ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

Facts:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with
an area of about 328 square meters. A 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the
estimated amount equivalent to the assessed value of the aforesaid portion. Since 1963 up to
1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of
Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia
received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795)
and the issuance in his name of a new certificate of title. Upon verification through his lawyer,
Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City
Treasurer. Francia filed a complaint to annul the auction sale.

Issue:

Whether or not the Respondent Appellate Court further committed an error and grave abuse of
discretion in not holding that the price of P2,400 paid by respondent Ho Gonzales was grossly
inadequate as to shock ones conscience amounting to fraud and a deprivation of property
without due process of law, and consequently, the auction sale made thereof is void.

Ruling:

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of
law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit:

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

xxx xxx xxx

(3) that the two debts be due.

 xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of
a lawsuit against the government.

SC stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because
he has a claim against the governmental body not included in the tax levy.
Internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
HERMENEGILDO M. TRINIDAD, Petitioner,
vs.
ESTRELLA ACAPULCO, Respondent

Facts:

On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged:
Sometime in February 1991, a certain Primitivo Caete requested her to sell a Mercedes Benz for
P580,000.00. Caete also said that if respondent herself will buy the car, Caete was willing to
sell it for P500,000.00. Petitioner borrowed the car from respondent for two days but instead of
returning the car as promised, petitioner told respondent to buy the car from Caete for
P500,000.00 and that petitioner would pay respondent after petitioner returns from Davao.
Following petitioners instructions, respondent requested Caete to execute a deed of sale
covering the car in respondents favor for P500,000.00 for which respondent issued three checks
in favor of Caete. Respondent thereafter executed a deed of sale in favor of petitioner even
though petitioner did not pay her any consideration for the sale. When petitioner returned from
Davao, he refused to pay respondent the amount of P500,000.00 saying that said amount would
just be deducted from whatever outstanding obligation respondent had with petitioner. Due to
petitioners failure to pay respondent, the checks that respondent issued in favor of Caete
bounced, thus criminal charges were filed against her. Respondent then prayed that the deed of
sale between her and petitioner be declared null and void; that the car be returned to her; and that
petitioner be ordered to pay damages.

Issue:

Whether or not legal compensation is available.

Ruling

Compensation takes effect by operation of law even without the consent or knowledge of the
parties concerned when all the requisites mentioned in Article 1279 of the Civil Code are
present.26 This is in consonance with Article 1290 of the Civil Code which provides that:

Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation.

Since it takes place ipso jure,27 when used as a defense, it retroacts to the date when all its
requisites are fulfilled.28

Article 1279 provides that in order that compensation may be proper, it is necessary:
 (1) that each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

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

(3) that the two debts be due;

(4) that they be liquidated and demandable;

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

Here, petitioners stance is that legal compensation has taken place and operates even against the
will of the parties because: (a) respondent and petitioner were personally both creditor and debtor
of each other; (b) the monetary obligation of respondent was P566,000.00 and that of the
petitioner was P500,000.00 showing that both indebtedness were monetary obligations the
amount of which were also both known and liquidated; (c) both monetary obligations had
become due and demandablepetitioners obligation as shown in the deed of sale and
respondents indebtedness as shown in the dishonored checks; and (d) neither of the debts or
obligations are subject of a controversy commenced by a third person. The claim of respondent
that there could be no legal compensation in this case as one of the obligations consists of
delivery of a car and not a sum of money must also fail. Respondent sold the car to petitioner on
March 4, 1991 for P500,000.00 while she filed her complaint for nullification of the sale only on
May 6, 1991. As legal compensation takes place ipso jure, and retroacts to the date when its
requisites are fulfilled, legal compensation has already taken place at the time of the sale. At such
time, petitioner owed respondent the sum of P500,000.00 which is the price of the vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is off-set
against theP566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00,
which respondent should pay with 12% interest per annum from date of judicial or extrajudicial
deed. Since there was no extrajudicial deed in this case, the interest shall be resolved from the
date petitioner filed its Supplemental Motion for Reconsideration invoking for the first time legal
compensation, that is, May 20, 1992.
HEIRS OF SERVANDO FRANCO, Petitioners,
vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents

Facts:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.On
November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory
note to evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of
the proceeds of the loan. On maturity of the two promissory notes, the borrowers failed to pay
the indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another
loan in the amount of P300,000.00, maturing in one month, secured by a real estate mortgage
over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of
attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia
executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or
on July 11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds
of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated
all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in
the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on
August 23, 1986. On maturity of the loan, the borrowers failed to pay the indebtedness
of P500,000.00, plus interests and penalties

Issue:

Whether or not there was a novation of the August 23, 1986 promissory note when respondent
Veronica Gonzales issued the February 5, 1992 receipt.

Ruling:

Novation did not transpire because no irreconcilable incompatibility existed between the
promissory note and the receipt. There is novation when there is an irreconcilable incompatibility
between the old and the new obligations. There is no novation in case of only slight
modifications; hence, the old obligation prevails. A novation arises when there is a substitution
of an obligation by a subsequent one that extinguishes the first, either by changing the object or
the principal conditions, or by substituting the person of the debtor, or by subrogating a third
person in the rights of the creditor. For a valid novation to take place, there must be, therefore:
(a) a previous valid obligation; (b) an agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new contract. In short, the new obligation
extinguishes the prior agreement only when the substitution is unequivocally declared, or the old
and the new obligations are incompatible on every point. A compromise of a final judgment
operates as a novation of the judgment obligation upon compliance with either of these two
conditions. To be clear, novation is not presumed. This means that the parties to a contract should
expressly agree to abrogate the old contract in favor of a new one. In the absence of the express
agreement, the old and the new obligations must be incompatible on every point.

