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FIRST DIVISION

[G.R. No. 149683. June 16, 2003]

ILOILO TRADERS FINANCE INC., petitioner, vs. HEIRS OF OSCAR SORIANO JR.,


and MARTA L. SORIANO, respondents.

DECISION
VITUG, J.:

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

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

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

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

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

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

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

The parties failed to comply with the court order. Resultantly, the trial court
disapproved the amicable settlement and set the case for pre-trial. Nothing much could be
gleaned from the records about what might have transpired next not until seven years
later when the Soriano couple filed a motion to submit anew the amicable settlement. The
motion was opposed by ITF on the ground that the amount expressed in the settlement
would no longer be accurate considering the lapse of seven years, implying in a way that it
could be amendable thereto if the computation were to be revised. The trial court denied
the Soriano motion. Significantly, while the order of denial was made on the thesis that the
debtor spouses, without the consent of ITF, could not unilaterally resurrect the amicable
settlement, the trial court, nevertheless, made the following observations -

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

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

Taking cue from the court order, the Sorianos withdrew their complaint and, on 16
October 1991, filed a case for novation and specific performance, docketed Civil Case No.
20047, before the Regional Trial Court, Branch 37, of Iloilo City. The case ultimately
concluded with a finding made by the trial court in favor of herein respondents. On appeal
to it, the Court of Appeals affirmed the judgment of the court a quo.
The parties have submitted that the issue focuses on whether or not the amicable
settlement entered into between the parties has novated the original obligation and also,
as they would correctly suggest in their argument, on whether the proposed terms of the
amicable settlement were carried out or have been rendered inefficacious.
The amicable settlement read -

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

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

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

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

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

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

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

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

Novation may either be extinctiv or modificatory, much being dependent on the nature
of the change and the intention of the parties. Extinctive novation is never presumed;
there must be an express intention to novate;  in cases where it is implied, the acts of the
[4]

parties must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one.  Implied novation necessitates that the
[5]

incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superseded by the new one. The test of incompatibility is whether
they can stand together, each one having an independent existence; if they cannot and
are irreconcilable, the subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an
existing obligation and, second, creating a new one in its stead. This kind of novation
presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2)
an agreement of all parties concerned to a new contract, (3) the extinguishment of the old
obligation, and (4) the birth of a valid new obligation.  Novation is merely modificatory
[6]

where the change brought about by any subsequent agreement is merely incidental to the
main obligation (e.g., a change in interest rates  or an extension of time to pay ); in this
[7] [8]

instance, the new agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.
An amicable settlement or a compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one already commenced.  It [9]

may be judicial or extrajudicial; the absence of court approval notwithstanding,  the [10]

agreement can become the source of rights and obligations of the parties.
It would appear that the arrangement reached by the Soriano spouses and ITF would
have the original obligation of respondent spouses on two promissory notes for the sums
of P150,000.00 and P80,000.00, both secured by real estate mortgages, impliedly
modified. The amicable settlement contained modificatory changes. Thus, (1) it increased
the indebtedness of the Soriano spouses, merely due to accruing interest, from
P290,691.00 to P431,200.00; (2) it extended the period of payment and provided for new
terms of payment; and (3) it provided for a waiver of claims, counterclaims, attorneys fees
or damages that the debtor-spouses might have against their creditor, but the settlement
neither cancelled, nor materially altered the usual clauses in, the real estate mortgages,
e.g., the foreclosure of the mortgaged property in case of default.
Verily, the parties entered into the agreement basically to put an end to Civil Case No.
14007 then pending before the Regional Trial Court.  Concededly, the provisions of the
[11]

settlement were beneficial to the respondent couple. The compromise extended the terms
of payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property.
It was well to the interest of respondent spouses to ensure its judicial approval; instead,
they went to ignore the order of the trial court and virtually failed to make any further
appearance in court. This conduct on the part of respondent spouses gave petitioner the
correct impression that the Sorianos did not intend to be bound by the compromise
settlement, and its non-materialization negated the very purpose for which it was
executed.
Given the circumstances, the provisions of Article 2041 of the Civil Code come in point
-

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

As so well put in Diongzon vs. Court of Appeals,  a supposed new agreement is deemed
[12]

not to have taken effect where a debtor never complied with his undertaking. In such a
case, the other party is given the option to enforce the provisions of the amicable
settlement or to rescind it  and may insist upon the original demand without the necessity
[13]

for a prior judicial declaration of rescission. [14]

WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910,
affirming that of the court a quo, is REVERSED and SET ASIDE, and another is entered
dismissing the complaint in Civil Case No. 20047 before the Regional Trial Court, Branch
37, of Iloilo City. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 118585 September 14, 1995

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE, and SPS.
MARCIAL SEE and LILIAN TAN, petitioners, 
vs.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF
MANILA, respondents.

FRANCISCO, J.:

In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment upholding the
validity of the extra-judicial foreclosure of the real estate property of petitioners — spouses Marcial See and Lilian
Tan, located at Paco District, Manila covered by TCT 105233, by private respondent Metropolitan Bank and Trust
Company (Metrobank).  Petitioners' motion for reconsideration was denied; hence, this petition for review
1

on certiorari raising the following assignments of errors:

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

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

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

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

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

It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita


Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan
Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan
constituted a real estate mortgage in favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was
annotated at the back of the title.

Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit without
changing its composition, it obtained a loan in the sum of P150,000.00 from Metropolitan Bank and
Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in favor of
said bank a second real estate mortgage over the same property. As in the first instance, the
mortgage was duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a corporation
denominated as Ajax Marketing and Development Corporation, with the original partners (Angelita
Rodriguez and Antonio Tan) as incorporators and three (3) additional incorporators, namely, Elisa
Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and
Development Corporation obtained from Metropolitan Bank and Trust Company a loan of
P600,000.00, the payment of which was secured by another real estate mortgage executed by
spouses Marcial See and Lilian Tan in favor of said bank over the same realty located in the District
of Paco, Manila. Again, the third real estate mortgage was annotated at the back of TCT No.
105233.

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

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

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

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

the same time with the change of either in the person of the debtor or creditor a mixed novation occurs. 6

The well settled rule is that novation is never presumed.  Novation will not be allowed unless it is clearly shown by
7

express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new
obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every
point incompatible with the new one.  In the same vein, to effect a subjective novation by a change in the person of
8

the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new
debtor assumes his place in the relation.  There is no novation without such release as the third person who has
9

assumed the debtor's obligation becomes merely a co-debtor or surety. 10

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

discharge of the mortgaged real estate property. Otherwise, there would be no sense placing these material
provisions. Moreover; the real estate mortgages contained this common provision, to wit:

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

Nature Date Granted Due Date Amount or Line

Loans and/or P 600,000.00

Advances in 150,000.00
current account 250,000.00

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

xxx xxx xxx

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

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

Neither can it be validly contended that there was a change, or substitution in the persons of either the creditor
(Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605.
The bare fact of petitioners' conversion from a partnership to a corporation, without sufficient evidence, either
testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX,
with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the obligation, any
third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation
arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is
never presumed. Clearly then, from the aforediscussed points, neither objective nor subjective novation occurred
here.

