Leelin Marketing Corporation vs. C & S Agro Development Company

The governing principle is that a counterbond executed for the discharge of a preliminary attachment stands as security for the payment of the judgment that the attaching creditor may recover, and the governing statute (Section 12, Rule 57 of the Rules of Court) is read into and incorporated as part of the bond. Consequently, when execution against the principal debtor is returned unsatisfied, the surety becomes liable upon the counterbond following a demand and a summary hearing, notwithstanding any mutual mistake in the instrument’s wording that erroneously limits liability to damages for wrongful attachment.

Leelin Marketing Corporation initiated a collection suit against C & S Agro Development Company and its principals, Mario Santos and Aurelio Cartano, before the Court of First Instance of Camarines Sur. Leelin secured a preliminary attachment over defendants’ merchandise and vehicles by posting a bond. Defendants subsequently moved to discharge the attachment by filing a P20,000.00 counterbond guaranteed by Belfast Surety & Insurance Co., Inc. The trial court approved the counterbond and lifted the attachment. After defendants defaulted, the trial court rendered judgment in favor of Leelin. The judgment attained finality, but a subsequent writ of execution was returned unsatisfied. Leelin then sought to enforce the counterbond against Belfast.

• Leelin procured a writ of preliminary attachment upon posting a bond of P12,962.17, resulting in the attachment of defendants’ store merchandise and two vehicles.
• Defendants secured the discharge of the attachment by presenting a P20,000.00 counterbond executed by Belfast Surety, which stated that the principals and surety bound themselves to pay costs and damages sustained by the plaintiff if the attachment was finally adjudged wrongful and without sufficient cause.
• The trial court approved the counterbond and dissolved the attachment. Defendants subsequently failed to appear for trial, leading to the reception of evidence by a court-appointed commissioner.
• The trial court ordered defendants to pay Leelin P14,020.26 with interest, P3,505.07 in attorney’s fees, and P1,312.25 for expenses. The decision attained finality.
• A writ of execution was issued but returned unsatisfied. Leelin filed a motion to charge Belfast on the counterbond. Belfast opposed, asserting non-liability under the literal terms of the bond.
• The trial court denied the motion, reasoning that Leelin should have notified the surety before trial or judgment finality to comply with due process and Section 20, Rule 57.

• Petitioner Leelin maintained that the counterbond was posted to secure the payment of the judgment the attaching creditor might recover, and that the trial court’s denial of liability contravened Sections 12 and 17 of Rule 57.
• Petitioner argued that execution against the principal debtors had been returned unsatisfied, demand was made, and a summary hearing was conducted, thereby satisfying all statutory prerequisites for enforcing the counterbond against the surety.

• Respondent Belfast Surety countered that it could not be held liable for the money judgment because the explicit terms of the counterbond limited its obligation to costs and damages arising from a wrongful attachment.
• Respondent asserted that petitioner failed to provide the surety with notice and an opportunity to be heard before the finality of the judgment, invoking due process requirements and the procedure for claiming damages on an illegal attachment under Section 20, Rule 57.

• Procedural Issues: Whether the trial court correctly applied Section 20, Rule 57 to require notice to the surety prior to the finality of judgment, and whether the summary proceeding to enforce the counterbond complied with due process.
• Substantive Issues: Whether a counterbond executed for the discharge of a preliminary attachment is liable for the money judgment recovered by the attaching creditor despite the bond’s wording limiting liability to damages for wrongful attachment.

• Procedural: The Court found the trial court’s reliance on Section 20, Rule 57 misplaced. That provision governs claims for damages on account of an illegal attachment, which requires a hearing before judgment. The enforcement of a counterbond under Section 17, Rule 57 operates differently. The Court ruled that the procedural requisites for enforcing the counterbond were met: execution was issued and returned unsatisfied, the creditor filed a motion to charge the surety, notice of the hearing was served on the surety, and a summary hearing was conducted in the same action. Thus, due process was satisfied.
• Substantive: The Court held that the counterbond secures the payment of the judgment the attaching creditor may recover, as mandated by Section 12 of Rule 57. The trial court confused the creditor’s attachment bond (Section 4) with the defendant’s counterbond (Section 12). Although the bond’s text erroneously limited liability to damages for wrongful attachment, the Court found this resulted from a mutual mistake. Because statutory and judicial bonds incorporate the governing law by reference, Section 12 of Rule 57 is read into the instrument. Contrary conditions are treated as surplusage. The surety is estopped from denying liability to prevent unjust enrichment, and the bond is reformed to reflect its true statutory purpose.

• Reformation of Instruments for Mutual Mistake — Under Article 1361 of the Civil Code, an instrument may be reformed when a mutual mistake of the parties causes it to fail to disclose their real agreement. The Court applied this doctrine to rectify the counterbond’s wording, which mistakenly limited the surety’s liability to damages for wrongful attachment, to reflect the parties’ actual intent and the statutory requirement to secure the payment of the judgment.
• Incorporation of Governing Statute into Judicial/Statutory Bonds — Contracts of suretyship executed pursuant to a statute are deemed to have the law in contemplation. The statute is read into and considered part of the bond, and any conditions contrary to law are ruled out as surplusage. The Court applied this principle to override the bond’s restrictive wording and enforce the surety’s liability under Section 12, Rule 57.
• Estoppel Against Unjust Enrichment — A party cannot be permitted to enrich itself by asserting bad faith or relying on a mutual mistake to evade a clear statutory obligation. The Court held the surety estopped from denying the bond’s true purpose of securing the judgment, as it had already benefited from the lifting of the attachment.

• "It is not the terms of the bond that control but the provisions of the law requiring the filing of such bond. In statutory or judicial bonds, the rule is 'that the statute under which the bond is given shall be read into and considered as a part thereof, and that whatever conditions contrary to law that may be embodied therein will be ruled out and treated as surplusage, the theory being that when a contract of suretyship is entered into pursuant to a statute, the parties are deemed to have had the law in contemplation when the contract was executed.' — The Court invoked this principle to subordinate the counterbond’s erroneous textual limitation to the mandatory security function prescribed by Rule 57, thereby holding the surety liable for the judgment debt.

• Towers Assurance Corporation v. Ororama Supermarket — Cited to illustrate the three statutory requisites for recovering from a surety on a counterbond under Section 17, Rule 57: (1) execution returned unsatisfied, (2) demand on the surety, and (3) notice and summary hearing.
• De la Cruz v. Del Pilar — Relied upon to support the reformation of the bond due to mutual mistake and to establish the principle that a surety is estopped from denying liability when it would result in unjust enrichment.
• Anzures v. Alto Surety & Ins. Co., Inc. — Cited to affirm the doctrine that statutory or judicial bonds incorporate the governing law by reference, rendering contrary contractual stipulations surplusage.

• Section 4, Rule 57, Rules of Court — Cited to distinguish the attaching creditor’s bond, which answers for damages if the attachment is wrongful, from the defendant’s counterbond.
• Section 12, Rule 57, Rules of Court — The primary provision governing the discharge of attachment upon posting a counterbond, which explicitly requires the bond to secure the payment of any judgment the attaching creditor may recover.
• Section 17, Rule 57, Rules of Court — Governs recovery on a counterbond when execution is returned unsatisfied, establishing the procedural mechanism and requisites for charging the surety.
• Section 20, Rule 57, Rules of Court — Addressed and distinguished by the Court; governs claims for damages on account of illegal attachment, which requires a different procedural posture and does not apply to enforcing a counterbond for a money judgment.
• Article 1361, Civil Code — Invoked to justify the reformation of the counterbond instrument due to mutual mistake regarding the parties’ real agreement.