RELATIONSHIP BETWEEN DEBTOR AND GUARANTOR

RULING:

The only relation that exists between the one bond and the other is merely that of
antecedent and consequent, in so far as that of Vizmanos in favor of the estate was the
cause of debt of that of the defendants in favor of Vizmanos. The first one was strictly
judicial, the second merely contractual between the parties.

When a surety pays for the party under bond, he has a right of action against such
party for the recovery of the amount paid by him.

A surety who pays for a debtor shall be identified by the latter. (Art. 1838, Civil
Code.)

The surety Vizmanos who paid for the debtor Palanca must be identified by Palanca. And
it was evident, when Vizmanos became surety for Palanca, that the latter could not pay
him, Palanca obligated himself by the four defendants, or, better said, the four
defendants assumed the obligation that rested upon Palanca to indemnify Vizmanos
for what the latter might pay for Palanca. This is in fact the obligation that is nor
exercised. The action of the surety against the party under bond or the debtor to
require the obligation of indemnity, has no other name nor other nature in law than
that of subrogation; it is an unquestionable doctrine. The action of subrogation is
regulated in article 1839 of the Civil Code:

By virtue of such payment the surety is subrogated in all the rights which the creditor had
against the debtor.

But be it well understood — says a commentator — that this subrogation can not be
interpreted in such absolute terms as to include more than the surety has paid, for,
though it is true that he puts himself in the place of the creditor and should have the
same rights as the latter in consequence of the subrogation, it is no less certain that
there would be an unjust enrichment to the prejudice of the debtor, if the surety who
pays for him were permitted to claim more than what he paid. Moreover, the benefit
of subrogation is the means of utilizing the right of reimbursement, and he could not
collect as such the excess from the rights and actions of the creditor over and above the
advance made by him

The contract law says no more than this:

Being that the case may occur — say those obligated — that the said Vizmanos may have
to pay the said bond or a part thereof . . . for the purpose of guaranteeing the
resimbursement of the sum or sums which by reason of the bond he may have to pay, the
executors have agreed and stipulated that . . . they shall be the sureties of Don Engracio
Palanca in favor of Sr. Luis S. Vizmanos, binding themselves as such conjointly to
reimburse or to pay . . whatever amounts the latter might have to pay or shall have paid
by reason of the judicial bond aforementioned. . . .

Being as it is an action of subrogation, it is not exercisable except in the case of payment.

The surety is subrogated by the payment, says the law, in all the rights that the creditor
had against the debtor. Being as it is an action of indemnity it is not conceived how,
rationally, the damage not yet caused can be anticipated. When the purse of the surety has
suffered no detriment, to sue the debtor in order that he provide funds for the surety in
expectancy of the action of the creditor, is not to ask an indemnity, but to demand a
guaranty to recover the loss when it may occur, and this guaranty is that already obtained
by the surety Vizmanos from Engracio Palanca on the latter's placing beforehand four
parties in his stead in order that they may the proper time ensure him of the restitution,
the reimbursement of what he shall have paid. To ask an indemnity of twenty, when the
loss to be indemnified is but eight, can in no wise be authorized either by law or by
reason.

The Civil Code specifies five cases as exceptions wherein the surety, even before
paying, may proceed against the principal debtor, but "in all these cases the action
of the surety tends to obtain his release from the security or a guaranty to defend
him against any proceedings of the creditor and from the danger of insolvency of the
debtor." (Art. 1843, Civil Code.) The security or bond given by the four defendants
in favor of the plaintiff Vizmanos had no other purpose than, in case he should make
payment to the estate of Margarita Jose, to defend himself against the proceedings
of the administrator of the estate and from the danger of insolvency of the debtor
Palanca.

Although, in principle, by virtue of the contract in question, the four defendants are
obligated to the plaintiff in the sum of P20,000, that is, at the rate of P5,000 each, the
action ad cautelam is, precisely, covered by such a contract, and the action of
subrogation, the only one exercisable, is only available in the quality of a restitution or
reimbursement of the payment effected. In the present case the plaintiff, by virtue of the
contract ad cautelam, is entitled to an action against the four defendants for recovery from
each of them up to the maximum amount of P5,000, but he can not by such action, as
surety for the principal debtor, collect more than the sum which he himself was actually
compelled to pay.

In virtue of the foregoing, the judgment appealed from is reversed

TUASON CASE

RULING:

The action brought by the plaintiff is that which surety, who pays the debt of the debtor, is
entitled to bring to recover the amount thus paid (art. 1823, Civil Code). It is evidence
that such a payment not having been made the alleged cause of action does not exist.

