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Iloilo traders v.

heirs of Soriano(1291 Novation) On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and Marta Soriano executed two promissory notes, secured by real property mortgages, in favor of petitioner Iloilo Traders Finance, Inc. (ITF). When the Sorianos defaulted on the notes, ITF, on 23 June 1981, moved for the extrajudicial foreclosure of the mortgages. Evidently, in order to forestall the foreclosure, respondent spouses filed, on 27 August 1981, a complaint for Declaration of a Void Contract, Injunction and Damages. On 06 January 1982, the trial court issued a writ of preliminary injunction to suspend the public sale of the hypothecated property. On 16 August 1983, the parties entered into an Amicable Settlement and, after affixing their signatures thereon, submitted the agreement before the court. Instead of approving forthwith the amicable settlement, the trial court required the parties to first give some clarifications on a number of items. The order read in part -

Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may have against herein defendants.

Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether the words herein defendants include defendants Bernadette Castellano and the provincial sheriff of Iloilo.

If the plaintiffs desire to dismiss the complaint against defendants Castellano and the provincial sheriff of Iloilo, they should state it categorically and in writing.

Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo Traders Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982 should be lifted as to all three defendants.

The clarification herein sought after by the Court shall be made in writing and signed by the parties concerned, assisted by their respective attorneys.

This Order shall be complied with within a period of ten (10) days from notice hereof.*1+

The parties failed to comply with the court order. Resultantly, the trial court disapproved the amicable settlement and set the case for pre-trial. Nothing much could be gleaned from the records about what might have transpired next not until seven years later when the Soriano couple filed a motion to submit anew the amicable settlement. The motion was opposed by ITF on the ground that the amount expressed in the settlement would no longer be accurate considering the lapse of seven years, implying in a way that it could be amendable thereto if the computation were to be revised. The trial court denied the Soriano motion. Significantly, while the order of denial was made on the thesis that the

debtor spouses, without the consent of ITF, could not unilaterally resurrect the amicable settlement, the trial court, nevertheless, made the following observations -

x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to agree and abide by the provisions thereof, as evidenced by the signatures thereto of its President and counsels, cannot be ignored. That intention pervades to the present time since the disapproval by the court pertains only to a technicality which in no way intruded into the substance of the agreement reached by the parties. Such being the case, the Amicable Settlement had novated the original agreement of that parties as embodied in the promissory note. The rights and obligations of the parties, therefore, at this time should be based on the provisions of the amicable settlement, these should pertain to the principal amount as of that date which the parties pegged at P431,200.00 and the legal rate of interest thereon.

The foregoing should however be a good issue in another forum, not in the present case.*2+

Taking cue from the court order, the Sorianos withdrew their complaint and, on 16 October 1991, filed a case for novation and specific performance, docketed Civil Case No. 20047, before the Regional Trial Court, Branch 37, of Iloilo City. The case ultimately concluded with a finding made by the trial court in favor of herein respondents. On appeal to it, the Court of Appeals affirmed the judgment of the court a quo.

The parties have submitted that the issue focuses on whether or not the amicable settlement entered into between the parties has novated the original obligation and also, as they would correctly suggest in their argument, on whether the proposed terms of the amicable settlement were carried out or have been rendered inefficacious.

The amicable settlement read -

COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their respective undersigned counsels and to this Honorable Court most respectfully submit the following Amicable Settlement, thus:

1. That the total of the two (2) accounts of plaintiff to herein defendant as of June 30, 1983 is Two Hundred Ninety Thousand Six Hundred Ninety One Pesos (P290,691.00) of which amount P10,691.00 shall be paid by plaintiffs to herein defendant at the time of the signing of this Amicable Settlement;

2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest for 36 months thus making a total of Four Hundred Thirty One Thousand Two Hundred Pesos (P431,200.00);

3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in 36 monthly installments as follows, the first installment at P12,005.00 shall be paid on or before August 16, 1983 and the 2nd to 36th installments at P11,977.00 shall be paid on the 15th day of each month thereafter until fully paid;

4. That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may have against herein defendants;

5. That should plaintiffs fail to comply with the terms of this Amicable Settlement the preliminary injunction issued in the case shall be immediately dissolved and the foreclosure and public auction sale of the properties of the plaintiffs subject of the mortgage to defendant shall immediately take place and the corresponding writ of execution shall issue from this Court;

6. That this Amicable Settlement is submitted as the basis for decision in this case.

WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing Amicable Settlement be approved.*3+

Novation may either be extinctiv or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate;[4] in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one.[5] Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.[6] Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates[7] or an extension of time to pay[8]); in this

instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.

An amicable settlement or a compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.[9] It may be judicial or extrajudicial; the absence of court approval notwithstanding,[10] the agreement can become the source of rights and obligations of the parties.

It would appear that the arrangement reached by the Soriano spouses and ITF would have the original obligation of respondent spouses on two promissory notes for the sums of P150,000.00 and P80,000.00, both secured by real estate mortgages, impliedly modified. The amicable settlement contained modificatory changes. Thus, (1) it increased the indebtedness of the Soriano spouses, merely due to accruing interest, from P290,691.00 to P431,200.00; (2) it extended the period of payment and provided for new terms of payment; and (3) it provided for a waiver of claims, counterclaims, attorneys fees or damages that the debtor-spouses might have against their creditor, but the settlement neither cancelled, nor materially altered the usual clauses in, the real estate mortgages, e.g., the foreclosure of the mortgaged property in case of default.

Verily, the parties entered into the agreement basically to put an end to Civil Case No. 14007 then pending before the Regional Trial Court.[11] Concededly, the provisions of the settlement were beneficial to the respondent couple. The compromise extended the terms of payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property. It was well to the interest of respondent spouses to ensure its judicial approval; instead, they went to ignore the order of the trial court and virtually failed to make any further appearance in court. This conduct on the part of respondent spouses gave petitioner the correct impression that the Sorianos did not intend to be bound by the compromise settlement, and its non-materialization negated the very purpose for which it was executed.