The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly.1wphi1 The term "expressly" means that
the contracting parties 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. 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.

here is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation novates
the first. Changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must affect any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the change is merely modificatory
in nature and insufficient to extinguish the original obligation.
CAROLINA HERNANDEZ-NIEVERA, DEMETRIO P. HERNANDEZ, JR., and
MARGARITA H. MALVAR,Petitioners,
vs.
WILFREDO HERNANDEZ, HOME INSURANCE AND GUARANTY CORPORATION,
PROJECT MOVERS REALTY AND DEVELOPMENT CORPORATION, MARIO P.
VILLAMOR and LAND BANK OF THE PHILIPPINES,Respondents.

Facts:

Project Movers Realty & Development Corporation (PMRDC), one of the respondents herein, is
a duly organized domestic corporation engaged in real estate development. Sometime in 1995, it
entered through its president, respondent Mario Villamor (Villamor), into various agreements
with co-respondents Home Insurance & Guaranty Corporation (HIGC)5 and Land Bank of the
Philippines (LBP), in connection with the construction of the Isabel Homes housing project in
Batangas and of the Monumento Plaza commercial and recreation complex in Caloocan City. In
its Asset Pool Formation Agreement, PMRDC conveyed to HIGC the constituent assets of the
two projects, whereas LBP agreed to act as trustee of the resulting Asset Pool for a consideration.
The execution of the projects would be funded largely through securitization, a method of
sourcing development funds by the issuance of participation certificates against the direct
backing assets of the projects, whereby LBP would act as the nominal issuer of such certificates
with the Asset Pool itself acting as the real issuer. HIGC, in turn, would provide guaranty
coverage to these participation certificates in accordance with its Contract of Guaranty with
PMRDC and LBP. PMRDC saw the need to convey additional properties to and augment the
value of its Asset Pool to support the collateralization of additional participation certificates to be
issued. Thus, on March 23, 1998, it entered with LBP and Demetrio the latter purportedly
acting under authority of the same special power of attorney as in the MOA into a Deed of
Assignment and Conveyance (DAC) whereby the lands within Area II were transferred and
assigned to the Asset Pool in exchange for a number of shares of stock which supposedly had
already been issued in the name and in favor of Demetrio. These pieces of land are the subject of
the present controversy as far as they are affected by the explicit provision in the DAC which
dispensed with the stipulated obligation of PMRDC in the MOA to pay option money should it
opt to buy the properties. PMRDC admittedly did not avail of its option to purchase the lands in
Area II in the twelve months that passed after the execution of the MOA. Although PMRDC
delivered to petitioners certain checks representing the money, the same however allegedly
bounced

Issue:

Whether or not the Memorandum of Agreement was novated by the Deed of Assignment and
Conveyance.

Ruling:

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. 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.
EQUITABLE PCI BANK, INC., PETITIONER, VS. OJ-MARK TRADING, INC. AND
SPOUSES OSCAR AND EVANGELINE MARTINEZ, RESPONDENTS.

Facts:

Petitioners-spouses Jaime (now deceased) and Myrna Torres owned and operated St. James
College of Paraaque[3] (St. James College), a sole proprietorship educational institution. in
1995, the Philippine Commercial and International Bank (PCIB) granted the Torres spouses
and/or St. James College a credit line facility of up to PhP 25,000,000, secured by a real estate
mortgage[4] (REM) over a parcel of land situated in Paraaque, in the name of St. James
College, The credit line underwent several annual renewals, As petitioners had defaulted in the
payment of the loan obtained from the secured credit accommodation, their total unpaid loan
obligation, as of September 2001, stood at PhP 18,300,000. EPCIB proposed a restructuring
package with a soft payment scheme for the outstanding loan balance of PhP 18,300,000. Under
the counter-proposal, the bank would book the accumulated past due loans to current status and
charge interest at a fixed rate of 13.375% per annum, payable in either options: Petitioner Jaime
Torres chose and agreed to the second option, i.e., the equal annual amortizations of PhP
6,100,000 payable every May. May 2003 came, but petitioners failed to pay the stipulated annual
amortization of PhP 6,100,000 agreed upon.. On June 23, 2003, petitioners tendered, and EPCIB
accepted, a partial payment of PhP 2,521,609.62, EPCIB made it abundantly clear on the OR
that: THE RECEIPT OF PAYMENT IS WITHOUT PREJUDICE TO THE BANKS RIGHT
AND CLAIMS ARISING FROM THE FACT THE ACCOUNT IS OVERDUE. NOR SHALL
IT RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS ACCEPTANCE OF
PAYMENT. EPCIB, through counsel, reminded and made it clear to petitioners that their first
partial payment did not detract from the past due character of their outstanding loan for which
reason it is demanding the remaining PhP 5,100,000 to complete the first PhP 6,100,000
principal payment. EPCIB proposed a new repayment scheme to which petitioners were not
amenable. On November 6, 2003, petitioners issued a Stop Payment Order[12] for their PhP
921,535.42 check. On November 10, 2003, EPCIB, through counsel, demanded full settlement
of petitioners loan obligation in the total amount of PhP 24,719,461.48. EPCIB filed before the
Office of the Clerk of Court and Ex-Officio Sheriff of the RTC in Paraaque City its Petition for
Sale[14] to extra-judicially foreclose the mortgaged property covered. On the very day of the
scheduled foreclosure sale, January 9, 2004, the Pasig City RTC issued a TRO,[16] enjoining
EPCIB from proceeding with the scheduled foreclosure sale, and set a date for the hearing on the
application for a writ of preliminary injunction. On March 10, 2004, the RTC issued an Order
granting a writ of preliminary injunction in favor of petitioners,

