
REYES, J.B.L., J.:
Instance of Manila, rendered in Civil Case No. 62518,
that the insolvency of a debtor-principal does not
release the surety from its obligation to the creditor
under the bond.
The lower court found that on 4 December 1961,
Noemi Almeda, married to Generoso Esquillo, and
doing business under the name and style of Almeda
Trading, entered into a contract with the National
Marketing Corporation (NAMARCO) for the purchase
of goods on credit, payable in 30 days from the dates
of deliveries thereof. As required by the NAMARCO,
a bond for P5,000.00, undertaken by the Manila Surety
& Fidelity Co., Inc. (Exhibit A), was posted by the
purchaser to secure the latters faithful compliance
with the terms of the contract. The agreement was later
supplemented on 17 October 1962 and a new bond for
the same amount of P5,000.00, also undertaken by the
Manila Surety & Fidelity Co., Inc. (Exhibit C),1 was
given in favor of the NAMARCO. The bonds
uniformly contained the following provisions:
2.
Should the Principals account on any purchase
be not paid on time, then the Surety, shall, upon
demand, pay said account immediately to the
NAMARCO;
3.
Should the account of the Principal exceed the
amount of FIVE THOUSAND (P5,000.00)
PESOS, Philippine Currency, such excess up
to twenty (20%) per cent of said amount shall
also be deemed secured by this Bond;
4.
The Surety expressly waives its right to
demand payment and notice of non-payment
and agreed that the liability of the Surety shall
be direct and immediate and not contingent
upon the exhaustion by the NAMARCO of
whatever remedies it may have against the
Principal and same shall be valid and
continuous until the obligation so guaranteed is
paid in full; and
5.
The Surety also waives its right to be notified
of any extension of the terms of payment which
the NAMARCO may give to the Principal, it
being understood that were extension is given
to satisfy the account, that such extension shall
not extinguish the guaranty unless the same is
made against the express wish of the Surety.
The records show that on 8 June 1965, the marketing
firm demanded from the purchaser Almeda Trading the
settlement of its back accounts which, as of 15 May
1965, allegedly amounted to P16,335.09. Furnished
with copy of the NAMARCOs demand-letter, the
surety company thereafter also wrote to the said
purchaser urging it to liquidate its unsettled accounts
with the NAMARCO (Exhibit E-1). It appears,
however, that previous to this, or on 26 March 1965,
Generoso Esquillo instituted voluntary insolvency
proceeding in the Court of First Instance of Laguna (Sp.
Proc. No. SP-181), and by order of said court of 6 April
1965, he was declared insolvent, with listed credits
amounting to P111,873.002 and properties valued at
P39,000.00. In the meeting of the named creditors of the
insolvent, held on 14 May 1965 for the purpose of
electing the assignee of his properties, the NAMARCO
was represented and its contingent claim duly
registered.3
On 10 September 1965, the Manila Surety & Fidelity
Co., Inc., commenced in the Court of First Instance of
Manila Civil Case No. 62518 against the spouses Noemi
Almeda and Generoso Esquillo, and the NAMARCO, to
secure its release from liability under the bonds
executed in favor of NAMARCO. The action was based
on the allegation that the defendant spouses had become
insolvent and that defendant NAMARCO had rescinded
its agreement with them and had already demanded
payment of the outstanding accounts of the couple.
Defendant NAMARCO filed its answer denying the
averments of the complaint and setting up, as
affirmative defenses, lack of cause of action and the
courts want of jurisdiction. On 16 December 1966, the
court rendered judgment sustaining NAMARCOs
contention that the insolvency of the debtor-principal
did not discharge the suretys liability under the bond.
Thus, the complaint was dismissed and plaintiff surety
company was ordered to pay off the indebtedness of the
defendant spouses to the NAMARCO to the extent of its
(the Suretys) undertaking, plus attorneys fees and
costs. From this decision, plaintiff surety interposed the
present appeal.
Plaintiff-appellants action to secure its discharge from
the suretyship was based on Article 2071 of the Civil
Code,4 which provides the surety with certain protective
remedies that may be resorted to before he has paid, but
after he has become liable to do so.5
Upon the other hand, the lower courts ruling, now on
appeal, is anchored on an equally explicit provision of
the Insolvency law (Act 1956, as amended), to wit:
SEC. 68. xxxxx xxxxx xxxxx
No discharge (of the insolvent from his obligations)
shall release, discharge or affect any person liable for
the same debt, for or with the debtor, either as partner,
joint contractor, indorser, surety, or otherwise.
