G.R. No. 26118 , December 31, 1926
PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. MARIANO ESCUETA, CIRILO B. SANTOS and TEOFILO VILLONGCO, defendants-appellants.

FACTS

The Philippine National Bank (PNB) filed a complaint against Mariano Escueta, Cirilo B. Santos, and Teofilo Villongco (defendants-appellants) to enforce a surety agreement they executed on February 14, 1919, jointly and severally guaranteeing the obligations of the Island Trading Co., Inc. to the bank. The agreement covered existing and future indebtedness. The principal debtor, Island Trading Co., owed PNB P26,736.10 with 6.5% interest from January 1, 1924. Two other original sureties, Wm. Kennedy (deceased) and Rafael Villanueva (who allegedly withdrew), were not included as defendants.

The defendants raised several defenses in their answer: (1) the surety agreement was never accepted by PNB; (2) PNB extended the time for payment of the principal debt without their consent, releasing them from liability; (3) PNB released co-surety Rafael Villanueva without their consent; and (4) PNB failed to present a claim against the estate of the deceased surety, Wm. Kennedy.

The trial court found the defendants liable but made two deductions from the claimed amount: (1) P17,076.68, representing the value of merchandise belonging to Island Trading Co. that PNB sent to its Shanghai branch but for which it failed to account; and (2) one-fifth of the remaining balance, representing the share of the deceased surety, Wm. Kennedy. Judgment was rendered for P7,727.54. Both PNB and the defendants appealed.

ISSUES:
1. Whether the trial court erred in deducting P17,076.68 from PNB’s claim for unaccounted merchandise.
2. Whether the trial court erred in deducting one-fifth of the claim for the alleged release of co-surety Rafael Villanueva.
3. Whether the defendants’ defenses (non-acceptance of the surety agreement, extension of time, release of co-surety, failure to claim against an estate) are valid.

RULING

1. On the deduction for merchandise (P17,076.68): The Supreme Court AFFIRMED the trial court’s deduction. The uncontradicted testimony of defendant Escueta established that PNB took control of the merchandise shipped to Shanghai. Having assumed control, it was PNB’s duty to account for the goods or their proceeds. Its failure to do so justified charging it with the value of the goods.

2. On the deduction for Villanueva’s share (one-fifth): The Supreme Court REVERSED the trial court. There was no evidence that PNB consented to Villanueva’s withdrawal or released him from the surety agreement. The fact that he was not sued is not proof of release, as the sureties were jointly and severally liable, allowing PNB to proceed against any or all of them. The defendants also failed to move for Villanueva’s inclusion as a party defendant.

3. On the defendants’ defenses: The Supreme Court REJECTED all defenses.
* Acceptance of Agreement: Acceptance was established by PNB’s retention of the document and its extension of credit to Island Trading Co. based on it. Acceptance need not be express or in writing.
* Extension of Time: The defense was not substantiated by evidence.
* Higher Interest Rate Charged to Principal: PNB only demanded the 6.5% interest specified in the surety agreement from the defendants. Charging a different rate to the principal did not alter the terms of the surety agreement against the defendants.
* Release of Co-surety / Failure to Claim against Estate: As held, there was no evidence of Villanueva’s release. Regarding Kennedy’s estate, the defense was untenable. The defendants, as joint and several sureties, were liable for the entire obligation. The creditor’s failure to proceed against a co-surety or his estate does not release the other sureties.

DISPOSITIVE PORTION:
The appealed judgment was MODIFIED. PNB’s recovery was increased to P9,659.42 (the original P26,736.10 minus the P17,076.68 deduction only), with interest at 6.5% per annum from April 3, 1924. The judgment was affirmed in all other respects. No costs were awarded.