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

An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four
corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the
mortgaged property shall also answer for future loans or advancements then the same is not improper as it is valid
and binding between the parties.  For merely consolidating and expediently making current the three previous
13

loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included
in the foreclosure's bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583,
however, was found to be improper by public respondent which ruling we shall not disturb for Metrobank's failure to
appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure
proceedings. As correctly pointed out by the Court of Appeals, the proceeds of the auction sale should be applied to
the obligation pertaining to PN BDS No. 3605 only, plus interests, expenses and other charges accruing thereto. It is
Metrobank's duty as mortgagee to return the surplus in the selling price to the mortgagors. 14
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank  where this
15

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

Prescinding from the above discussions, the fourth assignment of error obviously needs no further discussion.

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

Narvasa, C.J., Regalado, Puno and Mendoza, JJ., concur.


SECOND DIVISION

[G.R. No. 147950. December 11, 2003]

CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT HOUSE,


INC., respondent.

DECISION
QUISUMBING, J.:

In this petition for review, California Bus Lines, Inc., assails the decision,  dated April
[1]

17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment , [2]

dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-
28505 entitled State Investment House, Inc. v. California Bus Lines, Inc., for collection of a
sum of money. The Court of Appeals held petitioner California Bus Lines, Inc., liable for
the value of five promissory notes assigned to respondent State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a
domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a
credit line to Delta for P25,000,000.00 in three separate credit agreements dated May 11,
June 19, and August 22, 1979.  On several occasions, Delta availed of the credit line by
[3]

discounting with SIHI some of its receivables, which evidence actual sales of Deltas
vehicles. Delta eventually became indebted to SIHI to the tune of P24,010,269.32. [4]

Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two
(2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the
purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas, executed
sixteen (16) promissory notes in favor of Delta on January 23 and April 25, 1980.  In each
[5]

promissory note, CBLI promised to pay Delta or order, P2,314,000 payable in 60 monthly


installments starting August 31, 1980, with interest at 14% per annum. CBLI further
promised to pay the holder of the said notes 25% of the amount due on the same as
attorneys fees and expenses of collection, whether actually incurred or not, in case of
judicial proceedings to enforce collection. In addition to the notes, CBLI executed chattel
mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement
with Delta on October 7, 1981, to cover its overdue obligations under the promissory
notes.  The restructuring agreement provided for a new schedule of payments
[6]

of CBLIs past due installments, extending the period to pay, and stipulating daily
remittance instead of the previously agreed monthly remittance of payments. In case of
default, Delta would have the authority to take over the management and operations of
CBLI until CBLI and/or its president, Mr. DionisioLlamas, remitted and/or
updated CBLIs past due account. CBLI and Delta also increased the interest rate to 16%
p.a. and added a documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of
Receivables  in favor of SIHI as security for the payment of its obligations to SIHI per the
[7]

credit agreements. In view of Deltas failure to pay, the loan agreements were restructured
under a Memorandum of Agreement dated March 31, 1982.  Delta obligated itself to pay a
[8]

fixed monthly amortization of P400,000 to SIHI and to discount with SIHI P8,000,000


worth of receivables with the understanding that SIHI shall apply the proceeds against
Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to
threaten CBLI with the enforcement of the management takeover clause. To pre-empt the
take-over, CBLI filed on May 3, 1982, a complaint for injunction , docketed as Civil Case
[9]

No. 0023-P, with the Court of First Instance of Rizal, Pasay City,


(now Regional Trial Court of PasayCity). In due time, Delta filed its amended answer with
applications for the issuance of a writ of preliminary mandatory injunction to enforce the
management takeover clause and a writ of preliminary attachment over the buses it sold
to CBLI.  On December 27, 1982,  the trial court granted Deltas prayer for issuance of a
[10] [11]

writ of preliminary mandatory injunction and preliminary attachment on account of the


fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed
a Deed of Sale  assigning to SIHI five (5) of the sixteen (16) promissory notes  from
[12] [13]

California Bus Lines, Inc. At the time of assignment, these five promissory notes, identified
and numbered as 80-53, 80-54, 80-55, 80-56, and 80-57, had a total value
of P16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,  to CBLI requiring
[14]

CBLI to remit the payments due on the five promissory notes directly to it. CBLI replied
informing SIHI of Civil Case No. 0023-P and of the fact that Delta had taken over its
management and operations. [15]

As regards Deltas remaining obligation to SIHI, Delta offered its available bus units,
valued at P27,067,162.22, as payment in kind.  On December 29, 1983, SIHI accepted
[16]

Deltas offer, and Delta transferred the ownership of its available buses to SIHI, which in
turn acknowledged full payment of Deltas remaining obligation.  When SIHI was unable to
[17]

take possession of the buses, SIHI filed a petition for recovery of possession with prayer
for issuance of a writ of replevin before the RTC of Manila, Branch 6, docketed as Civil
Case No. 84-23019. The Manila RTC issued a writ of replevin and SIHI was able to take
possession of 17 bus units belonging to Delta. SIHI applied the proceeds from the sale of
the said 17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas
obligation to SIHI was thus reduced to P20,061,898.97. On December 5, 1984, Branch 6
of the RTC of Manila rendered judgment in Civil Case No. 84-23019 ordering Delta to pay
SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984,
[18]
 in Civil Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI agreed that
Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the
35 bus units. The RTC of Pasay approved this compromise agreement the following
day, July 25, 1984.  Following this, CBLI vehemently refused to pay SIHI the value of the
[19]

five promissory notes, contending that the compromise agreement was in full settlement of
all its obligations to Delta including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505,
against CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5)
promissory notes with interest at 14% p.a. SIHI also prayed for the issuance of a writ of
preliminary attachment against the properties of CBLI. [20]

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel
mortgages pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta
filed in the RTC of Pasay a motion for execution of the judgment based on the
compromise agreement.  The RTC of Pasay granted this motion the following day.
[21] [22]

In view of Deltas petition and motion for execution per the judgment of compromise,
the RTC of Manila granted in Civil Case No. 84-28505 SIHIs application for preliminary
attachment on January 4, 1985.  Consequently, SIHI was able to attach and physically
[23]

take possession of thirty-two (32) buses belonging to CBLI.  However, acting [24]

on CBLIs motion to quash the writ of preliminary attachment, the same court resolved
on January 15, 1986,  to discharge the writ of preliminary attachment. SIHI assailed the
[25]

discharge of the writ before the Intermediate Appellate Court (now Court of Appeals) in a
petition for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31,
1987, the Court of Appeals granted SIHIspetition in CA-GR SP No. 08378 and ruled that
the writ of preliminary attachment issued by Branch 34 of the RTC Manila in Civil Case
No. 84-28505 should stay.  The decision of the Court of Appeals attained finality
[26]

on August 22, 1987. [27]

Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff
of Pasay City conducted a public auction and issued a certificate of sheriffs sale to Delta
on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses for P3,920,000.
 On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March 27,
[28]

1987, issued by Branch 6 of the RTC of Manila in Civil Case No. 84-23019, sold the same
14 buses at public auction in partial satisfaction of the judgment SIHI obtained against
Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC
of Manila in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI
moved to sell the sixteen (16) buses of CBLI which had previously been attached by the
sheriff in Civil Case No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of
Manila.  SIHIsmotion was granted on December 16, 1987.  On November 29, 1988,
[29] [30]

however, SIHI filed an urgent ex-parte motion to amend this order claiming that through
inadvertence and excusable negligence of its new counsel, it made a mistake in the list of
buses in the Motion to Sell Attached Properties it had earlier filed.  SIHI explained that 14
[31]

of the buses listed had already been sold to Delta on April 2, 1987, by virtue of the
January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed had been
released to third party, claimant Pilipinas Bank, by Order dated September 16, 1987  of [32]

Branch 13 of the RTC of Manila.


CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989,
 Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the sale of the 16
[33]

buses listed in its motion to amend. The trial court ruled that the best interest of the parties
might be better served by denying further sales of the buses and to go direct to the trial of
the case on the merits. [34]

After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993,
discharging CBLI from liability on the five promissory notes. The trial court likewise
favorably ruled on CBLIs compulsory counterclaim. The trial court directed SIHI to return
the 16 buses or to pay CBLI P4,000,000 representing the value of the seized buses, with
interest at 12% p.a. to begin from January 11, 1985, the date SIHI seized the buses, until
payment is made. In ruling against SIHI, the trial court held that the restructuring
agreement dated October 7, 1981, between Delta and CBLI novated the five promissory
notes; hence, at the time Delta assigned the five promissory notes to SIHI, the notes were
already merged in the restructuring agreement and cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-
G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No.
52667 in this manner:

WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find
defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the
complaint a quo less the proceeds from the attached sixteen (16) buses. The award of attorneys fees
and costs is eliminated. The appealed decision is hereby REVERSED. No costs.

SO ORDERED. [35]

Hence, this appeal where CBLI contends that


I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING AGREEMENT
BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS
OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT
BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE
AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS
IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]

Essentially, the issues are (1) whether the Restructuring Agreement dated October 7,
1981, between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes
Delta Motors, Corp. assigned to respondent SIHI, and (2) whether the compromise
agreement in Civil Case No. 0023-P superseded and/or discharged the subject five
promissory notes. The issues being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the
incidental elements of the obligation under all sixteen (16) promissory notes, but it also
increased the obligations of CBLI with the addition of new obligations that were
incompatible with the old obligations in the said notes.  CBLI adds that even if the [37]

restructuring agreement did not totally extinguish the obligations under the sixteen (16)
promissory notes, the July 24, 1984, compromise agreement executed in Civil Case No.
0023-P did.  CBLI cites paragraph 5 of the compromise agreement which states that the
[38]

agreement between it and CBLI was in full and final settlement, adjudication and
termination of all their rights and obligations as of the date of (the) agreement, and of the
issues in (the) case. According to CBLI, inasmuch as the five promissory notes were
subject matters of the Civil Case No. 0023-P, the decision approving the compromise
agreement operated as res judicata in the present case. [39]

Novation has been defined as the extinguishment of an obligation by the substitution


or change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the debtor, or
subrogating a third person in the rights of the creditor. [40]

Novation, in its broad concept, may either be extinctive or modificatory.  It is extinctive [41]

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.  An extinctive novation results [42]

either by changing the object or principal conditions (objective or real), or by substituting


the person of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal).  Novationhas two functions: one to extinguish an existing
[43]

obligation, the other to substitute a new one in its place.  For novation to take place, four
[44]

essential requisites have to be met, namely, (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation. [45]

Novation is never presumed,  and the animus novandi, whether totally or partially,


[46]

must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken. [47]

The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly.  The term "expressly" [48]

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
[49]

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
[50]

determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the
same. The first is when novation has been explicitly stated and declared in unequivocal
terms. The second is when the old and the new obligations are incompatible on every
point. The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence.  If they cannot, they are incompatible and the latter
[51]
obligation novates the first.  Corollarily, changes that breed incompatibility must be
[52]

essential in nature and not merely accidental. The incompatibility must take place in any of
the essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation. [53]

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

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

In Inchausti & Co. v. Yulo  this Court held that an obligation to pay a sum of money is
[56]

not novated in a new instrument wherein the old is ratified, by changing only the term of
payment and adding other obligations not incompatible with the old
one. In Tible v. Aquino  and Pascual v. Lacsamana  this Court declared that it is well
[57] [58]

settled that a mere extension of payment and the addition of another obligation not
incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI executed on October 7, 1981, shows that the parties
did not expressly stipulate that the restructuring agreement novated the promissory
notes. Absent an unequivocal declaration of extinguishment of the pre-existing obligation,
only a showing of complete incompatibility between the old and the new obligation would
sustain a finding of novation by implication.  However, our review of its terms yields no
[59]

incompatibility between the promissory notes and the restructuring agreement.


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

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

2. Interest: 14% per annum;

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

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

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

WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory
notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00

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

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


PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance

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

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

Daily payments of P11,000.00 from


October 1 to December 31, 1981

Daily payments of P12,000.00 from


January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from


April 1, 1982 to June 30, 1982

Daily payments of P14,000.00 from


July 1, 1982 to September 30, 1982

Daily payments of P15,000.00 from


October 1, 1982 to December 31, 1982

Daily payments of P16,000.00 from


January 1, 1983 to June 30, 1983

Daily payments of P17,000.00 from


July 1, 1983

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

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

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

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

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

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

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

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

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

8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos.
16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the
Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-
42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall
continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public
Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of
stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand,
undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled Dionisio O.
Llamas vs. Alberto G. Doller, et al., Court of First Instance of Pasay, Branch XXIX. [60]

It is clear from the foregoing that the restructuring agreement, instead of containing
provisions absolutely incompatible with the obligations of the judgment, expressly ratifies
such obligations in paragraph 8 and contains provisions for satisfying them. There was no
change in the object of the prior obligations. The restructuring agreement merely provided
for a new schedule of payments and additional security in paragraph 6 (c) giving Delta
authority to take over the management and operations of CBLI in case CBLI fails to pay
installments equivalent to 60 days. Where the parties to the new obligation expressly
recognize the continuing existence and validity of the old one, there can be no novation.
 Moreover, this Court has ruled that an agreement subsequently executed between a
[61]

seller and a buyer that provided for a different schedule and manner of payment, to
restructure the mode of payments by the buyer so that it could settle its outstanding
obligation in spite of its delinquency in payment, is not tantamount to novation.  [62]

The addition of other obligations likewise did not extinguish the promissory
notes. In Young v. CA , this Court ruled that a change in the incidental elements of, or an
[63]

addition of such element to, an obligation, unless otherwise expressed by the parties will
not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLIs argument that the compromise agreement dated July
24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five promissory
notes. Both Delta and CBLI cannot deny that the five promissory notes were no longer
subject of Civil Case No. 0023-P when they entered into the compromise agreement
on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right
to compromise the same. Deltas limited authority to collect for SIHI stipulated in
the September 13, 1985, Deed of Sale cannot be construed to include the power to
compromise CBLIs obligations in the said promissory notes. An authority to compromise,
by express provision of Article 1878  of the Civil Code, requires a special power of
[64]

attorney, which is not present in this case. Incidentally, Deltas authority to collect in behalf
of SIHI was, by express provision of the Continuing Deed of Assignment,  automatically
[65]

revoked when SIHI opted to collect directly from CBLI.


