CA

Bus Lines v. State Investment House, Inc.

GR No. 147950 | 11 December 2003 | Quisumbing, J.

Kinds of Novation

Princess Trisha Joy Z. Uy | Law 122-Obligations and Contracts | Grp3

Sorry too much facts. Basically, PET owes Delta. Delta owes RESP. PET and Delta defaulted and entered a restructuring
agreement with their respective creditors. Delta assigned 5 of the promissory notes PET issued to the RESP. RESP wants
to collect from PET, but PET doesnt want to pay saying that the agreement was with Delta.

Facts:

! Delta Motors applied for financial assistance from RESP, SIHI. SIHI granted Delta a credit line, and after
sometime, Delta owed SIHI 24M.
! CA Bus Lines purchased 35 buses and 2 conversion engines from Delta, CBLI executed 16 promissory
notes in favor of Delta. Each note is for ~2M payable monthly.
! CBLI also promised to pay for attorneys fees and expenses of collection in case of judicial proceedings.
! CBLI also executed chattel mortgages over the 35 buses in Deltas favor.
! CBLI defaulted and entered into a restructuring agreement with Delta. It was agreed upon that in case
of default, Delta would have the authority to take over CBLI operations, until the account is satisfied.
! Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as security for the
payment of its obligation to SIHI. Delta failed to pay, and its loan was restructured.
! CBLI defaulted, and a suit was brought to the court for Delta to take over the company. A writ was
granted to Delta.
! Delta executed a Deed of Sale assigning to SIHI 5 of the promissory notes given by CBLI. It had a total
value of ~16M.
! SIHI sent a demand letter to CBLI to remit the payments of the promissory notes directly to it.
! CBLI informed SIHI that Delta had taken over its management.
! Delta offered its available bus units to SIHI as payment in kind of its remaining obligation. The buses
were valued at ~27M. SIHI accepted the offer and Delta transferred the ownership to SIHI which
acknowledged full payment of Deltas debt.
! SIHI was not able to take possession of all the buses, only 17, which was not sufficient to fulfill the
obligation. SIHI filed a suit, and the court ordered Delta to pay the remaining amount ~20M.
! CBLI agreed that Delta could extrajudicially foreclose on the chattel mortgages over the 35 bus units.
! CBLI refused to pay SIHI the value of the promissory notes saying that the agreement was between it
and Delta.
! SIHI filed a complaint against CBLI for collection.
! Delta bought 14 out of the 35 buses and sold the same for partial satisfaction of its debt to SIHI.
! SIHI moved to sell the 16 buses of CBLI and was granted. SIHI amended the motion stating that 14 of
the buses had already been sold to Delta, and the 2 others were sold to another party.
! The TC ruled that the best interest of the parties might be better served denying further sales and go
direct to the trial of the case on the merits. (Pati yung cout nahihilo na L )
! TC ordered SIHI to return the 16 buses or pay for it.
! TC: the restructuring agreement on Oct 7, 1981 novated the 5 promissory notes, at the time Delta
assigned the 5 promissory notes to SIHI, the notes were already merged into the restructuring
agreement and cannot be enforced against CBLI.
! CA Reversed.

Issue/Ratio:
WON the restructuring agreement between CBLI and Delta novated the 5 promissory notes assigned to
SIHI. NO

Novation - 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.
Extinctive Novation an old obligation is terminated by the creation of a new obligation that takes the
place of the former.
Objective/Real results by changing the object or principal conditions.
Subjective/personal results by substituting the person of the debtor or subrogating a third person
in the rights of the creditor.
Modificatory Novation old obligation subsists to the extent it remains compatible with the
amendatory agreement.
Functions of Novation
(1) Extinguish an existing obligation
(2) Substitute a new one in its place
Requisites of Novation
(1) PrevioUs valid obligation
(2) Agreement of all parties concerned to a new contract
(3) Extinguishment of the old obligation
(4) Birth of a valid new obligation
Indicators of Novation
(1) Novation has been stated in clear unequivocal terms
(2) Old and new obligations are incompatible on every point

The restructuring agreement between Delta and CBLI shows that the parties did not expressly stipulate
the restructuring agreement novated the promissory notes. Absent this, there must be a showing of
complete incompatibility, which is not present.
The restructuring agreement contained provisions to satisfy the obligation. There was no change in the
object of the prior obligations. The only change was the schedule of payment, and the court says that
this is done to help the debtor pay, but it is not tantamount to a novation.
Deltas authority to collect from CBLI was revoked when SIHI opted to directly collect.