GAN TION VS CA

28 SCRA 235
FACTS: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment
case against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or
P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he
had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of
Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the
complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became
final.

On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a
month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate
amount of P4,320.00, corresponding to a period from August 1961 to October 1963. Ong Wan Sieng was able to obtain
a writ of execution of the judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals,
where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for
unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding that although
"respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500
could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to
be turned over by the client to his counsel."

ISSUE: Whether or not there is legal compensation between Gan Tion and Ong Wan Sieng.

HELD: Yes.

According to Article 1279 of the Civil Code, for compensation to be proper it is necessary that each one of the
obligor be bound principally and he must be at the same time the principal creditor of the other; that both of the debts
consist in a sum of money; the two debts be due; that they be liquidated and demandable; and that over neither of them
there be any restraint or controversy commenced by a third person and communicated at due time to the debtor.

In this case, the award must be made in favor of the litigant, not of his counsel, and is justified by way of
indemnity for damages recoverable by the litigant. It is the litigant who is the judgment creditor and who may enforce
the judgment by execution. The requisites of compensation are present in this case, Gan Tion and Ong Wan Sieng is
the debtor and creditor of each other. Ong Wan Sieng is indebted to Gan Tion in the amount of 4,320 and Gan Tion is
indebted to Ong Wan the amount of 500 for the attorney’s fees; both debts are liquidated, due and demandable and
the debts are not commenced by a third person. Such credit, therefore, may be properly be the subject of legal
compensation.

Therefore, there is legal compensation between Gan Tion and Ong Wan Sieng.

SILAHIS MARKETING VS IAC

180 SCRA 29

FACTS: Gregorio de Leon doing business under the name and style of Mark Industrial Sales sold and delivered to
Silahis Marketing Corporation various items of merchandise covered by several invoices in the aggregate amount of P
22,213.75 payable within thirty (30) days from date of the covering invoices. Allegedly due to Silahis' failure to pay its
account upon maturity despite repeated demands, de Leon filed before the then Court of First Instance of Manila a
complaint for the collection of the said accounts including accrued interest thereon in the amount of P 661.03 and
attorney's fees of P 5,000.00 plus costs of litigation.

Silahis answered the allegations of the complaint insofar as the invoices were concerned but presented as
affirmative defenses; (1) a debit memo for P 22,200.00 as unrealized profit for a supposed commission that Silahis
should have received from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly to Dole
Philippines, Incorporated by the latter sometime in August 1975 without coursing the same through the former allegedly
in violation of the usual practice concerning sale of merchandise to Dole Philippines, Inc.; and (2) Silahis' claim that it
is entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found defective by its client,
Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon.

On August 25, 1978, the lower court confirmed the liability of Silahis for the claim of de Leon but at the same
time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo for unrealized profit and
commission. The Court believes that the defendant is properly chargeable for the amounts of the unpaid invoices set
forth in the complaint. However, the Court also believes that the plaintiff is also properly chargeable for the debit memo
of P 22,200.00, Exh. '1'. This is because it was proven by the defendant from the testimonies of Isaias Fernando, Jr.
and Jose Joel Tamon that contrary to the agreement between de Leon and Silahis that the latter was to serve the
account of Dole Philippines in Davao, de Leon made a direct sale of sprockets for P 111,000.00 which thereby deprives
Silahis of its corresponding commission for P 22,200.00 which the defendant would have otherwise made if the plaintiff
had followed its previous arrangement with the defendant. However, as to the counterclaim of the defendant for a
cancellation of the amount of P 6,000.00 for defective stainless screen wire purchased and intended for Borden
International, Davao City, the Court believes that it is much too late now to present said claim because the purchase
was made and delivered as early as December 22,1975 and the proposed return to the defendant by Borden was made
on April 1, 1976 only. After deducting the amount of P 22,200.00, which is the unpaid commission of the defendant
from the principal total amount of the unpaid invoices of the plaintiff of P 22,213.75, the unpaid balance in favor of the
plaintiff is P 13.75. The claim for interest and attorney's fees of the plaintiff may be offset against the interest and
attorney's fees of the defendant.

In a decision dated March 1 7, 1986, respondent Intermediate Appellate Court set aside the decision of the
lower court and dismissed herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal
basis. The appellate court found that there was no agreement, verbal or otherwise, nor was there any contractual
obligation between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc. by de Leon; nor was there
anything in the debit memo obligating de Leon to pay a commission to Silahis for the sale of P 111,000.00 worth of
sprockets to Dole Philippines although in the past, the former did supply certain items to the latter for delivery to Dole
Philippines, Incorporated.

ISSUE: Whether or not de Leon is liable to Silahis for the commission or margin for the direct sale which the former
concluded and consummated with Dole Philippines thereby making a partial compensation for the debt of Silahis to de
Leon.

HELD: NO.

Article 1279 requires, among others, that in order that legal compensation shall take place, "the two debts be
due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting
the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim
existing from breach of contract. Silahis admits the validity of its outstanding accounts with private respondent in the
amount of P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20%
margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents
legal compensation from taking place.

The Court agrees with respondent appellate court that there is no evidence on record from which it can be
inferred that there was any agreement between the petitioner and private respondent prohibiting the latter from selling
directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract binding
between the parties considering that the same, as correctly found by the appellate court, was not signed by private
respondent nor was there any mention therein of any commitment by the latter to pay any commission to the former
involving the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00. Indeed, such document can be
taken as self-serving with no probative value absent a showing or at the very least an inference, that the party sought
to be bound assented to its contents or showed conformity thereto.

Therefore, there can be no partial compensation between Silahis and de Leon.

BPI vs Reyes
Facts:
On September 25, 1985, Edvin Reyes opened a joint savings account at Bank of the
Philippine Islands with his wife Sonia Reyes. Months later, also held a joint account with
his grandmother, Emeteria M. Fernandez where he regularly deposited U.S. treasury
warrants payable representing the latter’s pension. In 1989, Fernandez died without the
knowledge of the U.S. Treasury Department. However, she was still sent a U.S. treasury
check worth $377.003 or P10,556. This was deposited in her joint account with Reyes.
Subsequently, the said account was closed and its funds were transferred to the joint
account of Reyes and her wife. In 1991, the treasury warrant was dishonoured as it
was discovered that Fernandez died three days prior to its issuance. The U.S.
department asked from the petitioner bank a refund. Days later, Reyes received a
telegram requesting him to contact the BPI employees regarding the treasury check
subject to a claim by Citibank NA, the correspondent bank of BPI. He verbally
authorized them to debit from his joint account with his wife the value of the claim. Not
long after, Reyes surprisingly asked for the restitution of the debited amount plus
damages. He claimed that because of the debit, he failed to withdraw money when he
needed them.
Issue:
Whether or not the legal compensation is proper
Held:
Yes. Article 1290 of the Civil Code provides that when all the requisites mentioned in
Article 1279 are present, compensation take effect by the operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation. Legal compensation operates even if it is against the
will or without the consent of the parties.
All of the requisites of a proper compensation are present in this case. Petitioner bank
stands as a debtor of the private respondent, a depositor. At the same time, said bank is
the creditor of the private respondent with respect to the dishonored U.S. Treasury
Warrant which the latter illegally transferred to his joint account. The debts involved
consist of a sum of money. They are due, liquidated, and demandable. They are not
claimed by a third person.

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and

RAMON LAPEZ, doing business under the name and style SAPPHIRE SHIPPING,
respondents.
Facts:
A local bank, while acting as local correspondent bank, intercepted funds being coursed
through it by its foreign counterpart for transmittal and deposit to the account of an
individual with another local bank, and applied the said funds to certain obligations
owed to it by the said individual.
PNB appropriated the amounts of $2,627.11 and P34,340.38 from remittances of
Ramon Lapez’s principals abroad.
The first remittance was made by the NCB of Jeddah for the benefit of Lapez, to be
credited to his account at Citibank, Greenhills Branch; the second was from Libya, and
was intended to be deposited at Lapez’s account with PNB. Lapez made a written
demand for remittance of the equivalent of $2,627.11 by means of a letter dated
December 4, 1986. This was answered by PNB on December 22, 1986 inviting Lapez to
come for a conference.
There were two instances in the past, one in November 1980 and the other in January
1981 when Lapez’s account was doubly credited with the equivalents of $5,679.23 and
$5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. PNB
claims, however, that plaintiff’s claim has prescribed.
PNB made a demand upon Lapez for refund of the double or duplicated credits
erroneously made on his account, by means of a letter dated October 23, 1986 or 5
years and 11 months from November 1980, and 5 years and 9 months from January
1981.
The deduction of P34,340.38 was made by PNB with the knowledge and consent of
Lapez, who was issued a receipt dated February 18, 1987.
There is no question that the two erroneous double payments made to Lapez’s
accounts in 1980 and 1981 created an extra-contractual obligation on the part of Lapez
in favor of the PNB, under the principle of solutio indebiti, as follows:
"'If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises."' (Article 2154)
RTC and CA ruled in favor of Lapez.
Issue:
WoN PNB was legally justified in making the compensation or set-off against the two
remittances coursed through it in favor of private respondent to recover on the double
credits it erroneously made in 1980 and 1981, based on the principle of solutio indebiti.

Held:
 No, they were not.
In the case of the $2,627.11, requisites Nos. 2 through 5 in making compensation
take in effect are apparently present, for both debts consist in a sum of money, are both
due, liquidated and demandable, and over neither of them is there a retention or
controversy commenced by third persons and communicated in due time to the debtor.
Thus between PNB (as the local correspondent of the National Commercial Bank
of Jeddah) and Lapez as beneficiary, there is created an implied trust pursuant to Art.
1453 of the Civil Code, quoted as follows:
"'When the property is conveyed to a person in reliance upon his declared
intention to hold it for, or transfer it to another or the grantor, there is an implied trust in
favor of the person whose benefit is contemplated.
In view of the foregoing, the Court is of the opinion that the parties are not both
principally bound with respect to the $2,627.11 from Jeddah neither are they at the
same time principal creditor of the other.
Therefore, as matters stand, the parties' obligations are not subject to
compensation or set off under Art. 1279 of the Civil Code, for the reason that PNB is not
a principal debtor nor is Lapez a principal creditor insofar as the amount of $2,627.11 is
concerned. They are debtor and creditor only with respect to the double payments; but
are trustee-beneficiary as to the fund transfer of $2,627.11.
Only the Lapez is principally bound as a debtor of PNB to the extent of the
double credits. On the other hand, PNB was an implied trustee, who was obliged to
deliver to the Citibank for the benefit of Lapez the sum of $2,627.11.
Mirasol vs.CA
Facts:
The Mirasols are sugarland owners and planters. Philippine National Bank (PNB)
financed the Mirasols' sugar production venture FROM 1973-1975 under a crop loan
financing scheme. The Mirasols signed Credit Agreements, a Chattel Mortgage on
Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage
empowered PNB to negotiate and sell the latter's sugar and to apply the proceeds to the
payment of their obligations to it.