As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to
remit the payments directly to SIHI effectively revoked Deltas limited right to collect in
behalf of SIHI.This should have dispelled CBLIs erroneous notion that Delta was acting in
behalf of SIHI, with authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the
rights and obligations only of Delta and CBLI and that it did not refer to, nor cover the
rights of, SIHI as the new creditor of CBLI in the subject promissory notes. CBLI and Delta
stipulated in paragraph 5 of the agreement that:

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

Even in the absence of such a provision, the compromise agreement still cannot bind
SIHI under the settled rule that a compromise agreement determines the rights and
obligations of only the parties to it.  Therefore, we hold that the compromise agreement
[67]

covered the rights and obligations only of Delta and CBLI and only with respect to the
eleven (11) other promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed
it of the takeover by Delta of CBLIs management and operations and the resultant
impossibility for CBLI to comply with its obligations in the subject promissory notes. CBLI
also adds that SIHIs failure to intervene in Civil Case No. 0023-P is proof that Delta
continued to act in SIHIs behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its
rights to the subject promissory notes in favor of SIHI. This had the effect of separating the
five promissory notes from the 16 promissory notes subject of Civil Case No. 0023-
P. From that time, CBLIs obligations to SIHI embodied in the five promissory notes
became separate and distinct from CBLIs obligations in eleven (11) other promissory
notes that remained with Delta. Thus, any breach of these independent obligations gives
rise to a separate cause of action in favor of SIHI against CBLI. Considering that Deltas
assignment to SIHI of these five promissory notes had the effect of removing the said
notes from Civil Case No. 0023-P, there was no reason for SIHI to intervene in the said
case. SIHI did not have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive.  Notably, [68]

Section 2,  Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in
[69]

defining the right to intervene. The present rules maintain the permissive nature of
intervention in Section 1, Rule 19 of the 1997 Rules of Civil Procedure, which provides as
follows:

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

Also, recall that Delta transferred the five promissory notes to SIHI on September 13,
1983 while Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer
of interest pendente lite is that the action may be continued by or against the original party
unless the court, upon motion, directs the person to whom the interest is transferred to be
substituted in the action or joined with the original party.  The non-inclusion of a
[71]

necessary party does not prevent the court from proceeding in the action, and the
judgment rendered therein shall be without prejudice to the rights of such necessary party.
[72]

In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another


court does not amount to an estoppel that may prevent SIHI from instituting a separate
and independent action of its own.  This is especially so since it does not appear that a
[73]

separate proceeding would be inadequate to protect fully SIHIs rights.


 Indeed, SIHIs refusal to intervene is precisely because it considered that its rights would
[74]

be better protected in a separate and independent suit.


The judgment on compromise in Civil Case No. 0023-P did not operate
as res judicata to prevent SIHI from prosecuting its claims in the present case. As
previously discussed, the compromise agreement and the judgment on compromise in
Civil Case No. 0023-P covered only Delta and CBLI and their respective rights under the
11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI and
CBLI and the five promissory notes. There being no identity of parties and subject matter,
there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory
notes is no longer allowed by Article 1484(3)  of the Civil Code, which prohibits a creditor
[75]

from suing for the deficiency after it has foreclosed on the chattel mortgages. SIHI, being
the successor-in-interest of Delta, is no longer allowed to recover on the promissory notes
given as security for the purchase price of the 35 buses because Delta had
already extrajudicially foreclosed on the chattel mortgages over the said buses on April 2,
1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of
the chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the
assignment of the five notes operated to create a separate and independent obligation on
the part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta. And since
there was a previous revocation of Deltas authority to collect for SIHI, Delta was no
longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of
authority to compromise the subject notes, yet it readily agreed to the foreclosure. To
sanction CBLIs argument and to apply Article 1484 (3) to this case would work injustice to
SIHI by depriving it of its right to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil
Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in
Civil Case No. 0023-P, did not operate to render the compromise agreement and the
foreclosure binding on SIHI. At the time SIHI effected the levy on execution to satisfy its
judgment credit against Delta in Civil Case No. 84-23019, the said buses already
pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer had any
interest in the said buses. Under the circumstances, we cannot see how SIHIs belated
acquisition of the foreclosed buses operates to hold the compromise agreementand
consequently Article 1484(3)applicable to SIHI as CBLI contends. CBLIs last contention
must, therefore, fail. We hold that the writ of execution to enforce the judgment of
compromise in Civil Case No. 0023-P and the foreclosure sale of April 2, 1987, done
pursuant to the said writ of execution affected only the eleven (11) other promissory notes
covered by the compromise agreement and the judgment on compromise in Civil Case
No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis
for SIHIs application for a writ of preliminary attachment.  According to CBLI, it committed
[76]

no fraud in contracting its obligation under the five promissory notes because it was
financially sound when it issued the said notes on April 25, 1980.  CBLI also asserts that
[77]

at no time did it falsely represent to SIHI that it would be able to pay its obligations under
the five promissory notes.  According to CBLI, it was not guilty of fraudulent concealment,
[78]

removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of its properties


to defraud its creditors;  and that SIHIs bare allegations on this matter were insufficient for
[79]

the preliminary attachment of CBLIs properties. [80]

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

Finally, in the light of the justness of SIHIs claim against CBLI, we cannot


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

WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R.
CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay
respondent State Investment House, Inc., the value of the five (5) promissory notes
subject of the complaint in Civil Case No. 84-28505 less the proceeds from the sale of the
attached sixteen (16) buses. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 164051               October 3, 2012

PHILIPPINE NATIONAL BANK, Petitioner, 


vs.
LILIAN S. SORIANO, Respondent.

DECISION

PEREZ, J.:

We arc urged in this petition for review on certiorari to reverse and set aside the Decision of the Court of Appeals in
C A-G.R. SP No. 76243 finding no grave abuse of discretion in the ruling of the Secretary of the Department of

Justice ( DOJ) which, in turn, dismissed the criminal complaint for Estafa, i.e., violation of Section 13 of Presidential
Decree No. 1 15 (Trust Receipts Law), in relation to Article 315, paragraph (b) of the Revised Penal Code, filed by
petitioner Philippine National Bank (PNB) against respondent Lilian S. Soriano (Soriano). 2

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

On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line (FSL) in the increased
amount of Thirty Million Pesos (₱30 Million) to Lisam Enterprises, Inc. [LISAM], a family-owned and controlled
corporation that maintains Current Account No. 445830099-8 with petitioner PNB.