Issue:

Whether there was indeed a novation of the contract between the parties

Ruling:

As a civil law concept, novation is the extinguishment of an obligation by the substitution or

change of the obligation by a subsequent one which terminates it, either by changing its objects
or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating
a third person to the rights of the creditor.[24] Novation may be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new one that takes the place
of the former; it is merely modificatory when the old obligation subsists to the extent that it
remains compatible with the amendatory agreement.[25] Novation may either be express, when
the new obligation declares in unequivocal terms that the old obligation is extinguished, or
implied, when the new obligation is on every point incompatible with the old one.[26] The test
of incompatibility lies on whether the two obligations can stand together, each one with its own
independent existence.[27]

For novation, as a mode of extinguishing or modifying an obligation, to apply, the

following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.[28]

The parties did not unequivocally declare, let alone agree, that the obligation had been
modified as to the terms of payment by the partial payments of the obligation.. The following
acts of EPCIB readily argue against the idea of its having agreed to a modification in the
stipulated terms of payment: (a) its letter-reply to petitioners June 23, 2003 letter; (b) the August
27, 2003 demand-letter of EPCIB for the full principal balance of PhP 5,100,000 from
petitioners; (c) the September 17, 2003 letter of EPCIB denying petitioners request for a partial
payment; (d) the OR dated June 30, 2003 EPCIB issued where the following entries were
written: THE RECEIPT OF PAYMENT IS WITHOUT PREJUDICE TO THE BANKS
RIGHTS AND CLAIMS ARISING FROM THE FACT THE ACCOUNT IS OVERDUE. NOR
SHALL IT RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS ACCEPTANCE OF
PAYMENT;
The notion of novation foisted by petitioners on the Court cannot be plausibly deduced from
EPCIBs acceptance of such lesser amount.
There is clearly no incompatibility between EPCIBs receipt of the partial payments of the
principal amounts and what was due in May 2003. As it were, EPCIB accepted the partial
payments remitted, but demanded, at the same time, the full payment of what was otherwise due
in May 2003.
Novatio non praesumitur, or novation is never presumed,[29] is a well-settled principle.
Consequently, that which arises from a purported modification in the terms and conditions of the
obligation must be clear and express., the acts of EPCIB before, simultaneously to, and after its
acceptance of payments from petitioners argue against the idea of its having acceded or
acquiesced to petitioners request for a change of the terms of payments of the secured loan.
Thus, a novation through an alleged implied consent by EPCIB, as proffered and argued by
petitioners, cannot be given.
MARIA SOLEDAD TOMIMBANG, Petitioner,
vs.
ATTY. JOSE TOMIMBANG, Respondent.

Facts:

Petitioner and respondent are siblings. Their parents donated to petitioner an eight-door
apartment located at 149 Santolan Road, Murphy, Quezon City, with the condition that during the
parents' lifetime, they shall retain control over the property and petitioner shall be the
administrator thereof.
In 1995, petitioner applied for a loan from PAG-IBIG Fund to finance the renovations on Unit H,
of said apartment which she intended to use as her residence. Petitioner failed to obtain a loan
from PAG-IBIG Fund, hence, respondent offered to extend a credit line to petitioner on the
following conditions: (1) petitioner shall keep a record of all the advances; (2) petitioner shall
start paying the loan upon the completion of the renovation; (3) upon completion of the
renovation, a loan and mortgage agreement based on the amount of the advances made shall be
executed by petitioner and respondent; and (4) the loan agreement shall contain comfortable
terms and conditions which petitioner could have obtained from PAG-IBIG.
An altercation broke out between the herein parties. Respondent and petitioner entered into a
new agreement whereby petitioner was to start making monthly payments on her loan. Another
quarrel occurred and they had a hearing at the barangay where the respondent reminded the
petitioner of her monthly payment. Petitioner left the unit and was nowhere to be found. She
stopped making monthly payments and ignored the demand letter. Respondent filed a complaint.
Petitioner does not deny that she obtained a loan from respondent. She, however, contends that
the loan is not yet due and demandable because the suspensive condition the completion of the
renovation of the apartment units - has not yet been fulfilled. She also assails the award of
attorney's fees to respondent as baseless

Issue:

Whether or not the contract is novated.

Ruling:
It is undisputed that herein parties entered into a valid loan contract. The The evidence on record
clearly shows that after renovation of seven out of the eight apartment units had been completed,
petitioner and respondent agreed that the former shall already start making monthly payments on
the loan even if renovation on the last unit (Unit A) was still pending. Evidently, by virtue of the
subsequent agreement, the parties mutually dispensed with the condition that petitioner shall
only begin paying after the completion of all renovations. There was, in effect, a modificatory or
partial novation, of petitioner's obligation. Article 1291 of the Civil Code. The decision of the
Court of Appeals is granted.

MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator,

THE PHILIPPINE DEPOSIT INSURANCE CORPORATION, Petitioner, v. EDWARD
WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as the
Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF
DEEDS of Cagayan de Oro City, Respondent

Facts:

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange
Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in the
business of granting loans and receiving deposits from the general public, and treated as banks.
FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation. The
articles of merger were not registered with the SEC due to incomplete documentation. On
August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an amendment to
Article 1 of its Articles of Incorporation, but the amendment was approved by the SEC only on
April 3, 1987. Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and
approved Board Resolution No. 86-002, assigning its assets in favor of DSLAI which in turn
assumed the formers liabilities. The business of MSLAI, however, failed. Hence, the Monetary
Board of the Central Bank of the Philippines ordered its closure and placed it under receivership
per Monetary Board Resolution No. 922 dated August 31, 1990. The Monetary Board found that
MSLAIs financial condition was one of insolvency, and for it to continue in business would
involve probable loss to its depositors and creditors. On May 24, 1991, the Monetary Board
ordered the liquidation of MSLAI, with PDIC as its liquidator.

Issue:

Whether or not there was novation of the obligation by substituting the person of the debtor

Ruling:

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate corporations. A
corporation is an artificial being created by operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly authorized by law or incident to its
existence. It has a personality separate and distinct from the persons composing it, as well as
from any other legal entity to which it may be related. Being separate entities, the property of
one cannot be considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI
remain as its assets and cannot be considered as belonging to DSLAI and MSLAI,
notwithstanding the Deed of Assignment wherein FISLAI assigned its assets and properties to
DSLAI, and the latter assumed all the liabilities of the former. As provided in Article 1625 of the
Civil Code, an assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property. The certificates of title of the subject
properties were clean and contained no annotation of the fact of assignment. Respondents
cannot, therefore, be faulted for enforcing their claim against FISLAI on the properties registered
under its name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal
standing to annul the execution sale over the properties of FISLAI. With more reason can it not
cause the cancellation of the title to the subject properties of Willkom and Go. It is a rule that
novation by substitution of debtor must always be made with the consent of the creditor. Article
1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting a new debtor in the

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

In this case, there was no showing that Uy, the creditor, gave her consent to the
agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such
agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred to DSLAI
remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The
subsequent sale of the properties by Uy to Willkom, and of one of the properties by
Willkom to Go, cannot, therefore, be questioned by MSLAI.
The consent of the creditor to a novation by change of debtor is as indispensable as the creditors
consent in conventional subrogation in order that a novation shall legally take place. Since
novation implies a waiver of the right which the creditor had before the novation, such waiver
must be express.
AGRIFINA AQUINTEY, petitioner,
vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

Facts:

Felicidad testified that she and her friend Agrifina had been engaged in the money-lending
business. Agrifina would lend her money with monthly interest, 34 and she, in turn, would re-lend
the money to borrowers at a higher interest rate. Their business relationship turned sour when
Agrifina started complaining that she (Felicidad) was actually earning more than
Agrifina. Before the respective maturity dates of her debtors' loans, Agrifina asked her to pay her
account since Agrifina needed money to buy a house and lot in Manila. However, she told
Agrifina that she could not pay yet, as her debtors' loan payments were not yet due. Agrifina then
came to her store every afternoon to collect from her, and persuaded her to go to Atty. Torres G.
A-ayo for legal advice. The lawyer suggested that she indorse the accounts of her debtors to
Agrifina so that the latter would be the one to collect from her debtors and she would no longer
have any obligation to Agrifina.3 She then executed deeds of assignment in favor of Agrifina
covering the sums of money due from her debtors. She signed the deeds prepared by Atty. A-ayo
in the presence of Agrifina. Some of the debtors signed the promissory notes which were
likewise prepared by the lawyer. Thereafter, Agrifina personally collected from Felicidad's
debtors. Felicidad further narrated that she received P250,000.00 from one of her debtors, Rey
Rivera, and remitted the payment to Agrifina.

Issue:

Whether or not there was novation of the obligation by substituting the person of the debtor

Ruling:

Substitution of the person of the debtor may be affected by delegacion. Meaning, the debtor
offers, the creditor accepts a third person who consent of the substitution and assumes the
obligation. It is necessary that the old debtor be released from the obligation and the third person
or new debtor takes his place in the relation. Without such release, there is no novation. Court of
Appeals correctly found that the respondents obligation to pay the balance of their account with
petitioner was extinguished pro tanto by the deeds of credit. CA decision is affirmed with the
modification that the principal amount of the respondents is P33,841.
LOADMASTERS CUSTOMS SERVICES, INC., vs. GLODEL BROKERAGE
CORPORATION and R&B INSURANCE CORPORATION,

Facts:

