Title
South City Homes, Inc. vs. BA Fice Corp.
Case
G.R. No. 135462
Decision Date
Dec 7, 2001
Dispute over unpaid drafts and trust receipts assigned to BA Finance; sureties held liable despite claims of novation and invalid agreements.

Case Summary (G.R. No. 165448)

Case Background and Nature of Dispute

The controversy revolves around a series of commercial transactions involving motor vehicle deliveries by CARCO to Fortune Motors Corporation (the debtor). The deliveries were covered by trust receipts and drafts which were later assigned to BA Finance Corporation (the assignee). To secure Fortune Motors’ obligations under these instruments, continuing suretyship agreements were executed by co-petitioners South City Homes, Palawan Lumber Manufacturing Corporation, and individuals. Upon Fortune Motors’ failure to pay amounts due, BAFC initiated a collection suit. The petitioners challenged the validity of the suretyship agreements, the effect of the assignment on their liabilities, and whether BAFC has a proper cause of action for a sum of money under the trust receipts.

Nature and Validity of the Suretyship Agreements

The petitioners argued that the suretyship agreements are invalid because no principal obligations existed at the time the surety contracts were executed; the principal obligations arose six months later with the drafts. The Supreme Court relied on Article 2053 of the Civil Code, which expressly allows guaranties to secure future debts, even if the principal amount is not yet ascertainable at the time of contract.

In jurisprudence (Fortune Motors (Phils.) Corp. v. Court of Appeals), the Court emphasized that continuing suretyship agreements securing a series of future credit transactions are common in commercial practice. Such contracts are valid and binding even before the principal obligation is born, analogous to obligations subject to a condition precedent. Therefore, the suretyship agreements executed in January and February 1983 validly covered the debts incurred under the drafts dated July-August 1983.

Effect of Assignment of Drafts and Trust Receipts on the Liability of Sureties

Petitioners contended that the assignment of the drafts and trust receipts by CARCO to BAFC without the knowledge or consent of Fortune Motors constitutes a novation, thereby extinguishing the sureties’ liabilities.

The Court clarified that an assignment of a credit is a transaction whereby the creditor (assignor) transfers his credit and accessory rights to another party (assignee), who steps into the shoes of the original creditor with the same enforceable rights against the debtor. Crucially, the debtor’s consent is not a requirement for the validity of such an assignment (Articles 1475 and 1624 of the Civil Code). Notification to the debtor suffices to obligate payment to the assignee.

Accordingly, the assignment did not extinguish the sureties’ obligations. The petitioners continue to remain liable jointly and severally with the principal debtor to BAFC under the continuing suretyship agreements. The theory of conventional subrogation and novation does not apply to assignments without the debtor’s consent; thus, the sureties’ liability subsists.

Cause of Action on the Collection Suit under Trust Receipts Transactions

The petitioners further submitted that BAFC, as the entruster under the trust receipts, should have first demanded the return of unsold vehicles from the entrustee (Fortune Motors) before pursuing a sum of money action. They argued that BAFC’s collection suit was premature under Presidential Decree No. 115 (Trust Receipts Law).

The Court explained that trust receipts are financing arrangements wherein the purchaser holds goods in trust for the entruster and must remit proceeds of sales or return unsold goods. Although the entruster has the right to cancel the trust and repossess the goods upon default, this right is discretionary ("may" cancel), not mandatory. The entruster may pursue alternative remedies to protect its interests, including a sum of money claim.

Thus, it is not a legal requirement that the entruster first demand the goods’ return to maintain an action for collection. BAFC, being the assignee and real party in inte

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