President Marcos issued PD 579 in November, 1974 authorizing Philippine Exchange

Co., Inc. (PHILEX) to purchase sugar allocated for export andauthorized PNB to finance
PHILEX's purchases. The decree directed that whatever profit PHILEX might realize
was to be remitted to the government. Believing that the proceeds were more than
enough to pay their obligations, petitioners asked PNB for an accounting of the
proceeds which it ignored. Petitioners continued to avail of other loans from PNB and to
make unfunded withdrawals from their accounts with said bank. PNB asked petitioners
to settle their due and demandable accounts. As a result, petitioners, conveyed to PNB
real properties by way of dacion en pago still leaving an unpaid amount. PNB
proceeded to extrajudicially foreclose the mortgaged properties. PNB still had
a deficiency claim.

Petitioners continued to ask PNB to account for the proceeds, insisting that said
proceeds, if properly liquidated, could offset their outstanding obligations. PNB
remained adamant in its stance that under P.D. No. 579, there was nothing
to account since under said law, all earnings from the export sales of sugar pertained to
the National Government.

On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and
damages against PNB.

Issue:
WON compensation through dacion en pago takes place between the parties,
thus extinguishes the obligation of the obligor.

Held:
Petitioners claim that the dacion en pago and the foreclosure of their mortgaged
properties were void for want of consideration. Petitioners insist that the loans granted
them by PNB from 1975 to 1982 had been fully paid by virtue of legal compensation.
Hence, the foreclosure was invalid and of no effect, since the mortgages were already
fully discharged. It is also averred that they agreed to the dacion only by virtue of a
martial law Arrest, Search, and Seizure Order (ASSO).
But the court find their argument unpersuasive. oth the lower court and the
appellate court found that the Mirasols admitted that they were indebted to PNB in the
sum stated in the latters counterclaim.[26] Petitioners nonetheless insist that the same
can be offset by the unliquidated amounts owed them by PNB for crop years 1973-74
and 1974-75. Petitioners argument has no basis in law. For legal compensation to take
place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must be
present.
In the present case, set-off or compensation cannot take place between the
parties because:
First, neither of the parties are mutually creditors and debtors of each other.
Under P.D. No. 579, neither PNB nor PHILEX could retain any difference claimed by the
Mirasols in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the
profits from the sales are to be paid.
Second, compensation cannot take place where one claim, as in the instant
case, is still the subject of litigation, as the same cannot be deemed liquidated.
With respect to the duress allegedly employed by PNB, which impugned
petitioners consent to the dacion en pago, both the trial court and the Court of Appeals
found that there was no evidence to support said claim. Factual findings of the trial
court, affirmed by the appellate court, are conclusive upon this Court.

#6
TRINIDAD v ACAPULCO, GR. No. 147477, June 27, 2006

FACTS:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged: Sometime in
February 1991, a certain Primitivo Cañete requested her to sell a Mercedes Benz for P580,000.00. Cañete
also said that if respondent herself will buy the car, Cañete was willing to sell it for P500,000.00.

Petitioner borrowed the car from respondent for two days but instead of returning the car as
promised, petitioner told respondent to buy the car from Cañete for P500,000.00 and that petitioner
would pay respondent after petitioner returns from Davao. Following petitioner’s instructions,
respondent requested Cañete to execute a deed of sale covering the car in respondent’s favor
for P500,000.00 for which respondent issued three checks in favor of Cañete.
 Respondent thereafter executed a deed of sale in favor of petitioner even though petitioner did
not pay her any consideration for the sale. When petitioner returned from Davao, he refused to pay
respondent the amount of P500,000.00 saying that said amount would just be deducted from whatever
outstanding obligation respondent had with petitioner. Due to petitioner’s failure to pay respondent, the
checks that respondent issued in favor of Cañete bounced, thus criminal charges were filed against
her.3 Respondent then prayed that the deed of sale between her and petitioner be declared null and void;
that the car be returned to her; and that petitioner be ordered to pay damages.

In his Answer petitioner contended that: it is not true that he borrowed the car and that any
demand was made to return it; he also did not give any instructions to respondent to buy the car from
Cañete because as early as September 28, 1990, Cañete has already sold the car to respondent
for P500,000.00; at the time respondent executed the deed of sale in his favor on March 4, 1991,
respondent was already in possession of the deed of sale from Cañete; the amount of P500,000.00 was
fully paid by way of dation in payment to partially extinguish respondent’s obligation with petitioner; the
contract entered into was a true sale of a motor vehicle and the mode of payment was that of dation in
payment agreed upon at the time of the sale.5

The parties filed their respective pre-trial briefs. Petitioner raised as issue: whether or not there
is valid dation in payment; while respondent put forth the questions: whether or not she is indebted to
petitioner in the amount of P566,000.00, and whether the car was ceded by her to petitioner in order to
partially pay off her obligation of P566,000.00 to petitioner as dation in payment.

The RTC issued an Order dated October 18, 1992 denying the Motion for Reconsideration and
Supplemental Motion of petitioner stating that the claim of dacion en pago is inexistent in this case and
the defense of legal compensation was not alleged or pleaded in petitioner’s Answer.

Petitioner appealed to the CA which affirmed the Decision of the trial court, finding that the issue
of legal compensation was filed too late as it was brought up only in the supplemental motion for
reconsideration; that the parties agreed that the issue to be tried was whether or not there was dacion
en pago; that dacion en pago however is not present in this case as the parties did not give their consent
thereto; that there can also be no legal compensation as one of the obligations of this case did not entail
payment of a monetary debt but the delivery of a car; and that the admission of petitioner that the sale
price of the car was not paid entitled respondent to file the action for rescission of sale.1

ISSUE:
Whether or not CA erred in holding that the answer of petitioner did not allege facts amounting to
extinguishment of obligation by legal compensation

HELD:

YES, CA erred in holding that the answer of petitioner did not allege facts amounting to
extinguishment of obligation by legal compensation.
 Under Article 1290 of the New Civil Code, which provides, When all the requisites
mentioned in article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation.

Also Article 1279 provides that in order that compensation may be proper, it is necessary:

1. that each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

2. that both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

3. that the two debts be due;

4. that they be liquidated and demandable;

5. that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

In this case, While the proceedings in the RTC focused on ascertaining the presence of the
elements of dacion en pago, it was likewise proven that petitioner owed respondent the amount
of P500,000.00 while respondent owed petitioner P566,000.00; that both debts are due, liquidated and
demandable, and; that neither of the debts or obligations are subject of a controversy commenced by a
third person. Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is
off-set against the P566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00, which
respondent should pay with 12% interest per annum from date of judicial or extrajudicial deed. Since there
was no extrajudicial deed in this case, the interest shall be resolved from the date petitioner filed its
Supplemental Motion for Reconsideration invoking for the first time legal compensation, that is, May 20,
1992.

Hence, the petition is GRANTED. The decision of the Court of Appeals dated February
16, 2001 is REVERSED and SET ASIDE. The P500,000.00 which Hermenegildo M. Trinidad
owed Estrella Acapulco is offset against the P566,000.00 which Acapulco owed Trinidad.
Acapulco is ordered to pay Trinidad the amount of P66,000.00 plus interest at 12% per annum
from May 20, 1992 until full payment.
#7
MONTEMAYOR v MILLORA, GR. No. 168251, July 27, 2011

FACTS:

On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente) obtained a loan of ₱400,000.00
from petitioner Dr. Jesus M. Montemayor (Jesus) as evidenced by a promissory note executed by Vicente.
On August 10, 1990, the parties executed a loan contract wherein it was provided that the loan has a
stipulated monthly interest of 2% and that Vicente had already paid the amount of ₱100,000.00 as well
as the ₱8,000.00 representing the interest for the period July 24 to August 23, 1990.

Subsequently and with Vicente’s consent, the interest rate was increased to 3.5% or ₱10,500.00
a month. From March 24, 1991 to July 23, 1991, or for a period of four months, Vicente was supposed to
pay ₱42,000.00 as interest but was able to pay only ₱24,000.00. This was the last payment Vicente made.
Jesus made several demands for Vicente to settle his obligation but to no avail.
 Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint for Sum of Money
against Vicente. On October 19, 1993, Vicente filed his Answer interposing a counterclaim for attorney’s
fees of not less than ₱500,000.00. Vicente claimed that he handled several cases for Jesus but he was
summarily dismissed from handling them when the instant complaint for sum of money was filed.

October 27, 1999, the RTC ordered Vicente to pay Jesus his monetary obligation amounting to
₱300,000.00 plus interest of 12% from the time of the filing of the complaint on August 17, 1993 until fully
paid. At the same time, the trial court found merit in Vicente’s counterclaim and thus ordered Jesus to
pay Vicente his attorney’s fees which is equivalent to the amount of Vicente’s monetary liability, and
which shall be set-off with the amount Vicente is adjudged to pay Jesus.

Judgment is hereby rendered ordering defendant Vicente D. Millora to pay plaintiff Jesus M.
Montemayor the sum of ₱300,000.00 with interest at the rate of 12% per annum counted from the filing
of the instant complaint on August 17, 1993 until fully paid and whatever amount recoverable from
defendant shall be set off by an equivalent amount awarded by the court on the counterclaim
representing attorney’s fees of defendant on the basis of "quantum meruit" for legal services previously
rendered to plaintiff.

Jesus filed his Motion for Reconsideration thereto on October 10, 2002 but this was eventually
denied by the trial court through its Order dated October 2, 2003. Jesus went to the CA via a Petition for
Certiorari under Rule 65 of the Rules of Court. On May 19, 2005, the CA denied the petiton.

ISSUE:

Whether or not despite the absence of a specific amount in the decision representing respondent’s
counterclaim, the same could be validly offset against the specific amount of award mention in favor of
the petitioner

HELD:

NO, The same could not be validly offset against the specific amount of award mention in favo
of the Petitioner.

Under the law, once a judgement attains finality it thereby becomes immutable and unalterable.
Also, for legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the
New Civil Code, quoted below, must be present.
 Article 1278 of the New Civil Code, Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.

