G.R. No. L-11007; November 28, 1959
FRANCISCO LAVIDES, petitioner, vs. PROCOPIO ELEAZAR, ET AL., respondents.

FACTS

During the Japanese occupation, Coconut Central Co., Inc. and Francisco Lavides executed a promissory note dated September 19, 1944, promising to pay Ponciano A. Bernardo and Procopio Eleazar the sum of twenty-five thousand pesos (P25,000.00) under specified conditions. The loan consisted of P100,000.00 in Japanese military notes, mostly used to redeem mortgages on the corporation’s property. On September 25, 1944, the parties executed a “confidential memorandum” to express the real intent of the loan, stating that the claim for payment shall first be made against Coconut Central Co., Inc., but if the corporation cannot meet the obligation in full upon demand due to destruction of its assets by the war or “in any other cause,” Lavides agreed to settle the obligation from his personal resources. On December 1, 1953, the creditors demanded payment from the corporation, which failed to comply. On February 6, 1954, they demanded payment from Lavides, and upon his failure, filed an action against both. Lavides defended that the contract was leonine, that his obligation was conditional upon the corporation having no properties (which it still had), and that the creditors had declined his offer to take possession of the corporation’s factory. The trial court ordered Lavides and the corporation to pay jointly and severally. The Court of Appeals affirmed but modified, holding Lavides as a mere guarantor entitled to the benefit of exhaustion of the debtor’s property. Lavides appealed by certiorari.

ISSUE

1. Whether Lavides’ obligation as a guarantor is conditional upon the destruction of the corporation’s assets.
2. Whether the creditors’ failure to demand payment within the period specified in the promissory note (90 days to one year after the ratification of the Treaty of Peace) releases Lavides from liability.
3. Whether the creditors’ refusal to take possession of the corporation’s assets affects Lavides’ liability.

RULING

1. On the condition of Lavides’ obligation: The Supreme Court held that Lavides is a simple guarantor, not a solidary co-debtor. Interpreting the confidential memorandum in relation to the promissory note, the Court ruled that Lavides becomes liable when the corporation fails to pay due to destruction of its assets or for any other reason. This construction aligns with the secondary liability of a guarantor under the Civil Code then in force (the old Civil Code), as the contract was executed in 1944. The Court rejected Lavides’ interpretation that his liability arises only upon destruction of assets, as this would practically exempt him from liability or convert him into an insurer of the properties.
2. On the delay in demand: The Court affirmed the Court of Appeals’ holding that mere delay by the creditor in proceeding against the principal debtor does not release the guarantor. The period specified in the note was primarily to determine the currency for repayment. Lavides did not show any prejudice from the delay or any alteration in values after the lapse of the period.
3. On the refusal to take assets: The Court found the creditors’ refusal to take possession of the corporation’s assets justified, as it would entail expense. At any rate, the assets remain available and must be exhausted before recovery from Lavides can be enforced. The Court noted that the decision grants Lavides the benefit of excussion, which is consistent with the guarantor’s rights.
The Supreme Court also addressed Lavides’ citation of Article 2058 of the New Civil Code (requiring exhaustion of legal remedies against the debtor before proceeding against the guarantor), ruling that the old Civil Code governs the 1944 contract. Under the old Code, the creditor could sue the guarantor jointly with the principal debtor. The issue of prior exhaustion under the New Civil Code was not raised in the trial court.
DISPOSITIVE PORTION: The judgment of the Court of Appeals was affirmed. No costs were awarded in this instance.