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ARTICLE 1293 REYES V SECRETARY OF JUSTICE 1996

FACTS - Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged in credit financing. Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise engaged in real estate development. The other respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for the Armed Forces of the Philippines. - Eurotrust and Bermic entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to finance the construction of the latter's Ritz Condominium and Gold Business Park. In turn, Bermic issued 21 postdated checks to cover payments of the loan packages. However, when those checks were presented for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrust's notices and repeated demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code. - Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government securities, conducted its own investigation and found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to return them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others. - On February 15, 1991, the representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the real owners of the fundAFP-MBAI and DECS-IMC. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million. - However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts "in constructive trust" for the real owners. But Reyes continued to collect on the other postdated checks dated April 17 to June 28, 1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her checks issued in favor of Eurotrust were dishonored. - After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any criminal liability on the part of Eleazar. - Reyes filed a petition for review of the said resolution with respondent Secretary of Justice contending that novation did not take place. - The Secretary of Justice dismissed the petition holding that "the novation of the loan agreement prevents the rise of any incipient criminal liability since the novation had the effect of canceling the checks and rendering without effect the subsequent dishonor of the already cancelled checks." - At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes with the office of the city prosecutor of Quezon City docketed as I.S. 92-926. Between August 1989 and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable securities, including government securities - AFP-MBAI decided to purchase several securities amounting to P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust nonetheless made partial payment to AFPMBAI amounting to P35,151,637.72. However, after deducting this partial payment, the amounts of P73 million treasury notes with interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed with the Office of the City Prosecutor of Quezon City a complaint for violation of BP 22 and estafa against Elsa Reyes. - Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of unreturned P73 million worth of government securities has been satisfied upon her payment of P30 million. With respect to the remaining P43 million, the same was paid when Eurotrust assigned its Participation Certificates to AFPMBAI. - Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of an information against Reyes for violation of BP 22 and estafa. - Reyes filed a petition for review with respondent Secretary of Justice. The latter

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dismissed the petition on the ground that only resolutions of the prosecutors dismissing criminal complaints are cognizable for review by the Department of Justice. - On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the respondent Secretary of Justice filed a petition for certiorari, prohibition and mandamus with the respondent court which, however, denied and dismissed her petition. Her motion for reconsideration was likewise denied in a Resolution 5 dated June 27, 1995. Hence, this present petition. - The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of B.P. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been novated when they agreed that respondent Eleazar should settle her firm's (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC instead of court which pointed out that "the first contract was novated in the sense that there was a substitution of creditor" 6 when respondent Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-MBAI. ISSUE WON novation took place in the instant case HELD NO Ratio In order that a novation can take place, the concurrence of the following requisites is indispensable: 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. - Last three essential requisites of novation are wanting in the instant case. No new agreement for substitution of creditor war forged among the parties concerned which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation - Nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute creditor in the loan contract. - Novation by substitution of creditor requires an agreement among the three parties concerned the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties, Hence, there is no novation if no new contract was executed by the parties. - The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an express intention to novate animus novandi. Novation is never presumed. - A thorough examination of the records shows that no hard evidence was presented which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. - The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release petitioner from her responsibility, does not constitute novation. The foregoing elements are found wanting in the case at bar. Disposition ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the same is hereby AFFIRMED in all respects. GARCIA V LLAMAS PANGANIBAN; DEC 8, 2003 FACTS - On Dec. 23 1996, Petitioner Romeo Garcia and Eduardo de Jesus borrowed P400,000 from Respondent Dionisio Llamas. On the same day, they executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest per month