Article 1279 of the New Civil Code, in order that compensation may be proper, it is
necessary:

1. that each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;

2. that both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

3. that the two debts be due;

4. that they be liquidated and demandable;

5. that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

In this case, both obligations are liquidated. Vicente has the obligation to pay his debt due to
Jesus in the amount of ₱300,000.00 with interest at the rate of 12% per annum counted from the filing
of the instant complaint on August 17, 1993 until fully paid. Jesus, on the other hand, has the obligation
to pay attorney’s fees which the RTC had already determined to be equivalent to whatever amount
recoverable from Vicente. The said attorney’s fees were awarded by the RTC on the counterclaim of
Vicente on the basis of "quantum meruit" for the legal services he previously rendered to Jesus.

Hence, the instant Petition on Certiorari is denied.

UNION BANK v DBP, GR No. 191555, January 20, 2014

Facts:
Foodmasters, Inc. (FI) had outstanding loan obligation to both Union Bank’s
predecessor-in-interest, Bancom Development Corporation (Bancom), and to Development Bank
of the Philippines (DBP).
 FI and DBP entered into a Deed of Cession of Property in Payment of Debt (dacion en
pago) whereby the former ceded in favor of the latter certain properties (including a processing
plant) in consideration of the following:
(a) The full and complete satisfaction of FI’s loan obligations to DBP; and
(b) The direct assumption by DBP of FI’s obligation to Bancom in the amount of
P17,000,000.00 (Assumed Obnligation).
DBP, as the new owner of the processing plant, leased back for 20 years the said property
to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP
and Bancom. DBP also entered into a separate agreement with Bancom (Assumption
Agreement) whereby the former:
(a) Confirmed its assumption of FI’s obligations to Bancom; and
(b) Undertook to remit up to 30% of any and all rentals due from FI to Bancom which
would serve as payment of the assumed obligations, to be paid in monthly installments.
On May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to
Foodmasters Worldwide, Inc. (FW) On May 9, 1984, Bancom conveyed all its receivables,
including DBP’s assumed obligations, to Union Bank. Claiming that the subject rentals have not
been duly remitted despite its repeated demands, Union Bank Filed a collection case against
DBP before the RTC.
DBP countered that the obligations it assumed were payable only out of the rental
payments made by FI. Since, FI had yet to pay the same, DBP’s obligation to Union Bank had
not arisen.
RTC ruled that when DBP failed to remit the subject rentals to Union Bank, it defaulted
on its assumed obligations.
CA set aside the RTC’s ruling. CA ruled that DBP did not default in its obligation to
remit the subject rentals to Union Bank precisely because it had yet to receive the rental
payments of FW.
On January 13, 2004, SC granted DBP’s appeal, and thereby reversed and set aside the
CA’s ruling. SC acknowledged that DBP’s obligation to Union Bank for remittance of the lease
payments is contingent on FW’s prior payment to DBP, and that any deficiency DBP had to pay
by December 29, 1998 as per the Assumption Agreement cannot be determined until after the
satisfaction of FW’s own rental obligations to DBP.
Union Bank moved for reconsideration which was denied by the SC.
DBP moved for the execution of the said decision before the RTC. The RTC then issued
a writ of execution ordering Union Bank to return to DBP all funds it received pursuant to
October 15, 2001 Writ of Execution. On September 13, 2005, union Bank filed a Manifestation
and Motion to Affirm Legal Compensation to the RTC, praying that the RTC apply legal
compensation between itself and DBP in order to offset the return of funds it previously received
from DBP.
RTC denied the above-mentioned motion for lack of merit. With Union Bank’s motion
for reconsideration having denied, Union Bank filed a petition for certiorari with the CA.
CA dismissed Union Bank’s petition, finding no grave abuse of discretion on the RTC’s
part. CA affirmed the denial of its motion to affirm legal compensation.
Union Bank moved for reconsideration which was denied in a resolution dated February
26, 2010; hence, the instant petition.

Issue:
Whether or not the CA correctly upheld the denial of Union Bank’s motion to affirm
legal compensation.

Held:
Yes. Compensation is defined as a mode of extinguishment obligations whereby two
persons in their capacity as principals are mutual debtors and creditors of each other with respect
to equally liquidated and demandable obligations to which no retention or controversy has been
timely commenced and communicated by the third parties. The requisites therefore are provided
under Article 1279 of the Civil Code which reads as follows:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditors of the other;
(2) That both debts consist in a sum of money, or if the things due are consumables, they
be of the same kind, and also of the same quality of the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by the
third persons and communicated in due time to the debtor.
The rule on legal compensation is stated in Article 1290 of the Civil Code which provides
that “when all the requisites mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguished both debts to concurrent amount, even though the creditors
and debtors are not aware of the compensation.”
Therefore, compensation could not have taken place between these debts for the apparent
reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s
assumed obligations to Union Bank for remittance of the lease payment are “contingent on the
prior payment thereof by FW to DBP,” it cannot be said that both debts are due (requisite 3 of
Article 1279 of the Civil Code). Also, the Court observed that any deficiency that DBP had to
make up for the full satisfaction of the assumed obligations “cannot be determined until
concluded that the same debt had already been liquidated, and thereby became demandable
(requisite 4 of Article 1279 of the Civil Code).
Thus, CA correctly upheld the denial of Union Bank’s motion to affirm legal
compensation.

April 30, 1971 G.R. No. L-29981

EUSEBIO S. MILLAR v. CA and ANTONIO P. GABRIEL

Facts:

Facts: Millar obtained a favorable condemning Antonio P. Gabriel to pay him the sum of P1,746.98 with interest at
12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of
suit. The lower court issued the writ of execution on the basis of which the sheriff seized the respondent's Willy's
Ford jeep. The respondent, however, pleaded with the petitioner to release the jeep under an arrangement
whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the vehicle in favor of
the petitioner. The petitioner agreed to the arrangement; thus, the parties executed a chattel mortgage on the
jeep. Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or
not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the
judgment obligation

ISSUE: Whether or not there is an implied novation.

HELD:

No, there has no implied novation. The Suprene Court held that there is no substantial incompatibility
between the mortgage obligation and the judgment liability of the respondent sufficient to justify a
conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the
deed of chattel mortgage serves only to provide an express and specific method for its extinguishment
— payment in two equal installments. The chattel mortgage simply gave the respondent a method and
more time to enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement in
no manner introduced any substantial modification or alteration of the judgment. Instead of
extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage
expressly ratified and confirmed the existence of the same, amplifying only the mode and period for
compliance by the respondent.

The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. The law requires no specific form for an effective novation by implication.
The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and
the second obligation novates the first. If they can stand together, no incompatibility results and
novation does not take place.
G.R. No. L-25897 August 21, 1976

AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner

vs.
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros
Occidental, Branch Bacolod City, and SERAFIN LAZALITA, respondents.

FERNANDO, Acting C.J.:

FACTS:
The municipality of Victorias owned several parcels of lands in Victorias, Negros
Occidental. It was sold to its inhabitants either in cash/installment for ten (10) years at P1.00/sq
meter. On Dec. 7, 1948, Lazalita bought Lot No. 1, Block 16 with an area of 230 sq.meters. Upon
full payment, a deed of definite sale and a certificate of title were executed in favor of buyer. He
possessed the land for eight (8) continuous years, and he introduced permanent and valuable
improvements thereon.

On 1955, spouses Dormitorio bought Lot No. 2, Block 16 from the Municipality with an
area of 343 sq.meters. They were able to obtain a transfer Certificate of Title although they have
not taken actual possession of said property. They subsequently filed an ejectment suit against
Lazalita. Upon investigation, it was discovered that the land originally bought by Lazalita was
converted into a municipal road (Jover St.) and the lot he was occupying actually belonged to the
spouses Dormitorio. With that, the Court of First Instance of Negros Occidental ordered Lazalita
to vacate the place and pay a monthly rental of P20.00 to Dormitorio.

Later, Lazalita filed a case against the Municipality since the value of his permanent
improvements and building introduced/constructed on the Dormitorio’s lot have far exceeded the
original purchase price of the land. Based on the land’s fair market value, it is now saleable at
present at P20.00/sq.meter. The Municipality agreed to amicably settle the case by giving Lazalita
another lot if they could open their newly proposed subdivision or pay him back the amount
necessary and just for him to acquire another lot for his residence and for the expenses of
transferring his present residential house thereto.

The parties in the ejectment case agreed that the decision in that case would no longer
be enforced and executed in relation to the amicable settlement reached by Lazalita and the
municipality. However, by means of fraud, misrepresentation and concealment of the true facts
of the case, the spouses were able to mislead the court thru an ex-parte motion to issue by
mistake an Order for the issuance of a Writ of Execution by making the court believe that the
former decision was still enforceable and executory.

Lazalita then filed a petition to set aside the writ of execution which was granted by the
CFI. The CFI ruled that the compromise agreement as evidenced by the agreed stipulation of
facts was a clear proof of animus novandi and superseded the first court order in the ejectment
case.

ISSUE:
Whether or not there was novation in this case.
RULING:
Yes. The Supreme Court ruled that the compromise agreement created new rights and
obligations between the parties which naturally superseded the judgment of the municipal court.
The judge properly set aside the writ of execution mistakenly issued. The presence of animus
novandi is undeniable nor is there anything novel in such an approach. When after judgment has
become final, facts and circumstances transpire which render its execution impossible or unjust,
the interested party may ask the court to modify or alter the judgment to harmonize the same
with justice and the facts (Moilna vs De la Riva). In this case, we have a stronger case since there
is a later decision expressly superseding the decision in the ejectment case.

The agreement was a result of a compromise which had the effect of res judicata. Thus,
the parties were bound by it. There was an element of bad faith when the spouses tried to evade
its terms. The spouses can’t claim that they were not informed by Judge Fernandez about
Lazalita’s motion to set aside the writ of execution. The spouses filed a Motion for Reconsideration
which in effect cured the failure to notify them. Hence, petition was dismissed

G.R. No. L-18411 December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.

Facts:
The Rodriguez spouses bought a parcel of land in Quezon City from Magdalena Estates. They executed a promissory
note in view of an unpaid balance of Php5,000. On the the same day, Rodriguez spouses and Luzon Surety executed
a bond in favor of Magdalena, the undertaking thereof being embodied therein as follows:

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price of
a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City, covered
by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from January 7,
1957; That the Surety shall be notified in writing within Ten (10) days from moment of default otherwise, this
undertaking is automatically null and void.

