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Allen McConn vs Paul Haragan et. al. and Associate Insurance and Surety Co., Inc.
January 31, 1962
Facts:
In a case pending at the CFI of Manila entitled Morris McConn vs Paul Haragan the Bureau of Immigration advised the
court that Paul Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave the
Philippines for 15 days only and requested information whether the court had any objection thereto.
The court required Haragan to file a bond of P4,000 "to answer for his return to the Philippines and the prosecution of his
case against him, with the understanding, that upon his failure to return, said bond will answer pro tanto for any judgment
that may be rendered against him". Thereupon, Haragan submitted a bond, subcribed by him and the Associated
Insurance & Surety Co., as principal and surety, respectively. A portion of which states:
WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for Hongkong and Tokyo, Japan,
the above-mentioned Court has required him to post a Surety Bond, in the amount of PESOS FOUR THOUSAND
ONLY (P4,000.00) Philippine Currency, the guarantee that he will return to the Philippines on or before September
16, 1955;
NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL and the SURETY, hereby
bind themselves, jointly and severally, in favor of the Republic of the Philippines, or its authorized representatives,
in the sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will
return to the Philippines on or before September 16, 1955 and that should he fail to do so, said bond will
answer pro tanto for any judgment that may be rendered against him.
Because of this the court consented to Haragans departure for a short stay abroad and a formal leave was given to him.
On the date of the supposed return of Haragan, his counsel informed the court that Haragan has been unable to return to
the Philippines because the Philippine Consulate in Hongkong had advised Haragan of a communication from our
Department of Foreign Affairs banning him from returning to the Philippines. The court then postponed the hearing to
January 6, 1956.
The court ruled against Haragan and ordered him to pay P 5,500 with 6% interest from Dec. 1954 until full payment and
attorneys fees. McConn moved for the execution of the said bond to satisfy the judgment against Haragan. Associate
Insurance and Surety objected thereto upon several grounds and, after due hearing, the lower court issued an order
releasing said company from liability under the bond aforementioned and denying plaintiff's motion.
Issue: WON the Surety Company is liable to McConn under the bond in view of Haragans failure to return to the
Philippines.
Ruling: No.
Rationale:
A careful reading of the surety bond, indicates that the surety's principal commitment and on the other hand if defendant
Haragan should return to the Philippines on or before September 16, 1955, said bond will not answer for the judgment. It
is now the contention of the Associated Insurance that since it was the Republic of the Philippines (obligee under the
bond) who rendered the return of defendant Haragan to the Philippines impossible, said surety company is thereby
released from its obligation, and cites in support thereof Articles 1266 and 2076 of the New Civil Code.
The Court finds it tenable and well grounded, for as the surety company has so well stated 'where the principal obligation
(of returning to the Philippines) has been extinguished by the action of the obligee, Philippine Government in preventing
such return, the accessory obligation of the surety is likewise extinguished and the bond released of its liability.'
Paraphrasing the last paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to do so, said bond
will (not) answer pro tanto for any judgment that may be rendered against him.It is in accord with the principle that The
debtor in obligation to do shall also be released when the prestation becomes legally or physically impossible without the
fault of the obligor. (Article 1266, Civil Code of the Philippines.).
Case: MIRA HERMANOS, INC. v. MANILA TOBACCONISTS, INC., ET.AL., PROVIDENT INSURANCE CO.
Date: September 29, 1943
Ponente: J. Ozaeta
Facts:
A written contract was entered into between Mira Hermanos and Manila Tobbacconists wherein the former agreed
to deliver to the latter merchandise for sale on consignment upon payment on or before the 20 th day of each month. To
secure the fulfillment of the obligation, Mira required Tobbacconists to give a bond of P3000 which was later executed by
the Provident Insurance.
Later on, the volume of business of the Tobbacconists have inceased so that the merchandise received by it on
consignment from Mira exceeded P3000 in value so the latter required the former to an additional bond of P2000. In
compliance thereto, Manila Compaia de Seguros executed a bond of P2000 with the same terms and condition as the
first bond.
Subsequently, a final and complete liquidation was made of the transactions between Mira and Tobbacconists, as
a result, a balance of P2272.79 was found. The Tobbacconists recognized the debt but was unable to pay so Mira
demanded payment from the 2 surety companies.
