G.R. No. L-15643; October 31, 1960
LIGGETT & MYERS TOBACCO CORPORATION, petitioner, vs. ASSOCIATED INSURANCE & SURETY CO., INC., and CONSOLIDATED UNDERWRITERS, INC., respondents.

FACTS

Petitioner Liggett & Myers Tobacco Corporation advanced 66 cases of Chesterfield cigarettes to P.C. Ailmal under an agreement whereby Ailmal would return an equal quantity of fresh cigarettes upon arrival of his own order. To guarantee payment of the internal revenue taxes on the cigarettes to be delivered, Ailmal, as principal, and respondent Associated Insurance & Surety Co., Inc. (represented by Consolidated Underwriters, Inc.), as surety, executed a bond in favor of Liggett & Myers for P14,520.00. When Ailmal’s shipment arrived, he failed to pay the exchange tax and bank charges, compelling Liggett & Myers to advance P1,107.18. Liggett & Myers later paid the specific taxes and withdrew the cigarettes from the bonded warehouse to prevent further loss. Discovering the cigarettes had deteriorated, Liggett & Myers, with court permission after notice to Ailmal and the surety, sold them, realizing P15,664.80. Liggett & Myers applied these proceeds to Ailmal’s obligation to deliver the 66 cases of fresh cigarettes or their value. The trial court held the surety not liable, reasoning the sale proceeds exceeded the tax amount guaranteed by the bond. The Court of Appeals affirmed, ruling the proceeds should first be applied to the tax obligation secured by the bond. Liggett & Myers appealed.

ISSUE

To which of the debtor’s obligations should the proceeds from the sale of the deteriorated cigarettes be applied?

RULING

The Supreme Court reversed the Court of Appeals. The proceeds should be applied to Ailmal’s obligation to deliver the 66 cases of fresh cigarettes or their value, not to the tax obligation guaranteed by the bond. Under Article 1252 of the Civil Code, the right to apply a payment to one of several debts belongs to the debtor at the time of payment. If the debtor does not exercise this right, the creditor may make the application. Here, Liggett & Myers, as creditor, applied the proceeds to the unsecured obligation for the value of the cigarettes. This application was made with court approval after notice to Ailmal and the surety, and they did not object. Their silence constituted assent to the application, which they could no longer revoke. Consequently, the tax obligation secured by the bond remained unpaid. The surety, jointly and severally liable with Ailmal, must reimburse Liggett & Myers the sum of P14,520.00 (the tax amount) with interest from the filing of the complaint. The decision of the Court of Appeals was modified accordingly.