When obligation became due and demandable Luzon Surety paid Php5,000 to Magdalena. Magdalena demanded
from Rodriguez spouses Php655.89 the alleged accumulated interests on the Php5,000 principal amount.
The spouses refused to pay that lead Magdalena to file a suit in the Municipal Court of Manila to enforce the payment.
Court rendered judgment in favor of Magdalena and Rodriguez spouses were ordered to pay jointly and Php655.89 ,
the legal interest from November 10, 19587 which is the date of filing of the complaint.

Upon appeal to CFI of Manila, the CFI ruled in favor of Magdalena ordering the defendants-appellants to pay jointly
and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date of the judicial demand,
the sum of P100.00 as attorney's fees, and to pay the costs. Hence this appeal.
Issue:
Whether or not there was novation

Ruling:
NO, there was no novation.

Magdalena did not waive or condone the interests due because it is very clear in the promissory note that Luzon
Surety will only pay the balance of the purchase price of Php5,000. The liability of Luzon Surety is not extended beyond
the terms of his contract. There was no novation or modification of the obligation just because Magdalena accepted
without reservation the subsequent agreement in the surety bond despite its failure to provide that is also guaranteed
payment of accruing interest.

The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established
that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement
of the parties or in acts of similar import.
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only
the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is
merely supplemented by the new one.

Just because a creditor receives a guaranty or accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a
novation and the creditor can still enforce the obligation against the original debtor.

[G.R. No. 120817. November 4, 1996]

ELSA B. REYES, petitioner, vs. COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT
ASSOCIATION, INC., and GRACIELA ELEAZAR, respondents.

FACTS:

The petitioner alleges that Eurotrust extended to Bermic a loan amounting to P216,053,126.80
to finance the construction of the latters Ritz Condominium and Gold Business Park. Bermic issued 21
postdated checks to cover payments of the loan packages. However, when those checks were presented
for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking Corporation
(RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrusts notices and repeated
demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against her
several criminal complaints for violation of B.P. 22 and estafa.

Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989, Eurotrust
extended to Bermic several loan packages amounting to P190,336,388.86. For its part, Bermic issued
several postdated checks to cover payments of the principal and interest of every loan packages
involved.
 Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, conducted its own
investigation and found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the
former borrowed the same securities but failed to return them to AFP-MBAI; and that the amounts paid
by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others.

When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to
AFP-MBAI, she, as President of Bermic, requested a meeting with Eurotrust representatives. The
representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the
real owners of the fund-AFP-MBAI and DECS-IMC. This agreement was formalized in two letters dated
March 19, 1991. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and
made payments to the latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.

However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks
issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts
in constructive trust for the real owners. But Reyes continued to collect on the other postdated checks
dated April 17 to June 28, 1991. Upon her counsels advise, Eleazar had the payment stopped. Hence, her
checks issued in favor of Eurotrust were dishonored.

The Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the complaints
filed by Elsa Reyes against Graciela Eleazar. Reyes filed a petition for review of the said resolution with
respondent Secretary of Justice contending that novation did not take place. The Secretary of Justice
dismissed the petition.

At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI
lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes. Between August 1989
and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable securities. AFP-MBAI
decided to purchase several securities amounting to P120,000,000.00 from Eurotrust. A total of 21
transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI
treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury
notes from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFP-MBAIs
repeated demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated
checks in favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust
nonetheless made partial payment to AFP-MBAI amounting to P35,151,637.72. However, after
deducting this partial payment, the amounts of P73 million treasury notes with interest and
P35,151,637.72 have remained unpaid.

The Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of
an information against Reyes for violation of BP 22 and estafa.

ISSUE:
WON novation took place.

RULING:
 We cannot see how novation can take place considering the surrounding circumstances which
negate the same. The principle of novation by substitution of creditor was erroneously applied in the
first questioned resolution involving the contract of loan between petitioner and respondent Eleazar.

Admittedly, in order that a novation can take place, the concurrence of the following requisites is
indispensable:

1. there must be a previous valid obligation,

2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.

Upon the facts shown in the record, there is no doubt that the last three essential requisites of
novation are wanting in the instant case. No new agreement for substitution of creditor was forged
among the parties concerned which would take the place of the preceding contract. The absence of a
new contract extinguishing the old one destroys any possibility of novation by conventional subrogation.
In including that a novation took place, the respondent court relied on the two letters dated March 19,
1991, which, according to it, formalized petitioners and respondent Eleazars agreement that BERMIC
would directly settle its obligation with the real owners of the funds - the AFP MBAI and DECS IMC.

A cursory reading of these letters, however, clearly and unmistakably shows that there was
nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as
the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely
gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and
DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. Well settled is
the rule that novation by substitution of creditor requires an agreement among the three parties
concerned - the original creditor, the debtor and the new creditor. It is a new contractual relation based
on the mutual agreement among all the necessary parties. Hence, there is no novation if no new
contract was executed by the parties. Article 1301 of the Civil Code is explicit, stating that Conventional
subrogation of a third person requires the consent of the original parties and of the third person.

The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them
does not ipso facto result in novation. There must be an express intention to novate - animus novandi.
Novation is never presumed Article 1300 of the Civil Code provides inter alia that conventional
subrogation must be clearly established in order that it may take effect.

Regarding the second Resolution of respondent Secretary of Justice, the contention is bereft of
any legal and factual basis. Just like in the first questioned resolution, no novation took place in this
case. A thorough examination of the records shows that no hard evidence was presented which would
expressly and unequivocally demonstrate the intention of respondent AFP-MBAI to release petitioner
from her obligation to pay under the contract of sale of securities. It is a rule that novation by
substitution of debtor must always be made with the consent of the creditor. Article 1293 of the Civil
Code is explicit, stating that novation which consists in substituting a new debtor in the place of the
original one, may be made even without or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

The consent of the creditor to a novation by change of debtor is as indispensable as the

creditors consent in conventional subrogation in order that a novation shall legally take place. The mere
circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the
obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to
release petitioner from her responsibility, does not constitute novation, at most, it only creates a
juridical relation of co-debtorship or suretyship on the part of respondent Eleazar to the contractual
obligation of petitioner to AFP-MBAI and the latter can still enforce the obligation against the petitioner.

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle - novatio non praesumitur - that novation is never presumed. At
bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito basically
extinguishing the old obligation for the new one.

The foregoing elements are found wanting in the case at bar.

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,

vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line
of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). In
compliance with the requirement to give a good and sufficient bond in the amount of P400,000.00, PAGRICO
submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in
the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound
themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit]
established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety
"without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also
provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also
include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection
of the obligation [of R & B Surety]" under the Surety Bond.

In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered
into with R & B Surety: (a) one agreement was executed by the Catholic Church Mart (CCM) and by petitioner
Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual
capacity; and (b) another agreement was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K.
Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and President of PACOCO
respectively and in their personal and individual capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay
an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said
SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED."

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B
Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totaling P70,000.00 evidenced by detailed vouchers and receipts.

R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for
reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the
Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan,
Jr., Jose K. Villanueva and Liu Tua Ben.

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R
& B Surety among others did not express the true intent of the parties thereto in that he had been asked by R & B
Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with
the requirements of the PNB that credit lines be secured.

Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R
& B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the
Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by
virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr.
undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity
Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation;
and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as
indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the
Surety Bond.

Petitioner Cochingyan and petitioner Villanueva did not submit any evidence on their defense.

The trial court rendered a decision in favor of R & B Surety. Not satisfied with the decision of the trial court, the
petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to the Supreme
Court as one raising only questions of law.

ISSUE:

WON the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the
Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements.

RULING:

We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the
Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust
Agreement.
The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement
merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor. Novation through a change of
the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by
the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation.
Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective
novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof.

If objective novation is to take place, it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old
one. Novation is never presumed: it must be established either by the discharge of the old debt by the express
terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible.

Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical
relation between the parties to the original contract is extended to a third person. It is essential that the old debtor
be released from the obligation, and the third person or new debtor take his place in the new relation. If the old
debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor
becomes merely a co-debtor or surety or a co-surety.

Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly
terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in
any manner release" R & B Surety from its obligation under the Surety Bond.

Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of novation by implication. But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in
other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of
implied novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume
the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business
for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical
example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the
extinguishment of the liability of the first debtor.

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound
to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly
liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had
been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R &
B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly,
PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to
the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those
indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.