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- The loan was not paid, despite the repeated demands by the respondent. He then filed for the recovery of said amount. Garcia averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for de Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been paid by de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of the check and respondents acceptance thereof novated or superseded the note. - Respondent however said that the said check has bounced - De Jesus in his answer said that out of the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon for two months. He claims to have paid P120,000 of the debt. He also claims that the respondent acted in bad faith in instituting the case, since the respondent has agreed to accept the benefits de Jesus would receive for his retirement. The respondent nonetheless filed the instant case while his retirement was being processed. - The trial court found in favor of the respondent, ordering petitioner and de jesus to pay P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representing interests already paid by x x x de Jesus. - The CA affirmed the trial courts ruling regarding Garcia. IT ruled that no novation has taken place respondent accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced upon its presentment. ISSUES 1. WON there was novation in the obligation 2. WON the defense that petitioner was only an accommodation party had any basis 3. Won the CA was correct in treating the case as a summary judgement HELD 1. NO novation took place. The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together. - Neither could the payment of interests change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof. substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the formers place in the relation. Novation is never presumed. - Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor. - De Jesus also is not a third person to the obligation, since he was a joint and solidary obligor of the loan 2. NO - The petitioners reasoning is untenable, since this is not a negotiable instrument. He cannot avail of the Negotiable Instruments Laws provisions on the liabilities and defenses of an accommodation party. Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation part 3. YES - A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or admissions - Petitioners Answer apparently raised several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. Disposition Petition denied

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Summary: Babst vs. Court of Appeals (GR 99398, 26 January 2001)

Babst vs. Court of Appeals [GR 99398, 26 January 2001]; also Elizalde Steel Consolidated Inc. vs. Court of Appeals [GR 104625] First Division, Ynares Santiago (J): 4 concur Facts: On 8 June 1973, ELISCON obtained from Commercial Bank and Trust Company (CBTC) a loan in the amount of P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory note. Elizalde Steel Consolidated, Inc. (ELISCON) defaulted in its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of 31 October 1982. The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on 31 August 1977. Subsequently, on 26 September 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship, whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each. Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation (NSC) 3 domestic letters of credit in the amounts of P1,946,805.73, P1,702,869.32 and P200,307.72, respectively, which ELISCON used to purchase tin black plates from NSC. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of 31 October 1982, in the total amount of P3,963,372.08. On 22 December 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of P201,181,833.16. On 28 December 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets. In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable. Consequently, on 17 January 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147, a complaint for sum of money against ELISCON, MULTI and Babst (Civil Case 49226). On 20 February 1987, the trial court rendered its Decision in favor of BPI. In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. On 29 April 1991, the Court of Appeals rendered a Decision modifying the judgment of the trial court. ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in a Resolution dated 9 March 1992. Subsequently, ELISCON filed a petition for review on certiorari (GR. 104625). Meanwhile, Babst also filed a petition for review with the Court (GR 99398). Issue [1]: Whether the BPI can institute the present case. Held [1]: There was a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. Hence, BPI has a right to institute the present case. Issue [2]: Whether BPI, the surviving corporation in a merger with CBTC, consented to the assumption by DBP of the obligations of ELISCON. Held [2]: Due to the failure of BPI to register its objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor. The authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the proposed payment formula, not to the substitution itself. BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor's failure or refusal to pay. There was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government. More importantly, the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI. Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there

