BANK OF THE PHILIPPINE ISLANDS, PLAINTIFF AND APPELLEE, VS. ALBALADEJO Y CIA., S. EN C, ET AL., DEFENDANTS. ISIDRO MARTINEZ, DEFENDANT AND APPELLANT.

On September 27, 1919, the defendant, ‘Albaladejo & 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 the credit, Florencio
Gordillo and Isidro Martinez, on September 30, 1919, executed the
following bond:

“BANK OF THE PHILIPPINE ISLANDS

“BOND

“Know all men by these presents, that we, Albaladejo y Compania, S. en
C, a copartnership with principal place of business in the town of
Legaspi, Province of Albay, P. I., as principal, and Messrs. Gordillo
and Isidro Martinez, both of legal age and residents of Manila, P. I.,
as sureties, are hereby held and bound into the Bank of the Philippine Islands, of Manila, P. I, in the sum of one hundred thousand pesos (P100,000),
Philippine currency, for the payment of which well and truly to be
made, we hereby jointly and severally, bind ourselves, our heirs,
executors, administrators, and assigns, firmly by these presents.

“The conditions of this obligation are such, that:

“Whereas the said Bank of the Philippine Islands has advanced to the said Albaladejo y Compania, S. en C, by way of a credit in current account, the sum of one hundred thousand pesos (P100,000) ;

“Now therefore, if the said Albaladejo y Companuz, S. en C, shall duly pay, or cause to be paid, to the said Bank of the Philippine Islands, three months after demand, the said sum of one hundred thousand pesos
(P100,000), and shall duly pay or cause to be paid quarterly, on the
last days of March, June, September and December of each year, until
the principal and interest are paid in full, interest on said sum and
on all sums from time to time remaining unpaid at the rate of eight per cent (8%) per annum, then this obligation shall be void, otherwise it shall remain in full force and effect.

“In witness whereof, we have hereunto set our hands at Manila, P. I., this 30th day of September, 1919.

“ALBALADEJO Y COMPAÑIA, S. EN C.
“By (Sgd.) PEDRO ALBALADEJO
“Obligado principal

“FLORENCIO GORDILLO
“Fiador

“ISIDRO MARTINEZ
“Fiador

“Witnesses:
“EM. S. REYES
“V. G. OPRECIO”
(ACKNOWLEDGMENT)

On April 16, 1920, the bank increased the rate of interest to 9 per
cent per annum. The plaintiff’s Exhibit C indicates that interest was
paid up to December 31, 1920, when the capital of the debt amounted to
P100,681.68, and after which date the payments ceased.

Failing to meet their obligations to the bank, the present action
was brought on January 15, 1925, against Albaladejo & Co. and the
members-of the partnership, Pedro Albaladejo, Mariano Albaladejo, and
Angel Suarez, together with the sureties, Florencio Gordillo and Isidro
Martinez, for the recovery of the sum of P136,536.26, the amount then
due the bank for the capital and the accrued interest at 9 per cent.

During the pendency of the action, Albaladejo & 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 & Co., Mariano Albaladejo, Pedro
Albaladejo, and Angel Suarez, leaving only Florencio Gordillo and
Isidro Martinez as defendants.

Upon trial the court below rendered judgment in favor of the Bank of
the Philippine Islands and against Florencio Gordillo and Isidro
Martinez, jointly and severally for the sum of P136,533.26, with
interest at 9 per cent per annum from the 1st of January, 1921, and
with the costs. From this judgment only Isidro Martinez appealed and
now presents the following assignments of error:

“The lower court erred:

“1. In holding
that it is the duty of the sureties to investigate the account of the
principal debtors with the bank and ask if it would grant an extension
of time for the payment of the loan, and that if the said sureties are
not agreeable to the extension they should have so informed the
creditor bank.

“2. 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.

“3. 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.”

The first assignment of error is well taken but is of no importance
as far as this case is concerned. The expressions referred to in the
assignment are merely obiter dicta and are not the basis of the
decision of the court below.

The second assignment of error is rather indefinite, but from the
argument of counsel, we gather that it has reference to the fact that
the plaintiff bank increased the interest rate from 8 per cent to 9 per
cent per annum without the express consent of the sureties. Taking this
fact in connection with the extension of time alleged to have been made
by the bank, and discussed under the third assignment of error, counsel
for the defendant argues that these circumstances worked a novation of
the original contract and released the sureties from their obligations
upon their bond.

This contention cannot be successfully maintained. There is no
sufficient evidence 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.
Such is not the case. Beginning with the case of Banco Espanol Filipino
vs. Donaldson Sim & Co. (5 Phil., 418), this court has consistently
held that delay in proceeding against the principal debtor does not
discharge the sureties from their liability. In the case of Clark vs.
Sellner (42 Phil., 384), action was deferred for over four years, but
the sureties were nevertheless held liable. As said in 21 R. C. L.,
1032:

“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 forbearance amounts to no more than 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 principle 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 of mere passiveness, will
not operate to discharge the surety. Stated broadly the principle is
that passiveness or indulgence on the part of the creditor will not
discharge a 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 trustee 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 therefor, 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 wilful 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, the 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 limitation.”

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. Bank of the Philippine Islands
vs. Gooch and Redfern (45 Phil., 514.)

From what has been said, it follows that the appellant, jointly and
severally with the other surety, Florencio Gordillo, is liable to the
extent of P100,000, with interest at the rate of 8 per cent per annum.

The appealed judgment is therefore modified by limiting the
plaintiff’s recovery to the sum of P100,000 with interest at the rate
of 8 per cent per annum from the first day of January, 1921, until
paid. In every other respect, the judgment of the court below is
affirmed with the costs of this instance against the appellant. So
ordered.

Johnson, Street, Malcolm, Johns, Romualdez, and Villa-Real, JJ., concur.