Estate of K.H. Hemady vs. Luzon Surety Co., Inc.

Factual Background

The Luzon Surety Co., Inc. executed twenty bonds as surety for various principals in favor of different creditors. For each bond the company required an indemnity agreement, or counterbond, signed by the respective principal and by K. H. Hemady as co-surety. Hemady signed as a solidary guarantor in all twenty instruments. The counterbonds contained printed stipulations on premiums, indemnity, interest at twelve percent, waiver of venue, waiver of notice of renewals, and a clause that the indemnitors’ liability was joint, several, and primary and exigible immediately upon default.

The Claim Presented to the Estate

After Hemady’s death, Luzon Surety Co., Inc. presented a contingent claim against his estate seeking allowance of the value of the twenty bonds it had executed in consideration of the counterbonds and recovery of unpaid premiums and documentary stamps, with twelve percent interest. The claim was filed in the estate proceedings as a contingent claim subject to the provisions of Rule 87, Section 5.

Trial Court Proceedings and Dismissal

Before the administratrix answered, the Court of First Instance, presided by Judge Hermogenes Caluag, dismissed the claims by order of September 23, 1953 for failure to state a cause of action. The trial court gave two grounds: first, that premiums and documentary stamp costs were not liabilities contemplated by the indemnity agreements because they were not liabilities incurred after execution of the counterbonds; and second, that Hemady’s liability as guarantor terminated upon his death so that losses occurring after his death could not be charged to his estate.

Trial Court’s Reasoning on Termination by Death

The trial court based its conclusion that guaranty ceased with Hemady’s death on Article 2046 of the Civil Code and on the character of guaranty as relying on the personal integrity of the guarantor. The court emphasized the new requirement of “integrity” for a guarantor under the Civil Code and reasoned that integrity is purely personal and not transmissible; therefore the estate could not be held for losses occurring after death. The court also observed that the printed indemnity form included a clause on security by way of first mortgage which was expressly waived by the company, implying the company relied on the personality and honesty of Hemady rather than a transferable obligation.

Issues on Appeal

The pivotal question on appeal was whether the obligations of Hemady as solidary guarantor under the counterbonds were transmissible to his heirs and thus provable against his estate as contingent claims, or whether the guaranty was extinguished by his death because of its personal nature and the statutory requirement of integrity.

Legal Framework on Transmissibility of Obligations

The Supreme Court recalled the general rule that contracts take effect between the parties, their assigns and heirs, except where rights and obligations are not transmissible by their nature, by stipulation, or by provision of law, as stated in Article 1311 and as manifested in Articles 774 and 776 regarding succession. The Court observed that status under the succession laws limits heirs’ responsibility to the value of the inheritance but preserves succession to obligations as well as rights.

Application to Suretyship: Nature of the Obligation

The Court analyzed the nature of a surety’s obligation and concluded that the indemnity agreements here were obligations to give money — reimbursement of sums the surety company might have to disburse — and that such obligations are patrimonial and thus transmissible. The Court rejected the view that the requirement of integrity rendered the obligation strictly personal as an exception under Article 1311, reasoning that the exception for personal obligations must be clearly established by contract or law and that the counterbonds contained no express stipulation rendering them non-transmissible.

On Article 2056 and Article 2057

The Court examined Article 2056 (requiring integrity, capacity, and sufficient property to answer for the obligation) and Article 2057 (permitting the creditor to demand another guarantor if the guarantor is later convicted of a crime involving dishonesty or becomes insolvent). The Court held that these provisions require the qualifications at the time of contracting but do not extinguish the guaranty because of a subsequent change. Article 2057 shows that supervening dishonesty gives the creditor the option to require a replacement guarantor but does not automatically annul the contract. Thus the supervening incapacity or loss of integrity does not operate to exonerate an otherwise valid obligation already assume