ESTATE OF HEMADY v.

LUZON SURETY
G.R. No. L-8437 | November 28, 1956

Petitioners: Estate of K.H. Hemady, deceased

Respondents: Luzon Surety Co., Inc.

Ponente: Reyes, J.B.L., J.

DOCTRINE: A solidary guarantor’s liability is not extinguished by death. The qualifications required by law under
Article 2056 need to be present only at the time of the perfection of the guaranty. Article 2057 is incompatible with
the trial court’s stand that the requirement of integrity makes the undertaking strictly personal so that the guaranty
automatically terminates upon his death. It is evident that once the contract has become perfected and binding, the
supervening incapacity of the guarantor would not exonerate him of the eventual liability he has contracted. If that be
true of his capacity to bind himself; then it should also be true of his integrity, which is a quality mentioned in the
article alongside the capacity.

FACTS:
The Luzon Surety Co. prayed for allowance, as a contingent claim, of the value of the twenty (20) indemnity
agreements or counterbonds and further asked for judgment on the unpaid premiums & documentary stamps
affixed to the bond with 12% interest thereon.

Each counterbonds were subscribed by a distinct principal and the deceased K.H. Hemady as a surety solidary
guarantor in all of them.

The trial court dismissed the case on two (2) grounds for Luzon Surety;s failure to state a cause of action.

PROCEDURAL HISTORY:
COURT OF FIRST INSTANCE. In favor of Estate. Dismissed the claims of Luzon Surety Co. on two grounds:
(1) That the premiums due & cost of documentary stamps were not contemplated under the indemnity
agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities
incurred after the execution of the counterbonds;
(2) That whatever losses may occur after Hemady’s death are not chargeable to his estate, because upon his
death, he ceased to be the guarantor.
o Rationale:
(1) The statutory qualification of integrity is something purely personal & is not transmissible.
Upon K.H. Hemady’s death, his integrity was not transmitted to his estate or successors.
(2) Moreover, the paragraph “Security by way of first mortgage” in the printed form of the
indemnity agreement was expressly waived & renounced by the security company which
means that Luzon Surety exclusively relied on the personality, character, honesty & integrity of
K. H, Hemady. There was also no real property mentioned in the list of properties mortgaged
at the back of the indemnity agreement.

SUPREME COURT. In favor of Luzon Surety. The general rule under Article 1311 applies, not either of the three
(3) exceptions.

ISSUES:
Whether or not the Estate of Hemady is liable for the contractual rights and obligations of K.H. Hemady when the
latter was still living including the reimbursement of the contingent claim demanded by Luzon Surety? (YES)

HELD:
YES, the Estate of Hemady is liable for the contractual rights and obligations of K.H. Hemady.

According to Article 1311 of the Civil Code, contracts take effect only as between the parties, their assigns and
heirs, except in the case where the rights and obligations arising from the contract are not transmissible (1)
by their nature; or (2) by stipulation; or (3) by operation of law.

Moreover, the Court cited Mojica v. Fernandez and other provisions of the Civil Code (Article 774 & 776) confirming
the statement that the heirs succeed not only the rights of the deceased but also his obligations as the heirs of a
deceased person are not “third persons”.
GENERAL RULE. Hence, under the law, the general rule is that a party’s contractual rights & obligations are
TRANSMISSIBLE to the successors. This rule is a consequence of the progressive “depersonalization” of
patrimonial rights & duties as observed by Victorio Polacco.

From the Roman concept of relation from person to person, the obligation has evolved into a relation from
patrimony to patrimony, with the persons occupying only a representative position, barring those rare cases where
the obligation is strictly personal (intuitu personae). The transition is marked by the disappearance of the
imprisonment of debt.

THREE (3) EXCEPTIONS. Article 1331 provides for three (3) exceptions. The Court explained each and as to why
they are not applicable in the case at bar:

NATURE OF THE OBLIGATION. When creditor Luzon Surety Co. accepted K.H. Hemady as surety in the
counterbonds, the nature of the obligation, being a reimbursement or payment of a sum of money, an obligation
to give did not warrant that K.H. Hemady’s peculiar individual qualities were contemplated as a principal indument for
the contract. Luzon Surety was indifferent that the reimbursement should be made by Hemady himself or by
someone else in his behalf, as long as the money was paid to it.

