Title
Citizens Surety and Insurance Co., Inc. vs. Court of Appeals
Case
G.R. No. L-48958
Decision Date
Jun 28, 1988
A surety company sought reimbursement from an estate after default, claiming indemnity agreements were unfulfilled; courts ruled collateral assignment didn’t extinguish obligations.
surety bonds
deed of assignment
obligation

Case Summary (G.R. No. L-48958)

Factual Background

On December 4, 1959, CITIZENS SURETY AND INSURANCE COMPANY, INC. issued two surety bonds, numbered CSIC Nos. 2631 and 2632, to guarantee performance by Pascual M. Perez Enterprises under a contract of sale of goods with the Singer Sewing Machine Co. On the same date, PASCUAL M. PEREZ, in his personal capacity and as attorney-in-fact for his wife Nicasia Sarmiento and on behalf of the enterprise, executed two indemnity agreements obligating himself and the enterprise to indemnify the petitioner for any payments, advances, and damages arising from the issuance of the bonds. Also on December 4, 1959, Perez executed a deed of assignment conveying his stock of low grade lumber, measured at two million board feet and valued at P0.20 per board foot or with a total value of P400,000, as further security for the petitioner's potential losses. A second real estate mortgage in favor of the petitioner was executed on April 12, 1960.

Events Leading to the Claim

Pascual M. Perez Enterprises defaulted on its contractual obligation to Singer Sewing Machine Co. and the petitioner paid Singer the fair value of the two surety bonds in the aggregate amount of P144,000.00. Perez Enterprises made partial reimbursements totalling P55,600.00 but failed to fully indemnify the petitioner despite demands. The petitioner thereupon filed a claim for a sum of money against the estate of the late Nicasia Sarmiento, which was being administered by PASCUAL M. PEREZ.

Trial Court Proceedings

After trial on the merits, the Court of First Instance of Batangas rendered judgment on April 15, 1968 in favor of CITIZENS SURETY AND INSURANCE COMPANY, INC. The court held that the estate of the late Nicasia Sarmiento was jointly and severally liable and ordered the administrator, PASCUAL M. PEREZ, to pay the claimant the sum of P144,000.00 with interest at ten percent per annum from the date the claim was filed, less the partial payments already made amounting to P55,600.00.

Court of Appeals Decision

Both parties appealed. On August 31, 1978, the Court of Appeals reversed and set aside the judgment of the Court of First Instance and entered judgment dismissing the petitioner's claim against the estate. The Court of Appeals reasoned that by virtue of the deed of assignment the ownership of the lumber had passed to the petitioner and that such conveyance constituted dation in payment which extinguished the administrator-appellant's obligation under the surety bonds.

Issues Presented to the Supreme Court

The petitioner raised three principal assignments of error: first, that the Court of Appeals erred in concluding that PASCUAL M. PEREZ’s obligation had been extinguished by the deed of assignment or by the release of the second real estate mortgage; second, that the Court of Appeals erred in finding that the deed of assignment constituted dation in payment; and third, that the Court of Appeals erred in wholly reversing the Court of First Instance and denying the petitioner recovery of the principal, interest, and attorney's fees.

Parties' Contentions

The petitioner contended that the deed of assignment and related instruments were given as collateral and not as a transfer in satisfaction of debt, and that the administrator remained liable for the unpaid balance. PASCUAL M. PEREZ maintained that the deed of assignment effected an absolute transfer of ownership constituting dation in payment and thus extinguished any obligation to reimburse the petitioner for the sums it paid under the surety bonds.

Supreme Court's Analysis on the Nature of the Deed of Assignment

The Court examined the deed of assignment and the contemporaneous instruments and acts surrounding its execution. The Court applied the rule that, although contracts with clear and plain terms are to be enforced literally, the parties' evident intention as shown by their contemporaneous and subsequent acts prevails where words appear contrary to that intention, referencing San Mauricio Milling Co. v. Ancheta, Sy v. Court of Appeals, and Lopez v. Court of Appeals as guiding precedents. The Court observed that the indemnity agreements, the execution of a subsequent real estate mortgage, the partial payments made after the assignment, and the later cancellation of the second mortgage were inconsistent with an absolute conveyance intended to extinguish the obligation at the time of the assignment. The Court noted that at the time the deed of assignment was executed there was no matured obligation of the assignor to refund the assignee because the petitioner had not yet been compelled to pay Singer; therefore dation in payment was inapt since the debt had not yet arisen or matured. The Court found that the documentary language in the deed, read against the parties' contemporaneous conduct, showed that the assignment was given as collateral to secure the indemnity obligation.

Supreme Court's Determination on Extinguishment and Remedies

The Court held that the deed of assignment did not constitute dation in payment and did not extinguish the administrator's obligation under the s

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