14 Heirs of Franco v. Spouses Gonzales
14 Heirs of Franco v. Spouses Gonzales
14 Heirs of Franco v. Spouses Gonzales
DECISION
BERSAMIN , J : p
There is novation when there is an irreconcilable incompatibility between the old and the
new obligations. There is no novation in case of only slight modi cations; hence, the old
obligation prevails.
The petitioners challenge the decision promulgated on March 19, 2003, 1 whereby the
Court of Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial
Court (RTC), Branch 16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in
Medel v. Court of Appeals, 2 the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando
and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who
was engaged in the money lending business under the name "Gonzales Credit
Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
advance interest for one month at 6% per month. Servado and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January 7,
1986. ASTcaE
On November 19, 1985, Servando and Leticia obtained from Veronica another
loan in the amount of P90,000.00, payable in two months, at 6% interest per
month. They executed a promissory note to evidence the loan, maturing on
January 19, 1986. They received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan
in the amount of P300,000.00, maturing in one month, secured by a real estate
mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued
a special power of attorney in favor of Leticia Medel, authorizing her to execute
the mortgage. Servando and Leticia executed a promissory note in favor of
Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986.
However, only the sum of P275,000.00, was given to them out of the proceeds of
the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on
maturity.
CD Technologies Asia, Inc. © 2016 cdasiaonline.com
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael
Medel, consolidated all their previous unpaid loans totaling P440,000.00, and
sought from Veronica another loan in the amount of P60,000.00, bringing their
indebtedness to a total of P500,000.00, payable on August 23, 1986. They
executed a promissory note, reading as follows:
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the
order of VERONICA R. GONZALES doing business in the business style of
GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo
G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS . . . FIVE
HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest
thereon at the rate of 5.5 PER CENT per month plus 2% service charge per
annum from date hereof until fully paid according to the amortization
schedule contained herein. (Underscoring supplied) cdrep
"I, WE further agree that in the event the present rate of interest on loan is
increased by law or the Central Bank of the Philippines, the holder shall
have the option to apply and collect the increased interest charges without
notice although the original interest have already been collected wholly or
partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree
that the amount of peso-obligation under this agreement is based on the
present value of peso, and if there be any change in the value thereof, due
to extraordinary in ation or de ation, or any other cause or reason, then
the peso-obligation herein contracted shall be adjusted in accordance with
the value of the peso then prevailing at the time of the complete ful llment
of obligation.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the
debtors waive all his/their rights under the provisions of Section 12, Rule
39, of the Revised Rules of Court."
In his answer to the complaint led with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the
sum of P500,000.00, and actually received the amount and bene ted therefrom;
that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a
witness.
In their separate answer led on April 10, 1990, defendants Leticia and Rafael
Medel alleged that the loan was the transaction of Leticia Yaptinchay, who
executed a mortgage in favor of the plaintiffs over a parcel of real estate situated
in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with
additional service charge of 2% per annum, and penalty charge of 1% per month;
that the stipulation for attorney's fees of 25% of the amount due is
unconscionable, illegal and excessive, and that substantial payments made were
applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of
the four promissory notes had been duly proved, and ruled that although the
Usury Law had been repealed, the interest charged by the plaintiffs on the loans
was unconscionable and "revolting to the conscience". Hence, the trial court
applied "the provision of the New [Civil] Code" that the "legal rate of interest for
loan or forbearance of money, goods or credit is 12% per annum."
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly
and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest
per annum from November 7, 1985 and 1% per month as penalty, until the
entire amount is paid in full.
IaEASH
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on
the interest for being iniquitous or unconscionable, and revived the judgment of the RTC
rendered on December 9, 1991, viz.:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997, and its resolution dated
November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the
decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch
16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED. 4
Upon the nality of the decision in Medel v. Court of Appeals , the respondents moved for
execution. 5 Servando Franco opposed, 6 claiming that he and the respondents had agreed
to x the entire obligation at P775,000.00. 7 According to Servando, their agreement,
which was allegedly embodied in a receipt dated February 5, 1992, 8 whereby he made an
initial payment of P400,000.00 and promised to pay the balance of P375,000.00 on
February 29, 1992, superseded the July 23, 1986 promissory note. TaDCEc
WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion
for Execution of Judgment.
