G.R. No. 41795 ; August 30, 1935
J.W. SHANNON and MRS. J.W. SHANNON, plaintiffs-appellees, vs. THE PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.E. ELSER, defendants. E.E. ELSER, appellant.

FACTS

The Philippine Lumber & Transportation Co., Inc., obtained a loan from Mrs. J.W. Shannon, secured by a promissory note jointly and severally guaranteed by Walter E. Jones and E.E. Elser. The principal was not paid upon maturity, though monthly interest was paid up to October 1929. After Jones’s death, the plaintiffs recovered a partial interest payment from his estate. Separately, J.W. Shannon obtained personal loans from Jones, and they agreed that Jones could deduct Shannon’s monthly payments from the interest due from the corporation, which Jones, as its president, did. When the corporation and Elser failed to pay the principal and remaining interest, the Shannons sued. The corporation was declared in default. Elser appealed the judgment holding him liable as a surety for half of the amounts due.

ISSUE

Whether the creditor’s actions—specifically, the deductions made for Shannon’s personal loans and the delay in filing suit—released the surety (Elser) from his obligation under Article 1851 of the Civil Code.

RULING

No. The Supreme Court affirmed the judgment against Elser. First, the deductions for Shannon’s personal loans were not “payments in advance” of the corporate interest that would constitute an extension of the payment period under Article 1851. They were independent transactions, and the setoff arrangement did not alter the principal obligation without the surety’s consent. Second, mere delay by the creditor in demanding payment or filing suit does not amount to laches or an implied extension that would discharge the surety. An extension under Article 1851 requires a new agreement depriving the creditor of the immediate right to enforce the claim. The creditor’s inaction or indulgence alone does not extinguish the surety’s liability.

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