G.R. No. L-11181; September 17, 1958
U.P. RECREATION CLUB, INC., plaintiff-appellant, vs. ALTO SURETY and INSURANCE CO., and NEREO ANDOLONG, defendants-appellees.

FACTS

The U.P. Recreation Club, Inc. leased its establishment to Nereo Andolong on a month-to-month basis starting December 1, 1953, for P800 monthly. Andolong posted a surety bond from Alto Surety & Insurance Co., Inc. for P9,600 to secure payment of rentals for one year. By December 1, 1954, Andolong had paid only P6,200, leaving a balance of P3,400 for that first year. The Club filed a complaint on December 20, 1954, against Andolong and the surety for this amount. Andolong did not answer and was effectively in default. Despite the suit, Andolong retained possession of the premises until September 30, 1955. For this second period of occupancy (December 1, 1954, to September 30, 1955), which was no longer covered by a bond, Andolong paid only P4,500, incurring a new deficiency of P3,500. The Club filed an amended complaint for this later amount against Andolong alone. The trial court initially held both Andolong and the surety jointly and severally liable for the P3,400 first-year deficiency. Upon the surety’s motion for reconsideration, the court modified its decision, absolving the surety. It reasoned that the lease created a running account, and payments made in 1955 (P4,500) should be applied to the earlier 1954 debt, thereby extinguishing the secured obligation. The Club appealed.

ISSUE

Whether the payments made by the lessee in 1955 for his occupancy during that year should be applied to extinguish the earlier, secured deficiency for 1954, thereby releasing the surety from liability.

RULING

No. The Supreme Court reversed the order absolving the surety and reinstated the original judgment holding it jointly and severally liable for the P3,400 deficiency from the first year of the lease.
The Court rejected the surety’s “running account” theory. Under the Civil Code, while a debtor has the right to direct the application of a payment when he has several debts of the same kind to one creditor, if the debtor fails to exercise this right at the time of payment, the creditor may make the application as he sees fit. Here, there was no showing that the debtor, Andolong, directed how his 1955 payments were to be applied. The creditor, the Club, was therefore entitled to apply those payments to the rentals currently due in 1955. This application was neither illegal, unjust, nor inequitable.
Crucially, the surety bond only covered the first year of the lease (December 1, 1953, to November 30, 1954). The obligation for that period became liquidated and demandable when the Club filed its complaint on December 20, 1954. The lessee’s continued occupation in 1955, without a new bond and while the lawsuit was pending, did not constitute a continuation or extension of the original secured contract. It was a separate period of occupancy creating a new, unsecured obligation. The surety could not escape its liability for the guaranteed 1954 deficiency by having later payments, for a different and unsecured period, applied to the earlier debt.
Concurring and Dissenting Opinion (Reyes, J.B.L., concurring in the result):
Justice Reyes concurred in the result, agreeing that the 1955 payments should not be applied to the 1954 deficit, especially since the 1955 rentals accrued after the action was filed and were outside the guaranty period. He emphasized that the burden was on the surety to prove that neither debtor nor creditor had made an application of the payments, which it failed to do. He dissented, however, from the main opinion’s obiter dictum suggesting a guaranteed obligation is not more onerous to the debtor, arguing that it is more onerous because the debtor may face suit from the guarantor as well.