Provident Insurance paid 60% alleging that the remaining 40% is to be paid by Manila Compa ia pursuant to
Article 8137 of the Civil Code. But the latter refused to pay the balance contending that so long as the liability of the
Tobbacconists did not exceed P3000, it was not bound to pay anything because the bond referred only to the obligation of
the Tobbacconists in excess of P3000 and up to P5000.
As a result, Mira sued the surety companies.
Issue: WON Provident Insurance is entitled to the benefit of dividing the liabilities between it and the Tobbacconists
Held: No.
Ratio:
Art. 1837 provides that should there be several sureties of only one debtor for the same debt, the liability
therefor shall be divided among them all. The creditor can claim from each surety only his proportional part
unless liability in solidum has been expressly stipulated. The right to the benefit of division against the cosureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of
property against the principal debtor.
As the trial court observed, there would have been no need for the additional bond of P2,000 if its
purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co.
Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the excess over and
above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which
covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists
exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the
event against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000.
In the instant case, although the two bonds on their face appear to guarantee the same debt co-extensively up to
P2,000 that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 it was pleaded and
conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the
Provident Insurance Co. guarantees only the first P3,000 and the Manila Compaia de Seguros, only the excess
over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.
Case: NATIONAL SHIPYARDS & STEEL CORPORATION v. CARIDAD TORRENTO and MUTUAL SECURITY
INSURANCE CORPORATION
Date: June 26, 1967
Ponente: J. Makalintal
Facts:
Torrento applied for a purchase on credit of 60 tins of steel bars, 3/8 deformed or plain, at P430 per ton, for a
120-day period with the NASSCO. A contract of purchase and sale was then executed.
Pursuant to the stipulation in the contract the value of the steel bars sold to Torrento should be secured by a
surety bond, in compliance therewith, Mutual Security Insurance Corporation (MSIC) and Torrento executed in favor of
NASSCO a P25,000 bond, whereas the contract called for the payment of P25,800 so a supplemental bond was executed
to increase the same to P25,800. In the bond, it was stated in clear terms that both principal and surety are held firmly
bound in the said sum, jointly and severally.
Later on, NASSCO could no longer supply the steel bars called for in the contract since the 3/8 deformed steel
bars had been exhausted. To address the problem, Torrento and NASSCO executed a supplemental agreement wherein
NASSCO shall sell to Torrento and the latter shall buy from the former 38.50 tons of steel bars of other sizes for P440 or
P430 per ton.
NASSCO then delivered to Torrento the said steel bars in the total value of P25,749.09. The 120-day period for
payment lapsed and demand letters were sent but MSIC made no reply. As a consequence, an action was brought to
recover the unpaid contract price from Torrento and MSIC. The lower court ruled against the latter.
On appeal, Torrento maintains that NASSCO has no cause of action against her for the reason that inasmuch as
she had paid the corresponding premium on the surety bond, the right of action, in case of her default is exclusively
against her surety. She argues that the cause of action does not arise until after payment by MSIC.
On one hand, MSIC averred that the execution of the supplemental agreement without its knowledge and consent
released it from any liability under the surety bond as there was a material alteration of the principal contract. CA ruled
against Torrento and MSIC, hence, the present appeal.
Issue: WON the supplemental agreement constitutes a material alteration that may release MSIC from any liability under
the surety bond
Held: No.
Ratio:
The supplemental agreement did not result in Torrentos assuming more onerous conditions than those stipulated in
the original contract, and for which the surety furnished the bond. There was consequently, no material or essential alteration
of the original contract which could result in the release of the surety from the obligation under the said bond.
For purposes of releasing a surety's obligation, there must be a material alteration of the contract in connection with
which the bond is given, a change which imposes some new obligation on the party promising or takes away some obligation
already imposed, changing the legal effect of the original contract and not merely the form thereof . . . To allow compensated
surety companies to collect and retain premiums for their services and then repudiate their obligations on slight pretexts which have no
relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection
of voluntary sureties.
While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability and that such liability
cannot be extended by implication, it should be noted in the present case that although the technical specifications of the items to
be purchased have been changed, it clearly appears that such changes are not substantial and have not added any other
liability to that originally assumed. A surety is not released by a change in the contract which does not have the effect of
making its obligation more onerous.
On the argument of Torrento, the Court found that since the surety bond expressly provides that Torrento and MSIC
solidarily bind themselves under the surety bond, it is a suretyship in which case the provisions of the Civil Code with respect to joint
and solidary obligations will apply and Article 1216 of the Civil Code which provides that the creditor may proceed against any of the
solidary debtors or all of them simultaneously. Although as a rule, sureties are only subsidiarily liable for an obligation, nevertheless, if
they biond themselves jointly and severally, or in solidum, with the principal debtor, the creditor can bring action against anyone of
them, either alone or together with the principal debtor.