On August 28, 2001, R&B Insurance issued Marine Policy No. MN-00105/2001 in favor
of Columbia to insure the shipment of 132 bundles of electric copper cathodes against All
Risks. On August 28, 2001, the cargoes were shipped on board the vessel Richard Rey from
Isabela, Leyte, to Pier 10, North Harbor, Manila. They arrived on the same date.
Columbia engaged the services of Glodel for the release and withdrawal of the cargoes from the
pier and the subsequent delivery to its warehouses/plants. Glodel, in turn, engaged the services
of Loadmasters for the use of its delivery trucks to transport the cargoes to Columbias
warehouses/plants in Bulacan and Valenzuela City. The goods were loaded on board twelve (12)
trucks owned by Loadmasters, driven by its employed drivers and accompanied by its employed
truck helpers. Six (6) truckloads of copper cathodes were to be delivered to Balagtas, Bulacan,
while the other six (6) truckloads were destined for Lawang Bato, Valenzuela City. The cargoes
in six truckloads for Lawang Bato were duly delivered in Columbias warehouses there. Of the
six (6) trucks en route to Balagtas, Bulacan, however, only five (5) reached the destination. One
(1) truck, loaded with 11 bundles or 232 pieces of copper cathodes, failed to deliver its cargo.
Later on, the said truck, an Isuzu with Plate No. NSD-117, was recovered but without the copper
cathodes. Because of this incident, Columbia filed with R&B Insurance a claim for insurance
indemnity in the amount of P1,903,335.39. After the requisite investigation and adjustment,
R&B Insurance paid Columbia the amount of P1,896,789.62 as insurance indemnity.
R&B Insurance, thereafter, filed a complaint for damages against both Loadmasters and Glodel
before the Regional Trial Court, Branch 14, Manila (RTC), docketed as Civil Case No. 02-
103040. It sought reimbursement of the amount it had paid to Columbia for the loss of the
subject cargo. It claimed that it had been subrogated to the right of the consignee to recover
from the party/parties who may be held legally liable for the loss.

Issue:

Whether or not petitioner Loadmasters be legally considered as an Agent of respondent Glodel.

Ruling:
Subrogation is the substitution of one person in the place of another with reference to a lawful
claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt
or claim, including its remedies or securities. Doubtless, R&B Insurance is subrogated to the
rights of the insured to the extent of the amount it paid the consignee under the marine insurance,
as provided under Article 2207 of the Civil Code, which reads:

ART. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss arising out
of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrong-doer or the person who
has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs. RURAL BANK OF
GERONA, INC., Respondent.

Facts:

RBG is a rural banking corporation organized under Philippine laws and located in Gerona,
Tarlac. In the 1970s, the Central Bank and the RBG entered into an agreement providing that
RBG shall facilitate the loan applications of farmers-borrowers under the Central Bank-
International Bank for Reconstruction and Developments (IBRDs) 4th Rural Credit
Project. The agreement required RBG to open a separate bank account where the IBRD loan
proceeds shall be deposited. The RBG accordingly opened a special savings account with
Metrobanks Tarlac Branch. As the depository bank of RBG, Metrobank was designated to
receive the credit advice released by the Central Bank representing the proceeds of the IBRD
loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to RBGs special
savings account for the latters release to the farmers-borrowers. More than a month after
RBG had made the withdrawals from its account with Metrobank, the Central Bank issued
debit advices, reversing all the approved IBRD loans. The Central Bank implemented the
reversal by debiting from Metrobanks demand deposit account the amount corresponding to
all three IBRD loans. Upon receipt of the November 3, 1978 debit advices, Metrobank, in
turn, debited the following amounts from RBGs special savings
account: P189,052.00, P115,000.00, andP8,000.41. Metrobank, however, claimed that these
amounts were insufficient to cover all the credit advices that were reversed by the Central
Bank. It demanded payment from RBG which could make partial payments. As of October
17, 1979, Metrobank claimed that RBG had an outstanding balance of P334,220.00. To
collect this amount, it filed a complaint for collection of sum of money against RBG before
the RTC

Issue:

Whether or not this is a case of legal subrogation under Article 1302 of the Civil Code.

Ruling:

Based on these arrangements, the Central Banks immediate recourse, therefore should have been
against the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered
by the debit advices from Metrobanks demand deposit account. Under the Project Terms and
Conditions, Metrobank had no responsibility over the proceeds of the IBRD loans other than
serving as a conduit for their transfer from the Central Bank to the RBG once credit advice has
been issued. Thus, we agree with the CAs conclusion that the agreement governed only the
parties involved the Central Bank and the RBG. Metrobank was simply an outsider to the
agreement. Our disagreement with the appellate court is in its conclusion that no legal
subrogation took place; the present case, in fact, exemplifies the circumstance contemplated
under paragraph 2, of Article 1302 of the Civil Code which provides:

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

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

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest
except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was
Metrobanks demand deposit account, instead of RBGs, which the Central Bank proceeded
against, on the assumption perhaps that this was the most convenient means of recovering the
cancelled loans. That Metrobanks payment was involuntarily made does not change the reality
that it was Metrobank which effectively answered for RBGs obligations.
After Metrobank received the Central Banks debit advices in November 1978, it (Metrobank)
accordingly debited the amounts it could from RBGs special savings account without any
objection from RBG.[14] RBGs President and Manager, Dr. Aquiles Abellar, even wrote
Metrobank, on August 14, 1979, with proposals regarding possible means of settling the amounts
debited by Central Bank from Metrobanks demand deposit account. [15] These instances are all
indicative of RBGs approval of Metrobanks payment of the IBRD loans. That RBGs tacit
approval came after payment had been made does not completely negate the legal subrogation
that had taken place.
Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the
credit with all the rights thereto appertaining, either against the debtor or against third
persons. As the entity against which the collection was enforced, Metrobank was subrogated to
the rights of Central Bank and has a cause of action to recover from RBG the amounts it paid to
the Central Bank, plus 14% per annum interest.
SWAGMAN HOTELS AND TRAVEL, INC., petitioner, vs. HON. COURT OF APPEALS,
and NEAL B. CHRISTIAN, respondents.

