Title
Palmares vs. Court of Appeals
Case
G.R. No. 126490
Decision Date
Mar 31, 1998
Petitioner, as co-maker, held solidarily liable for unpaid loan; 6% monthly interest upheld, penalty charges and attorney’s fees reduced.
promissory note
joint and several liability
surety
A

Case Summary (G.R. No. 126490)

Factual Background

Pursuant to a promissory note dated March 13, 1990, M.B. Lending Corporation extended a short-term loan of PHP 30,000.00 to the spouses Osmena and Merlyn Azarraga together with Estrella Palmares as a co-maker, with interest stipulated at 6% per month compounded every 30 days and a stipulated penalty of 3% per month. The principal and co-makers made partial payments totaling PHP 16,300.00, leaving an unpaid balance of PHP 13,700.00, with no payments after September 26, 1991. Following the principal makers’ default, respondent corporation sued petitioner Palmares alone for collection of the unpaid obligation.

Trial Court Proceedings

At the pre-trial conference before the Regional Trial Court the parties framed three issues: the proper rate of interest, penalty and damages; whether petitioner’s liability was primary or subsidiary; and whether petitioner was a guarantor or co-maker. The case was submitted for decision on the pleadings and memoranda. On November 26, 1992, the trial court dismissed the complaint without prejudice, reasoning that suing petitioner alone amounted to a discharge of a prior party, that petitioner’s offer to settle constituted a valid tender discharging a secondary obligor, that petitioner was only secondarily liable as co-maker, and that the promissory note was a contract of adhesion.

Ruling of the Court of Appeals

The Court of Appeals reversed and rendered judgment against petitioner for PHP 13,700.00, interest at 6% per month from the date of the loan until fully paid, the stipulated penalty of 3% per month on the outstanding balance, attorneys’ fees at 25% of the total amount due, and costs. The appellate court concluded that petitioner had bound herself to be jointly and severally or solidarily liable and therefore acted as a surety, making her primarily liable and subject to suit alone. The appellate court also held that the Usury Law was unenforceable pursuant to Central Bank Circular No. 905, thus validating the agreed rates.

Issues Presented on Review

Petitioner challenged the Court of Appeals’ characterization of her undertaking as suretyship and argued that the promissory note contained conflicting provisions that should be construed in her favor as creating a guaranty with subsidiary liability. She contended that the instrument was a contract of adhesion, that demand on the principal makers had not been proved, and that the interest and penalty provisions were usurious, unconscionable or otherwise excessive. Respondent corporation defended the enforcement of the instrument as written and maintained that petitioner consented to solidary liability and to demand by the creditor.

Petitioner's Contentions

Petitioner argued that the second paragraph of the "Attention to Co-Makers" clause, which used the words "jointly and severally or solidarily liable," conflicted with a subsequent paragraph limiting the creditor to demand payment only "in case the principal maker…defaults," thereby making her liability subsidiary and that of a guarantor. She asserted that the legal terms were technical and not understood by a lay signatory, that the suretyship obligation should not be extended by implication, and that the note, being a contract of adhesion, should be strictly construed against M.B. Lending Corporation under Article 1377, Civil Code. She further claimed that no effective demand had been made and that her offers to settle and part-payments should lead to mitigation of damages, including reduction of interest and penalty.

Respondent's Contentions and Record Evidence

Respondent corporation relied upon the express language of the note in which petitioner acknowledged she had "fully understood the contents" and agreed to be "jointly and severally or solidarily liable" with the principal maker. Respondent argued that petitioner’s subsequent averments and offers to settle did not amount to a sufficient tender and that the creditor was entitled to insist on performance as stipulated. The record showed payments and receipts issued in the names of petitioner and the Azarraga spouses, telephone exchanges and offers by petitioner to pay or to convey land which respondent refused as not being the performance contracted for.

Supreme Court's Disposition

The Supreme Court denied the petition for certiorari and affirmed the judgment of the Court of Appeals, with two modifications: the deletion of the stipulated penalty interest of 3% per month and the reduction of attorneys’ fees from 25% of the total amount due to PHP 10,000.00. The Court otherwise affirmed the imposition of the stipulated compensatory interest at 6% per month and the principal judgment for PHP 13,700.00.

Legal Basis and Reasoning on Liability

The Court analyzed the material language of the promissory note against the statutory definition in Article 2047, Civil Code, distinguishing suretyship from guaranty. It held that where the terms are clear, literal meaning controls, and petitioner expressly bound herself to be "jointly and severally or solidarily liable" with the principal maker. The Court rejected petitioner’s contention that the following clause limiting enforcement "in case the principal maker…defaults" converted the obligation into a guaranty, explaining that an undertaking to pay upon default may describe the manner of enforcement but does not, without more, import a guaranty of solvency. The Court reiterated that a surety is an insurer of the debt and becomes directly liable upon the principal’s default, whereas a guarantor insures the debtor’s solvency and may be pursued only after due diligence against the principal. The Court found that the note, executed on the same instrument and with petitioner’s express admission of understanding, created a suretyship and an original, primary obligation on petitioner.

Demand, Waiver, and Suit Against Surety Alone

The Court addressed petitioner’s claim that demand on the principal was a prerequisite to suit against her. It observed that the promissory note contained a contractual waiver of notice and demand and that, in any event, a creditor need not proceed against the principal before suing a surety where the obligation is joint and several. The Court treated the commencement of suit as a sufficient demand and noted that mere indulgence or delay by the creditor in pursuing the principal does not discharge the surety absent proof of prejudice or a binding extension or other act that impaired the surety’s rights.

Analysis of Offers, Tender and Payments

Examining petitioner’s asserted offers to pay and attempted tender, the Court found them insufficient to discharge petitioner’s obligation. The initial course of conduct showed petitioner asking the creditor to collect from the principal, offering to pay only if collection failed, and later proposing conveyance of a parcel of land which respondent correctly refused because the obligee may insist on performance as stipulated and is not obliged to accept a different prestation without novation. The Court observed that receipts issued in both names indicated that payments by the Azarragas were credited against the joint obligation, supporting the characterization of petitioner as co-obligor.

Assessment of Interest, Penal

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