Case: MANILA SURETY & FIDELITY CO., INC., vs. NOEMI ALMEDA, doing business under the name and style of ALMEDA
TRADING, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION,
Date: July 31, 1970
Ponente: REYES
Place: MANILA
Facts: Noemi Almeda, 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 As required by' the
NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc. was posted by the purchaser to secure the
latter's faithful compliance with the terms of the contract. The agreement was later supplemented and a new bond for the same amount
of P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. was given in favor of the NAMARCO
The bonds uniformly contained the following provisions:
2. Should the Principal's 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 marketing firm demanded from the purchaser Almeda Trading the settlement of its back accounts which, allegedly
amounted to P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the said
purchaser urging it to liquidate its unsettled accounts with the NAMARCO however, previous to this, Generoso Esquillo instituted
voluntary insolvency proceeding in the Court of First Instance of Laguna and by order of said court he was declared insolvent.
Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case 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.
The court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-principal did not discharge the
surety's liability under the bond.
Issue: WON the insolvency of a debtor-principal does not release the surety from its obligation to the creditor under the bond.
Held: YES
Ratio: 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 the
debtor's non-payment, the surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the
debtor's properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. 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 debtor's solvency or ability to pay, but of the debt itself.
The guarantor's action for release can only be exercised against the principal debtor and not against the creditor
Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts to
be released from the undertaking thus assumed would have been appropriate. 7 Nevertheless, , 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 creditor's 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 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 debtor's 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 creditor's act in resorting first to the properties of the insolvent debtor is to the surety's
advantage.
Case: BANK OF THE PHILIPPINE ISLANDS, vs. ALBALADEJO Y CIA., S. EN C., ET AL.,
Date: March 27, 1929
Ponente: OSTRAND,
Place:
Facts: defendant, Albaladejo and Co., a limited copartnership, obtained a current account credit to the amount of no more
than P100, 000 from the Bank of the Philippine Islands at the interest rate of 8 per cent per annum. To secure that credit,
Florencio Gordillo and Isidro Martinez, executed a bond.
The bank increased the rate of interest to 9 per cent per annum.
Failing to meet their obligations to the bank, an action was brought against Albaladejo and Co. and the members
of the partnership, Pedro Albaladejo the sureties, Florencio Gordillo and Isidro Martinez, for the recovery of the sum of
P136,586.26, the amount then due the bank for the capital and the accrued interest at 9 per cent.
During the pendency of the action, Albaladejo and Co., as well as the partners of the company, were declared
insolvent and subsequently discharged from their debts, and as a consequence, the present case was dismissed as
against Albaladejo and Co.,
Upon trial the court rendered judgment in favor of the Bank of the Philippine Islands and against Florencio Gordillo
and Isidoro Martinez, jointly and severally for the sum of P136,533.26, with interest at 9 per cent per annum
Issue: WON The lower court erred In not holding that the facts of the case constitute a valid novation of the contract
between the debtors and the bank which releases the sureties from the obligation under the former agreement and In not
holding that the extension granted by the bank to the principal debtors for the payment of the loan, without the consent of
the sureties extinguishes the latter's liability.
Held: No
Ratio: This contention cannot be successfully maintained. There is no sufficient in the record to show that the bank
actually extended the time for the payment of the debt, but the appellant maintains that the long delay on the part of the
bank in enforcing its rights against the debtors is equivalent to an extension of the time.
It is a general principle that a creditor is under no obligation to be actively diligent in pursuit of his principal debtor.
