Wise & Co., Inc. vs. Tanglao

A contract of suretyship must be express and cannot be presumed; a power of attorney authorizing the creation of suretyship and mortgage, when used solely to mortgage property without any express assumption of surety obligations in the resulting agreement, creates only a real right of mortgage and not personal liability as a surety.

Wise & Co. maintained an agency relationship with Cornelio C. David, who became indebted to it based on a liquidation of accounts. David's attorney, Dionisio P. Tanglao, held title to a parcel of land in Angeles, Pampanga, which David sought to use as security for his obligation. The dispute turned on whether a power of attorney executed by Tanglao in favor of David, authorizing David to sign Tanglao as guarantor and to mortgage Tanglao's property, created personal liability for Tanglao as a surety when the subsequent compromise agreement used that authority only to pledge the property as mortgage security.

Wise & Co. had as its agent Cornelio C. David, who became indebted to it based on a liquidation of accounts. Wise & Co. filed Civil Case No. 41129 in the Court of First Instance of Manila against David for recovery of the sum owed and obtained a preliminary attachment of David's property.

To avoid execution of the attachment, David turned to his attorney, Dionisio P. Tanglao, and on January 16, 1932, had Tanglao execute a power of attorney in his favor. The instrument authorized David to sign for Tanglao as guarantor for himself in his indebtedness to Wise & Co., and to mortgage Tanglao's lot — No. 517-F of the subdivision plan Psd-20, a portion of lot No. 517 of the cadastral survey of Angeles — to guarantee the obligation.

On January 18, 1932, David subscribed a compromise agreement, which he filed in court on January 23, 1932. Under its terms, David confessed judgment for P640, payable at P80 per month beginning February 15, 1932, until the full amount was paid. As security, David pledged three properties: (1) a house of light materials assessed at P320, (2) accesoria apartments assessed at P800, and (3) a 431-square-meter parcel of land under Transfer Certificate of Title No. 2307 of Pampanga, registered in Tanglao's name, which David held authority to pledge under the special power of attorney. The parties agreed to register the compromise with the Register of Deeds of Pampanga as a first lien, cancellable only upon full payment of the judgment.

David paid P343.47 on account of the P640, leaving an unpaid balance of P296.53. Wise & Co. then instituted the present action against Tanglao for recovery of that balance — a purely personal action rather than a foreclosure suit. The lower court ruled against Tanglao, who appealed.

• Nature of Obligation: Whether the power of attorney and the compromise agreement created a contract of suretyship rendering Tanglao personally liable for David's unpaid debt.
• Exhaustion of Remedies: Whether, even assuming Tanglao could be considered a surety, the action against him could lie without first exhausting all legal remedies against the principal debtor David.

• Nature of Obligation: No. The power of attorney was used only to mortgage Tanglao's property; the compromise agreement contained no express assumption of suretyship, and suretyship cannot be presumed but must be express under the law.
• Exhaustion of Remedies: No. Even assuming Tanglao was a surety, the action was premature because all legal remedies against the principal debtor David had not been previously exhausted, as required by Article 1830 of the Civil Code.

• Nature of Obligation: Under the power of attorney (Exhibit A), Tanglao empowered David to enter into both a contract of suretyship and a contract of mortgage over Tanglao's property. However, David used the authority only to mortgage the property; nothing in the compromise agreement (Exhibit B) stated that Tanglao became David's surety, nor was such an obligation inferable from any of its clauses. Even if an inference could be drawn, it would be insufficient to create an obligation of suretyship, which under the law must be express and cannot be presumed. The only obligation created by Exhibit B, in connection with Exhibit A, was that resulting from the mortgage of Tanglao's property to secure payment of the P640. Since Wise & Co. brought a purely personal action for recovery of the amount rather than a foreclosure suit, the action was improper against Tanglao.
• Exhaustion of Remedies: Even granting that Tanglao could be considered a surety under Exhibit B, the action did not lie against him because all legal remedies against the debtor had not been previously exhausted, pursuant to Article 1830 of the Civil Code and the decision of the Supreme Court of Spain of March 2, 1891. Wise & Co. held a judgment against David for payment of the debt, but it did not appear that execution of that judgment had been sought. Moreover, Exhibit B itself showed that David had two pieces of property — the house of light materials assessed at P320 and the accesoria apartments assessed at P800 — the combined value of which exceeded the P296.53 balance sought from Tanglao.

• Suretyship Must Be Express and Cannot Be Presumed — A contract of suretyship must be expressly created; it cannot be presumed from ambiguous circumstances or inferred from clauses that do not clearly state the surety's assumption of obligation. The Court applied this doctrine to hold that although the power of attorney authorized the creation of suretyship, the compromise agreement used that authority only to mortgage property and contained no express provision making Tanglao a surety, so no personal liability arose.
• Exhaustion of Remedies Against the Principal Debtor — Under Article 1830 of the Civil Code, a surety cannot be held liable until all legal remedies against the principal debtor have been exhausted. The Court found that Wise & Co. had not sought execution of its judgment against David, and that David possessed properties sufficient to satisfy the remaining debt, rendering the action against Tanglao premature.

• "Nothing is stated in Exhibit B to the effect that Tanglao became David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this inference might be made, it would be insufficient to create an obligation of suretyship which, under the law, must be express and cannot be presumed." — This passage states the ratio decidendi on the first ground: suretyship must be express and cannot be presumed, and the compromise agreement created only a mortgage, not personal surety liability.
• "At any rate, even granting that defendant Tanglao may be considered as a surety under Exhibit B, the action does not yet lie against him on the ground that all the legal remedies against the debtor have not previously been exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court of Spain of March 2, 1891)." — This passage articulates the alternative ground for absolving Tanglao: the requirement under Article 1830 to exhaust remedies against the principal debtor before proceeding against the surety.

• Decision of the Supreme Court of Spain, March 2, 1891 — Cited alongside Article 1830 of the Civil Code as authority for the rule that all legal remedies against the principal debtor must be exhausted before an action may lie against a surety.

• Article 1830, Civil Code (old) — Provides that a surety cannot be held liable until all legal remedies against the principal debtor have been previously exhausted. Applied to hold that even if Tanglao were a surety, the action was premature because Wise & Co. had not sought execution of its judgment against David, who possessed properties sufficient to cover the unpaid balance.

Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concurred.