Given the circumstances, the provisions of Article 2041 of the Civil Code come in point -

If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.

As so well put in Diongzon vs. Court of Appeals,*12+ a supposed new agreement is deemed not to have taken effect where a debtor never complied with his undertaking. In such a case, the other party is given the option to enforce the provisions of the amicable settlement or to rescind it[13] and may insist upon the original demand without the necessity for a prior judicial declaration of rescission.[14]

WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910, affirming that of the court a quo, is REVERSED and SET ASIDE, and another is entered dismissing the complaint in Civil Case No. 20047 before the Regional Trial Court, Branch 37, of Iloilo City. No costs.

SO ORDERED. California Bus Lines v. State Investment House ALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE, INC., respondent. DECISION QUISUMBING, J.:

In this petition for review, California Bus Lines, Inc., assails the decision,[1] dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment[2], dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held petitioner California Bus Lines, Inc., liable for the value of five promissory notes assigned to respondent State Investment House, Inc.

The facts, as culled from the records, are as follows:

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. To pre-empt the take-over, CBLI filed on May 3, 1982, a complaint for injunction[9], docketed as Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City, (now Regional Trial Court of 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+ When SIHI was unable to take possession of the buses, SIHI filed a petition for recovery of possession with prayer for issuance of a writ of replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI was able to take possession of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was thus reduced to P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.

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]

In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of Manila granted in Civil Case No. 84-28505 SIHIs application for preliminary attachment on January 4, 1985.*23+ Consequently, SIHI was able to attach and physically take possession of thirty-two (32) buses belonging to CBLI.*24+ However, acting on CBLIs motion to quash the writ of preliminary attachment, the same court resolved on January 15, 1986,[25] to discharge the writ of preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate Appellate Court (now Court of Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals granted SIHIs petition in CA-GR SP No. 08378 and ruled that the writ of preliminary attachment issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay.[26] The decision of the Court of Appeals attained finality on August 22, 1987.[27]

Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses for P3,920,000.[28] On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-23019.

Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of Manila.*29+ SIHIs motion was granted on December 16, 1987.[30] On November 29, 1988, however, SIHI filed an urgent ex-parte motion to amend this order claiming that through inadvertence and excusable negligence of its new counsel, it made a mistake in the list of buses in the Motion to Sell Attached Properties it had earlier filed.[31] SIHI explained that 14 of the buses listed had already been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed had been released to third party, claimant Pilipinas Bank, by Order dated September 16, 1987[32] of Branch 13 of the RTC of Manila.

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 CBLIs compulsory 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. to begin from January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling against SIHI, the trial court held that the restructuring agreement dated October 7, 1981, between Delta and CBLI novated the five promissory notes; hence, at the time Delta assigned the five promissory notes to SIHI, the notes were already merged in the restructuring agreement and cannot be enforced against CBLI.

SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:

WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, 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. No costs.

SO ORDERED.[35]

Hence, this appeal where CBLI contends that

I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE PROMISSORY NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.

III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]

Essentially, the issues are (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. The issues being interrelated, they shall be jointly discussed.

CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of the obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with the addition of new obligations that were incompatible with the old obligations in the said notes.[37] CBLI adds that even if the restructuring agreement did not totally extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984, compromise agreement executed in Civil Case No. 0023-P did.[38] CBLI cites paragraph 5 of the compromise agreement which states that the agreement between it and CBLI was in full and final settlement, adjudication and termination of all their rights and obligations as of the date of (the) agreement, and of the issues in (the) case. According to CBLI, inasmuch as the five promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the compromise agreement operated as res judicata in the present case.[39]

Novation has been defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal

conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor.[40]

Novation, in its broad concept, may either be extinctive or modificatory.[41] It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement.[42] An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal).[43] Novation has two functions: one to extinguish an existing obligation, the other to substitute a new one in its place.[44] For novation to take place, four essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.[45]

Novation is never presumed,[46] 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.[47]

The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly.[48] The term "expressly" means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.[49] Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts.[50] While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.

There are two ways which could indicate, in fine, 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 the two obligations can stand together, each one having its independent existence.[51] If they cannot, they are incompatible and the latter obligation novates the first.[52] 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.[53]

The necessity to prove the foregoing by clear and convincing evidence is accentuated where the obligation of the debtor invoking the defense of novation has already matured.[54]

With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled rule that the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the old one.[55]

In Inchausti & Co. v. Yulo[56] this Court held that an obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one. In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this Court declared that it is well settled that a mere extension of payment and the addition of another obligation not incompatible with the old one is not a novation thereof.

In this case, 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.

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the following common stipulations:

1.

They were payable in 60 monthly installments up to July 31, 1985;

2.

Interest: 14% per annum;

3. Failure to pay any of the installments would render the entire remaining balance due and payable at the option of the holder of the notes;

4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and expenses of 25% of the amount due in addition to the costs of suit.

The restructuring agreement, for its part, had the following provisions:

WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:

a. PN Nos. 16 to 26 (11 units)

Past Due as of September 30, 1981 P1,411,434.00

b. PN Nos. 52 to 57 (24 units)

Past Due as of September 30, 1981 P1,105,353.00

WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the following terms and conditions:

a. PN Nos. 16 to 26 (11 units) 37 months

PN Nos. 52 to 57 (24 units) 46 months

b. Interest Rate: 16% per annum

c. Documentation Fee: 2% per annum

d. Penalty previously incurred and Restructuring fee: 4% p.a.

e. Mode of Payment: Daily Remittance

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and covenant as follows:

1. That the past due installment referred to above plus the current and/or falling due amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in accordance with the following schedule of payments:

Daily payments of P11,000.00 from October 1 to December 31, 1981

Daily payments of P12,000.00 from January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from April 1, 1982 to June 30, 1982

Daily payments of P14,000.00 from July 1, 1982 to September 30, 1982

Daily payments of P15,000.00 from October 1, 1982 to December 31, 1982

Daily payments of P16,000.00 from January 1, 1983 to June 30, 1983

Daily payments of P17,000.00 from July 1, 1983

2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due to DMC in accordance with the schedule in paragraph 1. DMC may send a collector to receive the amount due at CBLs premises. All delayed remittances shall be charged additional 2% penalty interest per month.