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ARTICLE 1292 REPUBLIC GLASS CORP. and GERVEL, INC. V. LAWRENCE C. QUA G.R. No. 144413 FACTS: Petitioners Republic Glass Corporation (RGC) and Gervel, Inc. together with respondent Lawrence C. Qua were stockholders of Ladtek, Inc. Ladtek obtained loans from Metrobank and Private Development Corporation of the Philippines (PDCP) with RGC, Gervel and Qua as sureties. Among themselves, RGC, Gervel and Qua executed Agreements for Contribution, Indemnity and Pledge of Shares of Stocks. The Agreements states that in case of default in the payment of Ladteks loans, the parties would reimburse each other the proportionate share of any sum that any might pay to the creditors. Under the same Agreements, Qua pledged stocks of General Milling Corporation (GMC) in favor of RGC and Gervel. The pledged shares of stock served as security for the payment of any sum which RGC and Gervel may be held liable under the Agreements. Ladtek defaulted on its loan obligations to Metrobank and PDCP. Hence, Metrobank filed a collection case against Ladtek, RGC, Gervel and Qua. During the pendency of Collection Case, RGC and Gervel paid Metrobank P7M. Later, Metrobank executed a waiver and quitclaim in favor of RGC and Gervel. RGC and Gervels counsel, Atty. Antonio C. Pastelero, demanded that Qua pay reimbursement of the total amount RGC and Gervel paid to Metrobank and PDCP. Qua refused to reimburse the amount to RGC and Gervel. Subsequently, RGC and Gervel furnished Qua with notices of foreclosure of Quas pledged shares. Qua filed a complaint for injunction and damages with application for a temporary restraining order to prevent RGC and Gervel from foreclosing the pledged shares. Although it issued a temporary restraining order, RTC denied Quas "Urgent Petition to Suspend Foreclosure Sale." RGC and Gervel eventually foreclosed all the pledged shares of stock at public auction. ISSUE: WON RGC & GERVEL MAY SEEK REIMBURSEMENT FROM QUA? HELD: NO. RGC and Gervel assail the Court of Appeals ruling that the parties liabilities under the Agreements depend on the full payment of the obligation. RGC and Gervel insist that it is not an essential condition that the entire obligation must first be paid before they can seek reimbursement from Qua. RGC and Gervel contend that Qua should pay 42.22% of any amount which they paid or would pay Metrobank and PDCP. RGC and Gervels contention is partly meritorious.Payment of the entire obligation by one or some of the solidary debtors results in a corresponding obligation of the other debtors to reimburse the paying debtor. However, we agree with RGC and Gervels contention that in this case payment of the entire obligation is not an essential condition before they can seek reimbursement from Qua. The words of the Agreements are clear. RGC, GERVEL and QUA each covenant that each will respectively reimburse the party made to pay the Lenders to the extent and subject to the limitations set forth herein, all sums of money which the party made to pay the Lenders shall pay or become liable to pay by reason of any of the foregoing, and will make such payments within 5 days from the date that the party made to pay the Lenders gives written notice to the parties hereto that it shall have become liable therefor and has advised the Lenders of its willingness to pay whether or not it shall have already paid out such sum or any part thereof to the Lenders or to the persons entitled thereto. The Agreements are contracts of indemnity not only against actual loss but against liability as well. Whether the solidary debtor has paid the creditor, the other solidary debtors should indemnify the former once his liability becomes absolute. However, in this case, the liability of RGC, Gervel and Qua became absolute simultaneously when Ladtek defaulted in its loan payment. As a result, RGC, Gervel and Qua all became directly liable at the same time to Metrobank and PDCP. Thus, RGC and Gervel cannot automatically claim for indemnity from Qua because Qua himself is liable directly to Metrobank and PDCP.If we allow RGC and Gervel to collect from Qua his proportionate share, then Qua would pay much more than his stipulated liability under the Agreements. In addition to the amount claimed by RGC and Gervel, Qua would have to pay his liability of P6.2 million to Metrobank and more than P1 million to PDCP. Since Qua would surely exceed his proportionate share, he would then recover from RGC and Gervel the excess payment. This situation is absurd and circuitous.Contrary to RGC and Gervels claim, payment of any amount will not automatically result in reimbursement. If a solidary debtor pays the obligation in part, he can recover reimbursement from the co-debtors only in so far as his payment exceeded his share in the obligation. This is precisely because if a solidary debtor pays an amount equal to his July 30, 2004

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proportionate share in the obligation, then he in effect pays only what is due from him. If the debtor pays less than his share in the obligation, he cannot demand reimbursement because his payment is less than his actual debt. Since they only made partial payments, RGC and Gervel should clearly and convincingly show that their payments to Metrobank and PDCP exceeded their proportionate shares in the obligations before they can seek reimbursement from Qua. This RGC and Gervel failed to do. RGC and Gervel, in fact, never claimed that their payments exceeded their shares in the obligations. Consequently, RGC and Gervel cannot validly seek reimbursement from Qua.