G.R. No. 79642 July 5, 1993

BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner,
vs.
TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF APPEALS, respondents.
Facts: Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private
respondent Tropical Hut Food Market. Inc. ("Tropical") executed an 28 November 1980 a contract
of lease. Broadway, as lessor, agreed to lease a 3,042.19 square meter portion of the Broadway
Centrum Commercial Complex for a period of ten (10) years, commencing from 1 February 1981
and expiring on 1 February 1991, "renewable for a like period upon the mutual agreement of
both parties."
During the first year of the lessor-lessee relationship between Broadway and Tropical, no
problems were apparently experienced by either of them. On 5 February 1982, however, Tropical
wrote to Broadway stating that Tropical's rental payments to Broadway were equivalent to 7.31%
of Tropical's actual sales of P17,246,103.00 in 1981, while "[Tropical's] gross profit, rate [was]
only 10%." Tropical went on to say that the rental specified in that contract had been "based
merely on [Tropical's) projections that [Tropical] could reach an average sale of P120,000.00 a
day;" however, Tropical's total sales projection for 1982 was only P23,000,000.00. This would
mean again a rental rate of 6.08% of sales "which is too high for Tropical Hut-Broadway
considering that the present rental rates of other Tropical branches are even below the normal
rate of 1.5% on sales."
Broadway responded to Tropical's latter by stating that it (Broadway) believed that the problems
of Tropical's supermarket in the Broadway Centrum were within the control of Tropical's
management. Officers of Tropical met with the President of Broadway and during this
conference, Tropical's officers recounted the "low sales volume" that the Tropical Supermarket
in the Broadway Centrum was experiencing, apparently as a result of the temporary closure of
Doña Juana Rodriguez Avenue.3 This Avenue is a major thoroughfare adjacent to the Broadway
Centrum and was then closed to vehicular traffic because of the road expansion project of the
Government. Broadway's President, Mrs. Cita Fernandez Orosa, was aware that the temporary
closure of the Doña Juana Rodriguez Avenue had affected the business of all the Broadway's
tenants, including Tropical. She, therefore, agreed on 20 April 1982 to a "provisional and
temporary agreement"
Months later, the road expansion project at the Doña Juana Rodriguez Avenue was completed.
By a letter dated 15 December 1982, addressed to Tropical, Broadway referred to the rental
which "as of last, April 20, 1982, wasprovisionally reduced" to P60,000.00 a month or 2% of gross
receipts whichever is higher "without waving any of [Broadway's] rights under our rental
agreement."
Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadway's
President wrote to Mr. Luis Que turning down his request for reconsideration. Broadway,
however, was evidently desirous of keeping Tropical as a tenant if possible and so stated that the
P100,000.00 monthly rental would begin, not on April 1983 as stated in its letter of 15 December
1982 but rather on July 1983. By a letter, dated 9 April 1983, the Credit and Collection Officer of
Broadway sent Mr. Luis Que a bill for P81,320.00 representing the accrued differential of
P20,000.00 per month between the rental which Broadway was willing to grant to Tropical
(P80,000.00 per month starting 1 January, 1983) and up to 30 June 1983)and the P60,000.00 per
month or 2% of gross receipts whichever is higher, under the temporary and provisional letter-
agreement of 20 April 1982.
Tropical responded to the statement of account sent by Broadway by pleading, once more, in a
letter dated 15 April 1983, that Tropical's present rentals of P60,000.00 monthly or 2% of gross
receipts, whichever is higher, "would at least stay until we have somehow recovered," to which
Tropical proposed, however, to add 20% of its income from concessionaires (i.e., concessionaires
at Tropical-Broadway Supermarket).7
Tropical's last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983,
Broadway's President wrote to Mr. Luis Que stating that "the matter was no longer negotiable":
A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial Court,
Quezon City, seeking a restraining order or preliminary injunction to prevent Broadway from
invoking and implementing Section 5 of their Lease Contract and asking the court to decree
that the, rental provided for in the letter-agreement of 20 April 1982 "should subsist while the
low volume of sales [of Tropical] still continues." A restraining order was issued by the trial
court ex parte the next day and a preliminary injunction was granted on 2 June 1983, upon
Tropical's filing of a bond in the amount of P100,000.00.
On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed
Tropical that the basic rental would be increased to P140,000.00 per month during the next three
(3) years from 1 February 1984 to 1 February 1987 in accordance with paragraph (3) of the Lease
Contract dated 28 November 1980.
RTC: WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and against the
defendant as follows:
1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh. "G" or "5") shall
subsist or be effective during the period that a plaintiff cannot achieve its Projected daily sales
average as envisioned in its feasibility study;
3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is declared as partially
novated or modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area of the leased promises
afterplaintiff has achieved its projected daily sales average is fixed as follows:
February 1, 1981 to February 1, 1984 —
P39.45 per square meter or P101,609.00;
February 1, 1984 to February 1, 1987 —
P46.02 per square meter or P118.530.00;
February 1, 1987 to February 1, 1991 —
P54.24 per square mater or P139,702.00. CA: AFFIRMED.
Issue: Whether or not the latter-agreement dated 20 April 1982 had novated the Contract of
Lease of 28 November 1980.
Held: No. the basic conception that novation is the extinguishment of an obligation by the
substitution of that obligation with a subsequent one, which terminates it, either by changing its
object or principal conditions or by substituting a now debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 12Novation through a change of the
object or principal conditions of an existing obligation is referred to as objective (or real)
novation. Novation by the change of either the person of the debtor or of the creditor is described
as subjective (or personal) novation. Novation may also be objective and subjective (mixed) at
the same time. In both objective and subjective novation, a dual purpose is achieved — an
obligation in extinguished and a news one is created In lieu thereof. 13
If objective novation is to take place, it is essential that the new obligation expressly declare that
the old obligation to be extinguished, or that now obligation be on every point incompatible with
the old one. 14 Novation is never presumed; it must be established either by the discharge of use
old debt by the express terms of the new agreement, or by the acts of the parties whose intention
to dissolve the old obligation as a consideration of the emergence of the new one must be clearly
manifested. 15 It is hardly necessary to add that the role that novation is never presumed, is not
avoided by merely referring to partial novation. The will to novate, whether totally or partially,
must appear by express agreement of the parties, by their acts which are too clear and
unequivocal to be mistaken.
Applying the above principles to the case at bar, it is entirely clear to the court that the letter-
agreement of 20 April 1992 did not extinguish or alter the obligations of respondent Tropical and
the rights of petitioner Broadway under their lease contract dated 28 November 1980.

[G.R. No. 147950. December 11, 2003]

CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE, INC., respondent.
Facts: Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a domestic
corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to Delta
for P25,000,000.00 in three separate credit agreements dated May 11, June 19, and August 22,
1979.[3] On several occasions, Delta availed of the credit line by discounting with SIHI some of
its receivables, which evidence actual sales of Deltas vehicles. Delta eventually became indebted
to SIHI to the tune of P24,010,269.32.[4]
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel
Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses,
CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of
Delta on January 23 and April 25, 1980.[5] In each promissory note, CBLI promised to pay Delta
or order, P2,314,000 payable in 60 monthly installments starting August 31, 1980, with interest
at 14% per annum. CBLI further promised to pay the holder of the said notes 25% of the amount
due on the same as attorneys fees and expenses of collection, whether actually incurred or not,
in case of judicial proceedings to enforce collection. In addition to the notes, CBLI executed
chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations under the promissory notes.[6] The
restructuring agreement provided for a new schedule of payments of CBLIs past due installments,
extending the period to pay, and stipulating daily remittance instead of the previously agreed
monthly remittance of payments. In case of default, Delta would have the authority to take over
the management and operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas,
remitted and/or updated CBLIs past due account. CBLI and Delta also increased the interest rate
to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables[7] in
favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In
view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of
Agreement dated March 31, 1982.[8] Delta obligated itself to pay a fixed monthly amortization
of P400,000 to SIHI and to discount with SIHI P8,000,000 worth of receivables with the
understanding that SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten
CBLI with the enforcement of the management takeover clause.
CBLI filed on May 3, 1982, a complaint for injunction with CFI Pasay City.
In due time, Delta filed its amended answer with applications for the issuance of a writ of
preliminary mandatory injunction to enforce the management takeover clause and a writ of
preliminary attachment over the buses it sold to CBLI.[10] On December 27, 1982,[11] the trial
court granted Deltas prayer for issuance of a writ of preliminary mandatory injunction and
preliminary attachment on account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale[12] assigning to SIHI five (5) of the sixteen (16) promissory notes[13] from California Bus
Lines, Inc. At the time of assignment, these five promissory notes, identified and numbered as
80-53, 80-54, 80-55, 80-56, and 80-57, had a total value of P16,152,819.80 inclusive of interest
at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,[14] to CBLI requiring CBLI to
remit the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of
Civil Case No. 0023-P and of the fact that Delta had taken over its management and
operations.[15]
As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued at
P27,067,162.22, as payment in kind.[16] On December 29, 1983, SIHI accepted Deltas offer, and
Delta transferred the ownership of its available buses to SIHI, which in turn acknowledged full
payment of Deltas remaining obligation.[17] Thereafter, Delta and CBLI entered into a
compromise agreement on July 24, 1984,[18] in Civil Case No. 0023-P, the injunction case before
the RTC of Pasay. CBLI agreed that Delta would exercise its right to extrajudicially foreclose on
the chattel mortgages over the 35 bus units. The RTC of Pasay approved this compromise
agreement the following day, July 25, 1984.[19] Following this, CBLI vehemently refused to pay
SIHI the value of the five promissory notes, contending that the compromise agreement was in
full settlement of all its obligations to Delta including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI
in the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with
interest at 14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against
the properties of CBLI.[20]
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages
pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of
Pasay a motion for execution of the judgment based on the compromise agreement.[21] The RTC
of Pasay granted this motion the following day.[22]
RTC: in favor of SIHI Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had
previously been attached by the sheriff CBLI opposed SIHIs motion to allow the sale of the 16
buses. On May 3, 1989,[33] Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow
the sale of the 16 buses listed in its motion to amend. The trial court ruled that the best interest
of the parties might be better served by denying further sales of the buses and to go direct to the
trial of the case on the merits.[34] After trial, judgment was rendered in Civil Case No. 84-28505
on June 3, 1993, discharging CBLI from liability on the five promissory notes. The trial court
likewise favorably ruled on CBLIscompulsory counterclaim. The trial court directed SIHI to return
the 16 buses or to pay CBLI P4,000,000 representing the value of the seized buses, with interest
at 12% p.a.
SIHI appealed the decision to the Court of Appeals. We find defendant-appellee CBLI liable for
the value of the five (5) promissory notes subject of the complaint a quo less the proceeds from
the attached sixteen (16) buses. The award of attorneys fees and costs is eliminated. The
appealed decision is hereby REVERSED
Issue: 1) whether the Restructuring Agreement dated October 7, 1981, between petitioner CBLI
and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to
respondent SIHI, and (2) whether the compromise agreement in Civil Case No. 0023-P
superseded and/or discharged the subject five promissory notes.
Held: 1.No. the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly
stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal
declaration of extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding of novation by
implication.[59] However, our review of its terms yields no incompatibility between the
promissory notes and the restructuring agreement.
It is clear from the foregoing that the restructuring agreement, instead of containing provisions
absolutely incompatible with the obligations of the judgment, expressly ratifies such obligations
in paragraph 8 and contains provisions for satisfying them. There was no change in the object of
the prior obligations
2. Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984,
in Civil Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta and
CBLI cannot deny that the five promissory notes were no longer subject of Civil Case No. 0023-P
when they entered into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to
compromise the same. Deltas limited authority to collect for SIHI stipulated in the September 13,
1985, Deed of Sale cannot be construed to include the power to compromise CBLIs obligations in
the said promissory notes. An authority to compromise, by express provision of Article 1878[64]
of the Civil Code, requires a special power of attorney, which is not present in this case.
Incidentally, Deltas authority to collect in behalf of SIHI was, by express provision of the
Continuing Deed of Assignment,[65] automatically revoked when SIHI opted to collect directly
from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the
payments directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This
should have dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with
authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the
new creditor of CBLI in the subject promissory note.
THE WELLEX GROUP, INC. v. U-LAND AIRLINES, CO., LTD.
G.R. No. 167519, January 14, 2015

FACTS:
Wellex is a corporation established under Philippine law and it maintains airline operations
in the Philippines which owns shares of stock in several corporations. U-Land is a corporation
duly organized and existing under the laws of Taiwan, registered to do business in the
Philippines. It is engaged in the business of air transportation in Taiwan and in other Asian
countries.