3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of the restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.

4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL pertaining to the financial and field operations and service and maintenance matters of M.A.N. units. Records needed by the DMC representatives in monitoring said operations shall be made available by CBL and LLAMAS.

5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made from what is due and payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57.

6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and Silverio shall exercise any or all of the following options:

(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per annum on total past due installments will immediately become due and payable. In the event of judicial proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional sum equivalent to 25% of the amount due for attorneys fees and expenses of collection, whether actually incurred or not, in addition to the cost of suit;

(b) To enforce in accordance with law, their rights under the Chattel Mortgage over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or

(c) To take over management and operations of CBL until such time that CBL and/or LLAMAS have remitted and/or updated their past due account with DMC.

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at the time of purchase, an inventory of spare parts consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-month requirement to be prepared and submitted by CBL, and acceptable to DMC, within the first week of each month.

8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation until full payment.

9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et al., Court of First Instance of Pasay, Branch XXIX.*60+

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. The restructuring agreement merely provided for a new schedule of payments and additional security in paragraph 6 (c) giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be no novation.[61] Moreover, this Court has ruled that an agreement subsequently executed between a seller and a buyer that provided for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to novation. [62]

The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA[63], this Court ruled that a change in the incidental elements of, or an addition of such element to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment.

In fine, the restructuring agreement can stand together with the promissory notes.

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 notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:

5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement, adjudication and termination of all their rights and obligations as of the date of this agreement, and of the issues in this case.[66]

Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the settled rule that a compromise agreement determines the rights and obligations of only the parties to it.[67] Therefore, we hold that the compromise agreement covered the rights and obligations only of Delta and CBLI and only with respect to the eleven (11) other promissory notes that remained with Delta.

CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta of CBLIs management and operations and the resultant impossibility for CBLI to comply with its obligations in the subject promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case No. 0023-P is proof that Delta continued to act in SIHIs behalf in effecting collection under the notes.

The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the subject promissory notes in favor of SIHI. This had the effect of separating the five promissory notes from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the five promissory notes became separate and distinct from CBLIs obligations in eleven (11) other promissory notes that remained with Delta. Thus, any breach of these independent obligations gives rise to a separate cause of action in favor of SIHI against CBLI. Considering that Deltas

assignment to SIHI of these five promissory notes had the effect of removing the said notes from Civil Case No. 0023-P, there was no reason for SIHI to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.

Moreover, intervention is not mandatory, but only optional and permissive.[68] Notably, Section 2,[69] Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in defining the right to intervene. The present rules maintain the permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil Procedure, which provides as follows:

SEC. 1. Who may intervene.A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor's rights may be fully protected in a separate proceeding.[70]

Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that the action may be continued by or against the original party unless the court, upon motion, directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.[71] The non-inclusion of a necessary party does not prevent the court from proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party.[72]

In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court does not amount to an estoppel that may prevent SIHI from instituting a separate and independent action of its own.[73] This is especially so since it does not appear that a separate proceeding would be inadequate to protect fully SIHIs rights.*74+ Indeed, SIHIs refusal to intervene is precisely because it considered that its rights would be better protected in a separate and independent suit.

The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI from prosecuting its claims in the present case. As previously discussed, the compromise agreement and the judgment on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights under the 11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI and CBLI and the five promissory notes. There being no identity of parties and subject matter, there is no res judicata.

CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer allowed by Article 1484(3)[75] of the Civil Code, which prohibits a creditor from suing for the deficiency after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no longer allowed to recover on the promissory notes given as security for the purchase price of the 35 buses because Delta had already extrajudicially foreclosed on the chattel mortgages over the said buses on April 2, 1987.

This claim is likewise untenable.

Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the assignment of the five notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta. And since there was a previous revocation of Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of authority to compromise the subject notes, yet it readily agreed to the foreclosure. To sanction CBLIs argument and to apply Article 1484 (3) to this case would work injustice to SIHI by depriving it of its right to collect against CBLI who has not paid its obligations.

That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not operate to render the compromise agreement and the foreclosure binding on SIHI. At the time SIHI effected the levy on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any interest in the said buses. Under the circumstances, we cannot see how SIHIs belated acquisition of the foreclosed buses operates to hold the compromise agreementand consequently Article 1484(3) applicable to SIHI as CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of execution to enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of April 2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other promissory notes covered by the compromise agreement and the judgment on compromise in Civil Case No. 0023P.

In support of its third assignment of error, CBLI maintains that there was no basis for SIHIs application for a writ of preliminary attachment.[76] According to CBLI, it committed no fraud in contracting its obligation under the five promissory notes because it was financially sound when it issued the said notes on April 25, 1980.[77] CBLI also asserts that at no time did it falsely represent to SIHI that it would be able to pay its obligations under the five promissory notes.[78] According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors;*79+ and that SIHIs bare allegations on this matter were insufficient for the preliminary attachment of CBLIs properties.*80+

The question whether the attachment of the sixteen (16) buses was valid and in accordance with law, however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of preliminary attachment SIHI obtained and ruled that the trial court judge acted with grave abuse of discretion in discharging the writ of attachment despite the clear presence of a determined scheme on the part of CBLI to dispose of its property. Considering that the said Court of Appeals decision has already attained finality on August 22, 1987, there exists no reason to resolve this question anew. Reasons of public policy, judicial orderliness, economy and judicial time and the interests of litigants as well as the peace and order of society, all require that stability be accorded the solemn and final judgments of courts or tribunals of competent jurisdiction.[81]

Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIs contention that the Court of Appeals erred in dismissing its counterclaim for lost income and the value of the 16 buses over which SIHI obtained a writ of preliminary attachment. Where the party who requested the attachment acted in good faith and without malice, the claim for damages resulting from the attachment of property cannot be sustained.[82]

WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment House, Inc., the value of the five (5) promissory notes subject of the complaint in Civil Case No. 84-28505 less the proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to costs.

