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ESTRELLA PALMARES v. CA

FACTS:

The case involves a loan extended by M.B. Lending Corporation to the spouses Osmeña and Merlyn Azarraga, with Estrella Palmares acting as a co-maker. The loan had an interest rate of 6% per annum, compounded every 30 days. After several payments, a balance of P13,700.00 remained. However, no further payments were made after September 26, 1991. The corporation filed a complaint against Palmares, as the lone party-defendant, based on her solidary liability under the promissory note. Palmares argued that she offered to settle the obligation but was informed that they would try to collect from the Azarraga spouses. She also claimed that there were usurious and unconscionable charges and that she should only be liable if the principal debtors default. The trial court dismissed the complaint, but the Court of Appeals reversed the decision and found Palmares liable for the outstanding balance, interest, penalty charges, attorney's fees, and costs of suit. Palmares filed a petition for review on certiorari with the Supreme Court.

In her defense, Palmares argued that the provisions in the promissory note were conflicting, with one paragraph defining her liability as that of a surety and the other as that of a guarantor. She contended that her liability should only be that of a guarantor. She also claimed that she cannot be compelled to pay the loan because there was no demand made and the principal debtors made a partial payment. Palmares further disputed the monetary award, arguing that the outstanding balance was only P13,700.00 and the interest charged was exorbitant.

The respondent corporation argued that the terms of the contract were clear, and Palmares had full knowledge of its contents when she signed it voluntarily. They contended that Palmares should be estopped from claiming ignorance or misapprehension of the contract. The court clarified the distinction between a surety and a guarantor, explaining that a surety promises to pay if the principal does not, while a guarantor agrees that the creditor may proceed against them if the principal is unable to pay. The court determined that Palmares' liability was that of a surety, as she bound herself to pay if the principal maker defaults.

ISSUES:

  1. Whether the liability of Palmares under the promissory note is that of a surety or a guarantor.

  2. Whether the stipulations on interest and penalty charges on the promissory note are valid.

  3. Whether Palmares can be compelled to pay the loan under the circumstances alleged.

RULING:

  1. Liability of Palmares

    • Ruling The Court ruled that Palmares is a surety and is solidarily liable with the principal debtors. The terms of the contract were clear and explicit in establishing her liability as joint and solidary, and her liability does not depend on the solvency of the principal debtor.

  2. Interest and Penalty Charges

    • Ruling The Court found the interest of 6% per month and the penalty of 3% per month permissible under the circumstances, given that the Usury Law is no longer applicable. However, the penalty interest was deemed excessive and was eliminated by the Court.

  3. Demand for Payment

    • Ruling The Court upheld that no further judicial or extrajudicial demand was necessary due to the waiver of notice and demand provision. Furthermore, Palmares' attempts to negotiate alternative payments did not absolve her from liability under the original terms of the promissory note.

PRINCIPLES:

  1. Suretyship and Guaranty

    • A surety is an insurer of the debt, directly responsible for the debtor’s obligation.

    • A guarantor is an insurer of the debtor’s solvency, liable only if the debtor cannot pay after due diligence by the creditor.

    • Suretyship involves a direct promise to pay the obligation, while guaranty involves a promise to pay if the debtor defaults.

  2. Contracts of Adhesion

    • Contracts of adhesion are not invalid per se but are scrutinized for ambiguities, which are construed against the drafter.

  3. Payment and Default

    • If a promissory note waives the right to demand before declaring default, no further demand is necessary.

    • A surety can be held liable immediately upon the principal’s default.

  4. Interest and Penalty Charges

    • Interest rates and penalties stipulated in contracts may be valid even if high, but courts can reduce them if found to be excessive or unconscionable.

  5. Attorney’s Fees

    • Attorney’s fees stipulated in a contract can be reduced by the courts if found to be unconscionable or unreasonable.