G.R. No. L-979 - Commonwealth of the Philippines vs. Far Eastern Surety and Insurance Co.

The case involves the Commonwealth of the Philippines (plaintiff/appellee) and the Far Eastern Surety & Insurance Company, Inc. (defendant/appellant).
The principal debtor is represented by Vda. de Tiu Seng and Tan Kiang, collectively referred to as Tiu Seng.
On August 20 and October 1, 1935, Tiu Seng, as principal, and the Far Eastern Surety & Insurance Co., Inc. executed two bonds (Exhibits “A” and “A-1”) wherein both bound themselves jointly and severally to pay the government the sum of P10,000 as internal revenue taxes and surcharge.

Initially, the bonds were filed before the exact indebtedness was ascertained.
The Collector of Internal Revenue later determined that Tiu Seng’s total tax liability amounted to P30,512.64.
A demand was made for full payment, although it did not yield success in collection.

On November 6, 1936, a compromise was reached reducing Tiu Seng’s tax liability to P12,874.17.
Tiu Seng proposed and negotiated a payment schedule with the Collector:

An initial payment of P2,874.17 on January 20, 1937.
The balance of P10,000 was to be paid in installments—specifically, P1,000 per month over a period of 10 months.

Under this agreement, Tiu Seng eventually remitted a total of P11,644.12 to the Bureau of Internal Revenue.

Following the payments made, an outstanding balance of P1,230.05 remained.
The plaintiff now seeks to recover this balance from the defendant, the Far Eastern Surety & Insurance Co., Inc.
The central factual dispute arises from the allocation of payments between the tax liability not covered by the bond and the portion secured by the bond.

The defendant-appellant contended that its surety liability was strictly limited to the principal amount of P10,000.
It argued that any payment in excess of P10,000 should not invoke further liability under the surety bonds.
The trial judge, however, held that the payments by Tiu Seng should be applied first to the unsecured portion of the liability, thereby leaving the balance of P1,230.05 covered by the bonds.

The fundamental legal issue is whether the remaining sum of P1,230.05 falls within the scope of the bonds executed, given that the surety’s liability was defined as P10,000.

Does the surety’s obligation extend to cover the unpaid balance after the principal’s payments, despite the specified limit?
How should the payments made by Tiu Seng be appropriately applied between the unsecured debt and the portion secured by the bond?

A secondary issue involves the proper imputation and allocation of the payments made by Tiu Seng:

Whether these payments should be credited specifically to the debt secured by the bond or first to the unsecured portion of the tax obligation.
The application of relevant Civil Code provisions (Articles 1172 and 1174) and established judicial principles in determining the proper allocation of payments.