MANILA SURETY & FIDELITY COMPANY, INC., PLAINTIFF-APPELLEE, VS. RODOLFO R. VELAYO, DEFENDANT-APPELLANT.

Direct appeal from a judgment of the Court of First instance of
Manila (Civil Case No.-49435) sentencing appellant Rodolfo Velayo to pay appellee
Manila Surety & Fidelity Co., Inc. the sum of P2,565.00
with interest at 12-1/2% per annum from July 13, 1954; P120.93 as premiums with
interest at the same rate from June 13, 1954; attorneys’ fees in an amount
equivalent to 15% of the total award, and the costs.

Hub of the controversy are the
applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines
(1950).

The uncontested
facts are that in 1953, Manila Surety & Fidelity Co., upon request of
Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained
by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila.  Velayo undertook to
pay the surety company an annual
premium of P112.00; to indemnify the Company for any damage and loss of
whatsoever kind and nature that it shall or may suffer, as well as reimburse
the same for all money it should pay or become liable to pay under the bond
including costs and attorneys fees.

As “collateral security and by way of pledge” Velayo also delivered four pieces of jewelry to the Surety
Company “for the latter’s further protection”, with power to sell the
same in case the surety paid or become obligated to pay any amount of money in
connection with said bond, applying the proceeds to the payment of any amounts
it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto,
after deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter’s failure to do so, the surety
caused the pledged jewelry to be sold, realizing therefrom
a net product of P235.00 only. 
Thereafter and upon Velayo’s failure to pay
the balance, the surety company brought suit in the Municipal Court.  Velayo countered
with a claim that the sale of the pledged jewelry extinguished any further
liability on his part under Article 2115 of the 1950 Civil Code, which recites:

“ART. 2115.  The sale of
the thing pledged shall extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the principal obligation,
interest and expenses in a proper case. 
If the price of the sale is more than said amount, the debtor shall not
be entitled to the excess, unless it is otherwise agreed.  If the price of the sale is less, neither
shall the creditor be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary.”

The Municipal Court disallowed Velayo’s
claims and rendered judgment against him. 
Appealed to the Court of First Instance, the defense was once more
overruled, and the case decided in the terms set down at the start of this
opinion.

Thereupon, Velayo resorted to this
Court on appeal.

The core of the appealed decision is the following portion
thereof (Rec. Appeal pp. 71-72):

“It is thus crystal clear that the main agreement between the
parties is the Indemnity Agreement and if the pieces of jewelry mentioned by
the defendant were delivered to the plaintiff, it was merely as an added
protection to the latter.  There was no
understanding that, should the same be sold at public auction and the value
thereof should be short of the undertaking, the defendant would have no further
liability to the plaintiff.  On the
contrary, the last portion of the said agreement specifies that in case the
said collateral should diminish in value, the plaintiff may demand additional
securities.  This stipulation is
incompatible with the ideal of pledge as a principal agreement.  In this case, the status of the pledge is
nothing more nor less than that of a mortgage given as a
collateral for the principal obligation in which the creditor is
entitled to a deficiency judgment for the balance should the collateral not
command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of
the plaintiff to secure this obligation, has already been sold for only the
amount of P235.00, the liability of the defendant should be limited to the
difference between the amounts of P2,800.00 and P235.00 or P2,565.00.”

We agree with the appellant that the above quoted reasoning of
the appealed decision is unsound.  The
accessory character is of the essence of pledge and mortgage.  As stated in Article 2085 of the 1950 Civil
Code, an essential requisite of these contracts is that they be constituted to
secure the fulfillment of a principal
obligation, which in the present case is Velayo’s
undertaking to indemnify the surety company for any disbursements made on
account of its attachment counterbond.  Hence, the fact that the pledge is not the
principal, agreement is of no significance nor is it an obstacle to the
application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect
of the sale of the pledged chattels must be derived from stipulation.  This is incorrect, because Article 2115, in its last
portion, clearly establishes that the extinction of the principal obligation
supervenes by operation of imperative law that the parties cannot override:

“If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary.”

The provision is clear and unmistakable, and its effect can not
be evaded.  By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor
has waived any other remedy, and must abide by the results of the sale.  No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means
unique.  It is but an extension of the
legal prescription contained in Article 1484(3) of the same Code, concerning
the effect of a foreclosure of a chattel mortgage constituted to secure the
price of the personal property sold in installments, and which originated in
Act 4110 promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under
appeal is modified and the defendant absolved from the complaint, except as to
his liability for the 1954 premium in the sum of P120.93, and interest at
12-1/2% per annum from June 13, 1954.  In
this respect the decision of the Court below
is affirmed.  No costs.

SO ORDERED.

Concepcion, C.J., Dizon,
Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles, and Fernando, JJ., concur.