Title
Shannon vs. Elser
Case
G.R. No. 41795
Decision Date
Aug 30, 1935
A 1926 loan default case involving a promissory note, sureties, and independent loans; court upheld surety liability despite delays.
loans
third party
debtor
A

Case Summary (G.R. No. 41795)

Factual Background

The principal amount of P12,000 was never paid on its due date or thereafter. However, the stipulated interest was paid up to October 1929, inclusive. Walter E. Jones died on November 24, 1929. After his death, the plaintiffs filed a claim and recovered P1,062 from his estate as partial payment of accrued interest.

While the principal obligation remained pending, J. W. Shannon obtained additional loans from Walter E. Jones in two instances: on August 1, 1927 for 1,000, and on April 9, 1928 for P2,000. On April 28, 1928, Shannon also required Jones to pay on his account a bill of exchange drawn on him in the amount of P1,656. In total, Shannon’s loans from Jones amounted to P4,656. The parties agreed that this amount would be paid at P125 per month, with ten per cent interest per annum. If Shannon failed to pay, Jones was authorized to retain and apply amounts he might have belonging to Shannon or to Shannon’s wife toward the monthly payments.

The payment arrangement between Shannon and Jones affected the implementation of the monthly interest obligations under the loan from the plaintiffs. Jones did not receive monthly payments directly from Shannon under the agreement. Instead, Jones deducted from the monthly interest that the corporation—Philippine Lumber & Transportation Co., Inc., of which Jones was president—had to pay on the principal loan. These deductions were recorded in the corporate books.

Because neither the corporation nor its sureties paid the principal and the stipulated interest from November 1, 1929 onward, the Shannons brought suit against the debtor corporation and E. E. Elser as surety.

Proceedings in the Trial Court

The Philippine Lumber & Transportation Co., Inc. did not appear or answer and was declared in default. It neither intervened nor defended at trial. The case proceeded against E. E. Elser, who contested liability.

The trial court rendered judgment ordering the corporation to pay the plaintiffs P12,000 with interest at ten per cent per annum from November 1, 1929, minus P1,062 recovered from Walter E. Jones’s estate, and adding another ten per cent as attorney’s fees, plus costs. It further ordered that E. E. Elser pay to the plaintiffs one-half of all the above sums of money, except attorney’s fees, which were to be borne by Elser only in the event the corporation failed to pay.

Elser appealed, challenging the judgment on multiple assignments of error.

The Appellant’s Contentions

The appellant argued that the judgment was erroneous for several reasons.

First, he asserted that after the note became due, the plaintiffs had received from the principal debtor payments that were, in substance, made in advance of the stipulated interest for a relatively long period. He claimed that such conduct extended the period fixed for payment of the principal without his consent. Under this theory, the extension would relieve him from liability as surety under Article 1851 of the Civil Code.

To support his reliance on Article 1851, he cited Banco Espanol Filipino vs. Donaldson Sim & Co. (5 Phil., 418).

Second, he maintained that the trial court erred in not allowing him to present evidence on his defense of laches. He attempted to show that in 1927 and 1928 the principal debtor had property and money sufficient to pay the entire obligation, yet the plaintiffs allegedly waited unreasonably to sue, thereby causing him damages.

Third, he challenged the court for failing to absolve him on the ground that the plaintiffs’ alleged delay caused prejudice. He likewise sought absolution from the complaint on that basis.

Court’s Analysis on the “Extension” Theory (Article 1851)

The Court rejected the appellant’s first theory. It held that the facts did not support the claim that the loans Shannon received from Jones were actually payments in advance of the interest due from the principal debtor.

The Court found it indisputable that Shannon obtained the P4,656 not as interest paid in advance, but as independent loans granted by Jones to Shannon. The only connection between these separate transactions and the interest obligation under the corporate loan was an agreement that, if Shannon failed to pay monthly interest due to Jones, Jones could deduct the shortfall from any amounts he held belonging to Shannon or to Shannon’s wife.

The Court emphasized that the corporation, as principal debtor, had to pay monthly interest on the plaintiffs’ loan, and Jones, being the corporation’s president, made the deductions by withholding from that monthly interest. As a result, the Court viewed the transactions as internal adjustments in how interest was paid between Jones and Shannon, rather than an arrangement that granted a qualifying extension by the plaintiffs to the corporation.

In the Court’s view, because the loans to Shannon were not payments in advance of the stipulated interest, Article 1851 of the Civil Code and the doctrine invoked from Banco Espanol Filipino vs. Donaldson Sim & Co. did not squarely apply.

Court’s Analysis on Laches and Unreasonable Delay

On the second and third assigned errors, the appellant sought to introduce evidence that the plaintiffs delayed suit despite the principal debtor’s alleged ability in 1927 and 1928 to satisfy the entire obligation. The Court noted that the trial court timely sustained objections to this kind of evidence, and that the ruling was the subject of those assigned errors.

The Court held that the judgment was not erroneous on these grounds. It accepted that the plaintiffs had allowed “some years” to pass from maturity before bringing the action, but it ruled that such delay did not constitute laches in the sense required to extinguish the rights of the sureties, nor did it occasion the kind of loss of rights or privileges significant enough to discharge the appellant’s obligation.

The Court anchored its conclusion on prior jurisprudence. Citing Banco Espanol Filipino vs. Donaldson Sim & Co., the Court reiterated the doctrine that mere delay in demanding performance after maturity does not evince an intent to grant an extension. It treated such inaction as mere respite or leniency, not as novation, because novation required express agreement. It likewise stressed that delay, without more, did not create liability against a creditor unless the law required interpellation or protest in circumstances where such delay could be treated as injurious to an obligor.

The Court further relied on Clark vs. Sellner, which it described as rejecting the notion that delay by the creditor in enforcing guaranties automatically extinguished the creditor’s action. It reasoned that once a note matured, a surety could pay and thereby seek subrogation and reimbursement, which showed that creditor inaction did not, by itself, impair the surety’s position. The Court underscored the recognized principle that, as to sureties, the creditor had no obligation to display diligence in enforcing rights as a creditor. Thus, unless the contract expressly required promptness, the surety could not be discharged simply because the creditor had not acted.

Finally, the Court invoked Ibanez de Aldecoa vs. Hongkong & Shanghai Banking Corporation, where the United States Supreme Court, affirming this Court’s interpretation of Article 1851, held that nothing could be inferred from a creditor’s failure to sue as soon as the credit became due and that any extension capable of extinguishing surety liability required a new agreement where the creditor deprived himself of the right to immediately enforce the claim.

Applying these teachings, the Court concluded that the appellant’s laches theory could not relieve him of liability.

Disposition and Reso

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