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

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

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

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

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

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

xxxx

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

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

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

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

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

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

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

PNB filed a reply-affidavit maintaining Soriano’s criminal liability under the TRs:

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

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


WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN SORIANO is probably guilty of
violation of [the] Trust Receipt Law, in relation to Article 315 par. 1 (b) of the Revised Penal Code, let therefore 52
counts of ESTAFA be filed against the respondent. 8
Consequently, on 1 August 2001, the same office filed Informations against Soriano for fifty two (52) counts
of Estafa (violation of the Trust Receipts Law), docketed as Criminal Case Nos. 2001-0641 to 2001-0693, which
were raffled to the Regional Trial Court (RTC), Branch 21, Naga City.

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

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

On the other litigation front, the DOJ, in a Resolution dated 25 June 2002, reversed and set aside the earlier

resolution of the Naga City Prosecutor:

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

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

1. 27 November 2002 11

When this case was called for continuation of pre-trial, [Soriano’s] counsel appeared. However, Prosecutor Edgar
Imperial failed to appear.

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

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

2. 21 February 2003 12

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

3. 15 July 2003 13

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

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

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

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

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

Hence, this appeal by certiorari.

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

In its Memorandum, PNB posits the following issues:

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

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

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

Winnowed from the foregoing, we find that the basic question is whether the Court of Appeals gravely erred in
affirming the DOJ’s ruling that the restructuring of LISAM’s loan secured by trust receipts extinguished Soriano’s
criminal liability therefor.

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

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

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

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

We rule in the negative.

Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was ordered by the RTC. In particular,
the Secretary of the DOJ directed City Prosecutor of Naga City to move, with leave of court, for the withdrawal of
the Informations for estafa against Soriano. Significantly, the trial court gave the prosecution fifteen (15) days within
which to comply with the DOJ’s directive, and thereupon, readily granted the motion. Indeed, the withdrawal of the
criminal cases did not occur, nay, could not have occurred, without the trial court’s imprimatur. As such, the DOJ’s
directive for the withdrawal of the criminal cases against Soriano did not divest nor oust the trial court of its
jurisdiction.
Regrettably, a perusal of the RTC’s Orders reveals that the trial court relied solely on the Resolution of the DOJ
Secretary and his determination that the Informations for estafa against Soriano ought to be withdrawn. The trial
court abdicated its judicial power and refused to perform a positive duty enjoined by law. On one occasion, we have
declared that while the recommendation of the prosecutor or the ruling of the Secretary of Justice is persuasive, it is
not binding on courts. We shall return to this point shortly.
16 

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

Section 7, Rule 117 of the Rules of Court provides for the requisites for double jeopardy to set in: (1) a first jeopardy
17 

attached prior to the second; (2) the first jeopardy has been validly terminated; and (3) a second jeopardy is for the
same offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b) before a competent court;
(c) after arraignment; (d) when a valid plea has been entered; and (e) when the accused has been acquitted or
convicted, or the case dismissed or otherwise terminated without his express consent. 18

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

On both issues, the recent case of Cerezo v. People, is enlightening. In Cerezo, the trial court simply followed the
19 

prosecution’s lead on how to proceed with the libel case against the three accused. The prosecution twice changed
their mind on whether there was probable cause to indict the accused for libel. On both occasions, the trial court
granted the prosecutor’s motions. Ultimately, the DOJ Secretary directed the prosecutor to re-file the Information
against the accused which the trial court forthwith reinstated. Ruling on the same issues raised by PNB in this case,
we emphasized, thus:

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

In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the criminal case, that the RTC
judge failed to make his own determination of whether or not there was a prima facie case to hold respondents for
trial. He failed to make an independent evaluation or assessment of the merits of the case. The RTC judge blindly
relied on the manifestation and recommendation of the prosecutor when he should have been more circumspect
and judicious in resolving the Motion to Dismiss and Withdraw Information especially so when the prosecution
appeared to be uncertain, undecided, and irresolute on whether to indict respondents.

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

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

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

xxxx

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

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

We now come to the crux of the matter: whether the restructuring of LISAM’s loan account extinguished Soriano’s
criminal liability.

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

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

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

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

Novation is one of the modes of extinguishment of obligations; it is a single juridical act with a diptych function. The
21 

substitution or change of the obligation by a subsequent one extinguishes the first, resulting in the creation of a new
obligation in lieu of the old. It is not a complete obliteration of the obligor-obligee relationship, but operates as a
22 

relative extinction of the original obligation.

Article 1292 of the Civil Code which provides:

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

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

In order for novation to take place, the concurrence of the following requisites is indispensable:

(1) There must be a previous valid obligation;

(2) There must be an agreement of the parties concerned to a new contract;

(3) There must be the extinguishment of the old contract; and

(4) There must be the validity of the new contract. 23


Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unmistakable. The contracting parties must
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. Nonetheless, both kinds of novation must still be clearly proven.
24  25

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

Soriano is confident with her assertion that PNB’s approval of her proposal to restructure LISAM’s loan novated the
loan agreement secured by TR’s. Soriano relies on the following:

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

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

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

The test of incompatibility is whether the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that
breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in
any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and insufficient to extinguish the original obligation. 27

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

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

therefore, that Soriano’s criminal liability under the TR’s subsists considering that the civil obligations under the
Floor Stock Line secured by TR’s were not extinguished by the purported restructured Omnibus Line.
In Transpacific Battery Corporation v. Security Bank and Trust Company, we held that the restructuring of a loan
30 

agreement secured by a TR does not per se novate or extinguish the criminal liability incurred thereunder:

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

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

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

The Bank only extended the repayment term of the trust receipts from 90 days to one year with monthly installment
at 5% per annum over prime rate or 30% per annum whichever is higher. Furthermore, the interest rates were
flexible in that they are subject to review every amortization due. Whether the terms appeared to be more onerous
or not is immaterial.  Courts are not authorized to extricate parties from the necessary consequences of their acts.
1âwphi1

The parties will not be relieved from their obligations as there was absolutely no intention by the parties to
supersede or abrogate the trust receipt transactions. The intention of the new agreement was precisely to revive the
old obligation after the original period expired and the loan remained unpaid. Well-settled is the rule that, with
respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or
the new contract merely supplements the old one. 31

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

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

The Resolution of the Secretary of Justice dated 25 June 2002, directing the City Prosecutor of Naga City to move
for the withdrawal of the Informations for estafa in relation to the Trust Receipts Law against respondent Lilian S.
Soriano, and his 29 October 2002 Resolution, denying petitioner's Motion for Reconsideration,
are ANNULLED and SET ASIDE for having been issued with grave abuse of discretion; and the Resolution or the
Naga City Prosecutor's Office dated 19 March 2001, finding probable cause against herein respondent,
is REINSTATED. Consequently, the Orders of the Regional Trial Court, Branch 21 of Naga City in Criminal Cases
Nos. 2001-0641 to 2001-0693, except Criminal Case No. 2001-0671, dated 27 November 2002, 21 February 2003
and 15 July 2003 are SET ASIDE and its Order of 16 October 2002 resetting the continuation or the pre-trial
is REINSTATED. The RTC is further ordered to conduct the pretrial with dispatch.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 183804               September 11, 2013

S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION, Petitioner, 


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

DECISION

REYES, J.:

Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court of Appeals (CA) in CA-G.R. CV
No. 83811 which upheld the Decision3 dated May 8, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch
100, in Civil Case No. Q-01-45212.