The plaintiff company argues that, at all events, it is entitled to bring this action under
article 1843 of the Civil Code, which provides that the surety may, even before making
payment, bring action against the principal debtor. This contention of the plaintiff is
untenable. The present action, according to the terms of the complaint, is clearly based on
the fact of payment. It is true that, under article 1843, an action lies against the principal
debtor even before the surety pays the debt, but it clearly appears in the complaint that
this is not the action brought by the plaintiff. Moreover this article 1843 provided several
cumulative remedies in favor of the surety, at his election, and the surety who brings an
action under this article must choose the remedy and apply for it specifically. At any rate
this article does not provide for the reimbursement of any amount, as is sought by the
plaintiff.

But although the plaintiff has not as yet paid "Manila Compañia de Seguros" the amount
of the judgment against it, and even considering that this action cannot be held to come
under article 1843 of the Civil Code, yet the plaintiff is entitled to the relief sought in
view of the facts established by the evidence. The plaintiff became bound, by virtue of a
final judgment, to pay the value of the note executed by it in favor of "Manila Compañia
de Seguros." According to the document executed solidarily by the defendant and the
Universal Trading Company, the defendant bound himself to pay the plaintiff as soon as
the latter may have become bound and liable, whether or not it shall have actually paid. It
is indisputable that the plaintiff became bound and liable by a final judgment to pay the
value of the note to "Manila Compañia de Seguros."

The defendant also contends that the document executed by Albina Tuason in favor of
"Manila Compañia de Seguros" assuming and making hers the obligation of Tuason,
Tuason & Co., was a novation of the contract by substitution of the debtor, and relieved
Tuason, Tuason & Co. from all obligation in favor of "Manila Compañia de Seguros." As
to this, it is enough to say that if this was what Albina Tuason contemplated in signing the
document, evidently it was not what "Manila Compañia de Seguros" accepted. As above
stated, "Manila Compañia de Seguros" accepted this document only as additional security
for its credit and not as a novation of the contract.

Our conclusion is that the plaintiff has the right to recover of the defendant the sum of
P9,663, the value of the note executed by the plaintiff in favor of "Manila Compañia de
Seguros" which the plaintiff is under obligation to pay by virtue of final judgment. We do
not believe, however, that the defendant must pay the plaintiff the expenses incurred by it
in the litigation between it and "Manila Compañia de Seguros." That litigation was
originated by the plaintiff having failed to fulfill its obligation with "Manila Compañia de
Seguros," and it cannot charge the defendant with expenses which it was compelled to
make by reason of its own fault. It is entitled, however, to the expenses incurred by it in
this action brought against the defendant, which are fixed at P1,653.65 as attorney's fees.

KUENZELE CASE

RULING:

he plaintiff in this action contends that said four judgments ought to be set wholly aside
on account of their having been obtained, as he claims, by collusion and fraud, because
the debtor did not owe anything to Sunco at the time the four judgments were secured,
basing that contention on the fact, which is admitted, that Sunco and not yet paid the
sums for which he had become surety and in connection with which he obtained the
judgments.chanroblesvirtualawlibrary chanrobles virtual law library

We think that the article 1843 of the Civil Code is applicable to this case. In their
purposes articles 1838 and 1843 are quite distinct, although in perfect harmony, the latter
making more clearly effective the purpose of the former. Article 1838 provides for the
enforcement of the right of the surety against the debtor after he has paid the debt. Article
1843 provides for his protection before he has paid but after he has become liable to do
so. The one gives a right of action after payment, the other a protective remedy before
payment. (Supreme court of Spain, March 22, 1901.) The one is a substantive right, the
other of the nature of a preliminary remedy. The one gives a right of action which,
without the provisions of the of the other, might be worthless. The remedy given in article
1843 purposes to obtain for the surety "relief from the burden of his suretyship or a
guaranty to defend him against any proceedings of the creditor and from the danger of
insolvency of the debtor." (Last paragraph of art. 1843.) article 1838, speaking under this
article become available, he is past the point where a preliminary protective remedy is of
any value to him.chanroblesvirtualawlibrary chanrobles virtual law library

It being evident that the purpose of article 1843 is to give to the surety a remedy in
anticipation of the payment of the debt, which debt, being due, he could be called upon to
pay at any time, it remains only to say, in this connection, that the only procedure known
under our present practice to enforce that right is by action. (Manresa, Civil Code, vol.
12, p. 320.) The defendant Sunco availed himself of that right against the debtor. The
methods employed by him to realize his end were unusual but not of themselves
fraudulent. We agree with the trial court that the evidence adduced is entirely insufficient
to establish such fraud and collusion as would justify a decision setting aside the
judgment assailed. (Arts. 1291, 1297, Civil Code; Pena vs. Mitchell, 9 Phil. Rep., 587;
Jones vs. Brittan, 13 Fed. Cas., No. 7455; Oberly vs. Oberly, 190 Pa. st., 341; Caldwell
vs. Finfield, 24 n. J. L., 150.) The facts stated in the opinion of the court below
abundantly justify the conclusion.chanroblesvirtualawlibrary chanrobles virtual law
library

