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ESTATE OF K. H. HEMADY vs. LUZON SURETY CO., INC. - Janine

Rose Lumanag 

FACTS: 

The Luzon Surety Co. had filed a claim against the Estate based on

twenty different indemnity agreements, or counter bonds, each

subscribed by a distinct principal and by the deceased K. H.

Hemady, a surety solidary guarantor. 

The Luzon Surety Co., prayed for allowance, as a contingent

claim, of the value of the twenty bonds it had executed in

consideration of the counterbonds, and further asked for

judgment for the unpaid premiums and documentary stamps

affixed to the bonds, with 12 per cent interest thereon. 

The lower court dismissed the claims of Luzon Surety Co., ruling

as follows: 

The administratrix further contends that upon the death of

Hemady, his liability as a guarantor terminated, and therefore, in

the absence of a showing that a loss or damage was suffered, the

claim cannot be considered contingent. It should be noted that a

new requirement has been added for a person to qualify as aguarantor, that is: integrity. Upon the death of Hemady, his

integrity was not transmitted to his estate or successors.

Whatever loss therefore, may occur after Hemady’s death, are notchargeable to his estate because upon his death he ceased to be a

guarantor. 

ISSUE: 

W/N the death of Hemady extinguished the guaranty or

suretyship? 

HELD: 

No. The principle remains intact that the heirs succeed not only to

the rights of the deceased but also to his obligations. Under our

law, the general rule is that a party’s contractual rights andobligations are transmissible to the successors. However, Article

1311 provides for three exceptions: 

1.  The nature of the obligation of the surety or guarantor

warrants its intransmissibility; 

2.  By stipulation of the parties; and 

3.  By operation of law. 

Of the 3 exceptions fixed by Art 1311, the nature of obligation of

the surety or guarantor does not warrant   the conclusionthat his peculiar individual qualities arecontemplated as a principal inducement forthe contract. Creditor Luzon Surety Co.expects from Hemady when it accepted thelatter as surety in the counterbonds was thereimbursement of the moneys that the LuzonSurety Co. might have to disburse on accountof the obligations of the principal debtors. This

reimbursement is a payment of a sum ofmoney, resulting from an  obligation to give; and to the

Luzon Surety Co., it was indifferent that the reimbursemen

should be made by Hemady himself or by some one else in his

behalf, so long as the money was paid to i

Under the third exception, the provisions make reference to

those cases where the law expresses that the rights or obligations

are extinguished by death, as in the case of legal support, parenta

authority, usufruct, etc. However, by contract, the articles of theCivil Code that regulate guaranty or suretyship contain no

provision that the guaranty is extinguished upon the death of the

guarantor or the surety. 

The lower court sought to infer such a limitation from Art. 2056

to the effect that “one who is obliged to furnish a guarantor mus

present a person who possesses integrity, capacity to bind

himself, and sufficient property to answer for the obligation

which he guarantees”. It will be noted, however, that the lawrequires these qualities to be present only at the time of the

perfection of the contract of guaranty. It is self-evident that once

the contract has become perfected and binding, the supervening

incapacity of the guarantor would not operate to exonerate him

of the eventual liability he has contracted; and if that be true of

his capacity to bind himself, it should also be true of his integrity

which is a quality mentioned in the article alongside the capacity.

The foregoing concept is confirmed by the next Article 2057, that

runs as follows: 

“ART. 2057. –  If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become

insolvent, the creditor may demand another who has all the

qualifications required in the preceding article. The case is

excepted where the creditor has required and stipulated that a

specified person should be guarantor.” 

From this article it should be immediately apparent that the

supervening dishonesty of the guarantor (that is to say, the

disappearance of his integrity after he has become bound) does

not terminate the contract but merely entitles the creditor to

demand a replacement of the guarantor. But the step remains

optional in the creditor: it is his right, not his duty; he may waive

it if he chooses, and hold the guarantor to his bargain. Hence

Article 2057 of the present Civil Code is incompatible with the

trial court’s stand that the requirement of integrity in the

guarantor or surety makes the latter’s undertaking strictlypersonal, so linked to his individuality that the guaranty

automatically terminates upon his death. 

The contracts of suretyship entered into by K. H. Hemady in favor

of Luzon Surety Co. not being rendered intransmissible due to the

nature of the undertaking, nor by the stipulations of the contractsthemselves, nor by provision of law, his eventual liability

thereunder necessarily passed upon his death to his heirs. The

contracts, therefore, give rise to contingent claims provable

against his estate under section 5, Rule 87. 

“The most common example of the contigent claim is that whicharises when a person is bound as surety or guarantor for a

principal who is insolvent or dead. Under the ordinary contract of

suretyship the surety has no claim whatever against his principal

until he himself pays something by way of satisfaction upon the

obligation which is secured. When he does this, there instantly

arises in favor of the surety the right to compel the principal to

exonerate the surety. But until the surety has contributed

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something to the payment of the debt, or has performed the

secured obligation in whole or in part, he has no right of action

against anybody – no claim that could be reduced to judgment. 

For defendant administratrix it is averred that the above doctrine

refers to a case where the surety files claims against the estate of

the principal debtor; and it is urged that the rule does not apply

to the case before us, where the late Hemady was a surety, not a

principal debtor. The argument evinces a superficial view of the

relations between parties. If under the Gaskell ruling, the Luzon

Surety Co., as guarantor, could file a contingent claim against theestate of the principal debtors if the latter should die, there is

absolutely no reason why it could not file such a claim against the

estate of Hemady, since Hemady is a solidary co-debtor of his

principals. What the Luzon Surety Co. may claim from the estate

of a principal debtor it may equally claim from the estate of

Hemady, since, in view of the existing solidarity, the latter does

not even enjoy the benefit of exhaustion of the assets of the

principal debtor. 

The foregoing ruling is of course without prejudice to the

remedies of the administratrix against the principal debtors

under Articles 2071 and 2067 of the New Civil Code. 

Our conclusion is that the solidary guarantor’s liability is notextinguished by his death, and that in such event, the Luzon

Surety Co., had the right to file against the estate a contingent

claim for reimbursement. It becomes unnecessary now to discuss

the estate’s liability for premiums and stamp taxes, because

irrespective of the solution to this question, the Luzon Surety’sclaim did state a cause of action, and its dismissal was erroneous.