Case Summary (G.R. No. 256060-61)
Petitioner’s Position
Manila Surety & Fidelity Co., Inc. sought judicial release from its liability under the bonds it executed in favor of NAMARCO. The surety relied on Article 2071 of the Civil Code, invoking the special remedies afforded to a guarantor (including relief “in case of insolvency of the principal debtor”), and sought a court-ordered release from the guaranty.
Respondents’ Position
NAMARCO denied the petition’s averments and raised affirmative defenses including lack of cause of action and lack of jurisdiction. NAMARCO maintained that the debtor-principal’s insolvency did not discharge or otherwise affect the surety’s obligation under the bonds, relying on the Insolvency Act provision that no discharge of the insolvent shall release those liable with or for him.
Key Dates
- 4 December 1961: Original contract between Noemi Almeda (Almeda Trading) and NAMARCO for purchases on 30-day credit; original bond (P5,000) by Manila Surety & Fidelity executed.
- 17 October 1962: Agreement supplemented and a new bond for P5,000 executed (also by the surety).
- 26 March 1965: Generoso Esquillo instituted voluntary insolvency proceedings in Laguna (Sp. Proc. No. SP-181).
- 6 April 1965: Esquillo declared insolvent; listed credits P111,873.00 and properties valued P39,000.00.
- 14 May 1965: Creditors’ meeting where NAMARCO’s contingent claim was registered.
- 15 May 1965: NAMARCO’s accounts with Almeda Trading alleged to total P16,335.09.
- 8 June 1965: NAMARCO demanded settlement from Almeda Trading; surety notified the purchaser to liquidate accounts.
- 10 September 1965: Surety filed action in CFI Manila to be released from liability under the bonds (Civil Case No. 62518).
- 16 December 1966: Trial court dismissed the surety’s complaint, ruling insolvency did not discharge the surety.
- 31 July 1970: Supreme Court decision on appeal.
Applicable Law
- Article 2071, Civil Code: sets out remedies available to a guarantor before payment, including relief “in case of insolvency of the principal debtor,” and states that the guarantor’s action is to obtain release from the guaranty or to demand security that will protect him from creditor proceedings and from the danger of insolvency. (The Article’s full text as cited in the record is reproduced in the original decision.)
- Insolvency Act (Act 1956, as amended), Section 8 (quoted): provides that no discharge of the insolvent shall release, discharge, or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, endorser, surety, or otherwise. Section 68 of the Insolvency Act is also referenced as controlling on the question whether discharge of the debtor benefits the surety.
Facts Relevant to Liability
The bonds contained express provisions that (1) the surety would pay immediately upon demand any account of the principal not paid on time; (2) coverage extended to excess up to 20% over the P5,000 amount; (3) the surety expressly waived demand and notice of non-payment and agreed its liability would be direct and immediate and not contingent upon NAMARCO’s exhaustion of remedies against the principal; and (4) the surety waived notice of any extension of payment terms given to the principal, such extension not extinguishing the guaranty unless made against the surety’s express wish. NAMARCO’s demand letter alleged as of 15 May 1965 unsettled accounts totaling P16,335.09; the surety also urged the purchaser to liquidate.
Procedural History
The surety filed suit in Manila seeking judicial release from the suretyship. NAMARCO answered and defended on substantive and jurisdictional grounds. The trial court ruled in favor of NAMARCO, holding that the debtor’s insolvency did not discharge the surety. The surety appealed to the Supreme Court.
Legal Issue Presented
Whether a surety may obtain release from liability under Article 2071 of the Civil Code after the principal debtor has been judicially declared insolvent, where the creditor has not consented to the release or substitution of security.
Supreme Court’s Analysis — Nature and Scope of the Surety’s Undertaking
The Court observed that, under the terms of the bonds, the surety had assumed immediate and direct liability to pay NAMARCO’s claims, effectively insuring the debt itself (not merely the debtor’s solvency). The surety’s waiver of demand and notice and its agreement that the creditor need not exhaust remedies against the principal underscore that the surety became an insurer of payment, subject to the obligations it expressly accepted.
Supreme Court’s Analysis — Article 2071 and the Rights of the Creditor
Article 2071 permits the guarantor to proceed against the principal debtor (including “in case of insolvency”) to obtain release from the guaranty or to demand protective security. The Court stressed, however, that this remedial right operates against the principal debtor and not the creditor. A creditor cannot be compelled to release a guarantor because release would extinguish the guarantor’s obligation to the creditor and thus requires the creditor’s assent (remission or novation requires the creditor’s consent under Articles 1270 and 1301 of the Civil Code). Where the debtor is insolvent, the only practical means to obtain release is for the debtor to procure the creditor’s acceptance of an equivalent security or for the guarantor to obtain a counter-bond or counter-guaranty as authorized by Article 2071.
The Court cited commentary (Scaevola on the Spanish Civil Code) to the effect that relief for the guarantor can be obtained only by one of two modes: by inducing the creditor to freely abandon the guaranty in exchange for analogous security, or by the debtor offering the guarantor a counter- security that protects him from creditor proceedings and insolvency risk.
Supreme Court’s Analysis — Effect of Pending Insolvency Proceedings
When the surety sued (10 September 1965), the insolv
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Procedural Posture
- Appeal to the Supreme Court from the ruling of the Court of First Instance of Manila in Civil Case No. 62518.
- The lower court ruled that the insolvency of a debtor-principal does not release the surety from its obligation under the bond; the complaint of the surety to be released from liability was dismissed and the surety was ordered to pay the indebtedness to the extent of its undertaking, plus attorneys' fees and costs.
- Plaintiff-appellant (Manila Surety & Fidelity Co., Inc.) filed the present appeal to secure release from liability under the bonds it had executed in favor of NAMARCO.