The issue posed by this appeal, therefore, is whether a
surety can avail itself of the relief specifically afforded
in Article 2071 of the Civil Code and be released from
its liability under the bonds, notwithstanding a prior
declaration of the insolvency of the debtor-principal in
an insolvency proceeding.
We see no reversible error in the decision appealed
There is no question that under the bonds posted in favor
of the NAMARCO in this case, the surety company
assumed to make immediate payment to said firm of any
due and unsettled accounts of the debtor-principal, even
without demand and notice of said debtors non-
payment, the surety, in fact, agreeing that its liability to
the creditor shall be direct, without benefit of exhaustion
of the debtors properties, and to remain valid and
continuous until the guaranteed obligation is fully
satisfied. In short, appellant secured to the creditor not
just the payment by the debtor-principal of his accounts,
but the payment itself of such accounts. Clearly, a
contract of suretyship was thus created, the appellant
becoming the insurer, not merely of the debtors
solvency or ability to pay, but of the debt itself.6 Under
the Civil Code, with the debtors insolvency having
been judicially recognized, herein appellants resort to
the courts to be released from the undertaking thus
assumed would have been appropriate.7 Nevertheless,
the guarantors action for release can only be exercised
against the principal debtor and not against the creditor,
as is apparent from the precise terms of the legal
provision. The guarantor (says Article 2071 of the
Civil Code of the Philippines) even before having paid,
may proceed against the principal debtor_ _ _ _ _ _ _ _
_ _ _ _ to obtain a release from the guaranty_ _ _ _ _ _
_ _ _. The juridical rule grants no cause of action
against the creditor for a release of the guaranty, before
payment of the credit, for a plain reason: the creditor is
not compellable to release the guaranty (which is a
property right) against his will. For, the release of the
guarantor imports an extinction of his obligation to the
creditor; it connotes, therefore, either a remission or a
novation by subrogation, and either operation requires
the creditors assent for its validity (See Article 1270
and Article 1301). Especially should this be the case
where the principal debtor has become insolvent, for the
purpose of a guaranty is exactly to protect the creditor
against such a contingency.
In what manner, then, can the article operate? Where the
debtor can not make full payment, the release of the
guarantor can only be obtained with the assent of the
creditor, by persuading the latter to accept an equally
safe security, either another suitable guaranty or else a
pledge or mortgage. Absent the creditors consent, the
principal debtor may only proceed to protect the
demanding guarantor by a counterbond or
counterguaranty, as is authorized by the codal precept
(Article 2071 in fine). To this effect is the opinion of the
Spanish commentator, Scaevola, in his explanations to
Article 1843 of the Spanish Civil Code (from which
Article 2071 of our Code is derived). Says Scaevola:
Cmo se prestran tales garantis al fiador? Lo
contesta el aludido prrafo final del Artculo 1843. Se
har por uno de estos dos modos: ora consiguiendo el
deudor que el acreedor abandone libremente aquella
fianza, lo cual ocurrir dandole el deudor otra garanta
anloga, ya por razon de la persona fiadora, ya
ofrecindole una, garanta real, v. gr. prenda hipoteca;
ora ofrecindole el deudor al mismo fiador, pero
continuando este como tal, una garantia que lo ponga a
cubierto de los procedimientos del acreedor y del
peligro de insolvencia del deudor. (Scaevola, Cdigo
Civil, 2d Ed., Vol. 28, pp. 651-652).
_______________
The appellent's troubles are compounded by the fact that
when the complaint for release from suretyship was
filed in the Manila court on 10 September 1965, the
insolvency case in the Laguna court was already
pending and the debtor-principal Generoso Esquillo had
been judicially declared an insolvent. By the time the
appellant sued, therefore, the insolvency court had
already acquired jurisdiction over all the debtors
properties and of all claims by and against him, to the
exclusion of any other court.8 In the circumstances, the
lawful recourse of the guarantor of an obligation of the
insolvent would be to file a contingent claim in the
insolvency proceeding, if his rights as such guarantor or
surety are not to be barred by the subsequent discharge
of the insolvent debtor from all his liabilities.9
In the case at bar, it is true that the guaranteed claim of
NAMARCO was registered or filed in the insolvency
proceeding. But appellant can not utilize this fact in
support of its petition for release from the assumed
undertaking. For one thing, it is almost a certainty that
creditor NAMARCO can not secure full satisfaction of
its credit out of the debtors properties brought into the
insolvency proceeding. Considering that under the
contract of suretyship, which remains valid and
subsisting, the entire obligation may even be demanded
directly against the surety itself, the creditors act in
resorting first to the properties of the insolvent debtor is
to the suretys advantage. At least, the latter would be
answerable only for whatever amount may remain not
covered or unsatisfied by the disposition of the
insolvents properties,10 with the right to go against
debtor-principal after it has made the necessary payment
to the creditor. For another, the fact that the debtor-
principal may be discharged from all his outstanding
obligations in the insolvency case would not benefit the
surety, as to relieve it of its liability underthe surety
agreement. That is so provided in Section 68 of the
Insolvency Act, which shall be controlling in the case.
