GR L 979; (April, 1949) (Digest)
G.R. No. L-979; April 13, 1949
THE COMMONWEALTH OF THE PHILIPPINES, plaintiff-appellee, vs. THE FAR EASTERN SURETY & INSURANCE COMPANY, defendant-appellant.
FACTS
The Vda. de Tiu Seng and Tan Kiang (the principal debtor) owed internal revenue taxes. The Far Eastern Surety & Insurance Co. (the surety) executed two bonds, binding itself solidarily with the debtor to guarantee payment of P10,000 of the tax obligation. The total tax liability was later determined to be P30,512.64, which was compromised to P12,874.17. The debtor made total payments of P11,644.12 to the Bureau of Internal Revenue. The Commonwealth sought to recover the unpaid balance of P1,230.05 from the surety. The surety argued its liability was limited to P10,000 and was extinguished after the debtor’s total payments exceeded that amount.
ISSUE
Whether the payments made by the principal debtor should be applied first to the unsecured portion of the debt (the amount exceeding P10,000), thereby leaving the surety liable for the balance still covered by the bonds.
RULING
Yes. The Supreme Court affirmed the lower court’s judgment against the surety. Applying the rules on application of payments under the Civil Code, when a debtor owes two debts to the same creditor—one as sole debtor (the unsecured portion) and another as a solidary co-debtor with a surety (the secured portion)—and the debtor does not specify how payments are to be applied, the payment must be imputed first to the debt that is most burdensome to the debtor. The more onerous obligation is the unsecured debt for which the debtor is solely liable. Therefore, the payments made by the principal debtor were correctly applied first to the portion of the tax liability exceeding the P10,000 covered by the bonds. Consequently, the unpaid balance of P1,230.05 remained covered by the surety bonds, for which the surety was solidarily liable. The Court cited its precedent in *Hongkong & Shanghai Banking Corporation vs. Aldanese*.
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