Case Summary (G.R. No. 252578)
Facts
M.B. Lending advanced P30,000 to the Azarraga spouses and Palmares as co-maker. Between the note’s execution and after maturity, payments totalling P16,300 were made, leaving an outstanding balance of P13,700; no payments after September 26, 1991. The creditor sued Palmares alone for the unpaid balance, excluding the principal debtors, alleging their insolvency. Palmares filed an amended answer with counterclaim asserting (inter alia) that she agreed to be liable only upon default of the principal debtors, that interest and penalties were usurious/unconscionable, and that the note is a contract of adhesion.
Issues Presented
The parties framed and the courts considered: (1) proper rate of interest, penalties and damages; (2) whether Palmares’s liability is primary or subsidiary; and (3) whether Palmares is a guarantor (subsidiary liability) rather than a co-maker (primary/solidary liability). Palmares also argued that the complaint was premature for failure to make demand on the principals and sought mitigation or elimination of penalties, interest or attorney’s fees as unconscionable.
Trial Court Ruling
The Regional Trial Court dismissed the complaint without prejudice to a separate action against the Azarraga spouses, finding among other things that: (a) suing Palmares alone amounted to discharge of a prior party; (b) Palmares’s offer to settle constituted a valid tender sufficient to discharge secondary liability; (c) Palmares as co-maker was only secondarily liable; and (d) the promissory note was a contract of adhesion.
Court of Appeals Ruling
The Court of Appeals reversed and held Palmares solidarily liable as a surety/co-maker because she expressly bound herself to be “jointly and severally or solidarily liable.” The appellate court imposed: the P13,700 principal; interest at 6% per month compounded from contracting date until paid (relying on Central Bank Circular No. 905 for enforceability of the stated interest despite the Usury Law); a stipulated 3% per month penalty; attorney’s fees at 25% of the total amount due; and costs.
Petitioner’s Contentions on Appeal
Palmares asserted ambiguity in the promissory note, arguing the second paragraph’s “jointly and severally or solidarily liable” language conflicts with the subsequent clause conditioning the creditor’s demand upon the principal’s default, thereby evidencing only guaranty (subsidiary liability). She also argued that the note is a contract of adhesion and must be construed against the drafter (the lender); that demand on the principal was never proven; and that the interest and penalty charges are usurious, unconscionable, or inequitable given partial payments and her attempts to settle.
Legal Distinction Adopted by the Court
The Court reiterated the established distinction between suretyship and guaranty under Civil Code Art. 2047 and prevailing jurisprudence: a surety insures payment of the debt and is directly and primarily liable with the principal; a guarantor insures the solvency of the principal and typically has subsidiary liability enforceable after due diligence or recovery efforts against the principal. The Court emphasized that an undertaking to pay upon principal’s default does not automatically make the undertaking a guaranty rather than a suretyship.
Contract Interpretation and Estoppel
Applying the rule that clear and unambiguous contractual terms control, the Court accepted the plain language by which Palmares “fully understood the contents” and “fully aware” of her solidary liability. The Court rejected Palmares’s claim that technical terms could not be understood by a layperson, noting her explicit acknowledgment in the instrument and voluntary signature. Fraud was not established by clear and convincing evidence. Consequently Palmares was estopped from claiming ignorance or mistake as to the legal effect of her undertaking.
Reconciliation of the Clauses
The Court found the purported inconsistency between the “solidary” clause and the clause permitting the creditor to demand payment from Palmares upon principal’s default to be reconcilable: the latter merely specifies the circumstances in which the creditor may demand payment and does not convert the undertaking into a guaranty. No contractual stipulation limited enforcement to instances where the principal became insolvent or where the creditor must first exhaust remedies against the principal.
Extrinsic Evidence and Conduct
The Court considered contemporaneous and subsequent acts: Palmares immediately offered to settle when informed of default; receipts for payments were issued in the names of Palmares and the Azerragas (indicating account treatment as a single obligation); and Palmares herself offered payment alternatives. These factors supported the interpretation that Palmares contemplated and acted as an original and co-equal obligor, consistent with suretyship characteristics.