Facts:

Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty.
Leonor L. Infante and Rodney David Hegerty, its president and vice-president, respectively,
obtained from private respondent Neal B. Christian loans evidenced by three promissory notes
dated 7 August 1996, 14 March 1997, and 14 July 1997. Each of the promissory notes is in the
amount of US$50,000 payable after three years from its date with an interest of 15% per annum
payable every three months. In a letter dated 16 December 1998, Christian informed the
petitioner corporation that he was terminating the loans and demanded from the latter payment in
the total amount of US$150,000 plus unpaid interests in the total amount of US$13,500. On 2
February 1999, private respondent Christian filed with the Regional Trial Court of Baguio City,
Branch 59, a complaint for a sum of money and damages against the petitioner corporation,
Hegerty, and Atty. Infante. The complaint alleged as follows: On 7 August 1996, 14 March
1997, and 14 July 1997, the petitioner, as well as its president and vice-president obtained loans
from him in the total amount of US$150,000 payable after three years, with an interest of 15%
per annum payable quarterly or every three months. For a while, they paid an interest of 15%
per annum every three months in accordance with the three promissory notes. However, starting
January 1998 until December 1998, they paid him only an interest of 6% per annum, instead of
15% per annum, in violation of the terms of the three promissory notes. Thus, Christian prayed
that the trial court order them to pay him jointly and solidarily the amount of US$150,000
representing the total amount of the loans; US$13,500 representing unpaid interests from January
1998 until December 1998; P100,000 for moral damages; P50,000 for attorneys fees; and the
cost of the suit.[3]

The petitioner corporation, together with its president and vice-president, filed an Answer
raising as defenses lack of cause of action and novation of the principal obligations. According
to them, Christian had no cause of action because the three promissory notes were not yet due
and demandable. In December 1997, since the petitioner corporation was experiencing huge
losses due to the Asian financial crisis, Christian agreed (a) to waive the interest of 15% per
annum, and (b) accept payments of the principal loans in installment basis, the amount and
period of which would depend on the state of business of the petitioner corporation. Thus, the
petitioner paid Christian capital repayment in the amount of US$750 per month from January
1998 until the time the complaint was filed in February 1999. The petitioner and its co-
defendants then prayed that the complaint be dismissed and that Christian be ordered to pay P1
million as moral damages; P500,000 as exemplary damages; and P100,000 as attorneys fees.

Issue:

Whether or not there is a valid novation on the obligation.

Ruling:

The Court observes that the petitioner corporation argues the existence of novation based on its
own version of what transpired during the renegotiation of the three promissory notes in
December 1997. By using its own version of facts, the petitioner is, in a way, questioning the
findings of facts of the trial court and the Court of Appeals.

As a rule, the findings of fact of the trial court and the Court of Appeals are final and conclusive
and cannot be reviewed on appeal to the Supreme Court[18] as long as they are borne out by the
record or are based on substantial evidence.[19] The Supreme Court is not a trier of facts, its
jurisdiction being limited to reviewing only errors of law that may have been committed by the
lower courts. Among the exceptions is when the finding of fact of the trial court or the Court of
Appeals is not supported by the evidence on record or is based on a misapprehension of facts.
Such exception obtains in the present case.[20]

This Court finds to be contrary to the evidence on record the finding of both the trial court and
the Court of Appeals that the renegotiation in December 1997 resulted in the reduction of the
interest from 15% to 6% per annum and that the monthly payments of US$750 made by the
petitioner were for the reduced interests.

It is worthy to note that the cash voucher dated January 1998 [21] states that the payment of
US$750 represents INVESTMENT PAYMENT. All the succeeding cash vouchers describe the
payments from February 1998 to September 1999 as CAPITAL REPAYMENT. [22] All these
cash vouchers served as receipts evidencing private respondents acknowledgment of the
payments made by the petitioner: two of which were signed by the private respondent himself
and all the others were signed by his representatives. The private respondent even identified and
confirmed the existence of these receipts during the hearing. [23] Significantly, cognizant of these
receipts, the private respondent applied these payments to the three consolidated principal loans
in the summary of payments he submitted to the court.[24]

Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall
not be deemed to have been made until the interest has been covered. In this case, the private
respondent would not have signed the receipts describing the payments made by the petitioner as
capital repayment if the obligation to pay the interest was still subsisting. The receipts, as well
as private respondents summary of payments, lend credence to petitioners claim that the
payments were for the principal loans and that the interests on the three consolidated loans were
waived by the private respondent during the undisputed renegotiation of the loans on account of
the business reverses suffered by the petitioner at the time.

