G.R. No. L-20567 July 30, 1965
PHILIPPINE NATIONAL BANK, petitioner, vs. MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second Division), respondents.

FACTS

The Philippine National Bank (PNB) opened a letter of credit and advanced $120,000 to Edgington Oil Refinery for asphalt. Of this, 2,000 tons worth P279,000 were released to Adams & Taguba Corporation (ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to P75,000. To pay for the asphalt, ATACO executed an assignment in favor of PNB, appointing the Bank as its irrevocable attorney-in-fact to collect payments directly from the Bureau of Public Works under a specific purchase order until the debt was fully liquidated. ATACO delivered asphalt to the Bureau valued at P431,466.52. PNB collected P106,382.01 from April to November 1948 but then ceased collecting without explanation. In 1952, PNB discovered that other creditors had collected P311,230.41 from the Bureau from funds due to ATACO under the same purchase order. After demands were refused, PNB sued ATACO and Manila Surety. The trial court held both liable, limiting the surety’s liability to P75,000. Only the surety appealed to the Court of Appeals, which dismissed the complaint against it, finding PNB negligent for stopping its collections and allowing the assigned funds to be exhausted by other creditors, thereby prejudicing the surety.

ISSUE

Whether the Philippine National Bank’s negligence in failing to collect the assigned funds from the Bureau of Public Works exonerates the surety, Manila Surety & Fidelity Co., Inc., from its obligation.

RULING

Yes, the surety is exonerated. The Court affirmed the decision of the Court of Appeals. PNB, as an irrevocable attorney-in-fact under the assignment, had a duty to act with the care of a good father of a family in collecting the funds from the Bureau of Public Works. Its unexplained cessation of collections from November 1948, while the debt remained unpaid, constituted negligence. This negligence allowed other creditors to exhaust the funds that were specifically assigned to PNB for payment of the debt, thereby depriving the surety of the possibility of recoursing against that security. Under Article 2080 of the Civil Code, guarantors are released when by an act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. By its negligent inaction, PNB rendered the assignment ineffective and prevented the surety’s subrogation to that security, resulting in the surety’s release from its obligation.