Factual Antecedents

S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting materials from
Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada (respondent), for its Read-Rite project in
Canlubang, Laguna. The petitioner was unable to pay for the above purchase on due date, but blamed it on its
failure to collect under its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro Kleen). It was however able
to persuade Enviro Kleen to agree to settle its above purchase, but after paying the respondent ₱250,000.00 on
June 2, 1999,4 Enviro Kleen stopped making further payments, leaving an outstanding balance of ₱816,627.00. It
also ignored the various demands of the respondent, who then filed a suit in the RTC, docketed as Civil Case No.Q-
01-45212, to collect from the petitioner the said balance, plus damages, costs and expenses, as summarized in the
RTC’s decision, as follows:

The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the respondent by
reason of the novation of their contract, which, it reasoned, took place when the latter accepted the partial payment
of Enviro Kleen in its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in the
petitioner’s place. After trial, the RTC rendered judgment 6 on May 28, 2004 in favor of the respondent, the fallo of
which reads, as follows:

WHEREFORE, judgment is hereby rendered for the respondent. The petitioner is hereby ordered to pay the
respondent the following:

A. the sum of ₱816,627.00 representing the principal obligation due;

B. the sum equivalent to twenty percent (20%)per month of the principal obligation due from date of judicial
demand until fully paid as and for interest; and

C. the sum equivalent to twenty-five percent (25%) of the principal sum due as and for attorney’s fees and
other costs of suits. The compulsory counterclaim interposed by the petitioner is hereby ordered dismissed
for lack of merit.

SO ORDERED.7 (Emphasis supplied)

On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no novation of the contract took
place through the substitution of Enviro Kleen as the new debtor. But for the first time, it further argued that the trial
court should have dismissed the complaint for failure of the respondent to implead Genlite Industries as "a proper
party in interest", as provided in Section 2 of Rule 3 of the 1997 Rules of Civil Procedure. The said section provides:

SEC. 2. Parties in interest. — A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules,
every action must be prosecuted or defended in the name of the real party in interest.

In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may move to dismiss the suit
on the ground that it was not brought in the name of or against the real party in interest, with the effect that the
complaint is then deemed to state no cause of action.

In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the defense of novation,
and that at no stage in the proceedings did it raise the question of whether the suit was brought in the name of the
real party in interest. Moreover, the appellate court found from the sales invoices and receipts that the respondent is
the sole proprietor of Genlite Industries, and therefore the real party-plaintiff. Said the CA:

Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would contravene the basic
rules of fair play and justice.

In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of Genlite Industries, as
shown on the sales invoice and delivery receipts. There is also no question that a special power of attorney was
executed by respondent Engr.Luis U. Parada in favor of Engr. Leonardo A. Parada authorizingthe latter to file a
complaint against the petitioner.8 (Citations omitted)

The petitioner also contended that a binding novation of the purchase contract between the parties took place when
the respondent accepted the partial payment of Enviro Kleen of ₱250,000.00 in its behalf, and thus acquiesced to
the substitution by Enviro Kleen of the petitioner as the new debtor. But the CA noted that there is nothing in the two
(2) letters of the respondent to Enviro Kleen, dated April 14, 1999 and June 16, 1999, which would imply that he
consented to the alleged novation, and, particularly, that he intended to release the petitioner from its primary
obligation to pay him for its purchase of lighting materials. The appellate court cited the RTC’s finding 9 that the
respondent informed Enviro Kleen in his first letter that he had served notice to the petitioner that he would take
legal action against it for its overdue account, and that he retained his option to pull out the lighting materials and
charge the petitioner for any damage they might sustain during the pull-out:

Respondent x x x has served notice to the petitioner that unless the overdue account is paid, the matter will be
referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was likewise stated therein that
incidental damages that may result to the structure in the course of the pull-out will be to the account of the
petitioner.10

The CA concurred with the RTC that by retaining his option to seek satisfaction from the petitioner, any
acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as an additional debtor
from whom he could demand payment, but without releasing the petitioner as the principal debtor from its debt to
him.

On motion for reconsideration,11 the petitioner raised for the first time the issue of the validity of the verification and
certification of non-forum shopping attached to the complaint. On July 18, 2008, the CA denied the said motion for
lack of merit.12

Petition for Review in the Supreme Court

In this petition, the petitioner insists, firstly, that the complaint should have been dismissed outright by the trial court
for an invalid non-forum shopping certification; and, secondly, that the appellate court erred in not declaring that
there was a novation of the contract between the parties through substitution of the debtor, which resulted in the
release of the petitioner from its obligation to pay the respondent the amount of its purchase. 13

Our Ruling
The petition is devoid of merit.

The verification and certification of


non-forum shopping in the
complaint is not a jurisdictional but
a formal requirement, and any
objection as to non-compliance
therewith should be raised in the
proceedings below and not for the
first time on appeal.

"It is well-settled that no question will be entertained on appeal unless it has been raised in the proceedings below.
Points of law, theories, issues and arguments not brought to the attention of the lower court, administrative agency
or quasi-judicial body, need not be considered by are viewing court, as they cannot be raised for the first time at that
late stage. Basic considerations of fairness and due process impel this rule. Any issue raised for the first time on
appeal is barred by estoppel."14

Through a Special Power of Attorney (SPA), the respondent authorized Engr. Leonardo A. Parada (Leonardo), the
eldest of his three children, to perform the following acts in his behalf: a) to file a complaint against the petitioner for
sum of money with damages; and b) to testify in the trial thereof and sign all papers and documents related thereto,
with full powers to enter into stipulation and compromise. 15 Incidentally, the respondent, a widower, died of cardio-
pulmonary arrest on January 21,2009,16 survived by his legitimate children, namely, Leonardo, Luis, Jr., and Lalaine,
all surnamed Parada. They have since substituted him in this petition, per the Resolution of the Supreme Court
dated September 2, 2009.17 Also, on July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA authorizing their
brother Leonardo to represent them in the instant petition. 18

In the verification and certification of non-forum shopping attached to the complaint in Civil Case No. Q01-45212,
Leonardo as attorney-in-fact of his father acknowledged as follows:

xxxx

That I/we am/are the Plaintiff in the above-captioned case;

That I/we have caused the preparation of this Complaint;

That I/we have read the same and that all the allegations therein are true and correct to the best of my/our
knowledge;

x x x x.19

In this petition, the petitioner reiterates its argument before the CA that the above verification is invalid, since the
SPA executed by the respondent did not specifically include an authority for Leonardo to sign the verification and
certification of non-forum shopping, thus rendering the complaint defective for violation of Sections 4 and 5 of Rule
7. The said sections provide, as follows:

Sec. 4. Verification. — A pleading is verified by an affidavit that the affiant has read the pleading and that the
allegations therein are true and correct of his personal knowledge or based on authentic records.