There was therefore a novation of the terms of the three promissory notes in that the interest
was waived and the principal was payable in monthly installments of US$750. Alterations of the
terms and conditions of the obligation would generally result only in modificatory novation
unless such terms and conditions are considered to be the essence of the obligation itself. [25] The
resulting novation in this case was, therefore, of the modificatory type, not the extinctive type,
since the obligation to pay a sum of money remains in force.

Thus, since the petitioner did not renege on its obligation to pay the monthly installments
conformably with their new agreement and even continued paying during the pendency of the
case, the private respondent had no cause of action to file the complaint. It is only upon
petitioners default in the payment of the monthly amortizations that a cause of action would
arise and give the private respondent a right to maintain an action against the petitioner.

AZOLLA FARMS and FRANCISCO R. YUSECO, petitioners, vs. COURT OF APPEALS

and SAVINGS BANK OF MANILA, respondents.

Facts:

In 1982, Azolla Farms undertook to participate in the National Azolla Production Program. To
finance its participation, petitioners applied for a loan with Credit Manila, Inc., which the latter
endorsed to its sister company, respondent Savings Bank. The BOD of Azolla Farms passed a
board resolution authorizing Yuseco, the Chairman, President and Chief Operating Officer, to
borrow from Savings Bank in an amount not exceeding P2,200,000.00. Yuseco executed a
promissory note promising to pay Savings Bank the sum of P1,400,000.00. The net proceed of
P1,225,443.31 was released to FNCB Finance, the mortgagee of a residential house owned by
Yuseco. FNCB Finance released the mortgage and, in turn, the property was mortgaged to
Savings Bank as collateral for the loan. Yuseco and Francisco Bargas also executed an
assignment of their shares of stocks in Azolla Farms as additional security. Yuseco then executed
two other promissory note both for the amount of P300,000.00. Azolla project collapsed.
Petitioners Yuseco and Azolla Farms filed with RTC a complaint for damages against Savings
Bank. Petitioners alleged that Savings Bank unjustifiably refused to promptly release the
remaining P300,000.00 which impaired the timetable of the project which affects its viability and
resulting in its collapse. Respondent Savings Bank contends that there was evidence that Yuseco
was using the loan proceeds for expenses totally unrelated to the project and they decided to
withhold the remaining amount until Yuseco gave the assurance that the diversion of the funds
will be stopped. They also claimed that 90-day interval could not impaired the operation of the
project. Petitioners filed a Motion to Admit Amended Complaint alleging that the testimony of
defense witness Jesus Ventura raised the issue of the invalidity of the promissory notes and the
real estate mortgage. Petitioners seek that the promissory notes and real estate mortgage be
declare NOVATED, invalid and unenforceable. Trial Court rendered its decision annulling the
promissory notes and real estate mortgage, and awarding damages to petitioners. Court of
Appeals reversed and set aside the trial courts decision

Issue:

Whether or not there was novation.

Ruling:

Novation is the extinguishment of an obligation by the substitution or change of the obligation

by 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.
In order for novation to take place, the concurrence of the following requisites is indispensable:
1. Previous valid obligation
2. Agreement of the parties concerned to a new contract
3. Extinguishment of the old contract
4. Validity of the new contract

In the case at bar, there is no new obligation that supposedly novated the promissory notes or the
real estate mortgage, or a pre-existing obligation that was novated by the promissory notes and
the real estate mortgage. In fact, there is only one agreement between the parties in this case, i.e.,
petitioners P2,000,000.00 loan with respondent as evidenced by the 3 promissory notes.
CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE,
INC., respondent.

Facts:

Delta Motors Corporation applied for financial assistance from respondent State Investment
House, Inc., a domestic corporation engaged in the business of quasi-banking. SIHI agreed to
extend a credit line to Delta which eventually became indebted to SIHI. Meanwhile, petitioner
purchased on installment basis several buses to Delta. To secure the payment of the obligation
petitioner executed promissory notes in favor of Delta. When petitioner defaulted on the
payments of the debts, it entered into an agreement with delta to cover its due obligations.
However, petitioner still had trouble meeting its obligations with delta. Pursuant to the
memorandum of agreement delta executed a deed of sale assigning to respondent, the promissory
notes from petitioner. Respondent subsequently sent a demand letter to petitioner requiring
remitting payments due on the promissory notes. Petitioner replied informing respondent of the
fact that delta had taken over its management and operations.

Issue:

Whether or not 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,

Ruling:

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.

GLORIA OCAMPO-PAULE, petitioner, vs. HONORABLE COURT OF APPEALS and

PEOPLE OF THE PHILIPPINES, respondents.
Facts:

During the period August, 1991 to April, 1993, petitioner received from private complainant
Felicitas M. Calilung several pieces of jewelry with a total value of One hundred Sixty Three
Thousand One hundred Sixty Seven Pesos and Ninety Five Centavos (P163,167.95). The
agreement between private complainant and petitioner was that the latter would sell the same and
thereafter turn over and account for the proceeds of the sale, or otherwise return to private
complainant the unsold pieces of jewelry within two months from receipt thereof. Since private
complainant and petitioner are relatives, the former no longer required petitioner to issue a
receipt acknowledging her receipt of the jewelry. When petitioner failed to remit the proceeds of
the sale of the jewelry or to return the unsold pieces to private complainant, the latter sent
petitioner a demand letter. Notwithstanding receipt of the demand letter, petitioner failed to turn
over the proceeds of the sale or to return the unsold pieces of jewelry. Private complainant was
constrained to refer the matter to the barangay captain of Sta. Monica, Lubao, Pampanga. During
the barangay conciliation proceedings, petitioner acknowledge having received from private
complainant several pieces of jewelry worth P163,167.95. Both parties eventually executed an
agreement entitled Kasunduan sa Bayaran, whereby petitioner promised to pay private
complainant P3,000.00 every month to answer for the jewelry which she received from the latter.
When petitioner failed to comply with the terms of the Kasunduan sa Bayaran, private
complainant sent her another demand letter dated March 9, 1994 but she still failed to comply
with her obligation.