ARTICLE 1292 Reyes v. BPI Family Bank FACTS: Reyes spouses executed a real estate mortgage on their property in Iloilo City in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a P15,000,000 loan of Transbuilders Resources and Development Corporation (Transbuilders). When Transbuilders failed to pay its P15M loan within the stipulated period of one year, the bank restructured the loan through a promissory note executed by Transbuilders in its favor. Petitioners aver that they were not informed about the restructuring of Transbuilders loan. In fact, when they learned of the new loan agreement sometime in December 1996, they wrote BPI-FSB requesting the cancellation of their mortgage and the return of their certificate of title to the mortgaged property. They claimed that the new loan novated the loan agreement of March 24, 1995. Because the novation was without their knowledge and consent, they were allegedly released from their obligation under the mortgage.

ISSUE: Whether there was a novation of the mortgage loan contract between petitioners and BPI-FSB that would result in the extinguishment of petitioners liability to the bank. RULING: We agree with the CA that there was none. Novation is 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. The cancellation of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. In Garcia, Jr. v. Court of Appeals, we held that: In every novation there are four essential requisites:(1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one.

Thus, the well-settled rule is 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.

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BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly installments at 18% interest per annum. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. The novation of a contract cannot be presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.

VICENTE B. CHUIDIAN, petitioner, vs. SANDIGANBAYAN (Fifth Division) and the REPUBLIC OF THE PHILIPPINES, respondents.

FACTS:
Vicente B. Chuidian was alleged to be a dummy or nominee of Ferdinand and Imelda Marcos in several companies said to have been illegally acquired by the Marcos spouses. As a favored business associate of the Marcoses, Chuidian allegedly used false pretenses to induce the officers of the Philippine Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE), the Board of Investments (BOI) and the Central Bank, to facilitate the procurement and issuance of a loan guarantee in favor of the Asian Reliability Company, Incorporated (ARCI) sometime in September 1980. ARCI, 98% of which was allegedly owned by Chuidian, was granted a loan guarantee of Twenty-Five Million U.S. Dollars (US$25,000,000.00. While ARCI represented to Philguarantee that the loan proceeds would be used to establish five inter-related projects in the Philippines, Chuidian reneged on the approved business plan and instead invested the proceeds of the loan in corporations operating in the United States. Although ARCI had received the proceeds of the loan guaranteed by Philguarantee, the former defaulted in the payments thereof, compelling Philguarantee to undertake payments for the same. Consequently, in June 1985, Philguarantee sued Chuidian FOR VIOLATION OF THE TERMS OF THE LOAN AS WELL AS misuse of funds. On November 27, 1985, Philguarantee entered into a compromise agreement with Chuidian whereby petitioner Chuidian shall assign and surrender title to all his companies in favor of the Philippine in favor of the government. In return, Philguarantee shall absolve Chuidian from all civil and criminal liability, and in so doing, desist from pursuing any suit against Chuidian concerning the payments Philguarantee had made on Chuidians defaulted loans. It was further stipulated that instead of Chuidian reimbursing the payments made by Philguarantee arising from Chuidians default, the Philippine government shall pay Chuidian the amount of Five Million. Payments was actually received by petitioner, the remaining 4 million shall be paid through an irrevocable Letter of Credit (L/C), which Chuidian was able to make 2 monthly drawings at Los Angeles Branch of PNB. With the advent of the Aquino administration, the newly-established Presidential Commission on Good Government (PCGG) sequestered the properties of Chuidian as he was believe to be cronies of the Marcoses. In the meantime, Philguarantee filed a motion before the Superior Court of Santa Clara County of California seeking to vacate the stipulated judgment containing the settlement between Philguarantee and Chuidian. When L/C was frozen by PCGG, Chuidian filed before the US Court, an action against PNB to compel it to pay the proceeds of the LC. PNB refused to be compelled and cannot be held liable for breach under principles of illegality. The federal Court issue a judgment in favor of PNB. On February 27, 1987, a Deed of Transfer[11] was executed between then Secretary of Finance, and then PNB President Edgardo B. Espiritu, to facilitate the rehabilitation of PNB, among others, as part of the governments economic recovery program. The said Deed of Transfer provided for the transfer to the government of certain assets of PNB in exchange for which the government would assume certain liabilities of PNB.[12] Among those liabilities which the government assumed were unused commercial L/Cs and Deferred L/Cs, including SSD-005-85 listed under Dynetics, Incorporated in favor of Chuidian in the amount of Four Million Four Hundred Thousand Dollars (US$4,400,000.00) The government filed charges against Chaudian with conspiracy with the Marcoses, while the case was pending , the RP filed a motion for issuance of writ attachment over th L/C. The RP averred that if Chuidian would insist payment of L/C, he can ask the said foreign court to compel the PNB Los Angeles Branch. On July 13, 1999, the Sandiganbayan gave due course to Chuidians plea for the attached L/C to be deposited in an interest-bearing account, on the ground that it will redound to the benefit of both parties.The Sandiganbayan declared the national government as the principal obligor of the L/C even though the liability remained in the books of the PNB for accounting and monitoring purposes.The Sandiganbayan, however, denied Chuidians motion for reconsideration of the denial of his motion to lift attachment.

