Facts:

The case involves a legal action brought by Associated Insurance & Surety Co., Inc. (Plaintiff and Appellant) against Bacolod-Murcia Milling Co., Inc. and two other defendants, Sixto R. Ruiz and Raymundo D. Dizon (Defendants and Appellees). This case was initiated in the Court of First Instance of Manila on February 28, 1959. The events leading to the dispute began when Sixto R. Ruiz obtained two crop loans totaling P11,626.00 from Bacolod-Murcia Milling Co., Inc., which required him to secure his obligations through surety bonds. To comply with this condition, the plaintiff executed two surety bonds amounting to P2,956.50 in favor of the milling company.

The executed bonds contained specific conditions that included: (1) the creditor (milling company) was to apply the debtor's (Ruiz's) share in the harvested crops towards the repayment of the loans and could not use these funds for other debts until these loans were fully paid; (2) additional loans could not be gra

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Facts:

Background of the Case

• Plaintiff, Associated Insurance & Surety Co., Inc., initiated an action before the Court of First Instance of Manila.
• The purpose of the suit was twofold:
• To secure the cancellation of certain surety bonds executed by the plaintiff in favor of defendant Bacolod-Murcia Milling Co., Inc.
• Alternatively, to obtain an order directing defendants Sixto R. Ruiz and Raymundo D. Dizon to pay the amount of P2,956.60 plus interest, for eventual delivery to their co-defendant, and to cover attorney’s fees and other costs.

Surety Bonds and Conditions

• Defendant Sixto R. Ruiz obtained two crop loans aggregating P11,626.00 from Bacolod-Murcia Milling Co., Inc., subject to a condition that he post surety bonds covering 25% of the loans.
• In compliance, the plaintiff executed two surety bonds amounting to a total of P2,956.50 under the following conditions:
• The creditor (milling company) must apply the debtor’s share in the harvest exclusively to the liquidation of the crop loans until fully paid, without applying it to other indebtedness.
• The creditor shall not extend any additional loan beyond the debtor’s share in the crops unless the surety gives prior written consent.
• The plaintiff’s liability as surety terminates upon full payment of the indebtedness guaranteed by the bonds.

Alleged Breach of Conditions

• Plaintiff alleged that Bacolod-Murcia Milling Co., Inc. violated the agreed conditions by:
• Granting loans in excess of the debtor’s share in the harvest without obtaining the required written consent from the plaintiff.
• Failing to notify the plaintiff of the actual amount availed by the debtor, thereby depriving the plaintiff of the opportunity to protect its interest.
• As a result of these breaches, the plaintiff asserted that it had been relieved of its liability under the surety bonds.

Alternative Cause of Action via Indemnity Agreement

• The complaint also alleged that, as an alternative remedy, defendants Sixto R. Ruiz (debtor) and Raymundo D. Dizon (surety) executed an indemnity agreement.
• This agreement was meant to indemnify the plaintiff for any damages incurred due to the execution of the surety bonds.
• The milling company had demanded from the plaintiff an amount of P2,956.50 based on a standing account, which further substantiated the claim under the indemnity arrangement.

Procedural Posture and Lower Court Order

• Bacolod-Murcia Milling Co., Inc. filed a motion to dismiss, arguing the complaint failed to state a meritorious cause of action because:
• There was no allegation that the plaintiff had either paid its obligated sum or been compelled to pay under the bonds.
• The cited breach of bond conditions was viewed merely as a defense that could be raised when the plaintiff was forced to pay the obligation.
• The Court of First Instance granted the motion to dismiss in a brief, laconic order, dismissing the case with costs against the defendants.
• The plaintiff subsequently appealed the dismissal.

Issue:

Whether the complaint fails to state a cause of action against Bacolod-Murcia Milling Co., Inc. on the ground that the plaintiff, as surety, has not yet incurred any liability under the bonds.

• Does the absence of an allegation showing payment or demand for payment preclude a valid relief claim based on breaches of the conditions in the bonds?

Whether the breaches of the principal conditions of the surety bonds by the milling company, and the accompanying violations regarding loan extensions and notification requirements, constitute grounds for the release of the plaintiff from its surety liability.

• Can an action for cancellation of the bonds, based solely on the violated conditions, stand independent of any demand for payment of the debt?

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)