PNB v. Lilian S. Soriano We arc urged in this petition for review on certiorari to reverse and set aside the Decision of the Court of Appeals in C A-G.R. SP No. 762431 finding no grave abuse of discretion in the ruling of the Secretary of the Department of Justice ( DOJ) which, in turn, dismissed the criminal complaint for Estafa, i.e., violation of Section 13 of Presidential Decree No. 1 15 (Trust Receipts Law), in relation to Article 315, paragraph (b) of the Revised Penal Code, filed by petitioner Philippine National Bank (PNB) against respondent Lilian S. Soriano (Soriano).2

First, the ostensibly simple facts as found by the Court of Appeals and adopted by PNB in its petition and memorandum:

On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line (FSL) in the increased amount of Thirty Million Pesos (30 Million) to Lisam Enterprises, Inc. [LISAM], a family-

owned and controlled corporation that maintains Current Account No. 445830099-8 with petitioner PNB.

x x x. Soriano is the chairman and president of LISAM, she is also the authorized signatory in all LISAMs Transactions with [PNB].

On various dates, LISAM made several availments of the FSL in the total amount of Twenty Nine Million Six Hundred Forty Five Thousand Nine Hundred Forty Four Pesos and Fifty Five Centavos (P 29,645,944.55), the proceeds of which were credited to its current account with [PNB]. For each availment, LISAM through [Soriano], executed 52 Trust Receipts (TRs). In addition to the promissory notes, showing its receipt of the items in trust with the duty to turn-over the proceeds of the sale thereof to [PNB].

Sometime on January 21-22, 1998, *PNBs+ authorized personnel conducted an actual physical inventory of LISAMs motor vehicles and motorcycles and found that only four (4) units covered by the TRs amounting to One Hundred Forty Thousand Eight Hundred Pesos (158,100.00) (sic) remained unsold.

Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred Forty Four Pesos and Fifty Five Centavos (29,644,944.55) as the outstanding principal balance *of+ the total availments on the line covered by TRs, [LISAM] should have remitted to [PNB], Twenty Nine Million Four Hundred Eighty Seven Thousand Eight Hundred Forty Four Pesos and Fifty Five Centavos (29,487,844.55). Despite several formal demands, respondent Soriano failed and refused to turn over the said [amount to] the prejudice of [PNB].3

Given the terms of the TRs which read, in pertinent part:

RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by HONDA PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto attached as Annex "A" hereof, and in consideration thereof, the trustee hereby agrees to hold the Motor Vehicles in storage as the property of PNB, with the liberty to sell the same for cash for the Trustees account and to deliver the proceeds thereof to PNB to be applied against its acceptance on the Trustees account. Under the terms of the Invoices and (sic) the Trustee further agrees to hold the said vehicles and proceeds of the sale thereof in Trust for the payment of said acceptance and of any [of] its other indebtedness to PNB.

xxxx

For the purpose of effectively carrying out all the terms and conditions of the Trust herein created and to insure that the Trustee will comply strictly and faithfully with all undertakings hereunder, the Trustee hereby agrees and consents to allow and permit PNB or its representatives to inspect all of the Trustees books, especially those pertaining to its disposition of the Motor Vehicles and/or the proceeds of the sale hereof, at any time and whenever PNB, at its discretion, may find it necessary to do so.

The Trustees failure to account to PNB for the Motor Vehicles received in Trust and/or for the proceeds of the sale thereof within thirty (30) days from demand made by PNB shall constitute prima facie evidence that the Trustee has converted or misappropriated said vehicles and/or proceeds thereof for its benefit to the detriment and prejudice of PNB.4

and Sorianos failure to account for the proceeds of the sale of the motor vehicles, PNB, as previously adverted to, filed a complaint-affidavit before the Office of the City Prosecutor of Naga City charging Soriano with fifty two (52) counts of violation of the Trust Receipts Law, in relation to Article 315, paragraph 1(b) of the Revised Penal Code.

In refutation, Soriano filed a counter-affidavit asserting that:

1. The obligation of [LISAM] which I represent, and consequently[,] my obligation, if any, is purely civil in nature. All of the alleged trust receipt agreements were availments made by the corporation [LISAM] on the PNB credit facility known as "Floor Stock Line" (FSL), which is just one of the several credit facilities granted to [LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the restructuring of all of *LISAMs+ credit facilities. After exchanges of several letters and telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote *LISAM+ informing PNBs lack of objection to *LISAMs+ proposal of restructuring all its obligations. x x x.

2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with attached copy of PNB Boards minutes of meeting, with the happy information that the Board of Directors of PNB has approved the conversion of *LISAMs+ existing credit facilities at PNB, which includes the FSL on which the Trust receipts are availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL), Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are availments) and Time Loan. x x x.

