G.R. No. L-12334; May 22, 1959
ASSOCIATED INSURANCE & SURETY CO., INC., plaintiff-appellant, vs. BACOLOD-MURCIA MILLING COMPANY, INC., MAMERTO TINGSON, BUENAVENTURA C. ANLAP and EXPECTACION CABILES, defendants-appellees.

FACTS

Plaintiff-appellant Associated Insurance & Surety Co., Inc. executed a surety bond in favor of defendant-appellee Bacolod-Murcia Milling Co., Inc. to guarantee 25% (P6,910) of a crop loan extended by the milling company to planter Mamerto Tingson. The bond contained conditions, including that the obligee (milling company) would not grant additional loans to the principal (Tingson) in excess of his expected harvest share without the surety’s prior written consent, and that the loan would be liquidated from the planter’s harvest share. The complaint alleged two causes of action: (1) the milling company violated the bond by granting Tingson a loan much more in excess of his expected income without the surety’s consent, and failed to provide required notices regarding the loan amount and harvest proceeds; and (2) the milling company allowed Tingson to divert the loan for purposes other than planting, cultivation, and harvesting, resulting in insufficient crop production to cover the loan. The complaint sought to relieve the surety of its obligation under the bond and, alternatively, to recover from Tingson and his indemnitors. The milling company moved to dismiss the complaint on the ground that the surety’s cause of action had not yet accrued because it had not paid the guaranteed amount. The Court of First Instance granted the motion and dismissed the complaint.

ISSUE

Whether the complaint states a cause of action, notwithstanding the surety’s non-payment of the guaranteed amount, based on allegations that the obligee violated express conditions of the surety bond.

RULING

Yes. The order of dismissal is reversed and the case is remanded for further proceedings. The allegations in the complaint, which must be assumed true in a motion to dismiss, establish a cause of action. Under the first cause of action, the milling company’s alleged grant of an excessive loan without consent violated an express condition of the bond. Under the second cause of action, the alleged diversion of the loan for unauthorized purposes violated a condition sine qua non of the agreement. These breaches of the bond’s terms give the surety a right of action to seek release from liability and cancellation of the bond, even prior to making any payment. The fact that these allegations could also be raised as defenses in a collection action does not preclude the surety from filing a separate action for declaratory relief.