MANILA SURETY & FIDELITY CO., INC., PLAINTIIF-APPELLANT, VS. NOEMI ALMEDA, DOING BUSINESS UNDER THE NAME AND STYLE OF ALMEDA TRADING, GENEROSO ESQUILLO AND NATIONAL MARKETING CO…

This is an appeal from the ruling of the Court of First 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 latter’s 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 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 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 NAMARCO’ s 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 P111,873.00^[2]
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 court’s want of Jurisdiction.  On 16
December 1966, 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.  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
Surety’s) undertaking, plus attorneys’ fees and costs.  From this decision, plaintiff surety
interposed the present appeal.

Plaintiff-appellant’ s action to secure its discharge from the
surety ship 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 court’s ruling, now on appeal, is
anchored on an equally explicit provision of the Insolvency law (Act 1956, as
amended), to wit:

“SEC. 8.        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, endorser,
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 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. 
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 surety ship was thus
created, the appellant becoming the insurer, not merely of the debtor’s
solvency or ability to pay, but of the debt itself.^[6]
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, the guarantor’s 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 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 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 creditor’s consent, the principal
debtor may only proceed to protect the demanding guarantor by a counter bond or
counter guaranty, 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:

“Como se prestaran tales garantias al fiador?  Lo contesta el aludido parrafo final del Articulo
1843.  Se hara por uno de estos
dos modos:  ora consiguiendo el deudor que el acreedor
abandone libremente aquella fianza, lo cual ocurrira dandole
el deudor otra garantia analoga, ya por razon
de la persona fiadora, ya ofreciendole una garantia real, v. gr. prenda o hipoteca; ora ofreciendole
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,
Codigo Civil, 2d Ed., Vol. 28, pp. 651-652)

The appellant’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 debtor’s 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
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.  At least, the
latter would be answerable only for whatever amount may remain not covered or
unsatisfied by the disposition of the insolvent’s 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 under the 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 insolvent’s
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 appellant’s
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 surety’s 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.

^[1]
This bond was signed by Generoso Esquillo,
as attorney-in-fact of the Almeda Trading.

^[2]
Included in the list of petitioner’s liabilities was the unpaid account with
the NAMARCO, in the sum of P25,000.00 (Exhibits “F”, F-1″).

^[3]
Page 8, Exhibit “F-4”.

^[4]
“ART. 2071. The guarantor, even before having paid, may proceed against
the principal debtor:

(1) When he is sued for the
payment;

(2) In case of insolvency of the
principal debtor;

(3) When the debtor has bound
himself to relieve him from the guaranty within a specified period, and this
period has expired;

(4) When the debt has become
demandable, by reason of the expiration of the period for payment;

(5) After the lapse of ten years,
when the principal obligation has no fixed period for its maturity, unless it
be of such nature that it cannot be extinguished except within a period longer
than ten years;

(6) If there are reasonable
grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in
imminent danger of becoming insolvent.

“In all these cases, the
action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor.”

^[5] Kuenzle & Streiff vs.
Tan Sunco, 16 Phil. 670.

^[6] Machetti vs. Hospicio de San
Jose, 43 Phil. 297, 300.

^[7]
Manila Surety & Fidelity Co., Inc. vs. Batu
Construction and Co., 101 Phil. 494.

^[8]
Cu Unjieng e Hijos vs.
Mitchell, 58 Phil. 476.

^[9]
Castro Vda. de Azaola vs.
O’Farrell, 68 Phil. 74.

^[10]
See Vol. 6, Reyes and Puno, Outline of Philippine
Civil Law, Part II, page 86, citing Castan.