3. The [FSL] and the availments thereon allegedly secured by Trust Receipts, therefore, was (sic) already converted into*,+ and included in*,+ an Omnibus Line (OL) of 106 million on September 22, 1998, which was actually a Revolving Credit Line (RCL)[.]5

PNB filed a reply-affidavit maintaining Sorianos criminal liability under the TRs:

2. x x x. While it is true that said restructuring was approved, the same was never implemented because [LISAM] failed to comply with the conditions of approval stated in B/R No. 6, such as the payment of the interest and other charges and the submission of the title of the 283 sq. m. of vacant residential lot, x x x Tandang Sora, Quezon City, as among the common conditions stated in paragraph V, of B/R 6. The nonimplementation of the approved restructuring of the account of [LISAM] has the effect of reverting the account to its original status prior to the said approval. Consequently, her claim that her liability for violation of the Trust Receipt Agreement is purely civil does not hold water.6

In a Resolution,7 the City Prosecutor of Naga City found, thus:

WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN SORIANO is probably guilty of violation of [the] Trust Receipt Law, in relation to Article 315 par. 1 (b) of the Revised Penal Code, let therefore 52 counts of ESTAFA be filed against the respondent.8

Consequently, on 1 August 2001, the same office filed Informations against Soriano for fifty two (52) counts of Estafa (violation of the Trust Receipts Law), docketed as Criminal Case Nos. 2001-0641 to 2001-0693, which were raffled to the Regional Trial Court (RTC), Branch 21, Naga City.

Meanwhile, PNB filed a petition for review of the Naga City Prosecutors Resolution before the Secretary of the DOJ.

In January 2002, the RTC ordered the dismissal of one of the criminal cases against Soriano, docketed as Criminal Case No. 2001-0671. In March of the same year, Soriano was arraigned in, and pled not guilty to, the rest of the criminal cases. Thereafter, on 16 October 2002, the RTC issued an Order resetting the continuation of the pre-trial on 27 November 2002.

On the other litigation front, the DOJ, in a Resolution9 dated 25 June 2002, reversed and set aside the earlier resolution of the Naga City Prosecutor:

WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and the City Prosecutor of Naga City is hereby directed to move, with leave of court, for the withdrawal of the informations for estafa against Lilian S. Soriano in Criminal Case Nos. 2001-0641 to 0693 and to report the action taken thereon within ten (10) days from receipt thereof.10

On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued the following Orders:

1. 27 November 200211

When this case was called for continuation of pre-trial, *Sorianos+ counsel appeared. However, Prosecutor Edgar Imperial failed to appear.

Records show that a copy of the Resolution from the Department of Justice promulgated on October 28, 2002 was received by this Court, (sic) denying the Motion for Reconsideration of the Resolution No. 320, series of 2002 reversing that of the City Prosecutor of Naga City and at the same time directing the latter to move with leave of court for the withdrawal of the informations for Estafa against Lilian Soriano.

Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof within which to comply with the directive of the Department of Justice.

2. 21 February 200312

Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly approved by the City Prosecutor of Naga City to be meritorious the same is hereby granted. As prayed for, the Informations in Crim. Cases Nos. RTC 2001-0641 to 2001-0693 entitled, People of the Philippines vs. Lilian S. Soriano, consisting of fifty-two (52) cases except for Crim. Case No. RTC 2001-0671 which had been previously dismissed, are hereby ordered WITHDRAWN.

3. 15 July 200313

The prosecution of the criminal cases herein filed being under the control of the City Prosecutor, the withdrawal of the said cases by the Prosecution leaves this Court without authority to re-instate, revive or refile the same.

Wherefore, the Motion for Reconsideration filed by the private complainant is hereby DENIED.

With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of the Secretary of the DOJ, PNB filed a petition for certiorari before the Court of Appeals alleging that:

A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO WANT OR EXCESS OF JURISDICTION IN REVERSING AND SETTING ASIDE THE RESOLUTON OF THE CITY PROSECUTOR OF NAGA CITY FINDING A PRIMA FACIE CASE AGAINST PRIVATE RESPONDENT [SORIANO], FOR THE SAME HAS NO LEGAL BASES AND IS NOT IN ACCORD WITH THE JURISPRUDENTIAL RULINGS ON THE MATTER.14

As stated at the outset, the appellate court did not find grave abuse of discretion in the questioned resolution of the DOJ, and dismissed PNBs petition for certiorari.

Hence, this appeal by certiorari.

Before anything else, we note that respondent Soriano, despite several opportunities to do so, failed to file a Memorandum as required in our Resolution dated 16 January 2008. Thus, on 8 July 2009, we resolved to dispense with the filing of Sorianos Memorandum.

In its Memorandum, PNB posits the following issues:

I. Whether or not the Court of Appeals gravely erred in concurring with the finding of the DOJ that the approval by PNB of *LISAMs+ restructuring proposal of its account with PNB had changed the status of *LISAMs+ obligations secured by Trust Receipts to one of an ordinary loan, non-payment of which does not give rise to a criminal liability.

II. Whether or not the Court of Appeals gravely erred in concluding and concurring with the June 25, 2002 Resolution of the DOJ directing the withdrawal of the Information for Estafa against the accused in Criminal Case Nos. 2001-0641 up to 0693 considering the well-established rule that once jurisdiction is vested in court, it is retained up to the end of the litigation.

III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671 was already dismissed) of criminal cases for estafa against Soriano would violate her constitutional right against double jeopardy.15

Winnowed from the foregoing, we find that the basic question is whether the Court of Appeals gravely erred in affirming the DOJs ruling that the restructuring of LISAMs loan secured by trust receipts extinguished Sorianos criminal liability therefor.

It has not escaped us that PNBs second and third issues delve into the three (3) Orders of the RTC which are not the subject of the petition before us. To clarify, the instant petition assails the Decision of the appellate court in CA-G.R. SP No. 76243 which, essentially, affirmed the ruling of the DOJ in I.S. Nos. 2000-1123, 2000-1133 and 2000-1184. As previously narrated, the DOJ Resolution became the basis of the RTCs Orders granting the withdrawal of the Informations against Soriano. From these RTC Orders, the remedy of PNB was to file a petition for certiorari before the Court of Appeals alleging grave abuse of discretion in the issuance thereof.

However, for clarity and to obviate confusion, we shall first dispose of the peripheral issues raised by PNB:

1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against Soriano as directed by the DOJ violates the well-established rule that once the trial court acquires jurisdiction over a case, it is retained until termination of litigation.