Sec. 5. Certification against forum shopping. –– The plaintiff or principal party shall certify under oath in the
complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed thereto and
simultaneously filed therewith: (a) that he has not thereto fore commenced any action or filed any claim involving the
same issues in any court, or tribunal x x x and, to the best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other pending action or claim, a complete statement of the present status thereof; and (c)
if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that
fact x x x to the court wherein his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other
initiatory pleading but shall be cause for the dismissal of the case without prejudice, unless otherwise provided,
upon motion and after hearing.

The petitioner’s argument is untenable. The petitioner failed to reckon that any objection as to compliance with the
requirement of verification in the complaint should have been raised in the proceedings below, and not in the
appellate court for the first time.20 In KILUSAN-OLALIA v. CA,21 it was held that verification is a formal, not a
jurisdictional requisite:

We have emphasized, time and again, that verification is a formal, not a jurisdictional requisite, as it is mainly
intended to secure an assurance that the allegations therein made are done in good faith or are true and correct and
not mere speculation. The Court may order the correction of the pleading, if not verified, or act on the unverified
pleading if the attending circumstances are such that a strict compliance with the rule may be dispensed with in
order that the ends of justice may be served.

Further, in rendering justice, courts have always been, as they ought to be, conscientiously guided by the norm that
on the balance, technicalities take a backseat vis-à-vis substantive rights, and not the other way around. x x
x.22(Citations omitted)

In Young v. John Keng Seng,23 it was also held that the question of forum shopping cannot be raised in the CA and
in the Supreme Court, since such an issue must be raised at the earliest opportunity in a motion to dismiss or a
similar pleading. The high court even warned that "invoking it in the later stages of the proceedings or on appeal
may result in the dismissal of the action x x x."24

Moreover, granting that Leonardo has no personal knowledge of the transaction subject of the complaint below,
Section 4 of Rule 7 provides that the verification need not be based on the verifier’s personal knowledge but even
only on authentic records. Sales invoices, statements of accounts, receipts and collection letters for the balance of
the amount still due to the respondent from the petitioner are such records. There is clearly substantial compliance
by the respondent’s attorney-in-fact with the requirement of verification.

Lastly, it is well-settled that a strict compliance with the rules may be dispensed with in order that the ends of
substantial justice may be served.25 It is clear that the present controversy must be resolved on its merits, lest for a
technical oversight the respondent should be deprived of what is justly due him.

A sole proprietorship has no


juridical personality separate and
distinct from that of its owner, and
need not be impleaded as a party-
plaintiff in a civil case.

On the question of whether Genlite Industries should have been impleaded as a party-plaintiff, Section 1 of Rule 3
of the Rules of Court provides that only natural or juridical persons or entities authorized by law may be parties in a
civil case. Article 44 of the New Civil Code enumerates who are juridical persons:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

(2) Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;

(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of each shareholder, partner or member.

Genlite Industries is merely the DTI-registered trade name or style of the respondent by which he conducted his
business. As such, it does not exist as a separate entity apart from its owner, and therefore it has no separate
juridical personality to sue or be sued.26 As the sole proprietor of Genlite Industries, there is no question that the
respondent is the real party in interest who stood to be directly benefited or injured by the judgment in the complaint
below. There is then no necessity for Genlite Industries to be impleaded as a party-plaintiff, since the complaint was
already filed in the name of its proprietor, Engr. Luis U. Parada. To heed the petitioner’s sophistic reasoning is to
permit a dubious technicality to frustrate the ends of substantial justice.

Novation is never presumed but


must be clearly and unequivocally
shown.

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

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

Thus, in order to change the person of the debtor, the former debtor must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in the contractual relation. 29 Article 1293 speaks
of substitution of the debtor, which may either be in the form of expromision or delegacion, as seems to be the case
here. In both cases, the old debtor must be released from the obligation, otherwise, there is no valid novation. As
explained in Garcia30:

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from—and may even be made without the knowledge of—
the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor. 31 (Citations omitted)

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

The fact that Enviro Kleen Technologies, Inc. made payments to the respondent and the latter accepted it does not
ipso facto result innovation. Novation to be given its legal effect requires that the creditor should consent to the
substitution of a new debtor and the old debtor be released from its obligation (Art. 1293, New Civil Code). A
reading of the letters dated 14 April 1999 (Exh. 1) and dated 16 June 1999 (Exhs. 4 &4-a) sent by the respondent to
Enviro Kleen Technologies, Inc. clearly shows that there was nothing therein that would evince that the[respondent]
has consented to the exchange of the person of the debtor from the petitioner to Enviro Kleen Technologies, Inc.

xxxx

Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the respondent expressly stated that it has
served notice to the petitioner that unless the overdue account is paid, the matter will be referred to its lawyers and
there may be a pull-out of the delivered lighting fixtures. It was likewise stated therein that incident damages that
may result to the structure in the course of the pull-out will be to the account of the petitioner.

It is evident from the two (2) aforesaid letters that there is no indication of the respondent’s intention to release the
petitioner from its obligation to pay and to transfer it to Enviro Kleen Technologies, Inc. The acquiescence of Enviro
Kleen Technologies, Inc. to assume the obligation of the petitioner to pay the unpaid balance of [P]816,627.00 to the
respondent when there is clearly no agreement to release the petitioner will result merely to the addition of debtors
and not novation. Hence, the creditor can still enforce the obligation against the original debtor x x x. A fact which
points strongly to the conclusion that the respondent did not assent to the substitution of Enviro Kleen Technologies,
Inc. as the new debtor is the present action instituted by the respondent against the petitioner for the fulfillment of its
obligation. A mere recital that the respondent has agreed or consented to the substitution of the debtor is not
sufficient to establish the fact that there was a novation. x x x.32

The settled rule is that novation is never presumed,33 but must be clearly and unequivocally shown.34 In order for a
new agreement to supersede the old one, the parties to a contract must expressly agree that they are abrogating
their old contract in favor of a new one.35 Thus, the mere substitution of debtors will not result innovation, 36 and the
fact that the creditor accepts payments from a third person, who has assumed the obligation, will result merely in the
addition of debtors and not novation, and the creditor may enforce the obligation against both debtors. 37 If there is no
agreement as to solidarity, the first and new debtors are considered obligated jointly. 38 As explained in Reyes v.
CA39:

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. At most, it only creates a juridical relation of co-debtorship or surety ship on the part of
respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce the
obligation against the petitioner. In Ajax Marketing and Development Corporation vs. Court of Appeals which is
relevant in the instant case, we stated that —

"In the same vein, to effect a subjective novation by a change in the person of the debtor, it is necessary that the old
debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the
relation. There is no novation without such release as the third person who has assumed the debtor’s obligation
becomes merely a co-debtor or surety. xxx. Novation arising from a purported change in the person of the debtor
must be clear and express xxx."