Wellex and U-Land entered into a Memorandum of Agreement in which, they agreed to
develop a long-term business relationship through the creation of joint interest in airline operations
and property development projects in the Philippines.

The First Memorandum of Agreement stated that within 40 days from its execution date,
Wellex and U-Land would execute a share purchase agreement covering U-Land’s acquisition of
the shares of stock of both APIC (APIC shares) and PEC (PEC shares).

The 40-day period lapsed but Wellex and U-Land were not able to enter into any share
purchase agreement although draftswere exchanged between the two. However, despite the
absence of a share purchase agreement, U-Land remitted to Wellex a total of US$7, 499, 945.00

Wellex acknowledged the receipt of these remittances in a confirmation letter addressed

to U-Land and allegedly delivered stock certificates and subject properties. Despite these
transactions, Wellex and U-Land still failed to enter into the share purchase agreement and the
joint development agreement. Thus, U-Land filed a Complaint.

ISSUE:
Wheher or not the contract can be rescinded.

HELD:
 Yes. The failure of one of the parties to comply with its reciprocal prestation allows the
wronged party to seek the remedy of Article 1191. The wronged party is entitled to rescission or
resolution under Article 1191, and even the payment of damages.
There was no express or implied novation of the First Memorandum of Agreement. There
was no incompatibility between the original terms of the First 'emorandum of Agreement
and the remittances made by respondent U-Land for the shares of stock. These remittances were
actually made with the view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement inconsistent with the provisions of
the First Memorandum of Agreement. There being no novation of the First Memorandum
of Agreement, respondent U-Land is entitled to the return of the amount it remitted to petitioner
Wellex is likewise entitled to the return of the certificates of shares of stock and titles of land it
delivered to respondent U-Land.

CCC INSURANCE CORPORATION v. KAWASAKI STEEL CORPORATION

G.R. No. 156162, June 22, 2015

FACTS:
 Kawasaki executed a Consortium Agreement for Pangasinan Fishing Port Network
Project (Consortium Agreement). Kawasaki and FFMCCI formed a consortium for the purpose
of contracting with the Philippine Government for the construction of a fishing port network in
Pangasinan (Project). According to their Consortium Agreement, Kawasaki and FFMCCI
undertook to perform and accomplish their respective and specific portions of work in the
intended contract with the Philippine Government.
The Republic made an advance payment for the Project to the Kawasaki-FFMCCI
Consortium in the amount of P9,300,066.15, representing 15% of the contract price of
P62,000,441.00.
The Project commenced in November 1988. Sometime in April 1989, FFMCCI ceased
performing its work in the Project after suffering financial problems and/or business
reverses. Kawasaki informed CCCIC about the cessation of operations of FFMCCI, and the
failure of FFMCCI to perform its obligations in the Project and repay the advance payment made
by Kawasaki.

ISSUE:
Whether or not CCCIC can be held liable under the Bonds which are mere guarantees.

HELD:
Yes. The liability of CCCIC under the Surety and Performance Bonds is dependent on the
fulfillment and/or non-fulfillment of the obligation of FFMCCI to KAWASAKI under the
Consortium Agreement.
CCCIC failed to discharge the burden of proving novation of the Consortium Agreement
by the Agreement dated August 24, 1989. The Court failed to see the presence of the essential
requisites for a novation of contract, specifically, the irreconcilable incompatibility between the
old and new contracts.
FFMCCI was unable to finish its portion of work in the Project because of business
reverses, and by the Agreement dated August 24, 1989, Kawasaki assumed the Transferred Portion
of Work from FFMCCI and was accorded the right to receive the profits and benefits
corresponding to said portion. Although the Agreement dated August 24, 1989 resulted in the
reallocation of the respective portions of work of Kawasaki and FFMCCI, as well as their
corresponding shares in the profits and benefits under the Consortium Agreement, such changes
were not incompatible with the object, cause, and principal conditions of the Consortium
Agreement. Consequently, the changes under the Agreement dated August 24, 1989 were only
modificatory and did not extinguish the original obligations under the Consortium Agreement.
 ROMEO C. GARCIA vs. DIONISIO V. LLAMAS
G.R. No. 154127
December 8, 2003

FACTS:

Petitioner and Eduardo De Jesus borrowed P400,000.00 from respondent. Both executed
a promissory note wherein they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest per month. The loan has long been overdue and,
despite repeated demands, both have failed and refused to pay it. Hence, a complaint was filed
against both.

Resisting the complaint, Garcia averred that he assumed no liability because he signed
merely as an accommodation party for De Jesus; and that he is relieved from any liability arising
from the note inasmuch as the loan had been paid by De Jesus by means of a check dated 17
April 1997; and that, in any event, the issuance of the check and respondent’s acceptance thereof
novated or superseded the note.

Respondent answered that there was no novation to speak of because the check
bounced.

ISSUE/S:

Whether or not there was novation in the obligation.

RULING:

The elements of novation are not present in this case. By its terms, the note was made
payable to a specific person rather than to bearer or to order. Hence, the petitioner cannot avail
himself of the provisions of the Negotiable Instruments Law and the defenses of an
accommodation party.
 Even assuming that NIL was applicable, petitioner would still be liable for the promissory
note. Under Article 29 or Act 2031, an accommodation party is liable for the instrument to a holder
for value even if, at the time of its taking, the latter knew the former to be the only accommodation.
The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety.

LEONIDA C. QUINTO vs. PEOPLE OF THE PHILIPPINES

GR No. 126715
April 14, 1999

FACTS:

Petitioner Leonida Quinto received in trust several pieces of jewelry from Aurelia Cariaga
with a total value of P36,000 with the purpose of selling the same on a commission basis and with
the express obligation to turn over the proceeds of sale thereof or to return the jewelry within 5
days if not sold

The prosecution claimed that petitioner asked for more time to sell the items but failed to
conclude any sale. After 6 months, Aurelia sent a demand letter for the return of the items which
petitioner ignored.

The defense proffered that petitioner had sold several pieces of jewelry for Aurelia, and it
happened on some occasions that the buyers were unable to pay in full. When this happened,
petitioner brought the buyers to meet Aurelia who agreed to accept payment in installments.
Petitioner claims that the contract between herself and Aurelia was effectively novated when the
latter agreed to accept payment in installments directly from the buyers.

ISSUE:

Whether or not there was novation of the contract.

RULING:

NO.


Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unequivocal to
be mistaken.

There are two ways which could indicate the presence of novation and thereby produce
the effect of extinguishing an obligation by another which substitutes the same. The first is when
novation has been explicitly stated and declared in unequivocal terms. The second is when the
old and the new obligations are incompatible on every point.

The test of incompatibility is whether or not the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the
change would be merely modificatory in nature and insufficient to extinguish the original
obligation.

The changes alluded to by petitioner consists only in the manner of payment. There was
really no substitution of debtors since private complainant merely acquiesced to the payment but
did not give her consent to enter into a new contract. The fact alone that the creditor receives
guaranty or accepts payments from a third party who has agreed to assume the obligation does
not constitute an extinctive novation absent an agreement that the first debtor shall be released
from responsibility.

Thus, Decision affirmed, Petition dismissed.

G.R. No. 183804 September 11, 2013

S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT

CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A. PARADA of
GENLITE INDUSTRIES,Respondent.

FACTS

S.C. Megaworld Construction and Development Corporation bought electrical

lighting materials from Gentile Industries, a sole proprietorship owned by Engineer Luis
U. Parada, for its Read-Rite project in Canlubang, Laguna. The petitioner was unable to
pay for the above purchase on due date, but blamed it on its failure to collect under its
sub-contract with the Enviro KleenTechnologies, Inc. It was however able to persuade
Enviro Kleen to agree to settle its above purchase, but after paying the respondent
₱250,000.00 on June 2, 1999,4 Enviro Kleen stopped making further payments, leaving
an outstanding balance of ₱816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC, to collect from the petitioner the said
balance, plus damages, costs and expenses .

The petitioner in its answer denied liability, claiming that it was released from its
indebtedness to the respondent by reason of the novation of their contract, which, it
reasoned, took place when the latter accepted the partial payment of Enviro Kleen in its
behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in
the petitioner’s place.

RTC ruled against petitioner; that there was no novation. On appeal, the petitioner
also contended that a binding novation of the purchase contract between the parties took
place when the respondent accepted the partial payment of Enviro Kleen of ₱250,000.00
in its behalf, and thus acquiesced to the substitution by Enviro Kleen of the petitioner as
the new debtor. But the CA noted that there is nothing in the two (2) letters of the
respondent to Enviro Kleen, dated April 14, 1999 and June 16, 1999, which would imply
that he consented to the alleged novation, and, particularly, that he intended to release
the petitioner from its primary obligation to pay him for its purchase of lighting materials.
The appellate court cited the RTC’s finding9 that the respondent informed Enviro Kleen in
his first letter that he had served notice to the petitioner that he would take legal action
against it for its overdue account, and that he retained his option to pull out the lighting
materials and charge the petitioner for any damage they might sustain during the pull-out.
The CA concurred with the RTC that by retaining his option to seek satisfaction from the
petitioner, any acquiescence which the respondent had made was limited to merely
accepting Enviro Kleen as an additional debtor from whom he could demand payment,
but without releasing the petitioner as the principal debtor from its debt to him. Hence, the
recourse.

ISSUE

Whether or not there has been a subjective novation

RULING
 The highest court answered in the negative; held that novation is never presumed
but must be clearly and unequivocally shown.

Novation is a mode of extinguishing an obligation by changing its objects or

principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.27 It is "the substitution of a new
contract, debt, or obligation for an existing one between the same or different
parties."28 Article 1293 of the Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him rights mentioned in Articles 1236 and 1237.

Thus, in order to change the person of the debtor, the former debtor must be
expressly released from the obligation, and the third person or new debtor must assume
the former’s place in the contractual relation.29 Article 1293 speaks of substitution of the
debtor, which may either be in the form of expromision or delegacion, as seems to be the
case here. In both cases, the old debtor must be released from the obligation, otherwise,
there is no valid novation.

From the circumstances obtaining below, we can infer no clear and unequivocal
consent by the respondent to the release of the petitioner from the obligation to pay the
cost of the lighting materials. In fact, from the letters of the respondent to Enviro Kleen, it
can be said that he retained his option to go after the petitioner if Enviro Kleen failed to
settle the petitioner’s debt.

