Palmares vs. Court of Appeals

A person who signs a promissory note as a co-maker and explicitly binds herself to be "jointly and severally" or "solidarily" liable with the principal debtor is considered a surety, not a guarantor; as a surety, she is an insurer of the debt itself, directly and primarily liable, and may be sued by the creditor alone for the entire obligation upon the principal debtor's default.

Private respondent M.B. Lending Corporation extended a loan of P30,000.00 to the spouses Osmeña and Merlyn Azarraga. Petitioner Estrella Palmares signed the corresponding promissory note as a co-maker. The terms of the note stipulated that Palmares was "jointly and severally or solidarily liable" with the principal debtors. After partial payments were made, the Azarraga spouses defaulted on the remaining balance, prompting the lending corporation to seek collection.

• On March 13, 1990, M.B. Lending Corporation granted a P30,000.00 loan to the Azarraga spouses, payable on or before May 12, 1990, with a compounded interest of 6% per month.
• Petitioner Estrella Palmares signed the promissory note as a co-maker.
• The note contained a clause stating, "I, Mrs. Estrella Palmares, as the Co-maker... am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note."
• A subsequent paragraph stated, "...M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note..."
• The note also stipulated a penalty charge of 3% per month and attorney's fees of 25% of the total amount due.
• The debtors made partial payments totaling P16,300.00, leaving an outstanding balance of P13,700.00 as of the last payment on September 26, 1991.
• M.B. Lending Corporation filed a collection suit solely against Palmares, alleging the insolvency of the principal debtors.
• Palmares claimed that after the loan matured in 1990, she offered to settle the obligation, but the respondent told her not to worry as it would first try to collect from the Azarraga spouses.

• Petitioner Palmares argued that the provisions of the promissory note were conflicting, creating an ambiguity that should be interpreted to mean her liability is that of a guarantor, not a surety.
• She contended that the clause allowing the creditor to demand payment from her "in case the principal maker... defaults" established her liability as subsidiary, which is the essence of a guaranty.
• The petitioner asserted that the promissory note was a contract of adhesion prepared by the respondent and should be strictly construed against it.
• She claimed she could not be compelled to pay because the principal debtors were not yet in default, as no judicial or extrajudicial demand was properly made upon them.
• Palmares argued that the 6% monthly interest, 3% monthly penalty, and 25% attorney's fees were usurious, iniquitous, and unconscionable.
• She alleged that the respondent acted in bad faith by suing her alone without including the principal debtors who were the sole beneficiaries of the loan.

• Respondent M.B. Lending Corporation maintained that Palmares is a surety because she expressly bound herself to be "jointly and severally or solidarily liable" with the principal debtors.
• As a surety, Palmares is primarily and directly liable for the entire obligation, and the corporation has the right to proceed against her alone.
• The respondent argued that the stipulated 6% interest and 3% penalty charges are valid, citing that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905.
• It contended that even if the promissory note is a contract of adhesion, it is not per se invalid, as Palmares freely and voluntarily signed it.

• Procedural Issues:
• Whether a creditor can file a collection suit solely against the co-maker who signed as a surety, to the exclusion of the principal debtors.
• Whether a prior demand on the principal debtors is a condition precedent to hold the surety liable.
• Substantive Issues:
• Whether the petitioner's undertaking in the promissory note constitutes a suretyship or a guaranty.
• Whether the stipulated penalty charge of 3% per month and attorney's fees of 25% of the total amount due are valid and enforceable.

• Procedural:
• Yes, the creditor can sue the surety alone. The Court held that a creditor's right to proceed against a surety exists independently of the right to proceed against the principal debtor. Under Article 1216 of the Civil Code, a creditor may proceed against any one of the solidary debtors.
• No, a prior demand is not necessary. The Court ruled that demand on the surety is not required before bringing suit, as the commencement of the suit itself is a sufficient demand. Furthermore, the promissory note contained an express waiver of the right to notice and demand, which is binding on the surety.
• Substantive:
• The petitioner's undertaking is a suretyship. The Court found the language of the promissory note, specifically the phrase "jointly and severally or solidarily liable," to be clear and unequivocal in establishing Palmares' liability as a surety under Article 2047 of the Civil Code. The clause conditioning demand on the principal's default does not negate the suretyship but merely clarifies the time when the obligation becomes due and demandable from the surety.
• No, the stipulated penalties are not entirely enforceable. The Court held that the penalty charge of 3% per month and attorney's fees of 25% of the total amount due were highly inequitable, unconscionable, and unreasonable. Invoking its authority under Article 1229 of the Civil Code, the Court deleted the 3% monthly penalty entirely and reduced the award for attorney's fees to a fixed amount of P10,000.00.

• Suretyship vs. Guaranty (Art. 2047, Civil Code) — A surety binds himself solidarily with the principal debtor to fulfill the obligation, making him an insurer of the debt itself. A guarantor binds himself to the creditor to fulfill the obligation only if the principal debtor fails to do so, making him an insurer of the debtor's solvency. The Court applied this distinction to classify Palmares as a surety based on the "jointly and severally liable" clause in the contract.
• Solidary Liability (Art. 1216, Civil Code) — This principle allows a creditor to proceed against any one of the solidary debtors, or some or all of them simultaneously, for the full amount of the obligation. The Court used this doctrine to validate the respondent's act of suing Palmares alone without impleading the principal debtors.
• Contracts of Adhesion — These are contracts prepared entirely by one party, where the other party's participation is limited to affixing their signature or "adhering" to the contract. The Court reiterated that such contracts are not invalid per se. While ambiguities are construed against the drafter, the terms in this case were deemed clear and unequivocal, thus binding on Palmares who voluntarily signed the note.
• Equitable Reduction of Penalty (Art. 1229, Civil Code) — This article grants courts the authority to equitably reduce a penalty when the principal obligation has been partly or irregularly complied with by the debtor, or if the penalty is found to be iniquitous or unconscionable. The Court invoked this to eliminate the 3% monthly penalty and reduce the 25% attorney's fees as they were deemed excessive.
• Literal Meaning Rule in Contract Interpretation — If the terms of a contract are clear and leave no doubt as to the parties' intention, the literal meaning of its stipulations shall control. The Court applied this rule to uphold the clear contractual language establishing Palmares as a surety, dismissing her claim of ambiguity.

• "A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay."

• Magallanes, et al. vs. Court of Appeals, et al. — This case, which also involved respondent M.B. Lending Corporation and was described as "substantially on all fours" with the present one, was cited as precedent for the Court's decision to eliminate the iniquitous and unconscionable penalty interest altogether.
• Inciong, Jr. vs. Court of Appeals, et al. — Referenced to support the principle that fraud must be established by clear and convincing evidence, which the petitioner failed to provide regarding her signing of the promissory note.

• Art. 2047, Civil Code — This article defines guaranty and suretyship. It was the primary basis for determining that Palmares' solidary obligation made her a surety.
• Art. 1216, Civil Code — This provision on solidary obligations was cited to establish the creditor's right to proceed against Palmares alone.
• Art. 1229, Civil Code — This article was the legal basis for the Court's equitable reduction of the penalty charge and attorney's fees, which were deemed iniquitous.
• Art. 1169, Civil Code — Cited in relation to the waiver of demand, providing that demand by the creditor is not necessary for delay to exist when the obligation or the law expressly so declares.
• Art. 1377, Civil Code — Invoked by the petitioner regarding the interpretation of obscure contract stipulations, but the Court found no obscurity in the terms of the promissory note.