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PALMARES v. CA and MB LENDING

1998 / Regalado / Surety > Distinguished from guaranty

SURETY / SURETYSHIP GUARANTOR / GUARANTY

SURETY: Insurer of the debt GUARANTOR: Insurer of the solvency of the debtor

A suretyship is an undertaking that the debt shall be paid A guaranty is an undertaking that the debtor shall pay

A surety promises to pay the principal's debt if the principal willnot pay

A guarantor agrees that the creditor, after proceeding againstthe principal, may proceed against the guarantor if the principal

is unable to payA surety binds himself to perform if the principal does not,without regard to his ability to do so

A guarantor does not contract that the principal will pay, butsimply that he is able to do so

A surety undertakes directly for the payment and is soresponsible at once if the principal debtor makes default

A guarantor contracts to pay if, by the use of due diligence, thedebt cannot be made out of the principal debtor

FACTSPursuant to a promissory note, MB Lending extended a 30k loan to Sps. Azarraga and Estrella Palmares, payable on or before12 May 1990, with compounded interest at 6% per annum to be computed every 30 days from the date thereof.

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of thisPromissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with theabove principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the aboveloan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject tothe same conditions above-contained.

Palmares and Sps. Azarraga were only able to pay 16.3k. MB Lending filed a complaint against Palmares as the lone party-defendant, allegedly by reason of Sps. Azarragas insolvency. Palmares main contentionwas that she is to be held liable onlyupon default of the principal debtor Sps. Azarraga. She avers that immediately after the loan matured, she offered to settle theobligation, but MB Lending refused, and instead informed her that they would try to collect from Sps. Azarraga. In addition, partialpayment has been made.

RTC dismissed MB Lendings complaint without prejudice to the filing of a separate action for a sum of money againstSps. Azarraga. The offer Palmares made to pay the obligation is considered a valid tender of payment sufficient to discharge hersecondary liability on the instrument. As co-maker, Palmares is only secondarily liable on the instrument.

CA reversed RTC and declared Palmares liable to pay MB Lending the outstanding balance of 13.7k at 6% per monthcomputed from the date the loan was contracted until fully paid, penalty charges, attorneys fees, and costs. Palmares is a suretysince she bound herself to be jointly and severally liable with Sps. Azarraga when she signed as co-maker. Therefore, she isprimarily liable and may be sued for the entire obligation.

ISSUE & HOLDINGWON Palmares is a guarantor or a surety. SURETY; primarily liable.

RATIO

Palmares expressly bound herself to be jointly and severally or solidarily liable with Sps. Azarraga; therefore, her liability is that of asurety. The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also appliesto contracts of suretyship. The mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her ofliability.

The undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of acontract of suretyship. The second and third paragraphs of the promissory note do not contain any other condition for theenforcement of MB Lendings right against Palmares. A contract of suretyship is that wherein one lends his credit by joining in theprincipal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to thesolvency of the principal.

Several attendant factors support the finding that Palmares is a surety.

When she was informed about the spouses failure to pay, she immediately offered to settle the account with MB Lending. She presented the receipts of the payments already made, which were all issued in her name and of the Azarraga

spouses. This can only be construed to mean that the payments made by the principal debtors were considered by MBLending as creditable directly upon the account and inuring to the benefit of Palmares.

A surety is bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from thebeginning. In suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal. Thecontract of a surety starts with the agreement, which is precisely the situation obtaining in this case.

A surety is usually bound with his principal by the same instrument, executed at the same time and upon the sameconsideration; he is an original debtor, and his liability is immediate and direct. Where a written agreement on the same sheet ofpaper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith,providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable withthe buyer.

Re: Palmares argument that the complaint was prematurely filed for lack of demand UNMERITORIOUS

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Palmares was saying that Sps. Azarraga cannot as yet be considered in default, as MB Lending has not yet made either a judicial orextrajudicial demand. This argument fails. Paragraph (G) of the note states that "should I fail to pay in accordance with the aboveschedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in orderthat delay may exist since the contract itself already expressly so declares. As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since thecommencement of the suit is a sufficient demand. A surety is not even entitled, as a matter of right, to be given notice of theprincipal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his merefailure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The

surety is bound to take notice of the principal's default and to perform the obligation.The alleged failure of MB Lending to prove the fact of demand on Sps. Azarraga is immaterial. In the absence of astatutory or contractual requirement, it is not necessary that performance of his obligation be first demanded of the principal,especially where demand would have been useless; nor is it a requisite that the principal be called on to account. A suretyship is adirect contract to pay the debt of another. As an original promisor and debtor from the beginning, he is held ordinarily toknow every default of his principal.

Re: Palmares argument that the filing of the complaint solely against her was improper UNMERITORIOUSUnder NCC 1216, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.

In accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule thathis proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted bystatute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, beforeproceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal andsurety are equally bound.

MB Lendings mere failure to immediately sue Palmares on her obligation does not release her from liability.

Where a creditor refrains from proceeding against the principal, the surety is not exonerated. Mere want of diligence orforbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate noticeto sue on the obligation. In the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement thatthe creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequentinsolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. Theraison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time.

Leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might

be demanded, does not constitute an extension of the time of payment, which would release the surety.

In order to constitute an extension discharging the surety:

It should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principaland the creditor

It was made without the consent of the surety or with a reservation of rights with respect to him The contract must be one which precludes the creditor from enforcing the principal contract within the period during which

he could otherwise have enforced it, and which precludes the surety from paying the debt

None of these elements are present here. The mere fact that MB Lending gave Sps. Azarraga an extended period of time within

which to comply with their obligation did not effectively absolve Palmares from the consequences of her undertaking. Besides, theburden is on the surety Palmares to show that she has been discharged by some act of the creditor MB Lending.