G.R. No. L-9353 - Manila Surety and Fidelity Co., Inc. vs. Batu Construction and Co.

The plaintiff, Manila Surety and Fidelity Company, Inc., a domestic corporation engaged in the bonding business, filed a complaint against Batu Construction & Company, a partnership, and its individual partners Carlos N. Baquiran, Gonzalo P. Amboy, and Andres Tunac (collectively the defendants).
The complaint arises from a surety bond posted by the plaintiff in favor of the Government of the Philippines to secure the faithful performance of the construction of the Bacarra Bridge, Project PR-72(3), in Ilocos Norte, undertaken by the partnership as contractor.

On July 8, 1950, the defendants requested the plaintiff to post a surety bond for P8,812 to guarantee performance of the construction contract with the Government, executed on July 11, 1950.
Simultaneously, the defendants executed an indemnity agreement with the plaintiff whereby they agreed to indemnify the plaintiff for any loss, damage, cost, or expense sustained due to the surety bond, including attorney's fees not less than 15% of any amount claimed in litigation instituted by the plaintiff (except as to Andres Tunac). Payment was to be made as soon as the plaintiff became liable under the bond, regardless of whether the plaintiff had paid any sums yet.

On May 30, 1951, due to unsatisfactory progress, the Director of Public Works, with approval from the Secretary of Public Works and Communications, annulled the construction contract and notified the plaintiff that the Government would hold it liable for any cost to complete the bridge in excess of the contract price.
On or about November 23, 1951, Ricardo Fernandez and 105 others filed a case in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners, and the plaintiff surety company, for unpaid wages amounting to P5,960.10 plus lawful interest and costs.

The plaintiff alleged that the defendants were in imminent danger of insolvency and were removing or about to remove and dispose of their properties with intent to defraud creditors, particularly the plaintiff.
Plaintiff claimed it had no other sufficient security against the defendants and prayed for the issuance of a writ of attachment on defendants’ properties and for a judgment ordering the delivery of sufficient security to protect the plaintiff from proceedings by the creditors and danger of insolvency.

Andres Tunac denied having entered into the indemnity agreement or promising indemnity and disputed allegations regarding insolvency and jurisdiction of the Justice of Peace Court. He also raised the defense of exhaustion of the partnership’s property before resorting to his personal liability and counterclaimed for damages alleging bad faith and malicious prosecution by the plaintiff.
Gonzalo P. Amboy denied insolvency and property disposal, contended there was no liquidation to determine any liability, and asked that the writ of attachment be held in abeyance pending the resolution of the wage collection case.
Carlos N. Baquiran admitted certain allegations but claimed no knowledge about wage claims, denied insolvency and improper removal/disposal of properties, and raised defenses based on the absence of liquidation concerning the contract accounts between defendants and the Government.

The plaintiff presented evidence; after its case rested, Amboy moved to dismiss citing that Article 2071 of the Civil Code’s last paragraph applies only to guarantors and not to sureties.
The trial court agreed, finding the contract of suretyship and indemnity agreement executed, the Government’s annulment of the contract, and the wage claim filed but held that the plaintiff's cause of action failed as the last paragraph of Article 2071 was not applicable to sureties. The complaint was dismissed with costs against plaintiff.
Upon subsequent motion by Amboy and Tunac to prove damages from the attachment, the court found only Amboy entitled to recover 6% interest on P35 garnished; all other damage claims denied. The writ of attachment was dissolved.

The plaintiff appealed raising only a question of law regarding the applicability of Article 2071 of the Civil Code to sureties.

Whether the last paragraph of Article 2071 of the New Civil Code, which provides certain remedies to guarantors, applies also to sureties.
Whether the plaintiff’s cause of action falls under any of the paragraphs of Article 2071 of the New Civil Code.
Whether the plaintiff was entitled to the writ of attachment based on imminent insolvency or fraudulent disposition of properties by the defendants.