2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693 violate the constitutional provision against double jeopardy.

We rule in the negative.

Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was ordered by the RTC. In particular, the Secretary of the DOJ directed City Prosecutor of Naga City to move, with leave of court, for the withdrawal of the Informations for estafa against Soriano. Significantly, the trial court gave the prosecution fifteen (15) days within which to comply with the DOJs directive, and thereupon, readily granted the motion. Indeed, the withdrawal of the criminal cases did not occur, nay, could not have occurred, without the trial courts imprimatur. As such, the DOJs directive for the withdrawal of the criminal cases against Soriano did not divest nor oust the trial court of its jurisdiction.

Regrettably, a perusal of the RTCs Orders reveals that the trial court relied solely on the Resolution of the DOJ Secretary and his determination that the Informations for estafa against Soriano ought to be withdrawn. The trial court abdicated its judicial power and refused to perform a positive duty enjoined by law. On one occasion, we have declared that while the recommendation of the prosecutor or the ruling of the Secretary of Justice is persuasive, it is not binding on courts.16 We shall return to this point shortly.

In the same vein, the reinstatement of the criminal cases against Soriano will not violate her constitutional right against double jeopardy.

Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double jeopardy to set in: (1) a first jeopardy attached prior to the second; (2) the first jeopardy has been validly terminated; and (3) a second jeopardy is for the same offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b) before a competent court; (c) after arraignment; (d) when a valid plea has been entered; and (e) when the accused has been acquitted or convicted, or the case dismissed or otherwise terminated without his express consent.18

In the present case, the withdrawal of the criminal cases did not include a categorical dismissal thereof by the RTC. Double jeopardy had not set in because Soriano was not acquitted nor was there a valid and legal dismissal or termination of the fifty one (51) cases against her. It stands to reason therefore that the fifth requisite which requires conviction or acquittal of the accused, or the dismissal of the case without the approval of the accused, was not met.

On both issues, the recent case of Cerezo v. People,19 is enlightening. In Cerezo, the trial court simply followed the prosecutions lead on how to proceed with the libel case against the three accused. The prosecution twice changed their mind on whether there was probable cause to indict the accused for libel. On both occasions, the trial court granted the prosecutors motions. Ultimately, the DOJ Secretary directed the prosecutor to re-file the Information against the accused which the trial court forthwith reinstated. Ruling on the same issues raised by PNB in this case, we emphasized, thus:

x x x. In thus resolving a motion to dismiss a case or to withdraw an Information, the trial court should not rely solely and merely on the findings of the public prosecutor or the Secretary of Justice. It is the courts bounden duty to assess independently the merits of the motion, and this assessment must be embodied in a written order disposing of the motion. x x x.

In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the criminal case, that the RTC judge failed to make his own determination of whether or not there was a prima facie case to hold respondents for trial. He failed to make an independent evaluation or assessment of the merits of

the case. The RTC judge blindly relied on the manifestation and recommendation of the prosecutor when he should have been more circumspect and judicious in resolving the Motion to Dismiss and Withdraw Information especially so when the prosecution appeared to be uncertain, undecided, and irresolute on whether to indict respondents.

The same holds true with respect to the October 24, 2006 Order, which reinstated the case. The RTC judge failed to make a separate evaluation and merely awaited the resolution of the DOJ Secretary. This is evident from the general tenor of the Order and highlighted in the following portion thereof:

As discussed during the hearing of the Motion for Reconsideration, the Court will resolve it depending on the outcome of the Petition for Review. Considering the findings of the Department of Justice reversing the resolution of the City Prosecutor, the Court gives favorable action to the Motion for Reconsideration.

By relying solely on the manifestation of the public prosecutor and the resolution of the DOJ Secretary, the trial court abdicated its judicial power and refused to perform a positive duty enjoined by law. The said Orders were thus stained with grave abuse of discretion and violated the complainants right to due process. They were void, had no legal standing, and produced no effect whatsoever.

xxxx

It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when the following requisites are present: (1) a first jeopardy attached prior to the second; (2) the first jeopardy has been validly terminated; and (3) a second jeopardy is for the same offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b) before a competent court; (c) after arraignment; (d) when a valid plea has been entered; and (e) when the accused has been acquitted or convicted, or the case dismissed or otherwise terminated without his express consent.

Since we have held that the March 17, 2004 Order granting the motion to dismiss was committed with grave abuse of discretion, then respondents were not acquitted nor was there a valid and legal dismissal or termination of the case. Ergo, the fifth requisite which requires the conviction and acquittal of the accused, or the dismissal of the case without the approval of the accused, was not met. Thus, double jeopardy has not set in.20 (Emphasis supplied)

We now come to the crux of the matter: whether the restructuring of LISAMs loan account extinguished Sorianos criminal liability.

PNB admits that although it had approved LISAMs restructuring proposal, the actual restructuring of LISAMs account consisting of several credit lines was never reduced into writing. PNB argues that the stipulations therein such as the provisions on the schedule of payment of the principal obligation, interests, and penalties, must be in writing to be valid and binding between the parties. PNB further postulates that assuming the restructuring was reduced into writing, LISAM failed to comply with the conditions precedent for its effectivity, specifically, the payment of interest and other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City. On the whole, PNB is adamant that the events concerning the restructuring of LISAMs loan did not affect the TR security, thus, Sorianos criminal liability thereunder subsists.

On the other hand, the appellate court agreed with the ruling of the DOJ Secretary that the approval of LISAMs restructuring proposal, even if not reduced into writing, changed the status of LISAMs loan from being secured with Trust Receipts (TRs) to one of an ordinary loan, non-payment of which does not give rise to criminal liability. The Court of Appeals declared that there was no breach of trust constitutive of estafa through misappropriation or conversion where the relationship between the parties is simply that of creditor and debtor, not as entruster and entrustee.