INTRANSMISSIBILITY BY STIPULATION. Being an exception, this should not be easily implied but must be
expressly established or at the very least clearly inferable from the provisions of the contract itself. Nevertheless, the
text of the agreements sued upon nowhere indicate that they are non-transferable. Since under Article 1311,
the general rule is that a person who enters into a contract is deemed to have contracted for himself and his assigns
and heirs, it is unnecessary for him to expressly stipulate to that effect. Hence, the failure to stipulate that the
obligations will pass upon the heirs is not a sign that a guarantor intended his bargain to terminate upon his
death.

The fact that Luzon Surety waived the security by way of first mortgage indicates nothing more than the fact that it
has faith and confidence in the financial stability of the surety, not because his obligation was strictly person.

NOT TRANSMISSIBLE BY OPERATION OF LAW. This makes reference to those cases where the law expresses
that the rights or obligations are extinguished by death such as:
(1) Legal Support (Article 300)
(2) Parental Authority (Article 327)
(3) Usufruct (Article 603)
(4) Contracts for a Piece of Work (Article 1726)
(5) Partnership (Article 1830)
(6) Agency (Article 1919)

Under the Civil Code, there is provision that the guaranty is extinguished upon the death of the guarantor or
surety. The qualifications required by law under Article 2056 need to be present only at the time of the perfection
of the guaranty.

Article 2057 is incompatible with the trial court’s stand that the requirement of integrity makes the undertaking strictly
personal so that the guaranty automatically terminates upon his death. Under this article it is apparent that the
supervening dishonesty of the guarantor (the disappearance of his integrity after he has become bound) does
NOT terminate the contract but merely entitles the creditor to demand a replacement. But the step remains optional
in the creditor; it is his right, not his duty & he may waive it if he choose & hold the guarantor to his bargain.

By analogy, once the contract has become perfected and binding, the supervening incapacity of the
guarantor would not exonerate him of the eventual liability he has contracted. If that be true of his capacity to
bind himself; then it should also be true of his integrity, which is a quality mentioned in the article alongside the
capacity.

In summary, the contracts of suretyship entered into by K.H. Hemady in favor of Luzon Surety, not being rendered
intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by
provision of law—his eventual liability necessarily passed upon his death to his heirs. The Luzon Surety, therefore,
had the right to file against the estate a contingent claim for reimbursement.

DISPOSITION:
WHEREFORE, the order appealed from is REVERSED, and the records are ordered REMANDED to the court of
origin, with instructions to proceed in accordance with law. Costs against Estate of K.H. Hemady.
NOTES:
RULES OF COURT; NO EFFECT. The binding effect of contracts upon the heirs is not altered by the provision in
Rule 89 of the Rules of Court stating that money debts of a deceased must be liquidated & paid from his estate
before the residue is distributed among the heirs. The reason is that whatever payment is made from the estate is
ultimately a payment by the heirs & distributes since the amount of the paid claim in fact diminishes/reduces the
shares that the heirs would have been entitled to receive.

GASKELL RULING. The most common example of the contingent claim is that which arises when a person is bound
as surety/guarantor for a principal who is insolvent or dead. But until the surety has contributed something to the
payment of the debt or has performed the secured obligation in whole or in part, he has no right of action against
anybody and no claim that could be reduced to judgment. The Court ruled that if under the Gaskell ruling, Luzon
Surety as a guarantor could file a contingent claim against the estate of the principal debtors if the latter
should die, there is absolutely no reason why it could not file such a claim against the estate of Hemady
since Hemady is a solidary co-debtor of his principals. What Luzon Surety may claim from the estate of the
principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, the estate of
Hemady does not even enjoy the benefit of exhaustion of the assets of the principal debtor.

REMEDIES OF THE ESTATE. The ruling is without prejudice to the remedies of the administratix against the
principal debtors under Articles 2071 and 2067 of the Civil Code.