He may forbear the prosecution of his claim, and remain inactive, without impairing his right to resort to the surety,
particularly when his forebearance amounts to no more than a mere inaction or passivity. Therefore the mere neglect of
a creditor to sue or to attempt to collect a debt at the time it falls due does not discharge the sureties, although
the principal had ample means at the time, and subsequently became insolvent. Similarly, mere passiveness or
mere delay in the prosecution of an execution against the principal debtor after judgment, will not discharge the
surety. The principal under consideration, however, comprehends something more than mere passivity or inaction
resulting from negligence. Thus, a gratuitous indulgence of the principal, whether extended at his request or without it, and
whether it is yielded by the creditor from sympathy and from an inclination to favor him, or is the result or mere
passiveness, will not operate to discharge the surety, unless he omits to do, when required by the surety, what the law or
his duty enjoins him to do, or unless he neglects, to the injury of the surety, to discharge his duty in any matter in which he
occupies the position of a trustees for the surety. Mere delay or negligence in proceeding against the principal will
not discharge a surety unless there is between the creditor and principal debtor a valid and binding agreement
therefore, one which tends to prejudice him, or to deprive him of the power of obtaining indemnity by presenting
a legal obstacle, for the time, to the prosecution of an action on the original security. Positive and willful
interference by a creditor, embarrassing the recovery of the claim against the principal, will, however, release the surety. In
some jurisdictions, moreover, the duty of active diligence in the prosecution of suits, or of execution against the principal
can be devolved on the creditor by the surety, if he desires, by requesting it. Also, of course, if a delay in calling on the
principal for the money is the result of fraud, that surety will be exonerated. In extension of the principle that the mere
delay of the creditor to proceed against the principal will not discharge the surety, it has been held that the surety is not
discharged, even if the delay of the creditor is such that his remedy against the principal becomes barred by imitation.
It has also uniformly been held that increases of interest rates on the debt do not affect the original obligation of
the sureties, though they may not be bound by the increase.
Facts: Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located at Barrio Malinta (Finugo),
Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936 by Pedro Babida as payment of his attomey's fees in a
murder case wherein Babida was the accused.
The justice of the peace court in its decision ordered the defendants to vacate the land and allowed Singson to
withdraw from Domingo Gerardo, the depositary, "the canons of the land" or the owner's share of the harvests
To stay the execution of the inferior court's decision, while the appeal in the Court of First Instance was pending,
Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who are not defendants) executed a "counterload for
the amount of P3,000 to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which
they pray to be disposed (of) and deposited". That counterbond is known as the "first supersedeas bond".
The lower court in its decision ordered the defendants to restore the possession of the land to Singson
The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal, Doroteo Ballesteros
and Pedro Agatep (not parties to the case) separately executed supersedeas bonds in the sum of P2,000 wherein they
undertook "to pay to the plaintiff whatever damages he might sustain as a result of" the case. Those under are known as
the "second supersedeas bond".
Court of Appeals dismissed defendants' appeal
Execution sale on June 27, 1961 involving the first supersedeas bond. To implement the writ of execution of
against the first supersedeas bond, the sheriff served a written demand upon the four sureties to pay the sum of P730
plus the expenses and commission in the sum of P19.80.
As the four sureties did not heed his demand, the sheriff levied upon the lands of three of the sureties described in
the first supersedeas bond and in the writ of execution.
The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The sheriff scheduled the sale
of the lands of the three sureties.
The day of the auction sale, Singson was the only bidder. the three parcels of land of the sureties, were sold to
Singson.
The execution sale on June 30, 1961 involving the second supersedeas bond. The judicial was based on the first
or original writ of execution. To satisfy that writ of execution Singson was placed in ion of the 24-hectare homestead and
the defendants delivered to his overseer 158 cavans of palay, thus leaving an unsatisfied balance of 134 cavans of palay
valued at P1,340.
the sheriff, apparently to satisfy the balance levy ten hectares of land belonging to defendants Antonio, Bibis,
Calpito and Alfredo Peralta, with a total assessed value of P3,590.
The sureties on the "second supersedeas bond", the sheriff executed the respective certificates of sale in favor of
Singson for the nine parcels of land. He specified that the period of redemption would expire "within one (1) year, counted
from this date of sale". The two certificates of sale were registered
In a final certificate of sale dated the sheriff conveyed to Singson the parcels of land of the sureties Babida,
Garcia and Pacursa.
the defendants and the bondsmen filed a supplementary pleading" wherein they prayed that the execution sales
be declared void because the obligations of the sureties may be regarded as extinguished with the delivery of the 158
cavans of palay to Singson's overseer and because the sureties were not given the benefit of exhaustion of the principal
debtors' properties.
The trial court in its order denied the motion of the bondsmen
Issue: WON the bonds are void and sales are void because their liabilities on their supersedeas bonds had already been
extinguished before the sales were made;
Held: Yes
Ratio: The appeal can be disposed of by holding that the two so-called supersedeas bonds, which gave rise to the
execution sales under attack, are void because they were not signed by the twelve defendants or judgment debtors as
principal obligors They were signed only by the six sureties. Not having been signed by the principal debtors, the
supersedeas bonds do not evidence any Principal obligation and are devoid of consideration as to the sureties who have
no privity with the judgment creditor nor any liability to him.