We cannot subscribe to the appellate courts reasoning. The DOJ Secretarys and the Court of Appeals holding that, the supposed restructuring novated the loan agreement between the parties is myopic.

To begin with, the purported restructuring of the loan agreement did not constitute novation.

Novation is one of the modes of extinguishment of obligations;21 it is a single juridical act with a diptych function. The substitution or change of the obligation by a subsequent one extinguishes the first, resulting in the creation of a new obligation in lieu of the old.22 It is not a complete obliteration of the obligor-obligee relationship, but operates as a relative extinction of the original obligation.

Article 1292 of the Civil Code which provides:

Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

contemplates two kinds of novation: express or implied. The extinguishment of the old obligation by the new one is a necessary element of novation, which may be effected either expressly or impliedly.

In order for novation to 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.23

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 unmistakable. The contracting parties must incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts.24 Nonetheless, both kinds of novation must still be clearly proven.25

In this case, without a written contract stating in unequivocal terms that the parties were novating the original loan agreement, thus undoubtedly eliminating an express novation, we look to whether there is an incompatibility between the Floor Stock Line secured by TRs and the subsequent restructured Omnibus Line which was supposedly approved by PNB.

Soriano is confident with her assertion that PNBs approval of her proposal to restructure LISAMs loan novated the loan agreement secured by TRs. Soriano relies on the following:

1. x x x. All the alleged trust receipt agreements were availments made by [LISAM] on the PNB credit facility known as "Floor Stock Line," (FSL) which is just one of the several credit facilities granted to [LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the restructuring of all of *LISAMs+ credit facilities. After exchanges of several letters and telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote [LISAM] informing PNBs lack of objection to *LISAMs+ proposal of restructuring all its obligations. x x x.

2. On September 22, 1998, Mr. Avengoza sent a letter to *LISAM+, complete with attached copy of PNBs Boards minutes of meeting, with the happy information that the Board of Directors of PNB has approved the conversion of *LISAMs+ existing credit facilities at PNB, which includes the FSL on which the trust receipts are availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL), Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are availments) and Time Loan. x x x.26

Sorianos reliance thereon is misplaced. The approval of LISAMs restructuring proposal is not the bone of contention in this case. The pith of the issue lies in whether, assuming a restructuring was effected, it extinguished the criminal liability on the loan obligation secured by trust receipts, by extinguishing the entruster-entrustee relationship and substituting it with that of an ordinary creditor-debtor relationship. Stated differently, we examine whether the Floor Stock Line is incompatible with the purported restructured Omnibus Line.

The test of incompatibility is whether 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.27

We have scoured the records and found no incompatibility between the Floor Stock Line and the purported restructured Omnibus Line. While the restructuring was approved in principle, the effectivity thereof was subject to conditions precedent such as the payment of interest and other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City. These conditions precedent imposed on the restructured Omnibus Line were never refuted by Soriano who, oddly enough, failed to file a Memorandum. To our mind, Sorianos bare assertion that the restructuring was approved by PNB cannot equate to a finding of an implied novation which extinguished Sorianos obligation as entrustee under the TRs.

Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to penalty charges on the Floor Stock Line. There is no showing that the waiver extinguished Sorianos obligation to "sell the *merchandise+ for cash for *LISAMs+ account and to deliver the proceeds thereof to PNB to be applied against its acceptance on *LISAMs+ account." Soriano further agreed to hold the "vehicles and proceeds of the sale thereof in Trust for the payment of said acceptance and of any of its other indebtedness to PNB." Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one.28 Besides, novation does not extinguish criminal liability.29 It stands to reason therefore, that

Sorianos criminal liability under the TRs subsists considering that the civil obligations under the Floor Stock Line secured by TRs were not extinguished by the purported restructured Omnibus Line.

In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held that the restructuring of a loan agreement secured by a TR does not per se novate or extinguish the criminal liability incurred thereunder:

x x x Neither is there an implied novation since the restructuring agreement is not incompatible with the trust receipt transactions.

Indeed, the restructuring agreement recognizes the obligation due under the trust receipts when it required "payment of all interest and other charges prior to restructuring." With respect to Michael, there was even a proviso under the agreement that the amount due is subject to "the joint and solidary liability of Spouses Miguel and Mary Say and Michael Go Say." While the names of Melchor and Josephine do not appear on the restructuring agreement, it cannot be presumed that they have been relieved from the obligation. The old obligation continues to subsist subject to the modifications agreed upon by the parties.

The circumstance that motivated the parties to enter into a restructuring agreement was the failure of petitioners to account for the goods received in trust and/or deliver the proceeds thereof. To remedy the situation, the parties executed an agreement to restructure Transpacific's obligations.

The Bank only extended the repayment term of the trust receipts from 90 days to one year with monthly installment at 5% per annum over prime rate or 30% per annum whichever is higher. Furthermore, the interest rates were flexible in that they are subject to review every amortization due. Whether the terms appeared to be more onerous or not is immaterial.1wphi1 Courts are not authorized to extricate parties from the necessary consequences of their acts. The parties will not be relieved from their obligations as there was absolutely no intention by the parties to supersede or abrogate the trust receipt transactions. The intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one.31

Based on all the foregoing, we find grave error in the Court of Appeals dismissal of PNBs petition for certiorari. Certainly, while the determination of probable cause to indict a respondent for a crime lies with the prosecutor, the discretion must not be exercised in a whimsical or despotic manner tantamount to grave abuse of discretion.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 76243 finding no grave abuse of discretion on the part of the Secretary of Justice is REVERSED and SET ASIDE.

