The Manila Banking Corporation v. Anastacio Teodoro, Jr. and Grace Anna Teodoro
REITERATIONFacts
The Antecedents: Plaintiff-appellee, The Manila Banking Corporation, filed a collection case against defendants-appellants Anastacio Teodoro, Jr. and Grace Anna Teodoro based on several promissory notes. Specifically, on April 25, 1966, the defendants, along with Anastacio Teodoro, Sr., executed Promissory Note No. 11487 for P10,420.00, payable in 120 days with 12% interest. On May 3, 1966, and June 20, 1966, Anastacio Teodoro, Sr. and Anastacio Teodoro, Jr. executed Promissory Notes Nos. 11515 and 11699 for P8,000.00 and P1,000.00, respectively, also payable in 120 days with 12% interest. The defendants failed to pay these obligations. On January 24, 1964, Anastacio Teodoro, Jr. executed a Deed of Assignment of Receivables from the Emergency Employment Administration (EEA) to the bank, intended as security for credit accommodations. The EEA was later abolished, and its successor, the Philippine Fisheries Commission, failed to pay the defendants, rendering the receivables virtually worthless. The bank made repeated demands for payment from the defendants. Procedural History: The case was originally filed against Anastacio Teodoro, Sr., Anastacio Teodoro, Jr., and Grace Anna Teodoro. The case against Anastacio Teodoro, Sr. was dismissed due to his death. The trial court rendered judgment ordering the defendants jointly and severally to pay the bank P15,037.11 plus interest and attorney's fees for Promissory Note No. 11487, and ordering Anastacio Teodoro, Jr. to pay P8,934.74 plus interest and attorney's fees for Promissory Notes Nos. 11515 and 11699. The defendants appealed to the Court of Appeals, which certified the case to the Supreme Court as it involved a pure question of law. The Supreme Court required the parties to move in the premises due to the case's pendency, and the appellee moved for resolution. The Petition: The defendants-appellants argued that the decision amounted to a judicial remaking of the contract, violating the law and constituting a lack or excess of jurisdiction. The core issues were whether the Deed of Assignment of Receivables constituted payment of the loans and whether the bank should have first sued the Philippine Fisheries Commission.
Issue(s)
Whether the Deed of Assignment of Receivables extinguished the defendants' obligations under the promissory notes. Whether the plaintiff bank must exhaust all legal remedies against the Philippine Fisheries Commission before proceeding against the defendants for the collection of the loans.
Ruling
The appeal is dismissed for lack of merit, and the appealed decision of the trial court is affirmed in toto.
Ratio Decidendi
On whether the Deed of Assignment of Receivables extinguished the defendants' obligations under the promissory notes: The Court ruled that the assignment of receivables did not transfer ownership to the bank nor did it release the appellants from their loans. The Deed of Assignment explicitly stated it was for credit accommodations and as security for payment, and also served as a continuing guaranty for future loans. The Court emphasized that the character of a transaction is determined by the intention of the parties, not just the language used. It clarified that the assignment was not a sale or a dation in payment for the loans in question, as the loans were incurred after the deed was executed. At most, it was a dation in payment for P10,000.00, the amount of credit indicated at the time of assignment. The Court held that in case of doubt, the presumption favors pledge over dation in payment, as pledge involves a lesser transmission of rights. Therefore, the assignment was intended as collateral security and a continuing guaranty, not as an extinguishment of the principal obligation. On whether the plaintiff bank must exhaust all legal remedies against the Philippine Fisheries Commission before proceeding against the defendants for the collection of loans: The Court held that this must be answered in the negative. Since the obligation of the appellants under the promissory notes was not extinguished by the assignment of receivables, they remained the principal debtors. The deed of assignment merely guaranteed these obligations. Consequently, Article 2058 of the New Civil Code, which requires the exhaustion of remedies against the principal debtor before proceeding against the guarantor, did not apply. The Court noted that the bank did attempt to collect on the pledged receivables, but the EEA had been abolished, and the collection through the Office of the President was disapproved, rendering the receivables virtually worthless. It would be futile to proceed against a defunct office. Therefore, after repeated demands, it was proper for the bank to proceed against the appellants as principal debtors.
Main Doctrine
An assignment of receivables intended as collateral security for bank loans does not extinguish the principal obligation of the assignor, and the bank is not required to exhaust remedies against the obligor of the receivables before proceeding against the assignor, especially when the receivables have become virtually worthless.