Case Summary (G.R. No. L-20567)
Background and Transactions
PNB issued a letter of credit and advanced $120,000 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this, 2,000 tons (worth P279,000) were delivered to ATACO, under a trust receipt guaranteed by Manila Surety & Fidelity Co., up to P75,000. To ensure payment, ATACO assigned and appointed PNB as its irrevocable attorney-in-fact to collect from the Bureau of Public Works the proceeds of Purchase Order No. 71947, applying received payments toward the credit accommodation. The irrevocable nature of this power of attorney and assignment was explicitly stipulated to remain effective until full liquidation of the indebtedness.
Performance and Breach
ATACO delivered asphalt valued at P431,466.52, of which PNB collected P106,382.01 between April and November 1948. Subsequently, PNB ceased collection activities for unexplained reasons. In 1952, PNB’s investigators discovered that additional payments due to ATACO from the Bureau of Public Works, totaling P311,230.41, had been collected by another creditor. Consequently, PNB sued ATACO and Manila Surety & Fidelity Co. for the unpaid balance, amounting to P158,563.18 as of February 15, 1950, plus interests and costs.
Trial Court Ruling
On October 4, 1958, the Court of First Instance rendered a judgment ordering ATACO and the Surety Company to pay PNB P174,462.34 with interest, albeit limiting the surety’s liability to P75,000. It also held ATACO and Pedro A. Taguba liable to indemnify the surety for amounts it paid. The court dismissed ATACO’s and the Surety’s counterclaims except for a special tax claim.
Court of Appeals Decision
PNB appealed, but only Manila Surety & Fidelity perfected its appeal to the Court of Appeals. The appellate court found that PNB was negligent in ceasing its collection efforts from the Bureau of Public Works before the debt was fully collected. This negligence allowed other creditors to collect funds due to ATACO, to the surety’s prejudice. The Court of Appeals thus exonerated Manila Surety & Fidelity Co. from further liability.
Issues on Appeal and Legal Analysis
PNB contended that the power of attorney was merely additional security and argued that the duty to ensure performance of the principal debtor lay with the surety, not the creditor. The court rejected this argument, distinguishing that the negligence was not in failing to collect from ATACO directly but in failing to collect the funds from the Bureau of Public Works despite holding an exclusive and irrevocable power of attorney.
Under the Civil Code, agents must act with the diligence of a good father of a family (Article 1887) and are liable for damages caused by non-performance (Article 1884). Since the power of attorney was irrevocable, the Bureau of Public Works was obligated to pay PNB directly. The bank’s failure to act prevented the surety from recovering through the assigned funds.
This failure constituted an act of the creditor that deprived the surety of the right of subrogation to the creditor’s claims and securities, releasing the surety under Article 2080 of the Civil Code, which provides that guarantors are released if the creditor’s acts prevent them from exercising their rights and preferences.
Evidence and Further Observations
PNB’s letter of demand to the Bureau of Public Works and its letter informing ATACO of the outstanding balance did not demonstrate diligent collection efforts. No pressing of demands or notification to the surety regard
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Background and Procedural History
- The Philippine National Bank (PNB) filed a petition for review and reversal against the decision of the Court of Appeals (Second Division) in CA-G.R. No. 24232-R.
- The case arose from the dismissal of PNB’s complaint against Manila Surety & Fidelity Co., Inc., and the modification of the judgment of the Court of First Instance (CFI) of Manila in Civil Case No. 11263.
- The controversy involved amounts advanced by PNB under a letter of credit amounting to $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt.
- Out of the supply, 2,000 tons worth P279,000.00 were delivered to Adams & Taguba Corporation (ATACO) under a trust receipt secured by a surety bond of P75,000.00 issued by Manila Surety & Fidelity Co., Inc.
- ATACO assigned the right to collect payment from the Bureau of Public Works (BPW) to PNB, along with an irrevocable power of attorney to collect payments under Purchase Order No. 71947.
Facts of the Case
- BPW accepted asphalt deliveries by ATACO valued at P431,466.52.
- PNB collected P106,382.01 between April 21, 1948, and November 18, 1948.
- After November 18, 1948, PNB stopped collecting payments from BPW for unexplained reasons.
- In 1952, investigations showed that other creditors collected P311,230.41 from BPW funds payable to ATACO under the same purchase order.
- PNB demanded payment from ATACO and Manila Surety & Fidelity Co. Inc., but they refused, causing PNB to sue them to recover the unpaid balance of P158,563.18 as of February 15, 1950, plus interests and costs.
Judgment of the Court of First Instance
- On October 4, 1958, the CFI rendered judgment ordering:
- ATACO and Manila Surety & Fidelity Co., Inc. to pay P174,462.34 minus P8,000 paid by the surety company, with interest at 5% from February 25, 1956, limited to a maximum of P75,000 liability by the surety.
- ATACO and third-party defendant Pedro A. Taguba to jointly and severally pay the s