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ISSUE: WON the PNB upon its execution of Deed of Transfer to the government had made a valid substitution of debtor? HELD: There was no valid substitution of debtor. Article 1293 of the New Civil Code provides: Novation which consists in substituting a new debtor in the place of the original one, may be made 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. Accordingly, any substitution of debtor must be with the consent of the creditor, whose consent thereto cannot just be presumed. Even though Presidential Proclamation No. 50 can be considered an insuperable cause, it does not necessarily make the contracts and obligations affected thereby exceptions to the above-quoted law, such that the substitution of debtor can be validly made even without the consent of the creditor. Presidential Proclamation No. 50 was not intended to set aside laws that govern the very lifeblood of the nations commerce and economy. In fact, the Deed of Transfer that was executed between PNB and the government pursuant to the said Presidential Proclamation specifically stated that it shall be deemed effective only upon compliance with several conditions, one of which requires that: (b) the BANK shall have secured such governmental and creditors approvals as may be necessary to establish the consummation, legality and enforceability of the transactions contemplated hereby. The validity of this Deed of Transfer is not disputed. Thus, PNB is estopped from denying its liability thereunder considering that neither the PNB nor the government bothered to secure petitioners consent to the substitution of debtors. We are not unmindful that any effort to secure petitioners consent at that time would, in effect, be deemed an admission that the L/C is valid and binding. Even the Sandiganbayan found that: x x x Movant has basis in pointing out that inasmuch as the L/C was issued in his favor, he is presumed to be the lawful payee-beneficiary of the L/C until such time that the plaintiff successfully proves that said L/C is ill-gotten and he has no right over the same In Republic v. Sandiganbayan,[43] we held that the provisional remedies, such as freeze orders and sequestration, were not meant to deprive the owner or possessor of his title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. Thus, until such time that the government is able to successfully prove that petitioner has no right to claim the proceeds of the L/C, he is deemed to be the lawful payee-beneficiary of said L/C, for which any substitution of debtor requires his consent. The Sandiganbayan thus erred in relieving PNB of its liability as the original debtor. The petition is DISMISSED. The PNB is DIRECTED to remit to the Sandiganbayan the proceeds of Letter of Credit the amount of U.S. $4.4 million the same to be placed under special time deposit with the Land Bank of the Philippines, for the account of Sandiganbayan in escrow for the person or persons, natural or juridical, who shall eventually be adjudged lawfully entitled thereto, the same to earn interest at the current legal bank rates. The principal and its interest shall remain in said account until ordered released by the Court in accordance with law.