G.R. No. L-27249 - Manila Surety and Fidelity Co., Inc. vs. Almeda

On December 4, 1961, Noemi Almeda, married to Generoso Esquillo, operating as Almeda Trading, entered into a contract with the National Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable within 30 days from delivery.
As a requirement, a P5,000 bond was posted by Almeda Trading, undertaken by Manila Surety & Fidelity Co., Inc. (Exhibit "A"), to secure faithful compliance with the contract terms.
On October 17, 1962, the contract was supplemented, and a new bond for the same amount (P5,000), again undertaken by Manila Surety & Fidelity Co., Inc. (Exhibit "C"), was issued in favor of NAMARCO.
The bonds included provisions requiring the surety to pay immediately any overdue account, securing excess amounts up to 20% above P5,000, waiving demand and notice before payment, and waiving notice of payment extensions granted by NAMARCO to the principal debtor.

On June 8, 1965, NAMARCO demanded settlement from Almeda Trading for outstanding accounts amounting to P16,335.09 as of May 15, 1965.
The Manila Surety & Fidelity Co. also urged Almeda Trading to settle these accounts (Exhibit "E-1").
Previously, on March 26, 1965, Generoso Esquillo filed voluntary insolvency proceedings in the Court of First Instance of Laguna (Sp. Proc. No. SP-181).
On April 6, 1965, Esquillo was declared insolvent with listed credits of P111,873 and properties worth P39,000.
At a creditors’ meeting held May 14, 1965, NAMARCO registered its contingent claim.

On September 10, 1965, Manila Surety & Fidelity Co. filed Civil Case No. 62518 in the Court of First Instance of Manila against the spouses Noemi Almeda and Generoso Esquillo and NAMARCO, seeking discharge from liability under the bonds due to the insolvency of the principals.
NAMARCO denied the allegations and asserted defenses including lack of cause of action and lack of jurisdiction.
On December 16, 1966, the trial court ruled that insolvency of the principal debtor did not release the surety from liability, dismissed the complaint, and ordered the surety to pay the indebtedness plus attorneys’ fees and costs.

The appellant surety company based its claim on Article 2071 of the Civil Code, which affords the surety protective remedies requiring the surety to proceed against the principal debtor before payment.
The lower court based its ruling on Section 8 of the Insolvency Law (Act 1956, as amended), which unequivocally states that insolvent debtors’ discharge does not release any person liable for the same debt as partner, surety, or otherwise.

Whether the insolvency of the principal debtor (Noemi Almeda and Generoso Esquillo) releases the surety (Manila Surety & Fidelity Co., Inc.) from its liability under the bond.
Whether the surety can invoke Article 2071 of the Civil Code to obtain its release from liability despite the insolvency proceeding and declaration of insolvency of the principal debtor.