G.R. No. 135462; December 7, 2001
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING CORPORATION, petitioners, vs. BA FINANCE CORPORATION, respondent.

FACTS

Petitioners South City Homes, Inc. and Palawan Lumber Manufacturing Corporation, along with individual officers, executed Continuing Suretyship Agreements in early 1983, jointly and severally guaranteeing any and all indebtedness of Fortune Motors Corporation (Fortune Motors) to respondent BA Finance Corporation (BAFC). Subsequently, from July to August 1983, Canlubang Automotive Resources Corporation (CARCO) drew six drafts against Fortune Motors for delivered vehicles, which drafts, together with corresponding trust receipts executed by Fortune Motors, were assigned by CARCO to BAFC. Upon Fortune Motors’ default in paying the drafts and complying with the trust receipt terms, BAFC demanded payment from the sureties and, after non-payment, filed a collection suit.
The petitioners, as sureties, moved to dismiss, arguing that the assignment of the drafts and trust receipts from CARCO to BAFC constituted a conventional subrogation that novated the principal obligation without their consent, thereby discharging their suretyship. They also contended that BAFC’s action for a sum of money was premature, as under the Trust Receipts Law (P.D. No. 115), the entruster must first demand the return of the unsold vehicles.

ISSUE

Whether the assignment of the drafts and trust receipts novated the principal obligation, thereby discharging the sureties; and whether an action for a sum of money is premature without first demanding the return of the goods under the trust receipts.

RULING

The Supreme Court affirmed the Court of Appeals’ decision, holding the sureties jointly and severally liable. On the first issue, the Court ruled that the assignment of credit did not effect a novation that would discharge the sureties. A continuing suretyship agreement is valid and covers future obligations of the principal debtor, as explicitly stipulated in the contracts signed by the petitioners. The assignment from CARCO to BAFC was merely a transfer of the credit rights, not a substitution of the debtor or a material alteration of the obligation. Citing jurisprudence, the Court emphasized that an assignment of credit does not require the debtor’s consent but only notice, and it does not extinguish the original obligation. Therefore, the suretyship remained enforceable for the subsequently incurred drafts.
On the second issue, the Court held that an action for a sum of money is a proper remedy for default under a trust receipt. The use of the word “may” in P.D. No. 115 indicates that the entruster has discretion either to cancel the trust and take possession of the goods or to pursue an alternative action like a collection suit. BAFC was not required to first demand the return of the unsold vehicles before filing the case. Consequently, the suit was not premature, and the sureties were correctly held liable for the outstanding amounts.