G.R. No. L-48958 June 28, 1988
CITIZENS SURETY and INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and PASCUAL M. PEREZ, respondents.

FACTS

On December 4, 1959, petitioner Citizens Surety and Insurance Company issued two surety bonds to guarantee the obligations of Pascual M. Perez Enterprises under a contract with Singer Sewing Machine Co. In consideration, Pascual M. Perez, in his personal capacity and as attorney-in-fact for his wife Nicasia Sarmiento, executed indemnity agreements holding himself and the enterprise jointly and severally liable to reimburse the petitioner for any payments made under the bonds. On the same date, Perez also executed a Deed of Assignment covering his stock of lumber valued at P400,000.00 as collateral security. A second real estate mortgage was later executed on April 12, 1960.
Pascual M. Perez Enterprises defaulted, compelling the petitioner to pay Singer the total bond amount of P144,000.00. After partial payments totaling P55,600.00, the petitioner filed a money claim against the estate of the late Nicasia Sarmiento, administered by Perez. The Court of First Instance of Batangas ruled in favor of the petitioner, holding the estate jointly and severally liable. The Court of Appeals reversed this decision, holding that the principal obligation under the indemnity agreements had been extinguished by the execution of the Deed of Assignment, construing it as a dation in payment.

ISSUE

The main issue is whether the Deed of Assignment extinguished the principal obligation of Pascual M. Perez under the indemnity agreements through dation in payment.

RULING

The Supreme Court reversed the Court of Appeals and reinstated the trial court’s decision, ruling that the Deed of Assignment did not constitute dation in payment and did not extinguish the principal obligation. The legal logic is anchored on the interpretation of contracts according to their clear terms and the contemporaneous and subsequent acts of the parties. The deed was explicitly denominated as an “assignment” and its text established it as a collateral security, stating it was executed “for and in consideration of the issuance” of the surety bonds. It did not contain language indicative of an absolute conveyance in satisfaction of an obligation, which is essential for dation in payment.
Crucially, the subsequent conduct of the parties confirmed this interpretation. The execution of a second real estate mortgage months after the deed logically indicated that the underlying obligation was still alive and required further security. If the deed had extinguished the obligation, there would have been no need for additional collateral. Furthermore, Perez made partial payments on the indemnity after the deed’s execution, an act inconsistent with a claim that the obligation had been extinguished. Therefore, the deed was merely an accessory contract of pledge or chattel mortgage, not a mode of extinguishing the principal debt. The estate of Nicasia Sarmiento, being solidarily liable under the indemnity agreements executed by Perez as her attorney-in-fact, remained liable for the unpaid balance.