The settled rule is that novation is never presumed, 33 but must be clearly and
unequivocally shown.34 In order for a new agreement to supersede the old one, the
parties to a contract must expressly agree that they are abrogating their old contract in
favor of a new one.35 Thus, the mere substitution of debtors will not result
innovation,36 and the fact that the creditor accepts payments from a third person, who has
assumed the obligation, will result merely in the addition of debtors and not novation, and
the creditor may enforce the obligation against both debtors.37 If there is no agreement
as to solidarity, the first and new debtors are considered obligated jointly.

G.R. No. 180144 September 24, 2014

LEONARDO BOGNOT, Petitioner,

vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J.
BERNARDEZ, Respondent.

FACTS
 Sometime in September 1996, the petitioner and his younger brother, Rolando A.
Bognot, applied for and obtained a loan of ₱500,000.00 from the respondent RRI Lending
Corp, represented by Mr. Bernardez, the Ge. Mngr., payable on November 30,
1996.4 The loan was evidenced by a promissory note and was secured by a post dated
check5 dated November 30, 1996. The petitioner renewed the loan several times on a
monthly basis. He paid a renewal fee of ₱54,600.00 for each renewal, issued a new post-
dated check as security, and executed and/or renewed the promissory note previously
issued. The respondent on the other hand, cancelled and returned to the petitioner the
post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again
executed as principal and signed Promissory Note No. 97-0356 payable on April 1, 1997;
his co-maker was again Rolando. As security for the loan, the petitioner also issued BPI
Check No. 0595236,7 post dated to April 1, 1997.8 Subsequently, the loan was again
renewed on a monthly basis (until June 30, 1997), as shown by the Official Receipt No.
7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed
by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated
check dated June 30, 1997 as security. As had been done in the past, the respondent
superimposed the date "June 30, 1997" on the upper right portion of Promissory Note No.
97-035 to make it appear that it would mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot, went to
the respondent’s office and applied for another renewal of the loan. She issued in favor
of the respondent Promissory Note No. 97-051, and International Bank Exchange (IBE)
Check No. 00012522, dated July 30, 1997, in the amount of ₱54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the Bognot siblings’
signatures and replacement, Mrs. Bognot asked the respondent’s clerk to release to her
the promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters demanding payment of
the loan, plus interest and penalty charges. These demands went unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for
sum of money before RTC against the Bognot siblings. The respondent mainly alleged
that the loan renewal payable on June 30, 1997 which the Bognot siblings applied for
remained unpaid; that before June 30, 1997, Mrs. Bognot applied for another loan
extension and issued IBE Check No. 00012522 as payment for the renewal fee; that Mrs.
Bognot convinced the respondent’s clerk to release to her the promissory note and the
other loan documents; that since Mrs. Bognot never issued any replacement check, no
loan extension took place and the loan, originally payable on June 30, 1997, became due
on this date; and despite repeated demands, the Bognot siblings failed to pay their joint
and solidary obligation.

The RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay
the amount of the loan, plus interest and penalty charges. It considered the wordings of
the promissory note and found that the loan they contracted was joint and solidary. It also
noted that the petitioner signed the promissory note as a principal (and not merely as a
guarantor), while Rolando was the co-maker. It brushed the petitioner’s defense of full
payment aside, ruling that the respondent had successfully proven, by preponderance of
evidence, the nonpayment of the loan. On appeal, the CA affirmed the RTC’s findings.
Hence, the recourse.

ISSUE

Whether or not there has been a subjective novation

RULING

Although the petitioner’s belated claim of novation by substitution may no longer

be entertained, in any event, the highest court finds no merit in the defense of novation.
Novation cannot be presumed and must be clearly and unequivocably proven.

Novation is a mode of extinguishing an obligation by changing its objects or

principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place
of the originalone, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be expressly released from
the obligation, and the new debtor must assume the original debtor’s place in the
contractual relationship. Depending on who took the initiative, novation by substitution of
debtor has two forms – substitution by expromision and substitution by delegacion. The
difference between these two was explained in Garcia v. Llamas: 37

"In expromision, the initiative for the change does not come from -- and may
even be made without the knowledge of -- the debtor, since it consists of a third
person’s assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary."

In both cases, the original debtor must be released from the obligation; otherwise,
there can be no valid novation.38Furthermore, novation by substitution of debtor must
always be made with the consent of the creditor.39

The petitioner contends that novation took place through a substitution of debtors
when Mrs. Bognot renewed the loan and assumed the debt. He alleged that Mrs. Bognot
assumed the obligation by paying the renewal fees and charges, and by executing a new
promissory note. He further claimed that she issued her own check40 to cover the renewal
fees, which fact, according to the petitioner, was done with the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner
as debtor. She merely attempted to renew the original loan by executing a new promissory
note41 and check. The purported one month renewal of the loan, however, did not push
through, as Mrs. Bognot did not return the documents or issue a new post dated check.
Since the loan was not renewed for another month, the originaldue date, June 30,1997,
continued to stand.

More importantly, the respondent never agreed to release the petitioner from his
obligation. That the respondent initially allowed Mrs. Bognot to bring home the promissory
note, disclosure statement and the petitioner’s previous check dated June 30, 1997, does
not ipso factoresult in novation. Neither will this acquiescence constitute an implied
acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution
of a new debtor. Novation must be clearly and unequivocally shown, and cannot be
presumed.

Since the petitioner failed to show that the respondent assented to the substitution,
no valid novation took place with the effect of releasing the petitioner from his obligation
to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had
agreed to release the petitioner, the respondent can still enforce the payment of the
obligation against the original debtor. Mere acquiescence to the renewal of the loan, when
there is clearly no agreement to release the petitioner from his responsibility, does not
constitute novation.

G.R. No. 206806. June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,

vs.

DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.

Facts:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.
From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper
Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos.
The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he
delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 2007 in the
amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce. When
he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account. On
the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where
Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would
be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum
of agreement reads as follows: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed
between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM,
full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Syâs account. It has
been agreed further that the Local OCC materials to be used for the production of the above Test Liners
will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price
subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity of
Test Liner delivered to Megapack Container Corp. based on the above production schedule. On May 5,
2007, Dan T.Lim sent a letter to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31,
but no payment was made to him.

Issue: Whether or not there was novation.

Held:

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations,

by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows: "Art. 1293. Novation which consists in
substituting a new debtor in the place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in articles 1236 and 1237." In general, there are two modes of substituting the
person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change
does not come from â and may even be made without the knowledge of â the debtor, since it consists of
a third person assumption of the obligation. As such, it logically requires the consent of the third person
and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents
to the substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor. Novation may also be
extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new
one that takes the place of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation. For novation to take place, the following
requisites must concur: 1) There must be a previous valid obligation. 2) The parties concerned must agree
to a new contract. 3) The old contract must be extinguished. 4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two obligations can stand together,
each one with its own independent existence. Because novation requires that it be clear and unequivocal,
it is never presumed, thus: In the civil law setting, novation is literally construed as to make new. There is
nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow
substituted petitioner

Arco Pulp and Paper as respondent debtor. It merely shows that petitioner Arco Pulp and Paper opted to
deliver the finished products to a third person instead. The consent of the creditor must also be secured
for the novation to be valid: Novation must be expressly consented to. Moreover, the conflicting intention
and acts of the parties underscore the absence of any express disclosure or circumstances with which to
deduce a clear and unequivocal intent by the parties to novate the old agreement. In this case, respondent
was not privy to the memorandum of agreement, thus, his conformity to the contract need not be
secured. If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case. Petitioner Arco Pulp and Paper act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter
of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly
show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper
obligation to respondent remains valid and existing.
G.R. No. 136729 September 23, 2003

ASTRO ELECTRONICS CORP. and PETER ROXAS v. PHILIPPINE

EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION

Facts:

Guarantor Philguarantee subrogated the rights of creditor Philtrust by way of legal subrogation
when it paid of the loan obligations of Astro to the latter. The consent of Astro was not necessary since
the subrogation took effect by operation of law, by the payment of a guarantor. Hence, it can collect the
sum from the debtor.

Loan Agreement between Philippine Trust Company and Astro Electronics Corp. worth P3M,
Secured by three promissory notes where Peter Roxas signed twice, as President of Astro and in his
personal capacity, and signed as President and surety in a Continuing Suretyship Agreement in favor of
Philtrust , Guaranteed by Philippine Export and Foreign Loan Guarantee Corporation, paying 70% of
Astro’s loan subject to the condition that upon payment by Philguanrantee of said amount, it shall be
proportionally subrogated to the rights of Philtrust against Astro Default by Astro Payment by
Philguarantee ,Complaint for sum of money by Philguarantee against Astro and Roxas Legal Subrogation
by Philguarantee of Philtrust’s rights as creditor against Astro Legal subrogation as it took place by
operation of law by its payment of the value of 70% of Roxas and Astro’s loan obligation to guarantor
who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor >
Roxas’ acquiescence/knowledge is not necessary , Philguarantee subrogated the rights of Philtrust to
demand for and collect payment from both Roxas and Astro had all the right to proceed against Astro it
is Liability of Roxas as Principal Co-Debtor :

(1) Two Signatures in the Promissory Notes Sign as President and in Personal Capacity > In
personal capacity, he became a co-maker of the note that persons who write their names on the face of
promissory notes are makers, promising that they will pay to the order of the payee or any holder
according to its tenor , intention to be jointly and severally liable is manifested by the fact that he affixed
his signature on each of the promissory notes twice which necessarily would imply that he is undertaking
the obligation in two different capacities, official and personal;

(2) Presence even of the typewritten words “personal capacity” indicating with certainty that the
typewritten words were already existing at the time Roxas affixed his signatures thus demolishing his
claim that the typewritten words were just inserted after he signed the promissory notes;

(3) Provision that “I/We jointly, severally and solidarily, promise to pay” makes either of the
signatories solidary liable;
 (4) Absent satisfactory explanation by Roxas why he had signed twice in the contract ,
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his
rights. It may either be legal or conventional ;

a.) Legal subrogation is that which takes place without agreement but by operation of law because
of certain acts 1302 Guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor.

b.) Conventional subrogation is that which takes place by agreement of the parties.

G.R. No. 159097 July 5, 2010

METROPOLITAN BANK AND TRUST

COMPANY, Petitioner,
vs

RURAL BANK OF GERONA, INC.,

Respondent

FACTS:

The Central Bank and the RBG entered into an agreement providing that RBG shall
facilitate the loan applications of farmers-borrowers under the Central Bank-International Bank
for Reconstruction and Developments (IBRDs) 4th Rural Credit Project. The agreement required
RBG to open a separate bank account where the IBRD loan proceeds shall be deposited. The RBG
accordingly opened a special savings account with Metrobanks Tarlac Branch. As the depository
bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank
representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn,
credited the proceeds to RBGs special savings account for the latters release to the farmers-
borrowers.

