Philippine National Bank vs. Manila Surety and Fidelity Co., Inc.

A creditor holding an irrevocable power of attorney to collect assigned funds from a third party who negligently fails to collect, thereby allowing other creditors to exhaust those funds, releases the surety from its obligation under Article 2080 of the Civil Code, because the surety is deprived of subrogation to the rights and preferences of the creditor.

PNB opened a letter of credit and advanced $120,000 to Edgington Oil Refinery for 8,000 tons of hot asphalt, of which 2,000 tons worth P279,000 were released to ATACO under a trust receipt guaranteed by Manila Surety up to P75,000. To secure payment, ATACO constituted PNB as its assignee and attorney-in-fact to collect from the Bureau of Public Works under Purchase Order No. 71947, with the assignment expressly made irrevocable until full liquidation of the credit accommodation.

PNB opened a letter of credit and advanced $120,000 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000 were released and delivered to ATACO under a trust receipt guaranteed by Manila Surety up to P75,000. To pay for the asphalt, ATACO constituted PNB as its assignee and attorney-in-fact to collect from the Bureau of Public Works out of funds payable to ATACO under Purchase Order No. 71947. The assignment, designated Exhibit "A," stipulated that it would remain irrevocable until the credit accommodation was fully liquidated, and that PNB was appointed attorney-in-fact with full power to receive payments, endorse checks and treasury warrants, and apply the proceeds to settle the indebtedness. This power of attorney was likewise expressly made irrevocable until full liquidation.

ATACO delivered asphalt to the Bureau of Public Works with a total value of P431,466.52. From April 21, 1948 to November 18, 1948, PNB regularly collected P106,382.01 from the Bureau. Thereafter, for unexplained reasons, PNB ceased collection. In 1952, PNB's investigators discovered that additional moneys were payable to ATACO from the Bureau of Public Works, because the latter had allowed other creditors to collect funds due to ATACO under the same purchase order to a total of P311,230.41.

PNB demanded payment from both ATACO and Manila Surety, but its demands were refused. The Bank filed suit in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs. The trial court rendered judgment on October 4, 1958, ordering ATACO and Manila Surety to pay P174,462.34 as of February 24, 1956, subject to the P75,000 cap on the surety's liability, with interest at 5% per annum. Only the surety company perfected its appeal; the Central Bank did not appeal, and ATACO failed to perfect its appeal.

On appeal, the Court of Appeals found PNB negligent in having stopped collecting from the Bureau of Public Works before the debt was fully collected, thereby allowing other creditors to exhaust the funds to the prejudice of the surety. The appellate court held that PNB's negligence resulted in the exoneration of Manila Surety. PNB's motion for reconsideration was denied, prompting the present petition for review.

• Nature of the Power of Attorney: Petitioner maintained that the power of attorney obtained from ATACO was merely additional security in its favor, and that it was the duty of the surety, not the creditor, to see to it that the obligor fulfills his obligation.
• No Duty of Active Diligence: Petitioner argued that the creditor owed the surety no duty of active diligence to collect any sum from the principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.
• Demand Letters as Evidence of Diligence: Petitioner pointed to its letter of demand to the Bureau of Public Works dated May 5, 1949 (Exhibit "K") and its letter to ATACO dated October 31, 1949 (Exhibit "G") informing the debtor of its outstanding balance, as proof that it had exercised due diligence.

• Negligence of the Creditor-Agent: Whether PNB was negligent in ceasing to collect from the Bureau of Public Works the funds due to ATACO, contrary to its duty as holder of an exclusive and irrevocable power of attorney.
• Exoneration of the Surety: Whether PNB's negligence in allowing other creditors to exhaust the assigned funds resulted in the release of Manila Surety from its surety obligation.

• Negligence of the Creditor-Agent: Yes. PNB was negligent in failing to continue collecting from the Bureau of Public Works despite holding an irrevocable power of attorney, as an agent is required to act with the care of a good father of a family under Articles 1884 and 1887 of the Civil Code.
• Exoneration of the Surety: Yes. By allowing the assigned funds to be exhausted without notifying the surety, PNB deprived the surety of any possibility of recourse against the assigned security, thereby exonerating it pursuant to Article 2080 of the Civil Code.

• Negligence of the Creditor-Agent: The Court of Appeals did not hold PNB answerable for negligence in failing to collect from the principal debtor, but for its neglect in collecting sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney. As agent, PNB was required to act with the care of a good father of a family (Civil Code, Art. 1887) and was liable for damages the principal may suffer through non-performance (Civil Code, Art. 1884). The surety could not have collected from the Bureau itself, because the power of attorney was expressly irrevocable, so the Bureau could refuse payment to the principal debtor and, a fortiori, reject any demand by the surety. PNB's letter of demand to the Bureau (Exhibit "K") produced no reply, was not pressed, and did not result in notifying the debtor or surety that payment was not being made. Its letter to ATACO (Exhibit "G") had no bearing on the issue of diligence in collecting from the Bureau, since the funds were to come from elsewhere. The finding of negligence by the Court of Appeals was conclusive and fully supported by the evidence: other creditors collected P173,870.31 when the balance due to PNB was only P158,563.18.

• Exoneration of the Surety: Even if the assignment with power of attorney were considered mere additional security, by allowing the assigned funds to be exhausted without notifying the surety, PNB deprived the surety of any possibility of recourse against that security. This exonerated the surety under Article 2080 of the Civil Code, which provides that guarantors, even if solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. The Court noted that even if the Court of Appeals erred in its second reason—concerning rules on application of payments, which apply only where there are several distinct debts and not where there is one partially secured debt—the error was immaterial, because the principal reason based on PNB's negligence furnished adequate support for the decision.

• Release of surety by creditor's act (Article 2080, Civil Code) — Guarantors, even if solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. The Court applied this provision to hold that PNB's failure to collect the assigned funds—allowing other creditors to exhaust them—deprived the surety of subrogation to PNB's rights and preferences, thereby exonerating it.

• Agent's duty of diligence (Articles 1884 and 1887, Civil Code) — An agent is required to act with the care of a good father of a family and becomes liable for damages the principal may suffer through non-performance. The Court held PNB, as holder of an irrevocable power of attorney to collect from the Bureau of Public Works, bound by these duties, and its inaction constituted negligence.

• "The Court of Appeals did not hold the Bank answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884)." — This passage articulates the ratio decidendi: PNB's negligence lay not in failing to collect from the debtor directly, but in neglecting its duty as irrevocable attorney-in-fact to collect from the Bureau of Public Works.

• "Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code." — This passage establishes the link between the creditor's negligence and the surety's statutory release under Article 2080, forming the doctrinal core of the decision.

• Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958 — Cited by petitioner PNB for the proposition that the creditor owes the surety no duty of active diligence to collect from the principal debtor. The Court distinguished and rejected this citation as inapplicable, because the negligence found was not in failing to collect from the debtor but in failing to collect from the Bureau of Public Works under an irrevocable power of attorney.

• Article 2080, Civil Code — Provides that guarantors, even if solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. Applied to hold that PNB's inaction in collecting assigned funds, thereby allowing other creditors to exhaust them, deprived the surety of subrogation and exonerated it.
• Article 1887, Civil Code — Requires an agent to act with the care of a good father of a family. Applied to PNB as holder of the irrevocable power of attorney to collect from the Bureau of Public Works.
• Article 1884, Civil Code — Makes an agent liable for damages the principal may suffer through non-performance. Applied to establish PNB's liability for the consequences of its failure to continue collecting.

Bengzon, C.J., Concepcion, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concurred. Bautista Angelo and Barrera, JJ., took no part.