Demand, Notice and Suit Against Surety
The Court held that demand or notice to principal or surety was unnecessary given the instrument’s waiver clause (paragraph G) where Palmares waived notice and demand, and because a surety is ordinarily liable immediately upon the principal’s default without prior demand. Commencement of suit constitutes sufficient demand. The creditor’s choice to sue the surety alone did not discharge the principal nor invalidate the creditor’s right to recover from any solidary debtor under Article 1216 (creditor may proceed against
...continue readingCase Syllabus (G.R. No. 252578)
Facts
- On March 13, 1990, M.B. Lending Corporation (respondent) extended a short-term loan evidenced by a promissory note for P30,000.00 to spouses Osmeña and Merlyn Azarraga and to petitioner Estrella Palmares, with a maturity on or before May 12, 1990.
- The promissory note recited "compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof."
- After execution and even after maturity, four payments were made by petitioner and the Azarraga spouses totaling P16,300.00, leaving an unpaid balance of P13,700.00. No payments were made after the last payment on September 26, 1991.
- The promissory note contained an "ATTENTION TO CO-MAKERS" clause signed by petitioner stating she "fully understood the contents" and that "as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note" and that M.B. Lending Corporation "may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained."
- Paragraph (G) of the note provided that should the co-maker fail to pay according to schedule, she "hereby waive[s] my right to notice and demand."
Procedural History (trial court and Court of Appeals)
- M.B. Lending Corporation filed a complaint against petitioner Palmares alone (the principal debtors were not impleaded) claiming petitioner's solidary liability because she signed as co-maker and the Azarraga spouses were insolvent.
- Petitioner filed an Amended Answer with Counterclaim asserting she offered to settle after maturity, that payments of P17,010.00 (alleged partial payment figure) had been made, that interest and penalty charges were usurious and unconscionable, and that she agreed to be liable only upon default of the principal debtor; she also alleged bad faith in suing her alone.
- At pre-trial the parties framed, inter alia, three principal issues: the proper rate of interest, penalty and damages; whether the defendant's liability was primary or subsidiary; and whether Palmares was only a guarantor (subsidiary liability) rather than a co-maker with primary liability.
- The parties submitted the case on pleadings and memoranda. On November 26, 1992, the Regional Trial Court (Iloilo City, Branch 23) dismissed the complaint without prejudice to filing a separate action against the Azarraga spouses, finding: (a) filing against Palmares alone amounted to discharge of a prior party; (b) petitioner's offer to pay constituted a valid tender sufficient to discharge a secondary liability; (c) Palmares as co-maker was only secondarily liable; and (d) the promissory note was a contract of adhesion.
- The Court of Appeals reversed, holding petitioner solidarily liable as a surety/co-maker primarily liable. The CA awarded:
- P13,700.00 (outstanding balance) with interest at 6% per month from the date the loan was contracted until fully paid;
- stipulated penalty equivalent to 3% per month on outstanding balance;
- attorney’s fees at 25% of the total amount due; and
- costs of suit.
- The Court of Appeals relied in part on Central Bank Circular No. 905 to sustain contractual interest/penalty charges notwithstanding the Usury Law.
Issues Presented to the Supreme Court
- Whether Palmares, having signed as co-maker and bound “jointly and severally or solidarily,” acted as a surety (primary liability) or as a guarantor (subsidiary liability).
- Whether the promissory note’s clauses are ambiguous or conflicting such that petitioner's liability should be construed as that of a guarantor or otherwise restricted.
- Whether petitioner's alleged offers to pay and partial performance discharged or mitigated her liability.
- Whether the interest, penalty charges and attorney’s fees awarded are legal, usurious, unconscionable or subject to equitable reduction.
Petitioner’s Contentions (as raised in the petition)
- The Court of Appeals erred in holding Palmares acted as surety and thus solidarily liable:
- The promissory note’s terms are vague and contain conflicting provisions which do not establish solidary liability.
- The third paragraph conditions liability "in case the principal maker defaults," which petitioner argues defines a guaranty (subsidiary) rather than a suretyship.
- Technical terms "jointly and severally or solidarily liable" would not be fully appreciated by an ordinary layman; the note was a contract of adhesion prepared by the lender and should be strictly construed against the drafter (Art. 1377, Civil Code).
- Petitioner cannot be compelled to pay absent prior judicial or extrajudicial demand; demand letters were not attached to the complaint and partial payment in September 1991 was not controverted.
- Where interest charged is exorbitant or unconscionable, the court may equitably reduce penalty and damages; petitioner sought mitigation given her attempts to settle.
- Assuming solidary liability, the Court of Appeals erred in strictly imposing interest and penalty charges on the outstanding balance.