Finally, even supposing that the present action is not
blocked by the insolvency proceedings because it does
not aim at reducing the insolvents assets, but only at
having the suretyship substituted by other equivalent
security, still it is difficult to see how the principal
debtor, with his business, property and assets
impounded by the insolvency court, can obtain other
securities with which to replace the guaranty given by
the plaintiff-appellant. The action at bar would seem,
under the circumstances, destined to end in futility.
WHEREFORE, with the modification that
appellants liability shall be limited to the payment of
whatever amount may remain due to the appellee
NAMARCO and is unsatisfied in the insolvency
proceeding, but not to exceed the amount of the suretys
undertaking under the bonds, the decision appealed
from is affirmed in all other respects. Costs against
appellant surety company.
Concepcion, C.J., Dizon, Makalintal, Zaldivar,
Castro, Fernando, Teehankee, Barredo and Villamor,
JJ., concur.
Decision affirmed with modification.
Notes.(a) Distinction between guarantee and
suretyship.The vital difference between a contract of
a surety and that of a guarantor is sometimes said to be,
that a surety is charged as an original promissor while
the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary (United States
vs. Varadero de la Quinta, 40 Phil. 48). A guarantor
binds himself to pay if the principal is unable to pay; a
surety undertakes to pay if the principal does not pay
(Machetti vs. Hospicio de San Jose, 43 Phil. 297;
Manila Surety & Fidelity Co. vs. Batu Construction Co.,
L-9353, May 21, 1957, 53 O.G. 8836; see also Visayan
Surety & Insurance Corp. vs. De Laperal, 69 Phil. 688).
It has, however, been observed that the civil law
suretyship is nearly synonymous with the common law
guaranty; and the civil law relation existing between co-
debtors liable in solidum is similar to the common law
suretyship (Castellvi de Higgins vs. Sellner, 41 Phil.
142).
(b) Discharge or release of surety.The fact that a
Court of First Instance may have rendered judgment
erroneously against a solvent partner for a proportionate
part of a debt when judgment should have been rendered
against him for the whole, and that no appeal was taken
from such a judgment by the creditor, does not discharge
a surety of the firm debts, upon a showing that the other
partner is dead and his estate insolvent (Manila Railroad
Co. vs. Salivon, 48 Phil. 132).
In Philippine National Bank vs. Escueta, 50 Phil. 991,
the bank, in its books of accounts, charged the principal
debtor a higher rate of interest than that fixed in the
surety agreement, but in its action on the sureties it
demanded only the interest specified in the agreement.
It was held that the sureties were not thereby discharged
or released from their liability.
It has also been held that the deportation of the principal
does not extinguish the debt nor release the sureties
from liability (Government of P.I. vs. Lumbaca, 62 Phil.
962).
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ASSOCIATED INSURANCE & SURETY CO.,
INC., plaintiff-appellant,
vs.
BACOLOD-MURCIA MILLING CO., INC., ET
AL., defendants-appellees.
Castillo and Fineza for appellant.
Hilado and Hilado for appellee Bacolod-Murcia
Milling Co., Inc.
BAUTIUSTA ANGELO, J.:
Plaintiff brought this action before the Court of First
Instance of Manila to secure the cancellation of certain
surety bonds executed by it in favor of defendant
Bacolod-Murcia Milling Co., Inc. or, in the alternative,
to order defendants Sixto R. Ruiz and Raymundo D.
Dizon to pay to plaintiff the amount of P2,956.60, plus
interest thereon, for ultimate delivery to their co-
defendant and to order defendants to pay plaintiff's
attorney's fees and costs.