The Resolution of the Secretary of Justice dated 25 June 2002, directing the City Prosecutor of Naga City to move for the withdrawal of the Informations for estafa in relation to the Trust Receipts Law against respondent Lilian S. Soriano, and his 29 October 2002 Resolution, denying petitioner's Motion for Reconsideration, are ANNULLED and SET ASIDE for having been issued with grave abuse of discretion; and the Resolution or the Naga City Prosecutor's Office dated 19 March 2001, finding probable cause against herein respondent, is REINSTATED. Consequently, the Orders of the Regional Trial Court, Branch 21 of Naga City in Criminal Cases Nos. 2001-0641 to 2001-0693, except Criminal Case No. 2001-0671, dated 27 November 2002, 21 February 2003 and 15 July 2003 are SET ASIDE and its Order of 16 October 2002 resetting the continuation or the pre-trial is REINSTATED. The RTC is further ordered to conduct the pretrial with dispatch. Ajax Marketing and Development Corp v. Court of Appeals its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment upholding the validity of the extra-judicial foreclosure of the real estate property of petitioners spouses Marcial See and Lilian Tan, located at Paco District, Manila covered by TCT 105233, by private respondent Metropolitan Bank and Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was denied; hence, this petition for review on certiorari raising the following assignments of errors:

FIRST: The Honorable Court of Appeals erred in holding that the consolidation of the three (3) loans granted separately to three entities into a single loan of P1.0 Million was a mere restructuring and did not effect a novation of the loan as to extinguish the accessory mortgage contracts.

SECOND: The Honorable Court of Appeals erred in not holding that the consolidated loan of P1.0 Million was not accompanied by the execution of a new REM, as was done by the Bank in the earlier three (3) loans, and hence, was, to all legal intents/purposes, unsecured.

THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the extra-judicial foreclosure of the admittedly unsecured loan of P970,000.00 is a mere error that does not invalidated said foreclosure, contrary to the pronouncement in C & C Commercial Corp. vs. PNB, 175 SCRA 1.

FOURTH: The Honorable Court of Appeals erred in not declaring as null and void the extra-judicial foreclosure undertaken by Metrobank on the property of Sps. Marcial See and Lilian Tan. 2

The facts as found by public respondent Court of Appeals are as follows:

It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of said bank over their property in the District of Paco, Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was annotated at the back of the title.

Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second real estate mortgage over the same property. As in the first instance, the mortgage was duly annotated at the back of TCT No. 105233.

On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a corporation denominated as Ajax Marketing and Development Corporation, with the original partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust Company a loan of P600,000.00, the payment of which was secured by another real estate mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same realty located in the District of Paco, Manila. Again, the third real estate mortgage was annotated at the back of TCT No. 105233.

In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation, represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary co-obligor, and Elisa Tan as Vice-President/Treasurer and in her personal capacity as solidary co-obligor, executed a Promissory Note (PN) No. BDS-3605. 3

In their interrelated first and second assignment of errors, petitioners argue that a novation occurred when their three (3) loans, which are all secured by the same real estate property covered by TCT No. 105233 were consolidated into a single loan of P1 million under Promissory Note No. BDS-3605, thereby extinguishing their monetary obligations and releasing the mortgaged property from liability.

Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. 4 Novation, unlike

other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation. 5 When the change of the object or principal conditions of an obligation occurs at the same time with the change of either in the person of the debtor or creditor a mixed novation occurs. 6

The well settled rule is that novation is never presumed. 7 Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation 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 new one. 8 In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. 9 There is no novation without such release as the third person who has assumed the debtor's obligation becomes merely a co-debtor or surety. 10

The attendant facts herein do not make a case of novation. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements through the execution of PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9. COLLATERAL. This is wholly/partly secured by: (x) "real estate", 11 which strongly negate petitioners' asseveration that the consolidation of the three loans effected the discharge of the mortgaged real estate property. Otherwise, there would be no sense placing these material provisions. Moreover; the real estate mortgages contained this common provision, to wit:

That for and in consideration of credit accommodations obtained from the MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG. DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY detailed as follows:

Nature Date Granted

Due Date

Amount or Line

Loans and/or

600,000.00

Advances in

150,000.00

current account 250,000.00

and to secure the payment of the same and those that may hereafter be obtained including the renewals or extension thereof.

xxx

xxx

xxx

the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/ P250,000.00) . . .as well as those that the MORTGAGEE may have previously extended or may later extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors or assigns, the parcels of land which are described in the list inserted on page three of this document and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the MORTGAGOR declares that he/it is the absolute owner free from all liens and encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE, its successors or assigns, the obligation secured by this mortgage when due, together with interest, and shall keep and perform all and singular the covenants and agreements herein contained for the MORTGAGOR to keep and perform, then the mortgage shall be void; otherwise, it shall remain in full force and effect. 12

The foregoing shows that petitioners agreed to apply the real estate property to secure obligations that they may thereafter obtain including their renewals or extensions with the principals fixed at P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three previous loans to expediently make the loans current. There was no change in the object of the prior obligations. The consolidation of the three loans, contrary to petitioners' contention, did not release the mortgaged real estate property from any liability because the mortgage annotations at the back of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of the real estate mortgages.

Neither can it be validly contended that there was a change, or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a codebtor or surety. Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is

never presumed. Clearly then, from the aforediscussed points, neither objective nor subjective novation occurred here.

Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is invalid as it included two unsecured loans: one, the consolidated loan of P1.0 million under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No. 3583 subsequently extended by Metrobank.

An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same is not improper as it is valid and binding between the parties. 13 For merely consolidating and expediently making current the three previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included in the foreclosure's bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was found to be improper by public respondent which ruling we shall not disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out by the Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests, expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to return the surplus in the selling price to the mortgagors. 14

Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank 15 where this Court enjoined the foreclosure proceedings for including unsecured obligations. Petitioners' reliance on the C & C Commercial Corp. v. Philippine National Bank case is misplaced. In that case, the foreclosure sale included previously incurred unsecured obligations in favor of PNB which were not in the contemplation of the mortgage contract, whereas in the instant case, the mortgages were one in providing that the mortgaged real estate property shall also secure future advancements or loans, as well as renewals or extensions of the same.

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