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 defendants Mariano Escueta, Cirilo B. Santos, and Teofilo Villongco, sureties under an agreement dated February 14, 1919, to secure the obligations of the Island Trading Co., Inc. The principal debtor, Island Trading Co., owed PNB P26,736.10 with 6.5% interest per annum from January 1, 1924. Two other original sureties, Wm. Kennedy (deceased) and Rafael Villanueva (who allegedly withdrew), were not included as defendants.

The surety agreement was a continuing guaranty for all present and future obligations of the principal debtor to PNB. It contained waivers by the sureties, including waiver of demand, notice of non-payment, protest, and consent to the release of collateral or extension of payment terms by PNB without the sureties’ consent.

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 debt without their consent, releasing them from liability; (3) PNB released co-surety Rafael Villanueva without their consent; and (4) PNB failed to present its claim against the estate of the deceased surety, Wm. Kennedy.

The trial court found the defendants liable but deducted two amounts from the claimed sum: (1) P17,076.68, representing the value of merchandise sent by Island Trading Co. through PNB’s Shanghai branch for which PNB failed to account; and (2) one-fifth of the principal debt, representing the share of the deceased surety Wm. Kennedy. Judgment was rendered for PNB in the net amount of 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 due to its failure to account for merchandise.
2. Whether the trial court erred in deducting one-fifth of the debt, representing the share of co-surety Rafael Villanueva, whom PNB allegedly released.
3. Whether the defendants’ defenses (non-acceptance of the surety agreement, extension of time, release of a co-surety, failure to proceed against the estate of a deceased surety) are valid to release them from liability.

RULING

1. On the deduction of 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 sent to Shanghai. Having assumed control, it was PNB’s duty to account for the proceeds. Its failure to do so justified charging it with the value of the goods.

2. On the deduction of one-fifth for Rafael Villanueva: 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. His non-inclusion as a defendant did not prove release; the sureties were jointly and severally liable, so an action could proceed against any one or more of them. The defendants also did not move to have Villanueva included as a party defendant.

3. On the defendants’ defenses: The Supreme Court REJECTED all defenses raised by the defendants.
* Acceptance of the Agreement: The agreement’s delivery to and retention by PNB, coupled with the extension of credit to the principal debtor on its strength, constituted sufficient acceptance. Acceptance need not be express or in writing.
* Extension of Time: The surety agreement expressly waived the sureties’ consent to any extension of time granted to the principal debtor.
* Alleged Release of Co-surety: As held, there was no evidence of Villanueva’s release.
* Failure to Proceed Against Deceased Surety’s Estate: The defendants, as joint and several sureties, were liable for the entire debt. PNB’s failure to claim against Kennedy’s estate did not release the other sureties from their solidary obligation.
* Higher Interest Charged to Principal: PNB was only demanding the 6.5% interest stipulated in the surety agreement from the defendants. Any higher rate charged to the principal did not alter the terms of the surety contract against the sureties.

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