- Key procedural dates in the record include: contract entered 4 December 1961; supplementary agreement and new bond dated 17 October 1962; creditor's demand dated 8 June 1965; debtor's insolvency proceeding instituted 26 March 1965 (Sp. Proc. No. SP-181); order declaring insolvency dated 6 April 1965; creditors' meeting held 14 May 1965; appellant's suit filed 10 September 1965; lower court judgment 16 December 1966; Supreme Court decision dated July 31, 1970.
Facts
- On 4 December 1961, Noemi Almeda, married to Generoso Esquillo, doing business as Almeda Trading, entered into a contract with National Marketing Corporation (NAMARCO) to purchase goods on credit, payable in 30 days from delivery dates.
- NAMARCO required a bond for P5,000.00, undertaken by Manila Surety & Fidelity Co., Inc. (Exhibit "A"), to secure faithful compliance with the contract.
- The agreement was supplemented on 17 October 1962 and a new bond for P5,000.00, also undertaken by Manila Surety & Fidelity Co., Inc. (Exhibit "C"), was given in favor of NAMARCO. The second bond was signed by Generoso Esquillo as attorney-in-fact of Almeda Trading.
- As of 15 May 1965 NAMARCO alleged the purchaser's back accounts amounted to P16,335.09; on 8 June 1965 NAMARCO demanded settlement of back accounts and the surety wrote to the purchaser urging liquidation (Exhibit "E-1").
- Prior to the NAMARCO demand-letter, or on 26 March 1965, Generoso Esquillo instituted voluntary insolvency proceedings in the Court of First Instance of Laguna (Sp. Proc. No. SP-181). By order of 6 April 1965 he was declared insolvent; listed credits amounted to P111,873.00 and properties valued at P39,000.00.
- Included in the list of petitioner’s liabilities was the unpaid account with NAMARCO in the sum of P25,000.00 (Exhibits F, F-1).
- At the creditors' meeting on 14 May 1965 NAMARCO was represented and its contingent claim duly registered (Page 8, Exhibit "F-4").
- Manila Surety & Fidelity Co., Inc. commenced Civil Case No. 62518 in the Court of First Instance of Manila on 10 September 1965 against the spouses Noemi Almeda and Generoso Esquillo, and NAMARCO, seeking release from liability under the bonds on the ground of the spouses' insolvency.
- NAMARCO answered denying the complaint's averments and pleaded as affirmative defenses lack of cause of action and want of jurisdiction.
Bonds and Contractual Provisions
- Two bonds, each for P5,000.00, were posted in favor of NAMARCO and undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibits "A" and "C").
- The bonds contained the following provisions (as set out in the record):
- "2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon demand, pay said account immediately to the NAMARCO;"
- "3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent of said amount shall also be deemed secured by this Bond;"
- "4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that the liability of the Surety shall be direct and immediate and not contingent upon the exhaustion by the NAMARCO of whatever remedies it may have against the Principal and same shall be valid and continuous until the obligation so guaranteed is paid in full;"
- "5. The Surety also waives its right to be notified of any extension of the terms of payment which the NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the account, that such extension shall not extinguish the guaranty unless the same is made against the express wish of the Surety."
- The court characterized the surety's undertaking as insuring the debt itself — the surety agreed to make immediate payment to the creditor even without demand or notice; the surety thus became the insurer, not merely of the debtor’s solvency, but of the debt itself.
Timeline of Key Events (as presented)
- 4 December 1961: Original contract between Almeda Trading and NAMARCO; bond (Exhibit "A") posted.
- 17 October 1962: Supplementation of agreement and execution of new bond (Exhibit "C").
- 26 March 1965: Generoso Esquillo instituted voluntary insolvency proceeding (Sp. Proc. No. SP-181).
- 6 April 1965: Order of insolvency entered; credits P111,873.00; properties P39,000.00.
- 14 May 1965: Creditors' meeting; NAMARCO registered contingent claim.
- 15 May 1965: NAMARCO's alleged back accounts with Almeda Trading totaled P16,335.09.
- 8 June 1965: NAMARCO demanded settlement; surety wrote to purchaser urging liquidation (Exhibit "E-1").
- 10 September 1965: Manila Surety filed Civil Case No. 62518 seeking release from suretyship.
- 16 December 1966: Lower court judgment sustaining NAMARCO's contention and dismissing surety's complaint.
- 31 July 1970: Supreme Court rendered the decision now summarized.
Claims and Relief Sought by Plaintiff-Appellant (Surety)
- Plaintiff-appellant sought a judicial release from liability under the bonds executed in favor of NAMARCO, invoking Article 2071 of the Civil Code which affords certain remedies to a guarantor even before payment is made.
- The complaint alleged that the defendant spouses had become insolvent and that NAMARCO had rescinded its agreement with them and had demanded payment of outstanding accounts.
Defenses and Contentions of NAMARCO (Defendant-Appellee)
- NAMARCO denied the averments of the complaint.
- NAMARCO pleaded affirmative defenses of lack of cause of action and lack of jurisdiction.
- The lower court sustained NAMARCO's position that the insolvency of the debtor-principal did not discharge the surety’s liability under the bond, relying on the Insolvency law.
Issues Presented
- Whether a surety can avail itself of the relief specifically afforded in Article 2071 of the Civil Code and be released from liability under the bonds notwithstanding a prior judicial declaration of insolvency of the debtor-principal in an insolvency proceeding.
- Whether the surety's action for release may be exercised against the creditor rather than against the principal debtor.
- Whether the pendency and jurisdiction of the insolvency proceeding affect the availability or appropriateness of the sur