Other reasons for holding the two supersedeas bonds void are that the first supersedeas bond was not warranted
under the judgment of the justice of the peace court and the second supersedeas bond was required in the trial court's
order which was issued when it had no more jurisdiction over the case.
A supersedeas bond in an ejectment case is usually filed in the inferior court and approved by it and "executed to
the plaintiff to enter the action in the Court of First Instance". It covers "the rents, damages and costs down to the time of
the final judgment"
The supersedeas bond answers only for the rentals or the reasonable compensation for the use and occupation
of the premises as fixed in the judgment of the inferior court.
In the instant case, the justice of the peace court did not adjudge any rentals or reasonable compensation for the
use and occupation of the homestead. That court allowed "the plaintiff to withdraw the canons of the land" from the
depositary. Hence, there was no occasion or justification for requiring a supersedeas bond. For that reason, the "first
supersedeas bond" was not necessary and is, therefore, a nullity. Any execution against it would likewise be a nullity.
With respect to the "second supersedeas bond". it should be underscored that the lower court approved
defendants' record on appeal in its order wherein it directed the clerk of court to elevate the same to the Court of Appeals.
The appeal was deemed perfected on that date.
There is some basis for appellant's contention that the execution sales in question were invalid because the
judgment debtors' obligation was extinguished by the lower court's orders of September 10, 1960 and January 28, 1961,
reducing their liability for the owner's share of the harvests to 146 cavans of palay or P1,460.
In those two orders, the trial court had novated its judgment without any protest on the part of the judgment
creditor. It is an undisputed fact that, as heretofore repeatedly emphasized, the judgment debtors had delivered to
Singson's overseer 158 cavans of palay valued at P1,580, an amount which is more than the reduced liability of P1,460.
That explains why the defendants and the sureties contended in the lower court that its judgment had already been
satisfied and that, therefore, further execution was not in order.
But even if the supersedeas bonds could be proper bases for selling at public auction the properties of the five
sureties, to satisfy the defendants' liability to deliver 146 cavans of palay to Singson or to pay him P1,460, it would not
follow that the execution sales are valid.
attorney's fees.The trial court finding that no damage proven to have been suffered by Ong Guan Can on account of said attachment,
absolved the Standard Oil Co., of New York from this claim in case No. 29753.
PHILIPPINE NATIONAL BANK, vs. MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS
Facts: The Philippine National Bank had opened a letter of credit and advanced $120,000.00 to Edgington Oil Refinery
for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were released and delivered to Adams &
Taguba Corporation (known as ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to the amount
of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect
from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor.ATACO delivered to the
Bureau of Public Works, and the latter accepted, asphalt to the total value of P431,466.52. Of this amount the Bank
regularly collected, from April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the
Bank ceased to collect, until in 1952 its investigators found that more money were payable to ATACO from the Public
Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same purchase
order to a total of P311,230.41. Its demands on the principal debtor and the Surety having been refused, the Bank sued
both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests
and costs.The trial court rendered a decision Ordering defendants, Adams & Taguba Corporation and Manila Surety &
Fidelity Co., Inc., to pay plaintiff, Philippines National Bank; Orderinq cross-defendant, Adams & Taguba Corporation, and
third-party defendant, Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity
Co., Inc., whatever amount the latter has paid or shall pay under this judgment; Dismissing the complaint insofar as the
claim for 17% special tax is concerned; and Dismissing the counterclaim of defendants Adams & Taguba Corporation and
Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank of the
Philippines did not appeal, while defendant ATACO failed to perfect its appeal.The Bank recoursed to the Court of
Appeals, which rendered an adverse decision and modified the judgment of the court of origin as to the surety's liability. Its
motions for reconsideration having proved unavailing, the Bank appealed to this Court.
Issue:
Held:
The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of Public Works
the moneys falling due in favor of the principal debtor, ATACO, from and after November 18, 1948, before the debt was
fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the surety, and
held that the Bank's negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was merely in
additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the
principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for
negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the
Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such
collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes
liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the
Bank could not expect that the Bank would diligently perform its duty under its power of attorney, but because they could
not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to
collect was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to
the principal debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the principal debtor were considered as mere additional
security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of
any possibility of recoursing against that security.