But while the surety has the right to obtain as he did the judgments against the principal
debtor, he ought not to be allowed to realize the said judgments to the point of actual
collection of the same until he has satisfied or caused to be satisfied the obligation the
payment of which he assures. Otherwise, a great opportunity for collusion and improper
practices between the surety and his principal would be offered which might result to the
injury and prejudice of the creditor who holds the claim against
them.chanroblesvirtualawlibrary chanrobles virtual law library

The judgement of the court below is, therefore, affirmed, with costs against the appellant.
But the said Sunco shall not execute said judgments against the property of the judgment
debtor until he has paid the debt for which he stands surety. So
ordered.chanroblesvirtualawlibrary

RULING:

we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n
extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty" could apply in the instant case.

The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.

There is no other reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along with
that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for those obligations were to amture "as soon as
[R & B Surety] became liable to make payment of any sum under the terms of the [Surety
Bond] — whether the said sum or sums or part thereof have been actually paid or not."
Thus, the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of the referred to herein.(emphasis
supplied)

The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the surety of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the principal
debtor upon the orginal maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period. The underlying rationale is not present in the instant case. As
this Court has held,

merely delay or negligence in proceeding against the principal will not discharge a surety
unless there is between the creditor and the principal debtor a valid and binding
agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power
of obtaining indemnity by presenting a legal objection for the time, to the prosecution of
an action on the original security. 12

In the instant case, there was nothing to prevent the petitioners from tendering payment,
if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and
thereupon becoming subrogated to such remedies as R & B Surety may have against
PAGRICO.

3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even before
R & B Surety shall have paid the PNB. We have previously held similar indemnity
clauses to be enforceable and not violative of any public policy. 13

The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
contract of indemnity against loss as indemnitor will not be liable until the person to be
indemnified makes payment or sustains loss, in a contract of indemnity against liability,
as in this case, the indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered actual loss. 15
Accordingly, R & B Surety was entitled to proceed against petitioners not only for the
partial payments already made but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-
exist. The Trust Agreement merely furnished to PNB another party obligor to the
Principal Obligation in addition to PAGRICO and R & B Surety.

(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioner's consent so as to release petitioner's from their undertaking as indemnitors of
R & B Surety under the INdemnity Agreements; and

(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability
for payments to the PNB. The present suit is therefore not premature despite the fact that
the PNB has not instituted any action against R & B Surety for the collection of its
matured obligation under the Surety Bond.

RULING:

n the case at bar, there is no dispute as to meaning of the terms of the Indemnity
Agreement. The only bone of contention is whether or not such terms are null and void as
defendants-appellants would have this Court declare.

A careful analysis of the contract in question will show that the provisions therein do not
contravene any law or public policy much less do they militate against the public good. In
fact, as shown above, they are fully sanctioned by well-established jurisprudence. Having
voluntarily entered into such contract, the appellants cannot now be heard to complain.
Their indemnity agreement have the force and effect of law.

Elucidating further on the obligations of the parties in agreements of this nature, this
Court ruled:
...The indemnity agreement was not executed for the benefit of the creditors; it was rather
for the benefit of the surety and if the latter thought it necessary in its own interest to
impose this stipulation, and the indemnitors voluntarily agreed to the same, the court
should respect the agreement of the parties and require them to abide by their contract.
(Security Bank v. Globe Assurance, 107 Phil. 733 [1960].

III

Finally, the trial court did not err in ordering defendants-appellants to pay jointly and
severally the plaintiff the sum of P100,000.00 plus 15% as attorney's fees.

It must be stressed that in the case at bar, the principal debtors, defendants-appellants
herein, are simultaneously the same persons who executed the Indemnity Agreement.
Thus, the position occupied by them is that of a principal debtor and indemnitor at the
same time, and their liability being joint and several with the plaintiff-appellee's, the
Philippine National Bank may proceed against either for fulfillment of the obligation as
covered by the surety bonds. There is, therefore, no principle of guaranty involved and,
therefore, the provision of Article 2071 of the Civil Code does not apply. Otherwise
stated, there is no more need for the plaintiff-appellee to exhaust all the properties of the
principal debtor before it may proceed against defendants-appellants.