Issue:

Whether or not there was novation.

Ruling:

Petitioners argument that there was a novation of her criminal liability when she and private
complainant executed the Kasunduan sa Bayaran is untenable. It is well-settled that the
following requisites must be present for novation to take place: (1) a previous valid obligation;
(2) agreement of all the parties to the new contract; (3) extinguishment of the old contract; and
(4) validity of the new one.

Novation, in its broad concept, may either be extinctive or modificatory. 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. xxx
Novation is never presumed, and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken.

The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. The term expressly means that the
contracting parties 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. 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 contrareity, however, would
be an irreconcilable incompatibility between the old and the new obligations.

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

The execution of the Kasunduan sa Bayaran does not constitute a novation of the original
agreement between petitioner and private complainant. Said Kasunduan did not change the
object or principal conditions of the contract between them. The change in manner of payment
of petitioners obligation did not render the Kasunduan incompatible with the original
agreement, and hence, did not extinguish petitioners liability to remit the proceeds of the sale of
the jewelry or to return the same to private complainant.
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is
ratified, by changing only the terms of payment and adding other obligations not incompatible
with the old one, or wherein the old contract is merely supplemented by the new one
SPOUSES ARSENIO R. REYES and NIEVES S. REYES, petitioners, vs. COURT OF
APPEALS and PABLO V. REYES, respondents.

Facts:

This petition arose from a civil case for collection of a sum of money with preliminary
attachment filed by respondent Pablo V. Reyes against his first cousin petitioner Arsenio R.
Reyes and spouse Nieves S. Reyes. According to private respondent, petitioner-spouses
borrowed from him P600,000.00 with interest at five percent (5%) per month, which
totalled P1,726,250.00 at the time of filing of the Complaint. The loan was to be used
supposedly to buy a lot in Paraaque. It was evidenced by an acknowledgment receipt dated 15
July 1990 signed by the petitioner-spouses Arsenio R. Reyes and Nieves S. Reyes and witness
Romeo Rueda. Petitioners paid the interests on the loan with the following BPI Family Bank
checks drawn against their personal account. Petitioners also turned over to private respondent
their Nissan pickup truck worth P400,000.00 in partial payment of the loan, and on 30 January
1993 petitioner Arsenio executed a deed of absolute sale over the vehicle in favor of
respondent. Respondent's wife Araceli Reyes issued an acknowledgment
receipt therefor. Subsequently, petitioners failed to make any further payments despite written
demand for payment on 24 August 1993. In their Answer petitioners admitted their loan from
respondent but averred that there was a novation so that the amount loaned was actually
converted into respondent's contribution to a partnership formed between them on 23 March
1990. According to petitioner Nieves, sometime in 1989 respondent Pablo went to their house
and proposed to petitioner Arsenio the formation of a partnership to develop the property
petitioners planned to buy. He agreed and on 23 March 1990 they executed their Articles of
Partnership of Feliz Casa Realty Development, Ltd. Each partner was to contribute a capital
of P2,000,000.00. Arsenio's contribution was his P1,000,000.00 investment with the owner of
the real property to be purchased. Respondent Pablo contributed only P500,000.00.

Issue:

Whether or not there was a novation.

Ruling:
 For novation to take place, the following requisites must concur: (a) there must be a
previous valid obligation; (b) there must be an agreement of the parties concerned to a new
contract; (c) there must be the extinguishment of the old contract; and, (d) there must be the
validity of the new contract. In the case at bar, the third requisite is not present. The parties did
agree that the amount loaned would be converted into respondent's contribution to the
partnership, but this conversion did not extinguish the loan obligation. The date when the
acknowledgment receipt/promissory note was made negates the claim that the loan agreement
was extinguished through novation since the note was made while the partnership was in
existence.

Significantly, novation is never presumed. It must appear by express agreement of the

parties, or by their acts that are too clear and unequivocal to be mistaken for anything else. An
obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified
by changing only the terms of payment and adding other obligations not incompatible with the
old one, or wherein the old contract is merely supplemented by the new one.

When questioned as to why she executed the acknowledgment receipt, Nieves answered that
she did so only at respondent's request, allowing the latter to dictate the contents of the
receipt. The execution of the receipt was supposedly for the reason that respondent needed to
reassure his family that he had indeed invested his money in a profitable venture. If that was the
case, Nieves should have objected to the inclusion of the statement of interest payments in the
receipt. There was no need to disguise the intended profits as interest payments. Using
petitioners' reasoning, they belonged to the same family so there was no need to conceal the true
nature of the transaction. The statement of the interest payments negates the allegation that it is
merely an acknowledgment receipt and not a promissory note. The appellate court was correct in
concluding that the amount remained a loan despite the partnership agreement.