The complaint alleges that defendants Sixto R. Ruiz
obtained two crop loans in the aggregate amount of
P11,626.00 from defendant Bacolod-Murcia Milling
Co., Inc., a corporation duly organized under the laws
of the Philippines, subject to the condition that he shall
post surety bonds to guarantee the payment of 25% of
said crop loans; that in compliance with said condition,
plaintiff, also a corporation, executed in favor of the
milling corporation two surety bonds in the aggregate
amount of P2,956.50 for the purpose above-mentioned;
that said bonds were executed subject to the following
conditions: (1) the creditor shall apply the share of the
debtor in the harvest of the crops for which the loans
were granted to the liquidation of said loans and no part
thereof shall be applied to other indebtedness until the
loans have been fully liquidated; (2) the creditor shall
not grant any additional loan to the debtor in excess of
the latter's share in the crops covered by the bonds
without the prior written consent of the surety; and (3)
the liability of the surety will terminate upon complete
payment of the indebtedness guaranteed by the bonds;
that defendant milling company failed to comply with
conditions 1 and 2 mentioned above when it granted to
the debtor loans in excess of the latter's share in the
harvest of the crops covered by the bonds without the
written consent of plaintiff, and when it failed to notify
plaintiff of the amount the debtor has actually availed
himself of the crop loans obtained by him, thereby
depriving plaintiff of its right to be apprised of the loan
actually obtained, this notice being necessary to enable
plaintiff to take steps to protect its interest; and that in
view of the violations of the conditions above-
mentioned, plaintiff is deemed to have been relieved of
its liability under the bonds.
The complaint, as an alternative cause of action, also
alleges that defendant Sixto R. Ruiz, as debtor, and
defendant Raymundo D. Dizon, as surety, executed an
indemnity agreement in favor of plaintiff to indemnify
the latter for executed the two surety bonds in favor of
the milling company mentioned in the preceding
paragraph; that defendant milling company notified
plaintiff that the debtor has an standing account with
said defendant in the amount of P15,285.72 and
demanded that it pay its share thereof in the amount of
P2,956.50 as agreed upon in the surety bonds, and that
in the event plaintiff is compelled pay to the defendant
milling company said amount of P2,956.50, plaintiff
would have a valid cause of action against debtor and
his surety for the recovery of said amount under the
provisions of the indemnity agreement.
Defendant milling company filed a motion to dismiss on
the ground that the complaint fails to state a cause of
action against it for the following reasons: there is no
allegation in the complaint that the plaintiff, as a surety,
has paid the obligation it guaranteed, or has been
required to pay the same by said defendant. And
granting arguendo that the allegations in the complaint
regarding breach of the conditions of the surety bonds
are true, the same would only be matters of defense
which plaintiff could put up should it be made to pay its
obligation under the bonds of defendant milling
company.
Despite the opposition of plaintiff to this motion to
dismiss, the court granted the same in a brief order as
follows: "Defendants' motion to dismiss on the ground
that plaintiff's complaint states no cause of action being
meritorious, the same is granted. This case is hereby
dismissed, with costs against the defendants." Hence
this appeal.
There is merit in the appeal. While the order of the lower
court does not state the reasons why it granted the
motion to dismiss, for the same is very laconic, it may
however be inferred from its tenor that it agree to the
grounds set forth by defendant milling company in its
motion. The reasons advanced for the dismissal of the
case are that plaintiff, being a surety of the debtor who
obtained two crops loan from the milling company, has
not yet incurred any plaintiff under its bonds because the
complaint contains no allegations that it has voluntarily
paid the obligation or has been made to pay the same to
the company in accordance with the terms of the bonds.
It is contended that the allegations of the complaint
concerning breach of the principal conditions of the
bonds on the part of defendant milling company are
mere matters of defense which plaintiff could put up
when demand for payment is made upon it by the
milling company. And these arguments were found by
the lower court to be meritorious.
With this we disagree. The purpose of the action is not
dispute the validity of any demand for payment that may
have been made upon plaintiff by defendant company
on the strength of its liability under the bonds but rather
to ask for its release from its liability under the bonds
for certain breach of its conditions committed by the
milling company, and it is for the reason that the action
was brought against the milling company. It is true that,
as an alternative action, the debtor and the other surety
were also included to exact liability from them under the
indemnity agreement, but that is an action distinct and
separate from that alleged against the milling company
and as such it cannot in any way affect the relation of
the latter to the plaintiff. We find therefore immaterial
or unnecessary to allege in the complaint that plaintiff
has either paid or been required to pay its obligation
under the bonds by the creditor considering the nature
of the main cause of action. It is sufficient if it alleges
therein, as it actually does, that conditions agreed upon
in the bonds had been violated. We therefore conclude
that the complaint states a valid cause of action insofar
as the milling company is concerned.
The order appealed from is set aside. The case is
remanded to the lower court for further proceedings,
with costs against the appellees.