The Central Bank released several credit advice in Metrobank’s favor and accordingly
credited Metrobank’s demand deposit for the account of RBG. The amount, which was credited
to RBGs special savings account represented the approved loan application of farmer-borrower.
 On November 3, 1978, the Central Bank issued debit advices, reversing all the approved
IBRD loans.]The Central Bank implemented the reversal by debiting from Metrobanks demand
deposit account the amount corresponding to all three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the
amount to RBG account. However, claimed that these amounts were insufficient to cover all the
credit advices that were reversed by the Central Bank. It demanded payment from RBG which
could make partial payments. To collect this amount, it filed a complaint for collection of sum of
money against RBG before the RTC.

ISSUE:
Whether or Not there is legal Subrogation.

HELD:
Yes .
Under the Project Terms and Conditions, Metrobank had no responsibility over the
proceeds of the IBRD loans other than serving as a conduit for their transfer from the Central
Bank to the RBG once credit advice has been issued. Thus, we agree with the CAs conclusion that
the agreement governed only the parties involved the Central Bank and the RBG , Metrobank
was simply an outsider to the agreement. Our disagreement with the appellate court is in its
conclusion that no legal subrogation took place; the present case, in fact, exemplifies the
circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code which provides:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without
the debtors knowledge;
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latters share.

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest
except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was
Metrobank's demand deposit account, instead of RBG's, which the Central Bank proceeded
against, on the assumption perhaps that this was the most convenient means of recovering the
cancelled loans. That Metrobank's payment was involuntarily made does not change the reality
that it was Metrobank which effectively answered for RBG's obligations.
Was there express or tacit approval by RBG of the payment enforced against Metrobank? After
Metrobank received the Central Bank's debit advices in November 1978, it (Metrobank)
accordingly debited the amounts it could from RBG's special savings account without any
objection from RBG.[14]RBG's President and Manager, Dr. Aquiles Abellar, even wrote
Metrobank, on August 14, 1979, with proposals regarding possible means of settling the
amounts debited by Central Bank from Metrobank's demand deposit account.[15] These
instances are all indicative of RBG's approval of Metrobank's payment of the IBRD loans. That
RBG's tacit approval came after payment had been made does not completely negate the legal
subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the
credit with all the rights thereto appertaining, either against the debtor or against third
persons. As the entity against which the collection was enforced, Metrobank was subrogated to
the rights of Central Bank and has a cause of action to recover from RBG the amounts it paid to
the Central Bank, plus 14% per annum interest.

.
G.R. No. 142838 August 9, 2001

ABELARDO B. LICAROS, petitioner,

vs.
ANTONIO P. GATMAITAN, respondent.

FACTS:

Abelardo Licaros, a Fil. Businessman thought that it would be good to make a fund
placement with the Anglo-Asean Bank and Trust Limited (Anglo-Asean) which is a private bank
that works under the laws of the Republic of Vanuatu. Its main business is in receiving fund
placements from investors around the world and thereafter investing such deposits in money
market placements and potentially profitable capital ventures in H.K, Europe and the U.S. for
maximization of returns.

Eventually, Licarosa investment did not turn out well as he had difficulties in retrieving
not only his profits but also his investments. Thus, he sought the counsel of Antonio Gatmaitan,
a reputable banker and investment manager to help get back his investments.

Gatmaitan voluntarily offered to assume the payment of Anglo-Asean’s indebtedness to

Licaros subject to terms and conditions. They made it formal and effective through a
MEMORANDUM OF AGREEMENT (MOA) on July 29, 1988. 4. In line w/ this agreement, Gatmaitan
executed a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS in
favor of Licaros. Here, it’s stated that: Gatmatian promises to pay Licaros P3,150,000 w/o interest
as material consideration for the full settlement of his money claims from Anglo-Asean. Also, 70%
of all cash dividends from his shares of stock in the Prudential Life Realty Inc. to the extent of his
shareholding in Prudential Life Plan, Inc. (holding company of Prudential Realty) was assigned as
a security for the payment of the promissory note.

Nothing happened when Gatmaitan tried to claim the S150, 000 from Anglo-Asean. Thus,
he did€ ™not bother to fulfill his promise to pay Licaros the amount states in the promissory
note. However, Licaros felt that he had a right to collect on the basis of the promissory note
regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July 1996, Licaros, thru
counsel, addressed successive demand letters to Gatmaitan, demanding payment of the latter’s
obligations under the promissory note. Gatmaitan, however, did not accede to these demands.
Licaros then filed a complaint to the RTC where he won. But CA reversed it saying that the MOA
is of a conventional subrogation which needs the consent of Anglo-Asean for its validity.

ISSUES: Whether or Not the MOA is one of conventional subrogation.

HELD:
 Yes. Article 1301 Conventional Subrogation is that which takes place by agreement of
parties. assignment of credit: process of transferring the right of the assignor to the assignee who
would then have the right to proceed against the debtor. The assignment may be done
gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale.
Subrogation: transfer of all the rights of the creditor to a third person, who substitutes him in all
his rights. It may either be legal or conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain acts. Conventional subrogation is
that which takes place by agreement of parties.

Therefore, the MOA is a conventional subrogation. - The intent for it to be one of

conventional subrogation is clear in its stipulations. To wit:œWHEREAS, the parties herein have
come to an agreement on the nature, form and extent of their mutual prestation which they
now record herein with the express conformity of the third parties concerned€ • (emphasis
supplied), which third party is admittedly Anglo- Asean Bank. If the intent was just to make
Gatmaitan the assignee€ • of Licaros€ ™credit, it woud have been senseless to stipulate in the
MOA that same is conditioned on the express conformity• of Anglo-Asean Bank.

EDGAR LEDONIO, petitioner,

vs.

CAPITOL DEVELOPMENT CORPORATION, respondent

G.R. No. 149040 July 4, 2007 CHICO-NAZARIO, J.:

Facts

Petitioner obtained from a Ms. Patrocinio S. Picache two loans, with the aggregate
principal amount of P60,000.00, and covered by 2 promissory notes duly signed by
petitioner.

On 1 April 1989, Ms. Picache executed an Assignment of Credit in favor of

CAPITOL DEVELOPMENT CORPORATION (CDC),

Petitioner alleged that such promissory notes were void for being obtained by
force, he contended that he was not allowed to leave the leased property owned by
Mission Realty and Management Corporation(MRMC) which Ms. Picache was a BOD
if he did not sign a blank promissory note. He wanted to transfer his business to
another property as there were unpaid electric bills on such property which he was
not informed when he signed the lease contract. This purportedly affected his
business operations when MERALCO cut off their electricity because on
nonpayment.
RTC ruled in favor of respondent (CDC shall collect the P60, 000 from petitioners),
which was affirmed by the CA.

Ratio: Petitioner's contention did not inspire belief. Petitioner has been a
manufacturer of garments since 1979. It thus appears incredulous that a
businessman like [petitioner] would simply sign blank sheets of paper or blank
promissory notes just [to] be able to vacate the leased premises. Furthermore, his
claim that the electric power in the leased premises was cut off only two months
after he occupied the same is belied by his own evidence. The contract of lease
submitted by [petitioner] is dated February 24, 1988 and took effect on March 1,
1988. His letter to MRMC dated September 21, 1988, complained of the electric
power disconnection that took place on September 6, 1988, that is, six (6) months
after he had occupied the leased premises.

In the SC, he petitioned for review on certiorari. He asserts the position that
consent of the debtor to the assignment of credit is a basic/essential element in
order for the assignee to have a cause of action against the debtor. Without the
debtor's consent, the recourse of the assignee in case of non-payment of the
assigned credit, is to recover from the assignor. Petitioner further argues that
even if there was indeed an assignment of credit, as alleged by the respondent,
then there had been a novation of the original loan contracts when the respondent
was subrogated in the rights of Ms. Picache, the original creditor. In support of
said argument, petitioner invokes the following provisions of the Civil Code –

ART. 1300. Subrogation of a third person in the rights of the creditor is either
legal or conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it may
take effect.

ART. 1301. Conventional subrogation of a third person requires the consent of the
original parties and the third person.

According to petitioner, the assignment of credit constitutes conventional

subrogation which requires the consent of the original parties to the loan contract,
namely, Ms. Picache (the creditor) and petitioner (the debtor); and the third
person, the respondent (the assignee). Since petitioner never gave his consent to
the assignment of credit, then the subrogation of respondent in the rights of Ms.
Picache as creditor by virtue of said assignment is without force and effect.

Issue:
W/N there was a conventional subrogation which should produce novation in the
assignment of credit by Ms. Picache to CDC.

Held:

No, Under our Code, conventional subrogation is not identical to assignment of

credit. In the former, the debtor's consent is necessary; in the latter, it is not
required. Subrogation extinguishes an obligation and gives rise to a new one;
assignment refers to the same right which passes from one person to another.

This Court has consistently adhered to the foregoing distinction between an

assignment of credit and a conventional subrogation. Such distinction is crucial
because it would determine the necessity of the debtor's consent. In an
assignment of credit, the consent of the debtor is not necessary in order that the
assignment may fully produce the legal effects. What the law requires in an
assignment of credit is not the consent of the debtor, but merely notice to him as
the assignment takes effect only from the time he has knowledge thereof. A
creditor may, therefore, validly assign his credit and its accessories without the
debtor's consent. On the other hand, conventional subrogation requires an
agreement among the parties concerned – the original creditor, the debtor, and the
new creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties.24

Article 1300 of the Civil Code provides that conventional subrogation must be
clearly established in order that it may take effect. Since it is petitioner who
claims that there is conventional subrogation in this case, the burden of proof
rests upon him to establish the same by a preponderance of evidence.

In Licaros v. Gatmaitan, this Court ruled that there was conventional subrogation,
for it is immediately discernible that Gatmaitan and Licaros had intended to treat
their agreement as one of conventional subrogation is plainly borne by a stipulation
in their Memorandum of Agreement.

The Assignment of Credit, dated 1 April 1989, executed by Ms. Picache in favor of
respondent, was a simple deed of assignment. There is nothing in the said
Assignment of Credit which imparts to this Court, whether literally or deductively,
that a conventional subrogation was intended by the parties thereto.

WHEREFORE, the instant Petition for Review is hereby DENIED, and the Decision,
dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No. 43604, is
affirmed in toto.