G.R. No. L-10414; April 18, 1958
MANILA SURETY and FIDELITY CO., INC., plaintiff-appellee, vs. TEODULO M. CRUZ, defendant-appellant.

FACTS

On November 10, 1949, defendant Teodulo M. Cruz executed a deed of chattel mortgage in favor of plaintiff Manila Surety and Fidelity Co., Inc. This was in consideration of the plaintiff having posted surety bonds for Herminia Cruz and Felicisima Policarpio in favor of the National Rice and Corn Corporation (NARIC), pursuant to indemnity agreements executed by them and the defendant in favor of the plaintiff. Subsequently, the Price Stabilization Corporation (PRISCO), as legal successor of NARIC, filed civil cases against the plaintiff to enforce liability on these bonds. On May 23, 1952, the properties covered by the chattel mortgage were levied upon by a sheriff under a writ of execution in a separate civil case (Jose Estrada vs. Teodulo M. Cruz). The plaintiff filed a third-party claim. On May 31, 1952, the defendant agreed in writing that if he failed to settle the NARIC case involving Felicisima Policarpio by June 10, 1952, the plaintiff could take possession of the mortgaged properties. The defendant failed to settle, obtaining only a postponement of trial. The plaintiff then requested the sheriff to deliver the properties, but the defendant refused. The plaintiff instituted this replevin action. The trial court rendered judgment in favor of the plaintiff, declaring it entitled to possession of the properties and ordering the defendant to pay damages. The defendant appealed directly to the Supreme Court.

ISSUE

1. Whether the plaintiff’s action to enforce the indemnity agreements and take possession of the mortgaged properties was premature because the principal debtors’ liability to NARIC was still being disputed in court.
2. Whether partial payments made by the plaintiff to NARIC, at the instance of the Insurance Commissioner, constituted a novation that discharged the defendant from his liability under the indemnity agreements.
3. Whether the trial court lacked jurisdiction because the claim should have been litigated in the civil case where the plaintiff had filed its third-party claim.

RULING

1. The action was not premature. The indemnity agreements stipulated that the defendant’s indemnity shall be paid to the plaintiff “as soon as it has become liable for the payment of any amount, under the … bond, whether or not it shall have paid such sum.” The filing of actions by NARIC/PRISCO against the plaintiff to enforce the bonds was sufficient to make the plaintiff liable and entitle it to enforce the indemnity agreements, regardless of whether it had actually made payment.
2. There was no novation. The partial payments made by the plaintiff were within the amounts covered by the indemnity agreements and were made to accede to the demand of the Insurance Commissioner. They did not change the nature or modify the terms of the original obligations of the principal debtors or the surety bond. The defendant’s liability under the indemnity agreements remained, as he assumed to pay for any loss the plaintiff might sustain as a consequence of having become surety.
3. The trial court had jurisdiction. Under the Rules of Court, after a third-party claim is asserted and the judgment creditor fails to post an indemnity bond, the sheriff must release the property to the third-party claimant. In this case, the property was never under the court’s custody in the other civil case because the sheriff released it due to the lack of an indemnity bond. The property remained with the defendant, who refused to deliver it despite his commitments. The plaintiff was therefore justified in filing a separate replevin action. Furthermore, the defendant’s written agreement of May 31, 1952, expressly allowed the plaintiff to take over the properties upon his failure to settle the NARIC case.
The decision of the trial court was affirmed.