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle – novatio non praesumitur — that novation is never presumed. At bottom, for novation to
be a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for
the new one.40 (Citation omitted)

The trial court found that the respondent never agreed to release the petitioner from its obligation, and this
conclusion was upheld by the CA. We generally accord utmost respect and great weight to factual findings of the
trial court and the CA, unless there appears in the record some fact or circumstance of weight and influence which
has been overlooked, or the significance of which has been misinterpreted, that if considered would have affected
the result of the case.41 We find no such oversight in the appreciation of the facts below, nor such a misinterpretation
thereof, as would otherwise provide a clear and unequivocal showing that a novation has occurred in the contract
between the parties resulting in the release of the petitioner.

Pursuant to Article 2209 of the


Civil Code, except as provided
under Central Bank Circular
No. 905, and now under Bangko
Sentral ng Pilipinas Circular
No. 799, which took effect on
July 1, 2013, the respondent may
be awarded interest of six percent
(6%) of the judgment amount by
way of actual and compensatory
damages.

It appears from the recital of facts in the trial court’s decision that the respondent demanded interest of two percent
(2%) per month upon the balance of the purchase price of ₱816,627.00, from judicial demand until full payment.
There is then an obvious clerical error committed in the fallo of the trial court’s decision, for it incorrectly ordered the
defendant there into pay "the sum equivalent to twenty percent (20%) per month of the principal obligation due from
date of judicial demand until fully paid as and for interest." 42
A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error made by a clerk or a
transcriber; a mistake in copying or writing. 43 The Latin maxims Error placitandi aequitatem non tollit ("A clerical error
does not take away equity"), and Error scribentis nocere non debit ("An error made by a clerk ought not to injure; a
clerical error may be corrected") are apt in this case. 44 Viewed against the landmark case of Medel v. CA45, an award
of interest of 20% per month on the amount due is clearly excessive and iniquitous. It could not have been the
intention of the trial court, not to mention that it is way beyond what the plaintiff had prayed for below.

It is settled that other than in the case of judgments which are void ab initio for lack of jurisdiction, or which are null
and void per se, and thus may be questioned at any time, when a decision is final, even the court which issued it
can no longer alter or modify it, except to correct clerical errors or mistakes. 46

The foregoing notwithstanding, of more important consideration in the case before us is the fact that it is nowhere
stated in the trial court’s decision that the parties had in fact stipulated an interest on the amount due to the
respondent. Even granting that there was such an agreement, there is no finding by the trial court that the parties
stipulated that the outstanding debt of the petitioner would be subject to two percent (2%) monthly interest. The
most that the decision discloses is that the respondent demanded a monthly interest of 2% on the amount
outstanding.

Article 2209 of the Civil Code provides that "if the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum."
Pursuant to the said provision, then, since there is no finding of a stipulation by the parties as to the imposition of
interest, only the amount of 12% per annum 47 may be awarded by the court by way of damages in its discretion, not
two percent(2%) per month, following the guidelines laid down in the landmark case of Eastern Shipping Lines v.
Court of Appeals,48 to wit:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.49 (Citations omitted)

As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods or credit describes a
contractual obligation whereby a lender or creditor has refrained during a given period from requiring the borrower
or debtor to repay the loan or debt then due and payable. 51 Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular
No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving
payment of indemnities in the concept of damages arising from default in the performance of obligations in general
and/or for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is
Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:

"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum."

The term "forbearance," within the context of usury law, has been described as a contractual obligation of a lender
or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt
then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as
follows: The12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities
in the concept of damage arising from the breach or a delay in the performance of obligations in general," with the
application of both rates reckoned "from the time the complaint was filed until the adjudged amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to
the condition "that the courts are vested with discretion, depending on the equities of each case, on the award of
interest."52 (Citations omitted and emphasis ours)

Pursuant, then, to Central Bank Circular No. 416, issued on July 29,1974, 53 in the absence of a written stipulation,
the interest rate to be imposed in judgments involving a forbearance of credit shall be 12% per annum, up from 6%
under Article 2209 of the Civil Code. This was reiterated in Central Bank Circular No. 905, which suspended the
effectivity of the Usury Law from January 1, 1983. 54 But if the judgment refers to payment of interest as damages
arising from a breach or delay in general, the applicable interest rate is 6% per annum, following Article 2209 of the
Civil Code.55 Both interest rates apply from judicial or extrajudicial demand until finality of the judgment. But from the
finality of the judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of
credit, regardless of whether the award in fact pertained to one, and therefore during this period, the interest rate of
12% per annum for forbearance of money shall apply. 56

But notice must be taken that in Resolution No. 796 dated May 16,2013, the Monetary Board of the Bangko Sentral
ng Pilipinas approved the revision of the interest rate to be imposed for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest.
Thus, under BSP Circular No.799, issued on June 21, 2013 and effective on July 1, 2013, the said rate of interest is
now back at six percent (6%), viz:

BANGKO SENTRAL NG PILIPINAS


OFFICE OF THE GOVERNOR

CIRCULAR NO. 799


Series of 2013

Subject: Rate of interest in the absence of stipulation

The monetary Board, in its Resolution No. 796 dated 16 May 2013,approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.

FOR THE MONETARY BOARD:

DIWA C. GUINIGUNDO
Officer-In-Charge

The award of attorney’s fees is not proper.

Other than to say that the petitioner "unjustifiably failed and refused to pay the respondent," the trial court did not
state in the body of its decision the factual or legal basis for its award of attorney’s fees to the respondent, as
required under Article 2208 of the New Civil Code, for which reason we have resolved to delete the same. The rule
is settled that the trial court must state the factual, legal or equitable justification for its award of attorney’s
fees.57Indeed, the matter of attorney’s fees cannot be stated only in the dispositive portion, but the reasons must be
stated in the body of the court’s decision.58 This failure or oversight of the trial court cannot even be supplied by the
CA. As concisely explained in Frias v. San Diego-Sison59:

Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must
be reasonable, just and equitable if the same were to be granted. Attorney’s fees as part of damages are not meant
to enrich the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in
a suit because of the policy that no premium should be placed on the right to litigate. The award of attorney’s fees is
the exception rather than the general rule. As such, it is necessary for the trial court to make findings of facts and
law that would bring the case within the exception and justify the grant of such award. The matter of attorney’s fees
cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained and justified by
the trial court in the body of its decision. On appeal, the CA is precluded from supplementing the bases for awarding
attorney’s fees when the trial court failed to discuss in its Decision the reasons for awarding the
same. Consequently, the award of attorney’s fees should be deleted. 60 (Citations omitted)
1âwphi1

WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of Appeals in CA-G.R. CV No.
83811 is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction and Development Corporation
is ordered to pay respondent Engr. Luis A. Parada, represented by Engr. Leonardo A. Parada, the principal amount
due of ₱816,627.00, plus interest at twelve percent (12%) per annum, reckoned from judicial demand until June 30,
2013, and six percent (6%) per an own from July 1, 2013 until finality hereof, by way of actual and compensatory
damages. Thereafter, the principal amount due as adjusted by interest shall likewise earn interest at six percent
(6%) per annum until fully paid. The award of attorney's fees is DELETED.

SO ORDERED.