Petitioner cannot deny the fact that there was no full compliance with the tenor of
the compromise agreement. Private respondents on their part did not disregard
the payments made by the petitioner. They even offered that whatever payments
made by petitioner, it can be deducted from the principal obligation including
interest. However, private respondents posit that the payments made cannot alter,
modify or revoke the decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of
Appeals, the Supreme Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved
party must move for its execution, not its invalidation."
Moreover, under the circumstances of this case, petitioner does not stand to
suffer any harm or prejudice for the simple reason that what has been asked by
private respondents to be the subject of a writ of execution is only the balance of
petitioner's obligation after deducting the payments made on the basis of the
CD Technologies Asia, Inc. © 2016 cdasiaonline.com
compromise agreement.
His motion for reconsideration having been denied, 14 Servando appealed. He was
eventually substituted by his heirs, now the petitioners herein, on account of his intervening
death. The substitution was pursuant to the resolution dated June 15, 2005. 15 TDCaSE
Issue
The petitioners submit that the CA erred in ruling that:
I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON
THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT
EXECUTED IN 1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a
promissory note that had been already novated; that the promissory note had been
impliedly novated when the principal obligation of P500,000.00 had been xed at
P750,000.00, and the maturity date had been extended from August 23, 1986 to February
29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the
nal and executory decision of the Court; that novation did not take place because there
was no complete incompatibility between the promissory note and the memorandum
receipt; that Servando's previous payment would be deducted from the total liability of the
debtors based on the RTC's decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits. AIaDcH
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5,
1992 by respondent Veronica whereby Servando's obligation was xed at P750,000.00.
They insist that even the maturity date was extended until February 29, 1992. Such
CD Technologies Asia, Inc. © 2016 cdasiaonline.com
changes, they assert, were incompatible with those of the original agreement under the
promissory note.
The petitioners' assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent one that
extinguishes the rst, either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor. 16 For a valid novation to take place, there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment
of the old contract; and ( d ) a valid new contract. 17 In short, the new obligation
extinguishes the prior agreement only when the substitution is unequivocally declared, or
the old and the new obligations are incompatible on every point. A compromise of a nal
judgment operates as a novation of the judgment obligation upon compliance with either
of these two conditions. 1 8
The receipt dated February 5, 1992, excerpted below, did not create a new obligation
incompatible with the old one under the promissory note, viz.:
February 5, 1992
Received from SERVANDO FRANCO BPI Manager's Check No. 001700 in the
amount of P400,00.00 * as partial payment of loan. Balance of P375,000.00 to be
paid on or before FEBRUARY 29, 1992. In case of default an interest will be
charged as stipulated in the promissory note subject of this case.
(Sgd.) V. Gonzalez 19
To be clear, novation is not presumed. This means that the parties to a contract should
expressly agree to abrogate the old contract in favor of a new one. In the absence of the
express agreement, the old and the new obligations must be incompatible on every point.
20 According to California Bus Lines, Inc. v. State Investment House, Inc.: 21 DSCIEa
The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly. The term
"expressly" means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other
hand, no speci c form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. While
there is really no hard and fast rule to determine what might constitute to be a
suf cient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new
obligations.
