PHILIPPINE NATIONAL BANK, petitioner, vs. MANILA SURETY and FIDELITY CO., INC.

and THE COURT OF APPEALS (Second Division), respondents.

FACTS: The Philippine National Bank had opened a letter of credit and advanced thereon
$120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons
worth P279,000.00 were released and delivered to ATACO under a trust receipt guaranteed by
Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt, ATACO
constituted the Bank its assignee and attorneyinfact to receive and collect from the Bureau of
Public Works the amount aforesaid out of funds payable to the assignor.

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt. The Bank
regularly cllected for a few months. Thereafter, for unexplained reasons, the Bank ceased to
collect, until in 1952 its investigators found that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed other creditor to collect funds due to ATACO
under the same purchase order.

Its demands on the principal debtor and the Surety having been refused, the Bank sued both 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.

PNB contends the power of attorney obtained from ATACO was merely in additional security in
its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to
collect any, sum from the principal debtor.

ISSUE: won it was PNB's duty to collect from Bureau of Public Works.

HELD: Yes.

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:

ART. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter.

Because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when
the balance due to appellant Bank was only P158,563.18.

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