There is incompatibility when the two obligations cannot stand together, each one having
its independent existence. If the two obligations cannot stand together, the latter
obligation novates the rst. 22 Changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must affect any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change is merely modi catory in nature and insuf cient to extinguish the
original obligation. 2 3
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the
respondents only thereby recognized the original obligation by stating in the receipt that
the P400,000.00 was "partial payment of loan" and by referring to "the promissory note
CD Technologies Asia, Inc. © 2016 cdasiaonline.com
subject of the case in imposing the interest." The loan mentioned in the receipt was still the
same loan involving the P500,000.00 extended to Servando. Advertence to the interest
stipulated in the promissory note indicated that the contract still subsisted, not replaced
and extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servando's payment of his
obligation as con rmed by the decision of the RTC. It did not establish the novation of his
agreement with the respondents. Indeed, the Court has ruled that an obligation to pay a
sum of money is not novated by an instrument that expressly recognizes the old, or
changes only the terms of payment, or adds other obligations not incompatible with the
old ones, or the new contract merely supplements the old one. 24 A new contract that is a
mere reiteration, acknowledgment or rati cation of the old contract with slight
modi cations or alterations as to the cause or object or principal conditions can stand
together with the former one, and there can be no incompatibility between them. 25
Moreover, a creditor's acceptance of payment after demand does not operate as a
modification of the original contract. 26 CSaIAc
Worth noting is that Servando's liability was joint and solidary with his co-debtors. In a
solidary obligation, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. 27 The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is fully satis ed. 2 8 Thus,
the obligation was being enforced against Servando, who, in order to escape liability,
should have presented evidence to prove that his obligation had already been cancelled by
the new obligation or that another debtor had assumed his place. In case of change in the
person of the debtor, the substitution must be clear and express, 29 and made with the
consent of the creditor. 30 Yet, these circumstances did not obtain herein, proving
precisely that Servando remained a solidary debtor against whom the entire or part of the
obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a novation of the previous
agreement. It is settled that an extension of the term or period of the maturity date does
not result in novation. 3 1
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servando's remaining liability amounted to only P375,000.00,
the balance indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet
due because the respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a novation. However, as
found now, novation did not take place. Accordingly, Servando's obligation, being solidary,
remained to be that decreed in the December 9, 1991 decision of the RTC, inclusive of
interests, less the amount of P400,000.00 that was meanwhile paid by him.
WHEREFORE , the Court AFFIRMS the decision of the Court of Appeals promulgated on
March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to
proceed with the execution based on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by the late Servando Franco; and
DIRECTS the petitioners to pay the costs of suit. cECaHA
Footnotes
1.Rollo, pp. 103-110; penned by Associate Justice Bernardo P. Abesamis (retired), with
Associate Justice Juan Q. Enriquez, Jr. (retired) and Associate Justice Edgardo F.
Sundiam (deceased) concurring.
2.G.R. No. 131622, November 27, 1998, 299 SCRA 481.
3.Id., pp. 483-488.
4.Id., p. 490.
5.Records, pp. 202-204.
6.Id., pp. 211-218.
7.Rollo, pp. 5-6
8.Id., p. 20.
9.Records, pp. 238-239.
10.Id., pp. 240-241.
11.Id., pp. 245-253.
12.Id., pp. 316-317.
21.G.R. No. 147950, December 11, 2003, 418 SCRA 297, 309-310.
22.Valenzuela v. Kalayaan Development & Industrial Corporation, supra, note 17; California Bus
Lines, Inc. v. State Investment House, Inc., supra, note 21; Kwong v. Gargantos, G.R. No.
152984, November 22, 2006, 507 SCRA 540, 548.
23.Transpacific Battery Corporation v. Security Bank & Trust Co., G.R. No. 173565, May 8, 2009,
CD Technologies Asia, Inc. © 2016 cdasiaonline.com
587 SCRA 536, 546.
24.Aguilar v. Manila Banking Corporation, G.R. No. 157911, September 19, 2006, 502 SCRA 354;
Spouses Reyes v. BPI Family Savings Bank, Inc., G.R. Nos. 149840-41, March 31, 2006,
486 SCRA 276.
25.Jurado, Comments and Jurisprudence on Obligations and Contracts (2002 ed.), p. 331.
26.Valenzuela v. Kalayaan Development & Industrial Corporation, supra, note 17.
27.Article 1216, Civil Code.
28.Ang v. Associated Bank, G.R. No. 146511, September 5, 2007, 532 SCRA 244, 276; Inciong,
Jr. v. Court of Appeals, G.R. No. 96405, June 26, 1996, 257 SCRA 578, 588.
29.Garcia v. Llamas, G.R. No. 154127, December 8, 2003, 417 SCRA 292, 302.
30.Article 1293, Civil Code.
31.California Bus Lines, Inc. v. State Investment House, Inc., supra, note 21; Garcia, Jr. v. Court
of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA 493, 502.